<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4,1997
REGISTRATION NO. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------
ELECTROGLAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3559 77-0336101
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
---------------
2901 CORONADO DRIVE
SANTA CLARA, CA 95054
(408) 727-6500
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------------
ELECTROGLAS, INC.
2901 CORONADO DRIVE
SANTA CLARA, CA 95054
(408) 727-6500
(NAME, ADDRESS AND TELEPHONE NUMBER, OF AGENT FOR SERVICE)
-------------------------------
COPIES OF ALL COMMUNICATIONS TO BE SENT TO:
STEPHEN M. TENNIS, ESQ.
RENA L. O'MALLEY, ESQ.
MORRISON & FOERSTER LLP
755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1018
(415) 813-5600
-------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
effective time of the merger of a wholly owned subsidiary of the Registrant with
and into Knights Technology, Inc., which shall occur as soon as practicable
after the effective date of this Registration Statement and the satisfaction of
all conditions to closing of such merger.
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
-------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE PER UNIT OFFERING PRICE REGISTRATION FEE(1)
- ----------------------------- ----------------- ----------------------------- ------------------------------ -----------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par 1,500,000 $0.00
value shares (1) (1)
</TABLE>
(1) The registration fee was calculated pursuant to Rule 457(f)(2) and Rule
457(f)(3) under the Securities Act of 1933, based on the book value of the
securities computed as of December 31, 1996, the latest practicable date
prior to the date of filing the registration statement, minus cash to be
paid by Electroglas in connection with the transaction. The difference
between the book value of the securities ($2,457,466) and the cash to be
paid by Electroglas (estimated at $2,025,000 ) is a negative number.
Therefore, no registration fee is due.
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
KNIGHTS TECHNOLOGY, INC.
155 NORTH WOLFE ROAD
SUNNYVALE, CA 95086
_____ __, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
Knights Technology, Inc. ("Knights") to be held at ______ __.m., local time, on
__________ __, 1997 at Knights's principal offices at 155 North Wolfe Road,
Sunnyvale, CA 94086.
At this meeting you, along with the other holders of Knights Common Stock
and Series C Preferred Stock (collectively, the "Knights Shareholders"), will be
asked to consider and vote upon the following proposal:
To approve and adopt the Agreement and Plan of Reorganization, dated as of
March 12, 1997 (the "Agreement"), by and among Electroglas, Inc.
("Electroglas"), a Delaware corporation, Knights, and certain Knights
Shareholders (the "Principal Knights Shareholders"). The Agreement provides for
the combination of Electroglas and Knights through the creation of a new
Delaware corporation ("Newco"), organized as a wholly owned subsidiary of
Electroglas, followed by the merger of Newco with and into Knights (the
"Merger"). Knights will survive the Merger, thereby becoming a wholly owned
subsidiary of Electroglas. Pursuant to the Merger, each outstanding share of
Knights Common Stock, no par value, and each outstanding share of Knights Series
C Preferred Stock (collectively with Knights Common Stock, the "Knights Stock")
will automatically convert into the right to receive fully paid and
nonassessable Electroglas Common Stock, par value $.01, in an amount determined
by a conversion ratio described in the accompanying Proxy Statement/Prospectus,
and the right to receive on a pro rata basis an additional cash payment (the
"Knights Shareholder Cash") if the aggregate market value of the shares of
Electroglas Common Stock to be received does not meet a certain minimum level.
Cash will also be delivered in lieu of fractional shares. Holders of Knights
Preferred Stock will receive the Merger consideration described above in lieu of
the liquidation preference set forth in the Knights Articles of Incorporation.
Approximately ten percent of the aggregate Merger consideration that Electroglas
would otherwise deliver to the Knights Shareholders will, on a pro rata basis,
be placed in escrow for twelve months after the closing of the transaction as
collateral for the indemnification obligations of the Knights Shareholders under
the Agreement and for payment of certain claims and damages described in the
Agreement. The escrow assets will first be drawn from the Knights Shareholder
Cash, if any is payable, and then, if the Knights Shareholder Cash is
insufficient, from the shares of Electroglas Common Stock offered in exchange
for the Knights Stock surrendered in the Merger. Holders of outstanding options
to purchase shares of Knights Common Stock shall receive options to purchase
shares of Electroglas Common Stock, none of which shall be held in escrow.
Thomas A. Sherby, Dag Tellefsen and Shao-Hung Gerald Liu will serve as
representatives (the "Representatives") of the Knights Shareholders and be
authorized on behalf of the Knights Shareholders, with respect to claims against
assets held in escrow, to determine the rights of the Knights Shareholders, to
bind the Knights Shareholders, and to receive service of process on their
behalf.
At the Special Meeting, you may also be asked to consider and vote upon
such other business as may properly come before the meeting or any postponements
or adjournments thereof.
THE KNIGHTS BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
AGREEMENT, BELIEVES THAT THE TERMS OF THE AGREEMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, KNIGHTS AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF SHARES OF KNIGHTS STOCK VOTE "FOR" THE PROPOSAL TO APPROVE THE
AGREEMENT.
Details of the proposed Merger and other important information concerning
Knights and Electroglas appear in the accompanying Proxy Statement/Prospectus.
Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. You may revoke your proxy in the manner described in the accompanying
Proxy Statement/Prospectus at any time before it has been voted at the Special
Meeting. If you attend the Special Meeting, you may vote in person even if you
have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Very truly yours,
Thomas A. Sherby
Chairman of the Board, President and
Chief Executive Officer
<PAGE> 3
KNIGHTS TECHNOLOGY, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ______ __, 1997
To the Holders of Common Stock and Series C Preferred Stock of Knights
Technology, Inc. ("Knights Shareholders"):
NOTICE IS HEREBY GIVEN that a special meeting of Shareholders (the "Knights
Special Meeting") of Knights Technology, Inc. ("Knights") will be held at ______
__.m., local time, on _______ __, 1997, at Knights's principal offices at 155
North Wolfe Road, Sunnyvale, CA 94086, to consider and vote upon the following
proposal, which is more fully described in the accompanying Proxy
Statement/Prospectus:
1. To approve and adopt the Agreement and Plan of Reorganization,
dated as of March 12, 1997 (the "Agreement"), by and among
Electroglas, Inc. ("Electroglas"), a Delaware corporation,
Knights, and certain Knights Shareholders (the "Principal Knights
Shareholders"). The Agreement provides for the combination of
Electroglas and Knights through the creation of a new Delaware
corporation ("Newco"), organized as a wholly owned subsidiary of
Electroglas, followed by the merger of Newco with and into Knights
(the "Merger"). Knights will survive the Merger, thereby becoming
a wholly owned subsidiary of Electroglas. Pursuant to the Merger,
each outstanding share of Knights Common Stock and each
outstanding share of Knights Series C Preferred Stock
(collectively with Knights Common Stock, the "Knights Stock") will
automatically convert into the right to receive fully paid and
nonassessable Electroglas Common Stock, par value $.01, in an
amount determined by a conversion ratio described in the
accompanying Proxy Statement/Prospectus, and the right to receive
on a pro rata basis an additional cash payment (the "Knights
Shareholder Cash") if the aggregate market value of the shares of
Electroglas Common Stock to be received does not meet a certain
minimum level. Cash will also be delivered in lieu of fractional
shares. Holders of Knights Preferred Stock will receive the Merger
consideration described above in lieu of the liquidation
preference set forth in the Knights Articles of Incorporation.
Approximately ten percent of the aggregate Merger consideration
that Electroglas would otherwise deliver to the Knights
Shareholders will, on a pro rata basis, be placed in escrow for
twelve months after the closing of the transaction as collateral
for the indemnification obligations of the Knights Shareholders
under the Agreement and for payment of certain claims and damages
described in the Agreement. The escrow assets will first be drawn
from the Knights Shareholder Cash, if any is payable, and then, if
the Knights Shareholder Cash is insufficient, from the shares of
Electroglas Common Stock offered in exchange for the Knights Stock
surrendered in the Merger. Holders of outstanding options to
purchase shares of Knights Common Stock shall receive options to
purchase shares of Electroglas Common Stock, none of which shall
be held in escrow. Thomas A. Sherby, Dag Tellefsen and Shao-Hung
Gerald Liu will serve as representatives (the "Representatives")
of the Knights Shareholders and be authorized on behalf of the
Knights Shareholders, with respect to claims against assets held
in escrow, to determine the rights of the Knights Shareholders, to
bind the Knights Shareholders, and to receive service of process
on their behalf.
2. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof.
The Merger and other related matters are more fully described in the
accompanying Proxy Statement/Prospectus which is attached hereto as Exhibit 1
and forms a part of this Notice.
Only Shareholders of record at the close of business on ______ __, 1997 are
entitled to receive notice of and to vote at the Knights Special Meeting.
Under California law, if the Merger is consummated, a Shareholder of
Knights who does not vote in favor of the proposal to approve and adopt the
Agreement and who otherwise follows procedures prescribed in the statute will be
entitled to receive cash equal to the "fair value" of that Shareholder's shares
of Knights Stock in lieu of receiving shares of Electroglas and, if applicable,
the Knights Shareholder Cash. See the accompanying Proxy Statement/Prospectus at
"Dissenters' Rights of Appraisal" and Appendix C. IF MORE THAN FIVE PERCENT OF
THE SHARES OF KNIGHTS COMMON STOCK ARE DISSENTING SHARES OR IF ANY OF THE
HOLDERS OF KNIGHTS PREFERRED STOCK ASSERT DISSENTERS' RIGHTS, THEN ELECTROGLAS
SHALL NOT BE OBLIGATED TO CLOSE THE MERGER.
<PAGE> 4
All Shareholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, you are urged to
complete, date, sign and return the enclosed proxy card as promptly as possible
in the postage-prepaid envelope enclosed for that purpose, whether or not you
plan to attend the meeting. THE KNIGHTS BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU APPROVE THE AGREEMENT. THE APPROVAL OF THE AGREEMENT AND
CONSUMMATION OF THE MERGER REQUIRE THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY
OF THE OUTSTANDING SHARES OF THE KNIGHTS COMMON STOCK AND A MAJORITY OF THE
OUTSTANDING SHARES OF KNIGHTS PREFERRED STOCK. YOU MAY REVOKE YOUR PROXY IN THE
MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AT ANY TIME
BEFORE IT HAS BEEN VOTED AT THE SPECIAL MEETING. ANY SHAREHOLDER ATTENDING THE
SPECIAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY.
By Order of the Board of Directors,
Thomas A. Sherby
Chairman of the Board, President
and Chief Executive Officer
________ __, 1997
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 6
PROXY STATEMENT
OF
KNIGHTS TECHNOLOGY, INC.
------------
PROSPECTUS
OF
ELECTROGLAS, INC.
This Proxy Statement/Prospectus is being furnished to the holders of Common
Stock (the "Knights Common Stock") and Series C Preferred Stock ("Knights
Preferred Stock" and, collectively with Knights Common Stock, the "Knights
Stock") of Knights Technology, Inc., a California corporation ("Knights"), in
connection with the solicitation of proxies by the Board of Directors of Knights
(the "Knights Board") for use at a special meeting of the Shareholders of
Knights (the "Knights Special Meeting") to be held at ______ _.m., local time,
on _______ ___, 1997, or at any adjournments or postponements thereof, for the
purposes set forth herein and in the accompanying Notice of Knights Special
Meeting of Shareholders. The Knights Special Meeting will be held at the
principal offices of Knights, 155 North Wolfe Road, Sunnyvale, CA 94086.
Knights's telephone number at that location is (408) 988-0600.
This Proxy Statement/Prospectus relates to the Agreement and Plan of
Reorganization, dated as of March 12, 1997 (the "Agreement"), by and among
Electroglas, Inc. ("Electroglas"), a Delaware corporation, Knights and certain
Shareholders of Knights (the "Principal Knights Shareholders"). The Agreement
provides for the combination of Electroglas and Knights through the creation of
a new Delaware corporation ("Newco"), organized as a wholly owned subsidiary of
Electroglas, followed by the merger of Newco with and into Knights (the
"Merger"). Knights will survive the Merger, thereby becoming a wholly owned
subsidiary of Electroglas. Pursuant to the Merger, each outstanding share of
Knights Common Stock, no par value, and each outstanding share of Knights Series
C Preferred Stock ("Knights Preferred Stock" and, collectively with Knights
Common Stock, the "Knights Stock") will automatically convert into the right to
receive fully paid and nonassessable Electroglas Common Stock, par value $.01,
in an amount determined by a conversion ratio described in the accompanying
Proxy Statement/Prospectus, and the right to receive on a pro rata basis an
additional cash payment (the "Knights Shareholder Cash") if the aggregate market
value of the shares of Electroglas Common Stock to be received does not meet a
certain minimum level. Cash will also be delivered in lieu of fractional shares.
Holders of Knights Preferred Stock will receive the Merger consideration
described above in lieu of the liquidation preference set forth in the Knights
Articles of Incorporation. Approximately ten percent of the aggregate Merger
consideration that Electroglas would otherwise deliver to the Knights
Shareholders will, on a pro rata basis, be placed in escrow for twelve months
after the closing of the transaction as collateral for the indemnification
obligations of the Knights Shareholders under the Agreement and for payment of
certain claims and damages described in the Agreement. The escrow assets will
first be drawn from the Knights Shareholder Cash, if any is payable, and then,
if the Knights Shareholder Cash is insufficient, from the shares of Electroglas
Common Stock offered in exchange for the Knights Stock surrendered in the
Merger. Holders of options to purchase shares of Knights Common Stock shall
receive options to purchase shares of Electroglas Common Stock, none of which
shall be held in escrow. Thomas A. Sherby, Dag Tellefsen and Shao-Hung Gerald
Liu will serve as representatives (the "Representatives") of the Knights
Shareholders and be authorized on behalf of the Knights Shareholders, with
respect to claims against assets held in escrow, to determine the rights of the
Knights Shareholders, to bind the Knights Shareholders, and to receive service
of process on their behalf. A Copy of the Agreement and Plan of Reorganization
is attached hereto as Appendix A.
Electroglas has filed a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended, with the
Securities and Exchange Commission (the "Commission") covering the shares of
Electroglas Common Stock to be issued in connection with the Merger. This Proxy
Statement/Prospectus also constitutes the prospectus of Electroglas with respect
to such shares and has been filed as part of the Registration Statement.
This Proxy Statement/Prospectus and the accompanying forms of Proxy are
first being mailed or delivered to Knights Shareholders on or about _______ __,
1997.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS SHAREHOLDERS OF
KNIGHTS SHOULD CONSIDER IN EVALUATING THE AGREEMENT AND THE ACQUISITION OF
ELECTROGLAS COMMON STOCK OFFERED HEREBY.
<PAGE> 7
No persons have been authorized to give any information or to make any
representation other than as contained herein in connection with the offer of
Electroglas Common Stock to be issued in connection with the Merger, and, if
given or made, such information must not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to sell
or a solicitation of an offer to purchase the Electroglas Common Stock in any
jurisdiction or to any person to whom it would be unlawful to make such an offer
or solicitation. Neither the delivery of this Proxy Statement/Prospectus nor any
distribution of the Electroglas Common Stock shall, under any circumstances,
create any implication that there has been no change in the information set
forth herein or in the affairs of either Electroglas or Knights since the date
hereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Proxy Statement/Prospectus is ______ __, 1997
ii
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TABLE OF CONTENTS
<TABLE>
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PAGE
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AVAILABLE INFORMATION.............................................................................................1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................2
TRADEMARKS........................................................................................................2
SUMMARY...........................................................................................................3
The Companies..................................................................................................3
The Special Meeting of Knights Shareholders....................................................................4
Recommendations of the Knights Board of Directors..............................................................5
The Merger and Related Transactions............................................................................5
Interests of Certain Persons in the Merger.....................................................................9
Escrow Agreement...............................................................................................9
Employment Offers..............................................................................................10
Regulatory Matters.............................................................................................10
Certain Federal Income Tax Considerations......................................................................10
Accounting Treatment...........................................................................................10
Dissenters' Rights of Appraisal................................................................................10
Comparison of the Rights of Knights Shareholders and Electroglas Stockholders..................................11
Market Prices and Dividend Policies............................................................................12
Selected Historical Consolidated Financial Data And Comparative Per Share Data................................13
Comparative Per Share Data.....................................................................................15
RISK FACTORS......................................................................................................16
THE KNIGHTS SPECIAL MEETING.......................................................................................20
THE MERGER AND RELATED TRANSACTIONS...............................................................................22
Conversion of Knights Stock....................................................................................22
Additional Cash Payment........................................................................................23
Treatment of Stock Options.....................................................................................23
Escrow.........................................................................................................24
Closing and Effective Date.....................................................................................24
Effects of the Merger..........................................................................................24
Background of the Merger.......................................................................................24
Recommendations of the Board of Knights; Knights's Reasons for the Merger......................................27
Determination of the Board of Electroglas......................................................................27
Employment Offers..............................................................................................27
The Agreement and Plan of Reorganization.......................................................................27
The Escrow Agreement...........................................................................................32
Accounting Treatment...........................................................................................34
Interests of Certain Persons in the Merger.....................................................................34
Regulatory Approvals...........................................................................................35
Certain Federal Income Tax Consequences........................................................................35
Resale Restrictions............................................................................................37
Treatment of Shares of Dissenting Holders......................................................................37
Conversion of Shares; Procedures for Exchange of Certificates..................................................37
DISSENTERS' RIGHTS OF APPRAISAL...................................................................................39
</TABLE>
iii
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<TABLE>
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COMPARISON OF RIGHTS OF KNIGHTS SHAREHOLDERS AND ELECTROGLAS STOCKHOLDERS.........................................41
Vote Required for Extraordinary Transactions...................................................................41
Director Nominations...........................................................................................41
Amendment to Governing Documents...............................................................................42
Appraisal Rights...............................................................................................43
Derivative Action..............................................................................................43
Stockholder Consent In Lieu of Meeting.........................................................................43
Fiduciary Duties of Directors..................................................................................43
Indemnification................................................................................................44
Director Liability.............................................................................................44
Anti-Takeover Provisions and Interested Stockholder Transactions...............................................45
Cumulative Voting..............................................................................................45
Change from Preferred Shares to Common Shares..................................................................45
OTHER AGREEMENTS..................................................................................................47
PRINCIPAL STOCKHOLDERS OF ELECTROGLAS.............................................................................49
BUSINESS OF ELECTROGLAS...........................................................................................50
Overview.......................................................................................................50
Industry Background............................................................................................50
Electroglas Strategy...........................................................................................52
Overview of Technology.........................................................................................53
Products.......................................................................................................54
Engineering, Research and Development..........................................................................55
Marketing, Sales and Service...................................................................................55
Customers......................................................................................................55
Manufacturing and Suppliers....................................................................................56
Backlog........................................................................................................56
Competition....................................................................................................56
Patents, Trademarks, Copyrights and Other Intellectual Property................................................56
Employees......................................................................................................57
Properties.....................................................................................................57
Legal Proceedings..............................................................................................57
INFORMATION REGARDING ELECTROGLAS MANAGEMENT AND COMPENSATION.....................................................58
Directors, Executive Officers and Key Personnel................................................................58
Summary Compensation Table.....................................................................................61
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF KNIGHTS.......................................68
BUSINESS OF KNIGHTS...............................................................................................70
General........................................................................................................70
Industry Background............................................................................................70
Products.......................................................................................................71
Marketing, Sales and Support...................................................................................72
Research & Development.........................................................................................72
Competition....................................................................................................73
Patents, Trademarks, Copyrights and Other Intellectual Property................................................73
Employees......................................................................................................73
Properties.....................................................................................................74
SELECTED HISTORICAL FINANCIAL DATA AND COMPARATIVE PER SHARE DATA OF KNIGHTS......................................75
</TABLE>
iv
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<TABLE>
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KNIGHTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................76
Results of Operations Years Ended December 31, 1996, 1995 and 1994.............................................76
Liquidity and Capital Resources................................................................................77
Liquidity and Capital Resources................................................................................78
STOCKHOLDER PROPOSALS.............................................................................................80
EXPERTS...........................................................................................................80
LEGAL MATTERS.....................................................................................................80
FINANCIAL STATEMENTS OF KNIGHTS.................................................................................F-1
AGREEMENT AND PLAN OF REORGANIZATION............................................................................A-1
ESCROW AGREEMENT................................................................................................B-1
CALIFORNIA GENERAL CORPORATION LAW..............................................................................C-1
</TABLE>
v
<PAGE> 11
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE ELECTROGLAS COMMON STOCK OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A WRITTEN CONSENT, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER, SOLICITATION OF AN OFFER OR WRITTEN CONSENT IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF ELECTROGLAS COMMON STOCK PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED BY
REFERENCE HEREIN OR IN THE AFFAIRS OF ELECTROGLAS OR KNIGHTS SINCE THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS. HOWEVER, IF ANY MATERIAL CHANGE OCCURS DURING
THE PERIOD THAT THIS PROXY STATEMENT/PROSPECTUS IS REQUIRED TO BE DELIVERED,
THIS PROXY STATEMENT/PROSPECTUS WILL BE AMENDED AND SUPPLEMENTED ACCORDINGLY.
ALL INFORMATION REGARDING KNIGHTS IN THIS PROXY STATEMENT/PROSPECTUS HAS BEEN
SUPPLIED BY KNIGHTS, AND ALL INFORMATION REGARDING ELECTROGLAS IN THIS PROXY
STATEMENT/PROSPECTUS HAS BEEN SUPPLIED BY ELECTROGLAS.
AVAILABLE INFORMATION
Electroglas is subject to the informational requirements under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the United States Securities and Exchange Commission (the "SEC"). Copies of such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional Offices
of the SEC: Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
14th Floor, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, material filed by Electroglas can be
inspected at the offices of the National Association of Securities Dealers,
Reports Section, 1735 K Street, N.W. Washington, D.C. 20006. The SEC maintains a
web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
Under the rules and regulations of the SEC, the solicitation of proxies
from the Knights Shareholders to approve the Agreement and the consummation of
the Merger constitutes an offering of the Electroglas Common Stock to be issued
in connection with the Merger. Accordingly, Electroglas has filed with the SEC a
registration statement on Form S-4 (together with any amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to such offering. This Proxy
Statement/Prospectus constitutes the prospectus of Electroglas that is filed as
part of the Registration Statement. Other parts of the Registration Statement
are omitted from this Proxy Statement/Prospectus in accordance with the rules
and regulations of the SEC. For further information, reference is hereby made to
the Registration Statement. Statements made in this Proxy Statement/Prospectus
as to the contents of any contract, agreement or other document are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement or incorporated by
reference herein, reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference. Copies of the Registration
Statement, including the exhibits to the Registration Statement and other
material that is not included herein, may be inspected, without charge, at the
offices of the Commission referred to above, or obtained at prescribed rates
from the Public Reference Section of the SEC at the address set forth above.
<PAGE> 12
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
1. Electroglas's Annual Report on Form 10-K for the year ending December
31, 1996 is incorporated by reference in this Proxy Statement/Prospectus.
All reports and definitive proxy or information statements filed by
Electroglas pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Proxy Statement/Prospectus and prior to the date
of the Knights Special Meeting shall be deemed to be incorporated by reference
into this Proxy Statement/Prospectus from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE PROVIDED WITHOUT
CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF ANY SUCH
PERSON, A COPY OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE HEREIN
(EXCLUDING EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN). WITH RESPECT TO KNIGHTS'S DOCUMENTS, REQUESTS SHOULD BE
DIRECTED TO KNIGHTS TECHNOLOGY, INC., 155 NORTH WOLFE ROAD, SUNNYVALE, CA 94086
(TELEPHONE (408) 988-0600). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY SUCH REQUEST SHOULD BE MADE BY __________ ___, 1997.
----------------------------
TRADEMARKS
Merlin's Framework(TM), YieldManager(R), MegaLab(R) and MegaLink(TM) are
trademarks of Knights. EGCommander(TM) and SORTnet(TM) are trademarks of
ElECtRoglaS. THIS Proxy Statement/Prospectus also contains trademarks of
companies other than Knights and Electroglas and their respective subsidiaries.
KNIGHTS'S AND ELECTROGLAS'S FISCAL YEARS END DECEMBER 31. ELECTROGLAS'S
FISCAL QUARTERS END ON THE SATURDAY NEAREST THE END OF THE CALENDAR QUARTER. FOR
CONVENIENCE ELECTROGLAS HAS INDICATED THAT ITS QUARTERS END ON MARCH 31, JUNE 30
AND SEPTEMBER 30.
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<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus, the Appendices hereto and documents
incorporated by reference herein. This summary does not contain a complete
statement of all material information relating to the Agreement, the Merger or
the other matters discussed herein, and is subject to, and is qualified in its
entirety by, the more detailed information and financial statements contained or
incorporated by reference in this Proxy Statement/Prospectus. Shareholders of
Knights should carefully read this entire Proxy Statement/Prospectus. Certain
capitalized terms used in this summary are defined elsewhere in this Proxy
Statement/Prospectus.
THE COMPANIES
ELECTROGLAS.
Electroglas is a leader in the development, manufacture, marketing and
servicing of automatic wafer probing equipment for use in the fabrication of
semiconductor devices. Electroglas'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. Electroglas 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. Electroglas's primary product offerings are its 2000 Series
wafer probers and its Horizon 4000 Series wafer probers. All of Electroglas's
wafer probers feature Electroglas'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.
Immediately prior to the closing of the initial public offering of its Common
Stock on July 1, 1993, Electroglas assumed the assets and liabilities of the
Electroglas division in the asset transfer and, following the initial public
offering, Electroglas commenced operations as an independent corporation.
Electroglas, through its predecessors, has been in the wafer prober business for
more than 30 years. Electroglas's address is 2901 Coronado Drive, Santa Clara,
CA 95054 and its telephone number is (408) 727-6500. As used in this Proxy
Statement/Prospectus, unless the context otherwise requires, the term
"Electroglas" refers to Electroglas, Inc. and its subsidiaries.
KNIGHTS.
Knights Technology, Inc. ("Knights") is a leading supplier of yield
management software for the semiconductor industry. Knights has developed a
suite of yield management software products which interface with the established
design, process inspection, metrology, parametric and electrical test tools and
provide an integrated system to manage yield through the detection, isolation
and characterization of defects incurred in semiconductor design and production.
Knights's principal products are YieldManager(R) and Merlin's
Framework(TM). YieldManager, introduced in 1994, is an integrated enterprise,
client-seRVeR yield enhancement system for sub-micron semiconductor fabrication
facilities ("fabs"). YieldManager takes the output from testers, process and
inspection equipment used at various points in the semiconductor fabrication
process, correlates it and manages it in a manner that enables the operator of
the fab to maximize its manufacturing yield. YieldManager provides an
encompassing and integrated approach to yield management and automates processes
previously managed separately and often manually. Merlin's Framework is
Knights's principal CAD navigation product which uses the CAD semiconductor
design data to locate the physical attributes of the semiconductor itself.
Merlin's Framework has been widely accepted in the semiconductor industry for
failure analysis and process diagnostics and is the leading CAD navigation
product. Knights sells its software products directly to semiconductor
manufacturers in the U.S. and through OEMs, distributors and other sales
representatives worldwide.
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<PAGE> 14
Knights was founded in 1987 and focused on CAD navigation software for
automated analytical probe stations. By the end of 1991, Knights's Merlin's
Framework software was the de facto industry standard for CAD navigation of
analytical instruments for failure analysis.
Knights's headquarters are located at 155 North Wolfe Road, Sunnyvale,
California 94086 and its phone number is (408) 988-0600.
"NEWCO" refers to Electroglas Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of Electroglas formed solely for the
purpose of the Merger. Newco's principal offices are located at 2901 Coronado
Drive, Santa Clara, CA 95054.
THE SPECIAL MEETING OF KNIGHTS SHAREHOLDERS
TIME, PLACE AND DATE. A Special Meeting of the Shareholders of Knights will
be held on ________ __, 1997 at ____ __.m., local time, at the principal offices
of Knights, 155 North Wolfe Road, Sunnyvale, CA 94086 (including any and all
adjournments or postponements thereof, the "Knights Special Meeting").
PURPOSE OF THE SPECIAL MEETING. At the Knights Special Meeting, holders of
Knights Stock will consider and vote on a proposal to approve and adopt the
Agreement. The Agreement provides for the combination of Electroglas and Knights
through the creation of Newco, a new Delaware corporation organized as a wholly
owned subsidiary of Electroglas, followed by the Merger of Newco with and into
Knights. Knights will survive the Merger, thereby becoming a wholly owned
subsidiary of Electroglas. Pursuant to the Merger, each outstanding share of
Knights Common Stock and each outstanding share of Knights Preferred Stock will
automatically convert into the right to receive fully paid and nonassessable
Electroglas Common Stock in an amount determined by a conversion ratio described
below, and the right to receive on a pro rata basis an additional cash payment
(the "Knights Shareholder Cash") if the aggregate market value of the shares of
Electroglas Common Stock to be received does not meet a certain minimum level.
Approximately ten percent of the aggregate Merger consideration that Electroglas
would otherwise deliver to the Knights Shareholders will, on a pro rata basis,
be placed in escrow for twelve months after the closing of the transaction as
collateral for the indemnification obligations of the Knights Shareholders under
the Agreement and for payment of certain claims and damages described in the
Agreement. The escrow assets will first be drawn from the Knights Shareholder
Cash, if any is payable, and then, if the Knights Shareholder Cash is
insufficient, from the shares of Electroglas Common Stock offered in exchange
for the Knights Stock surrendered in the Merger. Holders of Knights Preferred
Stock will receive the Merger consideration described above in lieu of the
liquidation preference set forth in the Knights Articles of Incorporation.
Holders of options to purchase shares of Knights Common Stock shall receive
options to purchase shares of Electroglas Common Stock, none of which shall be
held in escrow. Thomas A. Sherby, Dag Tellefsen and Shao-Hung Gerald Liu will
serve as representatives (the "Representatives") of the Knights Shareholders and
be authorized on behalf of the Knights Shareholders, with respect to claims
against assets held in escrow, to determine the rights of the Knights
Shareholders, to bind the Knights Shareholders, and to receive service of
process on their behalf. Shareholders of Knights will also consider and vote
upon any other matter that may properly come before the meeting.
VOTES REQUIRED; RECORD DATE. Consummation of the Merger requires approval
of the proposal to adopt the Agreement by the affirmative vote of a majority of
the outstanding shares of Knights Common Stock and a majority of the outstanding
shares of Knights Preferred Stock entitled to vote on the matter at the Knights
Special Meeting. Holders of Knights Common Stock and Knights Preferred Stock are
entitled to one vote per share. Only persons who hold Knights Common Stock and
Knights Preferred Stock at the close of business on ____ __, 1997 (the "Knights
Record Date") are entitled to notice of and to vote at the Knights Special
Meeting. See "The Knights Special Meeting." As of March 12, 1997 directors and
executive officers of Knights and their affiliates were beneficial owners of an
aggregate of 3,939,800 shares of Knights Common Stock (exclusive of any shares
issuable upon the exercise of stock options remaining unexercised as of such
date), or approximately 79% of the 5,011,238 shares of Knights Common Stock that
were issued and outstanding as of such date, and an aggregate of 3,630,862
shares of Knights Preferred Stock, or 79% of the shares of Knights Preferred
Stock that were issued and outstanding as of such date. Each of the directors
and executive officers of Knights has indicated an intention to vote all shares
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<PAGE> 15
of Knights Common Stock and Knights Preferred Stock beneficially owned by him or
her in favor of adoption of the Agreement and consummation of the Merger.
Electroglas, as sole stockholder of Newco, has approved the Agreement. No
vote of Electroglas's stockholders is required to approve the Agreement.
RECOMMENDATIONS OF THE KNIGHTS BOARD OF DIRECTORS.
The Knights Board believes that the terms of the Agreement are fair to
Knights and its Shareholders and in their best interests, and it unanimously
recommends that holders of Knights Stock vote "FOR" approval of the Agreement.
See "The Merger and Related Transactions -- Background of the Merger," " --
Recommendation of the Board of Knights; Reasons for the Merger," and " --
Interests of Certain Persons in the Merger."
THE MERGER AND RELATED TRANSACTIONS
CONVERSION OF KNIGHTS STOCK. Pursuant to the Merger, and at the effective
time, each outstanding share of Knights Common Stock and each outstanding share
of Knights Preferred Stock will automatically convert into the right to receive
fully paid and nonassessable Electroglas Common Stock, par value $.01, in an
amount determined by the conversion ratio described below, plus the Knights
Shareholder cash, if any is payable. Approximately ten percent of the
Electroglas Common Stock or cash that Electroglas would otherwise deliver to the
Knights Shareholders will, on a pro rata basis, be placed in escrow for twelve
months after the closing of the transaction as collateral for the
indemnification obligations of the Knights Shareholders under the Agreement and
for payment of certain claims and damages described in the Agreement. Cash will
also be delivered in lieu of fractional shares.
CONVERSION OF NEWCO SHARES. In the Merger each share of Newco Common Stock,
$0.001 par value, that is issued and outstanding immediately prior to the
Effective Time will, without further action on the part of Electroglas as the
sole stockholder of Newco, be converted into one share of Knights Common Stock,
and that single share of Knights Common Stock, owned by Electroglas, will be the
only share of Knights Stock issued and outstanding after the Effective Time.
THE CONVERSION RATIO. The number of shares of Electroglas Common Stock
exchanged for each share of Knights Stock will be determined by multiplying the
number of Knights shares held by a ratio (the "Conversion Ratio") that equals
the quotient of (i) the number of Total Shares (as defined below) divided by
(ii) the sum of (a) the aggregate number of shares of Knights Stock issued and
outstanding at the Effective Time plus (b) the aggregate number of shares of
Knights Common Stock subject to outstanding, unexercised and vested options. The
term "Total Shares" means the total number of shares of Electroglas Common Stock
to be issued in the Merger, which is equal to the quotient of $29,400,000
divided by the closing sales price of Electroglas Common Stock as reported on
the Nasdaq National Market on the trading day prior to the Closing Date (the
"Closing Price"), provided, however, the Total Shares will not exceed 1,500,000
shares.
Fractional shares of Electroglas Common Stock will not be issued in
connection with the Merger. A holder of Knights Stock otherwise entitled to a
fraction of a share of Electroglas Common Stock will instead receive cash in an
amount equal to the same fraction of the Closing Price. If there is a split,
reverse split, stock dividend, or reclassification of Electroglas Common Stock,
the Conversion Ratio shall be adjusted accordingly.
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<PAGE> 16
The Conversion Ratio is expressed by the following formula, which
summarizes and is qualified in its entirety by the terms of the Agreement.
29,400,000
Closing Price(2) or 1,500,000, whichever is lower
(1)
====================================================
Number of Knights
Aggregate number of + common shares
of Knights Shares subject to vested options(3)
(1) The ratio shall be adjusted for any split, reverse split, stock
dividend or other reclassification or reorganization that changes the
number of outstanding Electroglas shares into a different number of
shares.
(2) The "Closing Price" equals the closing sale price of Electroglas Common
Stock on the Nasdaq National Market on the last trading day prior to
the Closing Date.
(3) Unvested options for 15,750 shares of Knights held by each of Robert
Anderson, Shao-Hung Gerald Liu and Dag Tellefsen and unvested options
for 20,000 shares of Knights held by James Poitras, each a director of
Knights, will vest and become exercisable upon the consummation of the
Merger. Unvested options for 51,780 shares and 137,860 shares held by
Ms. Korn and Mr. Sherby will vest and become exercisable upon the
consummation of the Merger.
The Conversion Ratio cannot be calculated until the Closing Date. If the
Closing Date had been March 13, 1997, the Conversion Ratio would have been
.1372234 shares of Electroglas Common Stock exchanged for each share of Knights
Stock, based on a closing price of $18.25 per share of Electroglas Common Stock
on the Nasdaq National Market System on March 12, 1997, and the Knights
Shareholder Cash would have totalled $2,025,000 (approximately $0.190 per
share). THE CLOSING WILL NOT TAKE PLACE UNTIL SOME TIME AFTER _______ __, 1997,
AND BECAUSE THE MARKET PRICE OF ELECTROGLAS COMMON STOCK MAY CHANGE
SUBSTANTIALLY KNIGHTS AND ELECTROGLAS CANNOT PREDICT WHETHER THE ACTUAL
CONVERSION RATIO WILL BE MORE OR LESS THAN THE PRECEDING HYPOTHETICAL AMOUNT.
See "The Merger and Related Transactions -- Conversion of Knights Stock."
ADDITIONAL CASH PAYMENT. If 1,500,000 shares multiplied by the Closing
Price results in a product (the "Target Consideration") that is less than
$29,400,000, then Electroglas will pay the Knights Shareholders, on a pro rata
basis, the Knights Shareholder Cash, an aggregate cash amount equal to the
difference between $29,400,000 and the Target Consideration. For purposes of
calculating the Knights Shareholder Cash, the term "pro rata basis" means based
on the same proportion that the aggregate number of shares of Knights Stock held
by each individual Knights Shareholder bears to the aggregate number of shares
of Knights Stock held by all Knights Shareholders.
STOCK OPTIONS. At the Effective Time, each outstanding and unexercised
Knights stock option will cease to represent a right to acquire shares of
Knights Common Stock and will convert automatically into an option to purchase
Electroglas Common Stock. The number of shares of Electroglas Common Stock
subject to the new option will equal the product of the number of shares of
Knights Common Stock subject to the original option and the Conversion Ratio,
rounded down to the nearest whole share. The exercise price per share of
Electroglas Common Stock under the new option will be substantially equal to the
quotient obtained by dividing the exercise price per share of Knights Stock
under the original option by the Conversion Ratio, rounded to the nearest cent.
The adjustment provided with respect to any options that are "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code")), shall be and is intended to be effected in a manner
consistent with Section 424(a) of the Code. The duration and other terms of the
new option shall be the same as the original option except that all references
to Knights shall be deemed to be references to Electroglas.
ESCROW. On the Closing Date, Electroglas will withhold from the Knights
Shareholders on a pro rata basis the cash payable as the Knights Shareholder
Cash; provided, however, that the cash withheld (the "Escrow Cash") shall not
exceed ten percent of the sum of (i) the Knights Shareholder Cash and (ii) the
product of the aggregate number
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<PAGE> 17
of shares of Electroglas Common Stock issued upon the conversion of the Knights
Stock multiplied by the Closing Price, which sum is referred to as the "Target
Escrow Cash." If the Escrow Cash is less than the Target Escrow Cash, then
Electroglas will withhold from the Knights Shareholders on a pro rata basis
shares of Electroglas Common Stock issued in the Merger equal to the quotient of
(i) the Target Escrow Cash minus the cash (if any) withheld from the Knights
Shareholder Cash, divided by (ii) the Closing Price. The Escrow Cash and stock
held in escrow (the "Escrow Assets") will be held for twelve months as
collateral for the indemnification obligations of the Knights Shareholders under
the Agreement and for payment of certain claims and damages described in the
Agreement. None of the options to purchase Electroglas Common Stock that will be
exchanged for options to purchase Knights Common Stock shall be withheld in
escrow. See "The Merger and Related Transactions -- The Escrow Agreement" and
"The Merger and Related Transactions -- ThE Agreement and Plan of Reorganization
- -- General Indemnification by Knights Shareholders; Liability of Knights
Shareholders for Certain Damages."
CLOSING AND EFFECTIVE DATE. The Closing Date shall be on or before July 15,
1997, or, if all conditions to closing of the transactions provided for in the
Agreement have not been satisfied or waived by such date, such other date as
Knights and Electroglas may mutually select. As promptly as practicable after
the satisfaction or waiver of the conditions set forth in the Agreement, the
parties thereto will file a Certificate of Merger with the Delaware Secretary of
State and the California Secretary of State (the "Certificate of Merger"). The
Merger will become effective upon such filing (the "Effective Time"). It is
anticipated that, assuming all conditions are met, the Merger will occur on or
before ___________ __, 1997.
EFFECTS OF THE MERGER. Following the Merger, Knights will continue its
operations as a wholly owned subsidiary of Electroglas.
BACKGROUND OF THE MERGER. The terms of the Agreement and the Merger,
including the Conversion Ratio and Knights Shareholder Cash, were determined
through negotiations between Electroglas and Knights. See "The Merger and
Related Transactions -- Background of the Merger."
KNIGHTS'S REASONS FOR THE MERGER. The factors considered by the Knights
Board in approving the Merger included, but were not limited to, the following:
Electroglas is highly respected by Knights target customer base and a merger
with Electroglas will enhance Knights's position in the industry; Electroglas's
global distribution and support channels support semiconductor manufacturing
facilities throughout the world and would provide Knights with the opportunity
to quickly penetrate target markets; the belief that Electroglas has both the
capital and infrastructure resources to meet the requirements for continued
growth of Knights; Electroglas's continued support of investment in research
and development, total quality management and providing information management
systems to the semiconductor industry; the Merger presents an opportunity for
Knights Shareholders to enhance the liquidity of their investment through their
holdings of publicly traded Electroglas Common Stock; the Merger will have a
positive impact on the employees of Knights due to the assessment that
Electroglas's culture and values closely matched those of Knights; the ability
of Knights employees to continue to vest their current Knights option holdings
under Electroglas employee stock option plan; and, finally, the strategic
alternatives for Knights other than the Merger, including remaining as an
independent company and obtain additional financing, entering into another
business combination or entering into some other affiliation with a strategic
partner.
By unanimous vote, the Board approved the Agreement and the Merger and
authorized Mr. Sherby, Ms. Korn and Mr. Liu to sign the Merger Agreement.
THE AGREEMENT AND PLAN OF REORGANIZATION.
Electroglas and Knights have made certain representations and warranties as
to their respective organization and good standing, corporate authority,
required approvals, capitalization, and the absence of previously undisclosed
material facts relating to the Agreement. Knights has made additional
representations and warranties, including those with respect to its business
operations including existing agreements, litigation, financial statements,
taxes, properties, absence of certain changes, agreements and commitments,
intellectual property, compliance with laws, certain transactions and
agreements, employees, corporate documents, absence of broker fees or expenses,
books and records, insurance, environmental matters, and government contracts.
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<PAGE> 18
Under the Agreement, Knights covenants and agrees to perform a number of
actions, including continuing the conduct of its business in its ordinary
course, not entering into extraordinary transactions, obtaining assignments of
patents and copyrights from employees and consultants who have not already made
such assignments, cooperating with Electroglas in consummating the Agreement,
and not taking any action to jeopardize the characterization of the Merger as a
reorganization within the meaning of Section 368(a) of the Code. Knights also
covenants and agrees not to solicit or negotiate another transaction that would
dispose of all or substantially all of Knights's business until the consummation
of the Merger or the termination of the Agreement according to its terms.
Electroglas covenants and agrees to grant Knights reasonable access to its
books and records and to cooperate in obtaining regulatory approval for the
consummation of the Agreement, and that until the Closing Date it shall not
repurchase any of its publicly traded shares at a price greater than $18.00.
The obligations of Electroglas and Knights to effect the Merger are subject
to the satisfaction of certain conditions, including, among others: the truth
and completeness in all material respects of the representations and warranties
of the other party; the performance by the other party of its covenants under
the Agreement; the absence of any order, decree or ruling by any court or
governmental agency that would prohibit the transactions contemplated by the
Agreement or render them illegal; the obtaining of any permits or authorizations
required by any regulatory authority having jurisdiction over the parties,
including the satisfaction of all requirements under applicable state and
federal securities laws; receipt of all written consents, assignments, waivers,
authorizations or other certificates reasonably deemed necessary by legal
counsel to consummate the Merger, absence of any pending litigation or
proceeding that will have the probable effect of enjoining or preventing the
consummation of any of the transactions provided for in the Agreement; and
receipt of an opinion of counsel for the other party covering matters typical
for a transaction such as the one contemplated in the Agreement. The obligation
of Knights to effect the Merger is conditioned, in addition to the items in the
preceding paragraph, on the Registration Statement (of which this Prospectus is
a part) becoming effective in accordance with the provisions of the Securities
Act. The obligation of Electroglas to effect the Merger is conditioned, in
addition to the items in the first paragraph under this caption, on the
fulfillment or satisfaction of the following items: delivery by the Chief
Financial Officer of Knights of a true and complete list of Knights Vested
Options and Knights Unvested Options; approval of the Agreement by the Knights
Shareholders; delivery by counsel to Electroglas of an opinion that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, absence of previously undisclosed
litigation that could reasonably be expected to have a material adverse effect
on financial conditions or results of operations of Knights; the execution and
delivery by Knights and the Representatives of the Escrow Agreement; the absence
of any material adverse change in the business of Knights (other than on account
of matters which affect the general economy or the industry in which Knights is
engaged or events triggered by Electroglas's statements as to its intentions
regarding its future management of Knights); Electroglas's not becoming aware
of, nor its due diligence investigation of Knights revealing, any facts or
circumstances or conditions specific to Knights that have or would have a
material adverse effect on the business of Knights; Dissenting Shares of Knights
Common Stock not exceeding five percent of the issued and outstanding shares of
Knights Common Stock on the Closing Date; and no holder of Knights Preferred
Stock having exercised dissenters' rights. See "The Merger and Related
Transactions -- The Agreement and Plan of Reorganization -- Conditions to the
Merger"
The Merger Agreement is subject to termination by either Electroglas or
Knights if, among other things, the Merger is not consummated by July 15, 1997.
The Merger Agreement also may be terminated by either Electroglas or Knights
under other circumstances, including the mutual written consent of Electroglas
and Knights; failure to cure within thirty (30) days after written notice a
breach of any representation, warranty, covenant or agreement; and permanent
injunction or other order by any federal or state court which would make illegal
or otherwise restrain or prohibit the consummation of the Merger. The Agreement
may be amended only in writing signed by the party that would be bound by the
amendment. Each party will bear its own expenses in the Merger, except that
Electroglas will pay reasonable accounting and legal fees of Knights up to a
maximum of $125,000 if the Merger is consummated. See "The Merger and Related
Transactions -- The Agreement and Plan of Reorganization -- Termination;
Amendment; Expenses."
GENERAL INDEMNIFICATION BY KNIGHTS SHAREHOLDERS; LIABILITY OF KNIGHTS
SHAREHOLDERS FOR CERTAIN DAMAGES. The Agreement provides that the Knights
Shareholders will indemnify Electroglas and its affiliates and hold them
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<PAGE> 19
harmless from any losses or liabilities incurred by Electroglas as a result of
any misrepresentation or breach of the representations, warranties and covenants
of Knights and the Knights Shareholders. Under the Escrow Agreement, if the
Merger is consummated, on the Closing Date, Electroglas will withhold from the
Knights Shareholders on a pro rata basis the cash payable as the Knights
Shareholder Cash, if any, up to an amount equal to ten percent of the sum of (i)
the Knights Shareholder Cash and (ii) the product of the number of shares of
Electroglas Common Stock issued upon the conversion of the Knights Stock and the
Closing Price, which sum is referred to as the "Target Escrow Cash." If the
Knights Shareholder Cash is less than the Target Escrow Cash, then Electroglas
will withhold from the Knights Shareholders on a pro rata basis shares of
Electroglas Common Stock issued in the Merger equal to the quotient of (i) the
Target Escrow Cash minus the cash (if any) withheld from the Knights Shareholder
Cash, divided by (ii) the Closing Price. The cash and stock held in escrow (the
"Escrow Assets") will be held for twelve months as collateral for the
indemnification obligations of the Knights Shareholders under the Agreement and
for payment of certain claims and damages described in the Agreement. None of
the options to purchase Electroglas Common Stock, that will be exchanged for
options to purchase Knights Common Stock, will be withheld in escrow. See "The
Merger and Related Transactions -- The Escrow Agreement" and "The Merger and
Related Transactions -- The Agreement and Plan oF Reorganization -- General
Indemnification by Knights Shareholders; Liability of Knights Shareholders for
Certain Damages." The Knights Shareholders shall not incur liability for Damages
beyond the Escrow Assets. However, that limitation shall not apply to any
Knights Shareholder with respect to any claims of intentional misrepresentation
or fraud or any criminal matters. (See "The Merger and Related Transactions --
The Escrow Agreement" and "The Merger and Related Transactions -- The Agreement
and Plan of Reorganization -- General Indemnification by Knights Shareholders;
Liability of Knights Shareholders for Certain Damages")
SURRENDER AND EXCHANGE PROCEDURE. As soon as practicable after the
Effective Time, each Knights Shareholder will receive instructions for
surrendering his or her Knights stock certificates, together with a letter of
transmittal that the Shareholder shall complete and submit along with the
Knights stock certificates surrendered in exchange for shares of Electroglas
Common Stock or cash. Shareholders of Knights should not submit their stock
certificates for exchange or cash payment until they receive the letter of
transmittal and instructions. See "The Merger and Related Transactions --
Conversion of Shares; Procedures for Exchange of Certificates."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation by the Knights Board that the Knights
Shareholders approve and adopt the Agreement and the transactions contemplated
thereby, Shareholders should be aware that certain members of Knights's
management and the Knights Board have certain interests in the Merger in
addition to the interests of Shareholders of Knights generally. These interests
arise from, among other things, certain employee benefit plans, indemnification
and insurance arrangements and employment agreements among Electroglas, Knights
and directors and certain executive officers of Knights. See "The Merger and
Related Transactions -- Interests of Certain Persons in the Merger" and "Other
Agreements."
ESCROW AGREEMENT
If the Merger is consummated, the Shareholders Representatives, Knights and
Electroglas shall enter into an Escrow Agreement substantially in the form
attached hereto as Appendix B. The Escrow Agreement sets forth the terms and
conditions under which the assets held in Escrow shall be held and disposed of.
The Escrow Agreement also provides that Thomas A. Sherby, Dag Tellefsen and
Shao-Hung Gerald Liu will serve as Representatives of the Knights Shareholders
and be authorized on behalf of the Knights Shareholders, with respect to claims
against the assets held in escrow, to determine the rights of the Knights
Shareholders, to bind the Knights Shareholders, and to receive service of
process on their behalf. See "The Merger and Related Transactions -- The Escrow
Agreement."
9
<PAGE> 20
EMPLOYMENT OFFERS
Electroglas has made offers of employment to four current officers of
Knights to serve as officers of the Knights Technology subsidiary of Electroglas
(the "Knights Subsidiary") after the Merger. The offers are all contingent on
the completion of the Merger by May 29, 1997. Thomas A. Sherby, currently
Chairman, President and CEO of Knights, has been offered the position of
President of the Knights Subsidiary. Mary P. Korn, currently Vice President of
Finance and Administration, Chief Financial Officer and Secretary of Knights,
has been offered the position of Vice President of Finance and Administration of
the Knights Subsidiary. Ankush Oberai, currently Vice President of Worldwide
Sales and Strategic Marketing of Knights, has been offered the position of Vice
President of Sales and Strategic Marketing of the Knights Subsidiary. Kuang-Hua
Ken Huang, currently Vice President of Engineering of Knights has been offered
the position of Vice President of Engineering of the Knights Subsidiary. See
"Other Agreements."
REGULATORY MATTERS
Electroglas and Knights are aware of no governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
the federal securities laws and applicable securities and "blue sky" laws of
various states.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.
Electroglas and Knights intend for the Merger to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code. However, if,
pursuant to the Merger, the Knights Shareholders receive, in the aggregate,
greater than twenty percent (20%) of the total consideration for their shares of
Knights Stock in cash, including the Knights Shareholder Cash, if any, any cash
paid to dissenting Knights Shareholders, any cash paid in lieu of fractional
shares, and any cash held pursuant to the Escrow Agreement, then the Merger will
not qualify as a "reorganization" within the meaning of Section 368(a) of the
Code. Even if the Merger qualifies as a reorganization, Knights Shareholders
will recognize income for any cash received. See "The Merger and Related
Transactions -- Certain Federal Income Tax Consequences." KNIGHTS SHAREHOLDERS
AND OPTIONHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE MERGER. See "The Merger and Related
Transactions -- Certain Federal Income Tax Consequences" and "The Merger and
Related Transactions -- The Agreement and Plan or Reorganization -- Conditions
to the Merger."
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles. See "The Merger and
Related Transactions -- Accounting Treatment."
DISSENTERS' RIGHTS OF APPRAISAL
Under California law, if the Merger is consummated, a Shareholder of
Knights who does not vote in favor of the proposal to approve and adopt the
Agreement and who otherwise follows procedures prescribed in the statute will be
entitled to receive cash equal to the "fair value" of that Shareholder's shares
of Knights Stock in lieu of receiving shares of Electroglas and the Knights
Shareholders Cash, if any. See "Dissenters' Rights of Appraisal" and Appendix C.
IF MORE THAN FIVE PERCENT OF THE SHARES OF KNIGHTS COMMON STOCK ARE DISSENTING
SHARES OR IF ANY OF THE HOLDERS OF KNIGHTS PREFERRED STOCK ASSERT DISSENTERS'
RIGHTS, THEN ELECTROGLAS SHALL NOT BE OBLIGATED TO CLOSE THE MERGER.
10
<PAGE> 21
COMPARISON OF THE RIGHTS OF KNIGHTS SHAREHOLDERS AND ELECTROGLAS STOCKHOLDERS
The rights of Knights Shareholders are currently governed by California law
and by Knights's Articles of Incorporation and Bylaws. At the Effective Time of
the Merger, holders of Knights Common Stock and Knights Preferred Stock will
become holders of Common Stock of Electroglas, a Delaware corporation, and their
rights as stockholders will be governed by Delaware law and by Electroglas's
Certificate of Incorporation and By-Laws. See "Comparison of Rights of Knights
Shareholders and Electroglas Stockholders."
11
<PAGE> 22
MARKET PRICES AND DIVIDEND POLICIES
The Electroglas Common Stock is listed and traded on Nasdaq. The following
table sets forth the high and low sales prices per share of Electroglas Common
Stock for the last two fiscal quarters indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
ELECTROGLAS
COMMON STOCK
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1995:
First Quarter ..................................... 24 3/8 13 5/8
Second Quarter .................................... 29 7/8 19 3/4
Third Quarter ..................................... 40 1/4 27 5/8
Fourth Quarter .................................... 37 19 3/4
Fiscal 1996:
First Quarter ..................................... 25 3/4 14 3/8
Second Quarter .................................... 22 1/2 13 3/4
Third Quarter ..................................... 15 1/4 12
Fourth Quarter .................................... 19 5/8 12 5/8
</TABLE>
On March 12, 1997, the last trading day prior to announcement of the
Agreement, the closing sales price of Electroglas Common Stock as reported by
Nasdaq was $18.25 per share. Had the Closing occurred on that day, the
Conversion Ratio would have been .1372234 shares of Electroglas Common Stock
exchangeable for each share of Knights Stock and the Knights Shareholder Cash
would have totaled $2,025,000 (approximately $0.190 per share). Based on that
closing price and hypothetical conversion ratio, the equivalent per share value
of Knights Common Stock as of such date was approximately $2.69.
Because the Conversion Ratio varies with the market price of Electroglas
Common Stock and because the market price of Electroglas Common Stock is subject
to fluctuation, both the number and the market value of the shares of
Electroglas Common Stock that holders of Knights Common Stock will receive in
the Merger, and the Knights Shareholder Cash, if any, may increase or decrease
prior to and following the Merger. Under the Agreement Electroglas is obligated
not to repurchase shares of Electroglas Common Stock at a price greater than $18
per share between the date of the Agreement and the Closing. SHAREHOLDERS ARE
URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR ELECTROGLAS COMMON STOCK. NO
ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICES OR MARKETS FOR ELECTROGLAS COMMON
STOCK.
No dividends have been declared or paid on Electroglas Common Stock since
Electroglas's incorporation, nor are any such dividends expected to be paid
following consummation of the Merger.
There is no public trading market for Knights Common Stock or Knights
Preferred Stock. Knights has never declared or paid cash dividends on its Common
Stock or on its Series C Preferred Stock.
12
<PAGE> 23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA AND
COMPARATIVE PER SHARE DATA
The following summary historical financial data of Electroglas has been
derived from its historical consolidated financial statements and should be read
in conjunction with such consolidated financial statements and the notes thereto
that are incorporated herein by reference.
ELECTROGLAS
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ELECTROGLAS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
---------------- -------------- -------------- -------------- --------------
<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
HISTORICAL CONSOLIDATED BALANCE
SHEET DATA
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 stockholders' equity(3) 173,651 157,394 110,755 39,499 10,451
</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 of
Electroglas's common stock ("the IPO")).
(3) Total stockholders' 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.
13
<PAGE> 24
KNIGHTS
The following summary historical financial data of Knights has been derived from
its historical financial statements and should be read in conjunction with such
financial statements and the notes thereto.
SELECTED HISTORICAL FINANCIAL DATA OF KNIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
----------------- ---------------- -----------------
<S> <C> <C> <C>
Product revenues $ 4,807 $ 4,720 $ 3,506
Maintenance and other revenues 1,331 433 516
----------------- ---------------- -----------------
Total revenues 6,138 5,153 4,022
Cost of product revenues 399 390 628
Cost of maintenance and other revenues 387 155 92
----------------- ---------------- -----------------
Gross margin 5,352 4,608 3,302
Research and development 1,992 1,187 750
Marketing and sales 2,418 1,523 968
General and administrative 1,665 1,259 925
----------------- ---------------- -----------------
Total Operating Expenses 6,076 3,970 2,643
Operating income (loss) (724) 638 659
Other income 58 81 42
----------------- ---------------- -----------------
Income (loss) before income tax expense (benefit) (666) 719 700
Income tax expense (benefit) (260) 250 243
----------------- ---------------- -----------------
Net income (loss) (406) 470 457
Net income (loss) per share $(0.08) $0.05 $0.05
================= ================ =================
Shares used in computing net income (loss) per share 4,966 10,100 10,045
================= ================ =================
HISTORICAL BALANCE SHEET DATA
Working capital $ 1,181 $ 2,380 $ 2,078
Total assets 4,177 4,734 3,370
Short-term borrowings 313 0 0
Accumulated deficit (1,884) (1,478) (1,947)
Total shareholders' equity 2,554 2,814 2,337
</TABLE>
14
<PAGE> 25
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Electroglas and Knights and combined per share data on an unaudited pro forma
basis after giving effect to the Merger as a purchase transaction and assuming
that 1,500,000 shares of Electroglas Common Stock will be issued based upon the
maximum number of shares to be issued under the Merger for all the Knights
outstanding Common and Preferred Stock. This data should be read in conjunction
with the selected financial data included in this Proxy Statement/Prospectus and
the separate historical consolidated financial statements of Electroglas and
separate historical financial statements of Knights included in or incorporated
by reference herein. The unaudited pro forma financial data are not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect as of the beginning of the period presented and
should not be construed as representative of future operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AS OF
DECEMBER 31, 1996
<S> <C>
Historical - Electroglas
Net income per share $1.36
Book value per share (1) $9.54
Historical - Knights
Net (loss) per share ($0.08)
Book value per share (1) $0.51
Pro forma combined net income per share (3)(5)
Pro forma net income per Electroglas share $1.16
Equivalent pro forma net income per Knights share (2) $0.16
Pro forma combined book value per share (4)(5)
Pro forma book value per Electroglas share $7.60
Equivalent pro forma book value per Knights share (2) $1.04
</TABLE>
(1) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of the
period. Historical Knights book value per share would have been $0.27 per share
if all outstanding Preferred Stock at the end of the period had been included in
the calculation.
(2) The equivalent Knights pro forma share amounts are calculated by multiplying
the combined pro forma per share amounts by the Conversion Ratio of 0.137224 of
a share of Electroglas Common Stock for each share of Knights Common and
Preferred Stock and Knights Common Stock subject to vested options, including
approximately 260,000 shares subject to options which accelerate on the Closing
Date.
(3) Pro forma combined net income per share reflects Electroglas and Knights net
income for the year ended December 31, 1996 and is based upon (i) Electroglas's
weighted average common and common equivalent shares outstanding for the year
ended December 31, 1996, (ii) 1,500,000 shares of Electroglas Common Stock
assumed to be issued for all the outstanding shares of Knights Common and
Preferred Stock and Knights Common Stock subject to vested options, including
approximately 260,000 shares subject to options that accelerate on the Closing
Date, based on the outstanding number of shares of Knights Common and Preferred
Stock and shares of Knights Common Stock subject to vested options at March 12,
1997 and assuming that such shares were outstanding for the entire period, (iii)
the applicable number of shares relative to the unvested options to purchase
Knights Common Stock assumed by Electroglas and (iv) the elimination of sales
made by Knights to Electroglas. To the extent that the number of outstanding
shares of Knights Common and Preferred Stock, or the number of shares of Knights
Common Stock subject to options, increases or decreases or the stock price of
Electroglas increases above $19.60 between March 12, 1997 and the Closing Date
of the Merger, the number of shares of Electroglas Common Stock to be issued in
connection with the Merger will decrease proportionately. Pro forma combined net
income per share includes pro forma adjustments of approximately (i) $714,000
for the estimated effect of amortization over a three to five year period of
acquired intangibles, including goodwill in the Merger, (ii) $528,000 for
additional amortization related to the developed technology acquired in the
Merger, and (iii) $49,000 for forgone interest income on the additional cash
paid by Electroglas in accordance with the Agreement.
(4) The pro forma combined net book value per share reflects the stockholders
equity of Electroglas at December 31, 1996 and 1,500,000 shares of Electroglas
Common Stock assumed to be issued for all the outstanding shares of Knights
Common and Preferred Stock based upon the outstanding number of shares of
Knights Common Stock at December 31, 1996.
(5) Based on preliminary estimates, Electroglas expects that approximately $20
million to $25 million of the total purchase price will be allocated to
in-process research and development and will be charged to operations at the
time of the Closing of the Merger. The effect of this charge using the
approximate mid-point of the range of $23 million has been reflected in the pro
forma combined book value per share but has not been reflected in the pro forma
combined net income per share.
15
<PAGE> 26
RISK FACTORS
The following factors should be considered carefully by the Knights
Shareholders in evaluating whether to approve the Agreement and thereby become
holders of Electroglas Common Stock. These factors should be considered in
conjunction with the other information included in this Proxy
Statement/Prospectus.
FORWARD-LOOKING STATEMENTS. The statements contained in this Proxy
Statement/Prospectus that are not purely historical are forward-looking
statements, including statements regarding Electroglas's beliefs, expectations,
hopes, plans or intentions regarding the future. Forward-looking statements in
this document include statements under the heading "Risk Factors -Integration of
the Businesses" regarding Electroglas's expectation as to any charge to reflect
the combination of the two companies in the Merger and under the heading
"Business of Electroglas - Electroglas Strategy" regarding Electroglas'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 Electroglas as of the date hereof, and Electroglas assumes no obligation to
update any forward-looking statement or statements. It is important to note that
Electroglas'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 the future could affect, Electroglas's actual
operating results and could cause Electroglas's actual consolidated operating
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, Electroglas. You should also consult the
risk factors listed from time to time in Electroglas's Reports on Forms 10-Q,
8-K and Annual Report to Stockholders. See also, "Knights Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Forward-Looking Statements."
INTEGRATION OF THE BUSINESSES. The Merger involves the integration of two
companies that previously operated independently, which will require substantial
management resources of the combined companies. No assurance can be given that
the merged companies will overcome the difficulties they encounter as they
integrate the operations of Electroglas and Knights. The need to coordinate
geographically separate organizations, integrate personnel with disparate
business backgrounds and combine different corporate cultures exacerbates the
difficulties of combining the companies' operations. Moreover, the process of
combining operations could interrupt or slow the momentum of the activities of
either or both of the companies' businesses. These difficulties connected with
the Merger and the integration of the two companies' operations could adversely
affect the business, results of operations or financial condition of the
combined companies.
Upon consummation of the Merger, Electroglas expects to incur a charge of
approximately $23 million to reflect the combination of the two companies,
including costs relating to in-process research and development, severance and
employee relocation, the elimination of duplicate systems and facilities and
other integration costs. The amount is preliminary and subject to change. In
addition, there can be no assurance that Electroglas will not incur additional
charges in the future to reflect costs associated with the Merger.
SEMICONDUCTOR INDUSTRY DOWNTURNS ADVERSELY AFFECT ELECTROGLAS REVENUES AND
OPERATING RESULTS. Electroglas'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 Electroglas'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 Electroglas'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
Electroglas's ability to reduce expenses during such downturns.
16
<PAGE> 27
VARIABILITY AND UNCERTAINTY OF QUARTERLY OPERATING RESULTS. Electroglas has
experienced and expects to continue to experience significant fluctuations in
its quarterly results. Electroglas's backlog at the beginning of each quarter
does not necessarily determine actual sales for any succeeding period.
Electroglas'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
Electroglas'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,
Electroglas'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 Electroglas's
competitors. Accordingly, Electroglas'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,
Electroglas expects to continue to make a significant investment in engineering,
research and development. There can be no assurance that Electroglas will be
successful in the introduction, marketing and cost effective manufacture of any
of its new products, or that Electroglas 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, Electroglas depends on close relationships with its customers and
the willingness of those customers to share information with Electroglas. The
failure to develop products and introduce them successfully and in a timely
manner could adversely affect Electroglas's competitive position and results of
operations.
DEPENDENCE ON PRINCIPAL CUSTOMERS. For the years ended December 31, 1996
and 1995, five of Electroglas'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 Electroglas's major customers ceased
or significantly curtailed its purchases, a material adverse effect on
Electroglas's results of operations could result. See "Business of Electroglas
- -- Customers."
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 Electroglas and have
larger service organizations and long-standing customer relationships.
Electroglas'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 Electroglas's results of operations.
Although Electroglas believes it has certain technological and other advantages
over its competitors, maintaining and capitalizing on these advantages will
require Electroglas to continue a high level of investment in engineering,
research and development, marketing and customer service and support. There can
be no assurance that Electroglas will have sufficient resources to continue to
make these investments or that Electroglas will be able to make the
technological advances necessary to maintain these competitive advantages. See
"Business of Electroglas -- Competition."
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.
17
<PAGE> 28
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 a 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 Electroglas'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. Electroglas's success depends in
significant part on its intellectual property. While Electroglas 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 Electroglas
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 Electroglas will be sufficiently broad to
protect Electroglas's technology. In addition, no assurance can be given that
any patents issued to Electroglas will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to Electroglas.
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 Electroglas'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 Electroglas'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 Electroglas's knowledge, neither it
nor any of its products has been identified by Mr. Lemelson as infringing his
patents.
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
Electroglas'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 Electroglas'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 Electroglas's results of
operations.
INTERNATIONAL OPERATIONS. International sales accounted for 45%, 45% and
47% of Electroglas's net sales for 1996, 1995 and 1994, respectively.
Electroglas expects international sales to continue to represent a significant
percentage of net sales. A number of factors may adversely affect Electroglas'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 Electroglas'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
Electroglas's operations, there can be no assurance that such factors will not
adversely impact Electroglas's operations in the future or require Electroglas
to modify its current business
18
<PAGE> 29
practices. In addition, the laws of certain foreign countries may not protect
Electroglas'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. Electroglas also needs to
attract additional skilled personnel in all areas of its business to grow. While
many of Electroglas's current employees have years of service with Electroglas,
there can be no assurance that Electroglas will be able to retain its existing
personnel or attract additional qualified employees in the future.
ACQUISITIONS. Electroglas may in the future pursue acquisitions of
complementary product lines, technologies or businesses. Acquisitions by
Electroglas 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 Electroglas 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 Electroglas has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. Electroglas has entered
into an agreement, whereby, if consummated, Electroglas 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
Electroglas's business or operating results.
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 Electroglas or by Electroglas's
competitors, government regulations, developments in patent or other property
rights, and developments in Electroglas'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 Electroglas's
Common Stock.
ANTITAKEOVER PROVISIONS. Certain provisions of Electroglas'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. Electroglas has no plans to issue any Preferred Stock. See
"Comparison of Rights of Knights Shareholders and Electroglas Stockholders --
Anti-Takeover Provisions and Interested Stockholder Transactions."
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THE KNIGHTS SPECIAL MEETING
PURPOSE OF THE KNIGHTS SPECIAL MEETING. At the Knights Special Meeting,
holders of Knights Common Stock and Knights Preferred Stock will consider and
vote on a proposal to adopt the Agreement. As a result of the Merger, Newco, a
new Delaware corporation that will be organized as a wholly owned subsidiary of
Electroglas will merge with and into Knights, with Knights to be the surviving
corporation of the Merger. Shareholders of Knights will also consider and vote
on any other matter that may properly come before the meeting.
Approval of the Agreement by the shareholders of Knights will also
constitute approval of the Escrow Agreement and approval of the equal
distribution of the proceeds of the Merger to all of the Knights Shareholders.
See "The Merger and Related Transactions - The Escrow Agreement" and "Comparison
of Rights of Knights Shareholders and Electroglas Stockholders - Change from
Preferred Shares to Common Shares."
THE KNIGHTS BOARD HAS UNANIMOUSLY APPROVED THE TERMS OF THE AGREEMENT,
BELIEVES THAT THE TERMS OF THE AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS
OF, KNIGHTS AND THE KNIGHTS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF SHARES OF KNIGHTS COMMON STOCK AND KNIGHTS PREFERRED STOCK VOTE "FOR"
APPROVAL OF THE AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES. Only holders of Knights Common Stock
and Knights Preferred Stock at the close of business on ______ __, 1997 (the
"Knights Record Date") are entitled to notice of and to vote at the Knights
Special Meeting. As of the Knights Record Date, there were ___________ shares of
Knights Common Stock issued and outstanding, and ____________ shares of Knights
Preferred Stock issued and outstanding, each of which entitled the holder
thereof to one vote.
All shares of Knights Stock represented by properly executed proxies will,
unless such proxies have been previously revoked, be voted in accordance with
the instructions indicated in the proxies. IF NO INSTRUCTIONS ARE INDICATED IN A
SIGNED AND RETURNED PROXY, SHARES OF KNIGHTS STOCK SUBJECT TO THAT PROXY WILL BE
VOTED IN FAVOR OF ADOPTION OF THE AGREEMENT. Knights does not know of any
matters other than those described in the Notice of Special Meeting that are to
come before the Knights Special Meeting. However, if any other matter or matters
are properly presented for action at the Knights Special Meeting, the persons
named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment. A
Knights Shareholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice thereof to the Secretary of Knights, by
signing and returning a later dated proxy, or by voting in person at the Knights
Special Meeting. However, mere attendance at the Knights Special Meeting will
not in and of itself have the effect of revoking the proxy. Votes cast by proxy
or in person at the Knights Special Meeting will be tabulated by the inspector
of election appointed for the meeting.
SOLICITATION OF PROXIES. Proxies are being solicited by and on behalf of
the Knights Board. Knights will bear all expenses in connection with such
solicitation. In addition to solicitation by use of the mails, directors,
officers and employees of Knights may solicit proxies in person or by telephone,
telegram or other means of communication. Directors, officers and employees will
not receive additional compensation for these solicitation activities, but may
be reimbursed for related out-of-pocket expenses.
QUORUM. Holders of a majority of all of the issued and outstanding shares
of Knights Common Stock and holders of a majority of all of the issued and
outstanding Knights Preferred Stock must be present in person or by proxy to
constitute a quorum at the Knights Special Meeting.
REQUIRED VOTE. Adoption of the Agreement requires the affirmative vote of a
majority of the outstanding shares of Knights Common Stock entitled to vote
thereon and a majority of the outstanding Knights Preferred Stock entitled to
vote thereon at the Knights Special Meeting. For purposes of determining whether
the Agreement has been adopted, the inspector of election will include
abstentions in the number of outstanding shares of Knights Stock entitled to
vote thereon at the Knights Special Meeting. Accordingly, abstentions will have
the effect of a "NO" vote on the proposal to adopt the Agreement.
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As of March 12, 1997, directors and executive officers of Knights and their
affiliates were beneficial owners of an aggregate of 3,939,800 shares of Knights
Common Stock (exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of such date), or approximately 79% of the
5,011,238 shares of Knights Common Stock and 3,630,862 shares of Knights
Preferred Stock, or approximately 79% of the Knights Preferred Stock issued and
outstanding as of such date that were issued and outstanding as of such date.
Each of the directors and executive officers of Knights has indicated an
intention to vote all shares of Knights Common Stock and Knights Preferred Stock
beneficially owned by him or her in favor of approval of the Agreement.
THE MATTERS TO BE CONSIDERED AT THE KNIGHTS SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE KNIGHTS SHAREHOLDERS. ACCORDINGLY, SHAREHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY
STATEMENT/PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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<PAGE> 32
THE MERGER AND RELATED TRANSACTIONS
THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE PROPOSED MERGER, THE AGREEMENT AND RELATED TRANSACTIONS. THE FOLLOWING
DESCRIPTION DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE TERMS OF THE
AGREEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT, WHICH
IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED
HEREIN BY REFERENCE. YOU ARE URGED TO READ THE AGREEMENT IN ITS ENTIRETY.
GENERAL. The Principal Knights Shareholders, Knights and Electroglas have
entered into an Agreement and Plan of Reorganization dated as of March 12, 1997,
which provides for the creation of Newco, a new Delaware corporation that will
be organized as a wholly-owned subsidiary of Electroglas and will merge with and
into Knights in the Merger, a reverse triangular merger with Knights to be the
surviving corporation. As a result Knights will be a wholly owned subsidiary of
Electroglas and the present Knights Shareholders will receive shares of
Electroglas Common Stock and the right to receive on a pro rata basis the
Knights Shareholder Cash if the aggregate market value of the shares of
Electroglas Common Stock to be received does not meet a certain minimum level.
The Agreement provides that the parties will consummate the Merger if the
requisite number of Knights Shareholders approve the Agreement and all other
conditions to the Merger are satisfied or waived as provided in the Agreement.
CONVERSION OF KNIGHTS STOCK
Upon consummation of the Merger, each share of Knights Common Stock and
each share of Knights Preferred Stock that is issued and outstanding immediately
prior to the Effective Time (as hereinafter defined) will, by virtue of the
Merger and at the Effective Time, and without further action on the part of any
holder thereof, be converted into the number of fully paid and nonassessable
shares of Electroglas Common Stock, $0.01 par value equal to the Conversion
Ratio described below.
CONVERSION RATIO. The Conversion Ratio for the conversion of Knights Stock
will be the quotient of (i) the number of Total Shares divided by (ii) the sum
of (a) the aggregate number of shares of Knights Stock issued and outstanding at
the Effective Time plus (b) the aggregate number of shares of Knights Common
Stock subject to all outstanding, unexercised and vested options (the "Vested
Knights Options"). The Agreement defines Total Shares as the total number of
shares of Electroglas Common Stock to be issued in the Merger, which is equal to
the quotient of $29,400,000 divided by the Closing Price (the closing sale price
of Electroglas Common Stock on the Nasdaq National Market on the trading day
prior to the Closing Date), provided, however, the Total Shares shall not exceed
1,500,000 shares.
ADJUSTMENTS FOR CAPITAL CHANGES. If prior to the Merger Electroglas
recapitalizes either through a split-up of its outstanding shares into a greater
number, or through a combination of its outstanding shares into a lesser number,
or reorganizes, reclassifies or otherwise changes its outstanding shares into
the same or a different number of shares of other classes (other than through a
split-up or combination of shares provided for in the previous clause), or
declares a dividend on its outstanding shares payable in shares or securities
convertible into shares, the calculation of the Conversion Ratio will be
adjusted appropriately.
NO FRACTIONAL SHARES. Fractional shares of Electroglas Common Stock will
not be issued in connection with the Merger. A holder of Knights Stock otherwise
entitled to a fractional share of Electroglas Common Stock will be paid in cash
in lieu of any fractional share in an amount equal to the same fraction of the
Closing Price.
CONVERSION OF NEWCO SHARES. Upon consummation of the Merger, each share of
Newco Common Stock, $0.001 par value, that is issued and outstanding immediately
prior to the Effective Time will, by virtue of the Merger and without further
action on the part of the sole stockholder of Newco, be converted into and
become one share of Knights Common Stock that is issued and outstanding
immediately after the Effective Time, and the shares of Knights Common Stock
into which the shares of Newco common stock are so converted will be the only
shares of Knights Stock that are issued and outstanding immediately after the
Effective Time.
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<PAGE> 33
The Conversion Ratio is expressed by the following formula, which
summarizes and is qualified in its entirety by the terms of the Agreement.
29,400,000
----------
Closing Price(2) or 1,500,000, whichever is lower
====================================================.(1)
Number of Knights
Aggregate number of + common shares
of Knights Shares subject to vested options(3)
(1) The ratio shall be adjusted for any split, reverse split, stock
dividend or other reclassification or reorganization that changes the
number of outstanding Electroglas shares into a different number of
shares.
(2) The "Closing Price" equals the closing sale price of Electroglas Common
Stock on the Nasdaq National Market on the last trading day prior to
the Closing Date.
(3) Unvested options for 15,750 shares of Knights held by each of Robert
Anderson, Shao-Hung Gerald Liu and Dag Tellefsen and unvested options
for 20,000 shares of Knights held by James Poitras, each a director of
Knights, will vest and become exercisable upon the consummation of the
Merger. Unvested options for 51,780 shares and 137,860 shares held by
Ms. Korn and Mr. Sherby will vest and become exercisable upon the
consummation of the Merger.
The Conversion Ratio cannot be calculated until the Closing Date. If the
Closing Date had been March 13, 1997, the Conversion Ratio would have been
.1372234 shares of Electroglas Common Stock exchanged for each share of Knights
Stock, based on a closing price of $18.25 per share of Electroglas Common Stock
on the Nasdaq National Market System on March 12, 1997, and the Knights
Shareholder Cash would have totalled $2,025,000 (approximately $0.190 per
share). THE CLOSING WILL NOT TAKE PLACE UNTIL SOME TIME AFTER _______ __, 1997,
AND BECAUSE THE MARKET PRICE OF ELECTROGLAS COMMON STOCK MAY CHANGE
SUBSTANTIALLY KNIGHTS AND ELECTROGLAS CANNOT PREDICT WHETHER THE ACTUAL
CONVERSION RATIO WILL BE MORE OR LESS THAN THE PRECEDING HYPOTHETICAL AMOUNT.
ADDITIONAL CASH PAYMENT
If the product of 1,500,000 shares multiplied by the Closing Price (the
"Target Consideration") is less than $29,400,000, then Electroglas will pay to
the Knights Shareholders, on a pro rata basis, an additional cash payment (the
"Knights Shareholder Cash"), which will be an aggregate cash amount equal to the
difference between $29,400,000 and the Target Consideration. For purposes of
calculating the Knights Shareholder Cash, the term "pro rata basis" means based
on the same proportion that the aggregate number of shares of Knights Stock held
by each individual Knights Shareholder bears to the aggregate number of shares
of Knights Stock held by all Knights Shareholders.
TREATMENT OF STOCK OPTIONS
At the Effective Time, each outstanding, unexercised and vested Knights
stock option and each outstanding, unexercised, and unvested Knights stock
option will cease to represent a right to acquire shares of Knights Stock and
will convert automatically into an option to purchase Electroglas Common Stock.
The number of shares of Common Stock of Electroglas subject to the new option
will be equal to the product of the number of shares of Knights Common Stock
subject to the original option and the Conversion Ratio, provided that any
fractional Electroglas Common Stock resulting from such multiplication will be
rounded down to the nearest whole share; and the exercise price per Electroglas
Common Share under the new option will be substantially equal to the quotient
obtained by dividing the exercise price per share of Knights Stock under the
original option by the Conversion Ratio, provided that such exercise price will
be rounded to the nearest cent. The adjustment provided with respect
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<PAGE> 34
to any options that are "incentive stock options" (as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code")) will be and is
intended to be effected in a manner consistent with Section 424(a) or the Code.
The duration and other terms of the new option, including the vesting schedule,
will be the same as the original option except that all references to Knights
will be deemed to be references to Electroglas. None of the options to purchase
Electroglas Common Stock resulting from the conversion will be placed in escrow.
ESCROW
Pursuant to the Escrow Agreement, on the Closing Date, Electroglas will
withhold from the Knights Shareholders on a pro rata basis the Knights
Shareholder Cash or, if cash is insufficient, cash and stock, approximately
equal to approximately ten percent of the aggregate consideration that would
otherwise be delivered to the Knights Shareholders and hold that amount in
escrow for a period of twelve months as collateral for the indemnification
obligations of the Knights Shareholders under the Agreement and for payment of
certain claims and damages described in the Agreement. None of the options to
purchase Electroglas Common Stock that result from the conversion of outstanding
and unexercised options to purchase Knights Common Stock shall be placed in
escrow. If the Merger is consummated, the Representatives, Knights and
Electroglas shall enter into an Escrow Agreement substantially in the form
attached hereto as Appendix B. The Escrow Agreement sets forth the terms and
conditions under which the assets held in Escrow shall be held and disposed of.
See " -- The Escrow Agreement" and " -- The Agreement and Plan of Reorganization
- -- General Indemnification of Knights Shareholders; Liability of Knights
Shareholders for Certain Damages."
CLOSING AND EFFECTIVE DATE
As soon as practicable after the conditions set forth in the Agreement are
satisfied or waived, Knights and Newco will file a Certificate of Merger with
the Delaware Secretary of State and the California Secretary of State (the
"Certificate of Merger"). The Merger will become effective upon such filing (the
"Effective Time"). It is anticipated that, assuming all conditions are met, the
Merger will occur on or before ___________, 1997. See " -- The Agreement and
Plan of Reorganization -- Conditions to the Merger."
EFFECTS OF THE MERGER
At the Effective Time: (a) the separate existence of Newco will cease, and
Newco will be merged with and into Knights, and Knights will be the surviving
corporation; (b) the Articles of Incorporation and Bylaws of Knights will
continue unchanged as the Articles of Incorporation and Bylaws of the surviving
corporation; (c) each share of Knights Stock outstanding immediately prior to
the Effective Time will be converted as described above; (d) each share of Newco
Common Stock outstanding immediately prior to the Effective Time will be
converted into one outstanding share of Knights Common Stock; (e) the Board of
Directors and executive officers of Electroglas will remain unchanged and the
sole director of Newco immediately prior to the Effective Time will become the
sole director of Knights as the surviving corporation and the officers of Newco
will become the officers of Knights; and (f) the Merger will, at and after the
Effective Time, have all of the effects provided by applicable law.
BACKGROUND OF THE MERGER
In their efforts to enhance their market position and grow their businesses
in an increasingly competitive environment, each of Electroglas and Knights has
continually evaluated various strategic alternatives, including mergers and
acquisitions. Other than the Merger described herein, Electroglas has no
commitments or agreements relating to a business combination with any other
acquisition candidate.
On March 7, 1996, Mr. Neil R. Bonke, Chairman of the Board of Electroglas,
and Mr. Thomas A. Sherby, Chief Executive Officer of Knights, met for general
discussion, at which time the possible strategic alliance of Electroglas and
Knights was mentioned.
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<PAGE> 35
On March 20, 1996, Mr. Bonke, Mr. Sherby and Mr. Joseph Savarese, Vice
President, Business Development of Electroglas, met and discussed the possible
strategic alliance of Electroglas and Knights.
On April 18, 1996, Knights retained the investment banking firm of
Montgomery Securities ("Montgomery") to review its strategic alternatives and to
advise Knights in connection with a possible sale of its business.
On April 25, 1996, Mr. Bonke, Mr. Savarese and Mr. Sherby met to discuss a
possible strategic combination of Electroglas and Knights, and the Knights Board
of Directors also discussed progress but took no formal action.
During the period from May 1996 through January 1997, representatives of
Knights and Montgomery contacted a number of companies, including private
and publicly-held companies in the semiconductor capital equipment and
manufacturing enterprise software industries, to ascertain their interest in
entering into a business combination with Knights. Such representatives also
contacted a number of venture capital funds to evaluate the possibility of an
investment in or recapitalization of Knights, in which a portion of the proceeds
would be used to provide liquidity to Knights shareholders. From time to time
during this period, management of Knights held meetings with a number of these
potential partners and considered the interest expressed in Knights by certain
of these parties. In addition, at various times, representatives of Montgomery
met with Knights's management and its Board of Directors to assess the various
strategic alternatives available to Knights and its shareholders.
On May 16, 1996, Mr. Savarese held preliminary discussions with Lehman
Brothers's investment banking group regarding a preliminary analysis and
valuation of Knights.
On May 22, 1996, Mr. Bonke and Mr. Sherby met for further discussion of the
possible strategic combination of Electroglas and Knights.
On May 24, 1996, Electroglas retained Lehman Brothers as their investment
banker for the purposes of the possible strategic combination of Electroglas and
Knights.
On May 30, 1996, Lehman Brothers met at Knights with various Knights
officers to conduct on-site preliminary due diligence. Ms. Mary P. Korn, Chief
Financial Officer of Knights, provided Lehman Brothers with financial statements
and other financial data on Knights.
During the month of June, the management of each of the parties to the
transaction engaged in numerous and detailed discussions and negotiations
regarding the potential acquisition of Knights.
On July 3, 1996, Lehman Brothers met with Knights officers to discuss and
clarify various issues related to the potential acquisition of Knights.
On July 19, 1996, Lehman Brothers presented to Electroglas's management
their valuation analysis of Knights.
On July 23, 1996, the Electroglas Board of Directors engaged in a detailed
discussion of the proposed transaction and considerations related thereto,
including the valuation of Knights.
On August 2, 1996, Messrs. Bonke, Wozniak and Sherby met to continue
negotiations relating to the potential acquisition of Knights.
On September 20, 1996, Mr. Wozniak and Mr. Sherby met to continue
discussions and Electroglas subsequently delivered to Knights a letter of intent
proposing to acquire Knights, which letter of intent was subsequently rejected
by Knights.
During the months of October 1996 and November 1996, Electroglas's
management continued to engage in internal discussions and discussions with
Lehman Brothers as to the potential acquisition of Knights.
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<PAGE> 36
On October 25, 1996, the Knights Board of Directors discussed progress on
the potential acquisition of Knights but took no formal action.
On December 17, 1996, Mr. Savarese telephoned Mr. Sherby and continued
discussions regarding the proposed transaction.
On December 19, 1996, Mr. Savarese and Mr. Sherby met to discuss the
valuation of Knights.
On December 20, 1996, Electroglas delivered to Knights a letter of intent
to acquire Knights.
On December 30, 1996, Montgomery delivered to Knights an analysis of the
valuation of Knights contained in Electroglas's December 20, 1996 letter.
During the remainder of December 1996 and in to early January 1997,
Knights's management and Montgomery continued to analyze the valuation of
Knights.
On January 22, 1997, Montgomery and Knights's management prepared a counter
proposal to Electroglas's December 20, 1996 letter agreeing to recommend the
proposed merger to the Knights Board of Directors if certain conditions were met
by Electroglas. The resulting counter proposal was put into a letter which was
delivered by Mr. Sherby to Mr. Bonke, Mr. Wozniak and Mr. Savarese the same day.
On January 23, 1997, the Knights Board of Directors and Montgomery engaged
in a detailed discussion of both the strategic implications to Knights of the
proposed merger and of the valuation.
On January 24, 1997, Electroglas delivered to Knights a new letter of
intent to acquire Knights.
On January 25, 1997, Mr. Sherby discussed the details of Electroglas's
January 24, 1997 letter with Montgomery.
On January 25, 1997 and January 26, 1997, Mr. Savarese and Mr. Sherby
discussed the details of Electroglas's January 24, 1997 letter.
On January 28, 1997, Electroglas delivered to Knights a new letter of
intent to acquire Knights which was modified and signed by Mr. Sherby on behalf
of Knights. The modifications were subsequently rejected by Electroglas.
On January 31, 1997, Electroglas delivered to Knights a new letter of
intent to acquire Knights which was signed by Mr. Sherby on behalf of Knights
the same day.
During the month of February 1997, Electroglas conducted certain
preliminary due diligence on Knights, including a series of formal meetings,
informal telephone conversations and the review and analysis of various
documents and financial data provided to Electroglas. During such period,
Electroglas drafted and negotiated with Knights a definitive agreement for the
proposed transaction.
On March 4, 1997, the Electroglas Board of Directors met and considered the
terms of the proposed transaction. The Electroglas Board of Directors then
unanimously approved the terms of the proposed transaction and authorized Mr.
Wozniak to negotiate and consummate a definitive agreement and plan of
reorganization with Knights.
On March 12, 1997, the Knights Board of Directors met and discussed the
terms set forth in the form of definitive agreement for the proposed
transaction. The Knights Board approved the definitive agreement and the
transactions contemplated thereby.
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<PAGE> 37
On March 12, 1997, the Agreement was signed by each of Electroglas, Knights
and the Principal Knights Shareholders.
RECOMMENDATIONS OF THE BOARD OF KNIGHTS; KNIGHTS'S REASONS FOR THE MERGER
The factors considered by the Knights Board in approving the Merger
included, but were not limited to, the following: Electroglas is highly
respected by Knights target customer base and a merger with Electroglas will
enhance Knights's position in the industry; Electroglas's global distribution
and support channels support semiconductor manufacturing facilities throughout
the world and would provide Knights with the opportunity to quickly penetrate
target markets; the belief that Electroglas has both the capital and
infrastructure resources to meet the requirements for continued growth of
Knights; Electroglas's continued support of investment in research and
development, total quality management and providing information management
systems to the semiconductor industry; the Merger presents an opportunity for
Knights Shareholders to enhance the liquidity of their investment through their
holdings of publicly traded Electroglas Common Stock; the Merger will have a
positive impact on the employees of Knights due to the assessment that
Electroglas's culture and values closely matched those of Knights; the ability
of Knights employees to continue to vest their current Knights option holdings
under Electroglas employee stock option plan; and, finally, the strategic
alternatives for Knights other than the Merger, including remaining as an
independent company and obtain additional financing, entering into another
business combination or entering into some other affiliation with a strategic
partner.
By unanimous vote, the Board approved the Agreement and the Merger and
authorized Mr. Sherby, Ms. Korn and Mr. Liu to sign the Merger Agreement.
THE BOARD OF DIRECTORS OF KNIGHTS RECOMMENDS THAT SHAREHOLDERS OF KNIGHTS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND MERGER.
DETERMINATION OF THE BOARD OF ELECTROGLAS
The Electroglas Board has concluded that the terms of the proposed Merger
are fair to, and in the best interests of, Electroglas and its stockholders.
EMPLOYMENT OFFERS
Electroglas has made offers of employment to four current employees of
Knights to serve as officers of the Knights Technology subsidiary of Electroglas
(the "Knights Subsidiary") after the Merger. The offers are all contingent on
the completion of the Merger by May 29, 1997. Thomas A. Sherby, currently
Chairman, President and CEO of Knights, has been offered the position of
President of the Knights Subsidiary. Mary P. Korn, currently Vice President of
Finance and Administration, Chief Financial Officer and Secretary of Knights,
has been offered the position of Vice President of Finance and Administration of
the Knights Subsidiary. Ankush Oberai, currently Vice President of Worldwide
Sales and Strategic Marketing of Knights, has been offered the position of Vice
President of Sales and Strategic Marketing of the Knights Subsidiary. Kuang-Hua
Ken Huang, currently Vice President of Engineering of Knights, has been offered
the position of Vice President of Engineering of the Knights Subsidiary. See
"Other Agreements."
THE AGREEMENT AND PLAN OF REORGANIZATION
REPRESENTATIONS AND WARRANTIES. In the Agreement, Knights, the Principal
Knights Shareholders and Electroglas have made representations and warranties as
to various aspects of their respective corporations, including the following:
their organization and good standing; the existence of requisite corporate power
and authority to enter in the Agreement and the validity of the Agreement as a
binding obligation of each corporation; and that the execution, delivery and
performance of the Agreement will not contravene the terms of any law or legal
judgment or decree, or contravene the corporation's articles, bylaws or, except
as disclosed by Knights, any material
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<PAGE> 38
contract of either corporation. Knights and the Principal Knights Shareholders
have made representations and warranties as to additional aspects of Knights,
including the following: the capitalization of Knights, including the number of
outstanding options; the absence of any subsidiaries; litigation against
Knights; the accuracy of Knights financial statements; payment of taxes; Knights
possession of good title to all its properties; the absence of certain changes
in the business of Knights from its ordinary course; the material agreements and
commitments of Knights, the intellectual property rights of Knights, compliance
with laws; absence of ownership interest in competitors of Knights by directors
and officers of Knights or members of their immediate family, the absence of
material contracts of Knights in which the officers or directors or their
immediate family members have a direct or indirect interest; employment matters;
absence of brokers, the absence of previously undisclosed material facts
relating to the Agreement, corporate documents, books and records, insurance,
environmental matters, government contracts and the contents of the Registration
Statement. Electroglas has made additional representations regarding the truth
of the reports filed by Electroglas with the Securities and Exchange Commission
pursuant to Electroglas's obligations as a reporting company under the
Securities and Exchange Act of 1934 and the contents of the Registration
Statement.
Approximately ten percent of the Electroglas Common Stock or cash that the
Knights Shareholders would otherwise be entitled to receive will be held in
escrow as collateral for certain claims that might arise against Knights in the
twelve months after the Closing, including claims resulting from any breach in
the representations and warranties of Knights described in the preceding
paragraph. Therefore, the Knights Shareholders are urged to read the
representations and warranties of Knights contained in the Agreement. See "--
The Escrow Agreement" and "-- General Indemnification by Knights Shareholders;
Liability of Knights Shareholders for Certain Damages."
COVENANTS OF KNIGHTS AND ELECTROGLAS. Under the Agreement, Knights has
agreed that from the date of the Agreement through the Effective Time it will
advise Electroglas of any event that would render any representation or warranty
of Knights contained in the Agreement (if the representation or warranty were
made on or as of the date of the event or the Closing Date) untrue or inaccurate
in any material respect and of any material adverse change in Knights's
financial condition, properties, assets, liabilities, business, results of
operations or prospects, that it will maintain its business, reporting to
Electroglas a material deterioration in the relationship with any material
customer, supplier or key employee, and, if requested by Electroglas, exert all
reasonable efforts to restore the relationship. Knights has also agreed that
from the date of the Agreement through the Effective Time it will not, without
the prior written consent of the President of Electroglas, such consent not to
be unreasonably withheld, do or agree to do any of the following: (a) borrow any
money; (b) enter into any transaction not in the ordinary course of business or
enter into any transaction or make any commitment involving an expense of
Knights or capital expenditure by Knights in excess of $10,000; (c) encumber or
permit to be encumbered any of its assets except in the ordinary course of its
business consistent with past practice and to an extent which is not material;
(d) dispose of any of its material assets except in the ordinary course of
business consistent with past practice; (e) enter into any material lease or
contract for the purchase or sale of any property, real or personal, tangible or
intangible, except in the ordinary course of business consistent with past
practice, or enter into any of certain types of agreements; (f) fail to maintain
its equipment and other assets in good working condition and repair according to
the standards it has maintained to the date of the Agreement, subject only to
ordinary wear and tear; (g) pay any bonus, royalty, increased salary (except for
annual increases in the ordinary course of business consistent with past
practice and disclosed to Electroglas in writing) or special remuneration to any
officer, employee or consultant (except pursuant to existing arrangements
heretofore disclosed in writing to Electroglas) or enter into any new employment
or consulting agreement with any such person, or enter into any new employment
agreement or employment benefit plan; (h) change accounting methods; (i)
declare, set aside or pay any cash or stock dividend or other distribution in
respect of capital stock, or redeem or otherwise acquire any of its capital
stock; (j) amend or terminate any contract, agreement or license to which it is
a party except those amended or terminated in the ordinary course of business,
consistent with past practice, and which are not material in amount or effect;
(k) lend any amount to any person or entity, other than advances for travel and
expenses which are incurred in the ordinary course of business consistent with
past practice, not material in amount, which travel and expenses shall be
documented by receipts for the claimed amounts; (l) guarantee or act as a surety
for any obligation except for the endorsement of checks and other negotiable
instruments in the ordinary course of business, consistent with past practice;
(m) waive or release any material right or claim except in the ordinary course
of business, consistent with past practice; (n) issue or sell any shares of its
capital stock of any class or any other of its securities, or issue or create
any warrants, obligations,
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subscriptions, options, convertible securities, stock appreciation rights or
other commitments to issue shares of capital stock, or accelerate the vesting of
any outstanding option or other security; (o) split or combine the outstanding
shares of its capital stock of any class or enter into any recapitalization
affecting the number of outstanding shares of its capital stock of any class or
affecting any other of its securities (p) except for the Merger, merge,
consolidate or reorganize with, or acquire any entity; (q) amend its Articles of
Incorporation or Bylaws; (r) license any of Knights's technology or any of
Knights's Intellectual Property, except in the ordinary course of business
consistent with past practice; (s) change any insurance coverage or issue any
certificates of insurance, except for issuances of certificates of insurance in
the ordinary course of business; (t) terminate the employment of any key
employee; or (u) agree to do any of the things described in clauses (a) through
(t).
The Agreement also provides that Knights shall do the following: cause
present employees and consultants of Knights who have not previously done so to
execute assignments assigning their copyright and other intellectual property
rights to Knights; execute and file, or join in the execution of filing, of any
application or document necessary to obtain regulatory approval; use its best
efforts to obtain any written consents necessary to consummate the transaction
and for Electroglas to carry on the business of Knights; notify Electroglas
promptly in writing of any new litigation, proceeding or investigation; provide
Electroglas with reasonable access (subject to certain conditions regarding
treatment of confidential material) to its files, books, records and offices,
financial and intellectual property materials; use all reasonable efforts to
satisfy the conditions to closing set forth in the Agreement or to cause the
conditions to be satisfied; use its best efforts to assist Electroglas to the
extent necessary to comply with the securities and Blue Sky laws of all
jurisdictions applicable in connection with the Merger; notify Electroglas if
any of Knights's key employees intends to cease working for Knights; not take
any action that would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code; prepare and
timely file all tax returns and amendments due up to the Closing; to pay all
taxes except those being contested in good faith by Knights or for which Knights
has set aside reserves on its books; and terminate all tax allocation and tax
sharing agreements of Knights. Knights has also agreed to authorize its officers
to execute and deliver any documents or instruments that Electroglas considers
reasonably necessary, or that Electroglas is advised are reasonably necessary,
to vest, perfect or confirm title of Knights's assets in Electroglas.
Electroglas has agreed to do the following: to provide Knights with
reasonable access to its management and officers and material information
regarding Electroglas; to use all reasonable efforts to satisfy the conditions
to Closing set forth in the Agreement or to cause the conditions to be
satisfied; to execute and file, or join in the execution or filing, of any
application or document necessary to obtain regulatory approval; and, until the
Closing, not to repurchase any publicly traded shares of Electroglas Common
Stock at a price less than $18.00 per share.
NO SOLICITATION OR NEGOTIATION OF TRANSACTIONS. The Agreement also provides
that between the date of the Agreement and the termination of the Agreement or
consummation of the Merger, Knights will not authorize any officer, director,
employee or affiliate of Knights, or any other person, to solicit, facilitate,
discuss or encourage any offer, inquiry or proposal received from any party
other than Electroglas, concerning the possible disposition of all or any
substantial portion of Knights's business, assets or capital stock by merger,
sale or any other means, or otherwise solicit, facilitate, discuss or encourage
any such disposition through a transaction other than the Merger, or provide any
confidential information to, or negotiate with, any third party other than
Electroglas in connection with any offer, inquiry or proposal concerning any
such disposition. Knights will immediately notify Electroglas of any such offer,
inquiry or proposal.
CONDITIONS TO THE MERGER. Each party's respective obligation to effect the
Merger is conditioned, among other things, on the fulfillment or satisfaction of
following items: the truth and completeness in all material respects of the
representations and warranties of the other party; the performance by the other
party of its covenants under the Agreement; the absence of any order, decree or
ruling by any court or governmental agency or threat thereof that would prohibit
the transactions contemplated by the Agreement or render them illegal; the
obtaining of any permits or authorizations required by any regulatory authority
having jurisdiction over the parties, including the satisfaction of all
requirements under applicable state and federal securities laws; receipt of all
written consents, assignments, waivers, authorizations or other certificates
reasonably deemed necessary by legal counsel to consummate the Merger; the
absence of any pending litigation or proceeding that will have the probable
effect of enjoining or
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preventing the consummation of any of the transactions provided for in the
Agreement; and the receipt of an opinion of counsel for the other party covering
matters typical for a transaction such as the Agreement.
The obligation of Knights to effect the Merger is conditioned, in addition
to the items in the preceding paragraph, on the Registration Statement becoming
effective in accordance with the provisions of the Securities Act.
The obligation of Electroglas to effect the Merger is conditioned, in
addition to the items in the first paragraph under this caption, on the
fulfillment or satisfaction of the following items: delivery by the Chief
Financial Officer of Knights of a true and complete list of Knights Vested
Options and Knights Unvested Options; approval of the Agreement by the Knights
Shareholders in accordance with the California Corporations Code (the "CCC");
delivery by counsel to Electroglas of an opinion that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code; absence of any litigation or proceedings not
previously disclosed that could reasonably be expected to have a material
adverse effect on the financial condition or results of operations of Knights;
the execution and delivery by Knights and the Representatives of the Escrow
Agreement; the absence of any material adverse change in the business of Knights
(other than on account of matters which affect the general economy or the
industry in which Knights is engaged or events triggered by Electroglas's
statements as to its intentions regarding its future management of Knights);
Electroglas's not becoming aware of, and its due diligence investigation of
Knights not revealing, any facts or circumstances or conditions specific to
Knights that have or would have a material adverse effect on the business of
Knights; dissenting shares of Knights Common Stock not exceeding five percent of
the issued and outstanding shares of Knights Common Stock on the Closing Date;
and no holder of Knights Preferred Stock having exercised dissenters' rights.
TERMINATION; AMENDMENT; EXPENSES. The Merger Agreement may be terminated at
any time prior to the Effective Time, whether before or after approval by the
Knights Shareholders, (a) by the mutual consent of Knights and Electroglas; (b)
by either Knights or Electroglas, if the conditions to closing have not been
satisfied or waived on or before July 15, 1997, other than as a result of breach
by the terminating party; (c) by Knights, if Electroglas materially breaches any
of its representations, warranties, covenants or agreements, or any material
representation of Electroglas becomes untrue, and Electroglas does not cure the
breach within a reasonable time or thirty days (whichever is longer); (d) by
Electroglas, if Knights materially breaches any of its representations,
warranties, covenants or agreements, or if any material representation of
Knights in the Agreement becomes untrue and Knights does not cure the breach
within a reasonable time or thirty days (whichever is longer); or (e) by either
Knights or Electroglas if a federal or state court issues a permanent injunction
or other order that would make the Merger illegal or otherwise restrain or
prohibit its consummation.
The Agreement may be amended, and the observance of any of its terms may be
waived, only by a writing signed by the party to be bound by the amendment or
waiver. Electroglas, Knights and the Principal Knights Shareholders may amend
the Agreement at any time before or after the approval of the Knights
Shareholders.
Each party will bear its own expenses and fees of its accountants,
attorneys, investment bankers and other professionals incurred with respect to
this Agreement; however, if the Merger is consummated, Electroglas will pay at
or immediately before the Closing the reasonable accounting and attorneys' fees
and expenses incurred by Knights in connection with the Merger up to a maximum
of $125,000.
GENERAL INDEMNIFICATION BY KNIGHTS SHAREHOLDERS; LIABILITY OF KNIGHTS
SHAREHOLDERS FOR CERTAIN DAMAGES. In the Agreement, the Knights Shareholders
agree to indemnify and hold harmless Electroglas and its officers, directors,
agents and employees, and each person, if any, who controls or may control
Electroglas within the meaning of the Securities Act (referred to individually
as an "Indemnified Person" and collectively as "Indemnified Persons") from and
against any and all claims, demands, actions, causes of action, losses, costs,
damages, liabilities and expenses including, without limitation, reasonable
legal fees (collectively, "Damages"): (1) arising out of any misrepresentation
or breach of or default in connection with any of the representations,
warranties or covenants given or made by Knights or the Principal Knights
Shareholders in the Agreement or any certificate, document or instrument
delivered by or on behalf of Knights or by one of the Knights Shareholders
pursuant to the Agreement; or (2) resulting from any failure of any Knights
Shareholder to have good, valid and marketable title to the issued and
outstanding Knights capital stock held by the Shareholder, free and clear of all
liens, claims, pledges, options,
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adverse claims, assessments or charges of any nature whatsoever, or to have full
right, capacity and authority to vote such Knights capital stock in favor of the
Merger and the other transactions contemplated by the Agreement of Merger.
LIMITATIONS; EXCEPTION TO LIMITATIONS. The indemnification provisions will
comprise the sole and exclusive remedies of the Indemnified Persons for breach
of, or misrepresentation or default in connection with, any of the
representations, warranties or covenants given by or on behalf of Knights or by
one of the Knights Shareholders pursuant to the Agreement. The Indemnified
Persons will exercise their remedies only with respect to the Escrow Assets and
any other assets deposited in escrow pursuant to the Escrow Agreement, and the
Knights Shareholders shall not incur liability for Damages (as defined above)
beyond the Escrow Assets. However, the liability of any of the Knights
Shareholders for any intentional misrepresentation, fraud or criminal act will
not be limited. The Knights Shareholders will settle any claims for
indemnification or payment by returning to Electroglas shares of Electroglas
Common Stock valued at the Closing Price and/or cash.
EXPIRATION OF REPRESENTATIONS AND WARRANTIES; SURVIVAL OF CLAIMS. The
representations, warranties and covenants of Knights and the Principal Knights
Shareholders will remain operative and in full force and effect (but only as of
the date they were made and as of the date of Closing) after the Closing, but a
claim for violation of the representations and warranties by Knights may only be
raised if written notice of the Claim is given to Knights on or prior to the day
one year after the Closing (the "Applicable Expiration Date"). An Indemnified
Person's right to indemnification for breach of any representation or warranty
will survive the expiration of that representation or warranty if the
Indemnified Person makes the claim for indemnification or Damages prior to the
expiration of a particular representation or warranty. If the Agreement is
terminated, the representations, warranties and covenants of Knights and the
Principal Knights Shareholders will terminate at the same time, except for
covenants relating to treatment of confidential materials of Electroglas,
dispute resolution, expenses, assignment and other similar items.
The representations, warranties and covenants of Electroglas shall remain
in full force and effect after the Closing until the termination of the Escrow
Period. If the Agreement is terminated, the representations, warranties and
covenants of Electroglas will terminate.
INDEMNIFICATION PROCEDURES. Thomas A. Sherby, Dag Tellefsen and Shao-Hung
Gerald Liu will act as representatives of the Knights Shareholders for purposes
of the Escrow Agreement and the Agreement (the "Representatives"). They will be
duly authorized to be the Representatives and have the authority to bind the
Knights Shareholders for purposes of the Escrow Agreement. Promptly after the
receipt by Electroglas of notice or discovery of any claim, damage or legal
action or proceeding giving rise to indemnification or payment rights for
Damages under the Agreement, Electroglas will give the Representatives and the
Escrow Agent written notice of the claim, damage, legal action or proceeding (a
"Claim") in accordance with Section 3 of the Escrow Agreement. Electroglas may
assert a Claim at any time prior to the Applicable Expiration Date. Within ten
days of delivery of such written notice, the Representatives may, at the expense
of the Knights Shareholders, elect to take all necessary steps properly to
contest any Claim involving third parties or to prosecute the Claim to
conclusion or settlement satisfactory to the Representatives. If the
Representatives make the foregoing election, Electroglas will have the right to
participate at its own expense in all proceedings. If the Representatives do not
make such an election, Electroglas will be free to handle the prosecution or
defense of any such Claim, will take all necessary steps to contest the Claim
involving third parties or to prosecute such Claim to conclusion or settlement
satisfactory to Electroglas, and will notify the Representatives of the progress
of any such Claim, will permit the Representatives at the sole cost of the
Knights Shareholders to participate in such prosecution or defense and will
provide the Knights Shareholders with reasonable access to all relevant
information and documentation relating to the Claim and Electroglas's
prosecution or defense thereof. In any case, the party not in control of the
Claim will cooperate with the other party in the conduct of the prosecution or
defense of such Claim. Neither party will compromise or settle any such Claim
without the written consent of either Electroglas (if the Representatives defend
the Claim) or the Representatives (if Electroglas defends the Claim), such
consent not to be unreasonably withheld.
GOVERNING LAW; ARBITRATION OF DISPUTES. The Agreement provides that the
laws of the State of California shall govern the validity of the Agreement
(irrespective of choice of law principles), the construction of its terms, and
the
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interpretation and enforcement of the rights and duties of the parties. Disputes
arising under the Agreement shall be settled by arbitration under procedures set
forth in the Agreement.
THE ESCROW AGREEMENT
On the Closing Date, Electroglas will withhold from the Knights
Shareholders on a pro rata basis the cash payable as the Knights Shareholder
Cash; provided, however, that the cash withheld (the "Escrow Cash") shall not
exceed ten percent of the sum of (i) the Knights Shareholder Cash and (ii) the
product of the aggregate number of shares of Electroglas Common Stock issued
upon the conversion of the Knights Stock multiplied by the Closing Price, which
sum is referred to as the "Target Escrow Cash." If the Escrow Cash is less than
the Target Escrow Cash, then Electroglas will withhold from the Knights
Shareholders on a pro rata basis shares of Electroglas Common Stock issued in
the Merger equal to the quotient of (i) the Target Escrow Cash minus the cash
(if any) withheld from the Additional Cash Payment, divided by (ii) the Closing
Price. The Escrow Cash and stock held in escrow (the "Escrow Assets") will be
held for twelve months to secure the indemnification obligations of the Knights
Shareholders and to pay any Damages (as defined in the Agreement) arising under
the Agreement to Electroglas and other Indemnified Persons (as defined above)
(see " -- the Agreement and Plan of Reorganization -- General Indemnification by
Knights Shareholders; Liability of Knights Shareholders for Certain Damages").
None of the options to purchase Electroglas Common Stock that will be exchanged
for options to purchase Knights Common Stock shall be withheld in escrow. The
terms under which the Escrow Assets shall be held and disposed of are set forth
in the Escrow Agreement.
APPROVAL OF THE AGREEMENT AND THE MERGER BY THE KNIGHTS SHAREHOLDERS AT THE
KNIGHTS SPECIAL MEETING SHALL CONSTITUTE APPROVAL OF THE ESCROW AGREEMENT AND
APPROVAL OF THE APPOINTMENT OF MESSRS. SHERBY, TELLEFSEN AND LIU AS
REPRESENTATIVES OF THE KNIGHTS SHAREHOLDERS.
The following description of the Escrow Agreement does not purport to be a
complete statement of the terms of the Escrow Agreement and is qualified in its
entirety by reference to the Escrow Agreement, which is attached as Appendix B
to this Proxy Statement/Prospectus and is incorporated herein by reference.
LIMITATIONS ON LIABILITY. The Knights Shareholders will not incur liability
under the Agreement or under the Escrow Agreement beyond the Escrow Assets, and
the Indemnified Persons shall exercise their remedies under the Agreement and
the Escrow Agreement only with respect to the number of Escrow Shares and/or the
cash amount that shall be set forth next to each Knights Shareholder's name on
Attachment A to the Escrow Agreement at the time of Closing. However, the
liability of any Knights Shareholders for any intentional misrepresentation,
fraud or criminal act will not be limited.
DIVIDENDS, VOTING AND RIGHTS OF OWNERSHIP. Except for tax-free dividends
paid in stock declared with respect to the Escrow Shares pursuant to Section
305(a) of the Code ("Additional Escrow Securities"), any distributions of any
kind made in respect of the Escrow Shares will be distributed currently by
Electroglas to each Knights Shareholder. Each Knights Shareholder will have the
right to vote the Escrow Shares deposited in that Knights Shareholder's account
so long as the Escrow Shares are held in escrow. While the Escrow Shares remain
in the Escrow Agent's possession, the Knights Shareholders will retain and will
be able to exercise all other incidents of ownership of the Escrow Shares that
are not inconsistent with the terms and conditions of the Escrow Agreement.
INDEMNIFICATION AND PAYMENT OF CLAIMS. The Representatives may bind the
Knights Shareholders for purposes of the Escrow Agreement and take any other
action as Representatives that is approved by a majority of the Representatives.
Promptly after receipt by Electroglas of notice or discovery of any claim,
damage or legal action or proceeding (a "Claim") giving rise to indemnification
rights under the Agreement, Electroglas will give the Representatives and the
Escrow Agent written notice of the Claim, which Electroglas may assert at any
time prior to the Applicable Expiration Date of the matter subject to the Claim.
Within thirty calendar days of delivery of written notice, the Representatives
may, at the expense of the Knights Shareholders, elect to take all necessary
steps properly to contest any Claim involving third parties or to prosecute the
Claim to conclusion or settlement satisfactory to the Representatives. If the
Representatives make the foregoing election, Electroglas has the right to
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participate at its own expense in all proceedings. If the Representatives do not
make such an election, Electroglas is free to handle the prosecution or defense
of any such Claim, take all necessary steps to contest the Claim involving third
parties or prosecute the Claim to conclusion or settlement satisfactory to
Electroglas, and will notify the Representatives of the progress of any such
Claim, will permit the Representatives, at the sole cost of the Knights
Shareholders, to participate in such prosecution or defense and will provide the
Representatives with reasonable access to all relevant information and
documentation relating to the Claim and Electroglas's prosecution or defense
thereof. In any case, the party not in control of the Claim will cooperate with
the other party in the conduct of the prosecution or defense of such Claim.
Neither party will compromise or settle any such Claim without the written
consent of either Electroglas (if the Representatives defend the Claim) or the
Representatives (if Electroglas defends the Claim).
DISTRIBUTIONS TO KNIGHTS SHAREHOLDERS. Twelve months after the Closing Date
(the "Final Release Date"), the Escrow Agent will release from escrow to each
Knights Shareholder the Knights Shareholders' Escrow Assets, plus that portion
of all Additional Escrow Shares related to the Escrow Shares, less (A) any
Escrow Assets delivered to Electroglas in satisfaction of Claims by Electroglas
and (B) any Escrow Assets subject to delivery to Electroglas with respect to any
then pending but unresolved Claims of Electroglas. Any Escrow Assets held as a
result of clause (B) will be released to the Knights Shareholders or released to
Electroglas (as appropriate) promptly upon resolution of each specific Claim
involved. Notwithstanding anything to the contrary in the Escrow Agreement, the
Escrow Agent will not deliver any Escrow Assets out of Escrow to Electroglas
until claims exceed $50,000.
RELEASE OF ESCROW ASSETS. Within five business days after the applicable
release condition is met (either due to the expiration of the Escrow Period or
to the resolution of any pending Claim for which the Escrow Assets were held),
the Escrow Agent will deliver to the Knights Shareholders the requisite number
of Escrow Shares and the amount of Escrow Cash to be released on that date as
identified by Electroglas and the Representatives to the Escrow Agent in
writing. The delivery will be in the form of stock certificates issued in the
name of such Knights Shareholders and cash, as applicable. The Escrow Agent will
have stock certificates and/or checks in its possession no later than three
business days prior to the day on which Escrow Agent is to deliver certificates
or cash to the Knights Shareholders. Certificates representing Escrow Assets
will bear a legend during the escrow period, before the Final Release Date,
indicating that they are subject to the Agreement. Cash will be paid in lieu of
fractions of Escrow Shares in an amount equal to the same fraction of the
Closing Price. Within five business days after a written request by the
Representatives, Electroglas will submit a certified schedule of the cash
amounts payable for fractional shares and will deposit with the Escrow Agent
sufficient funds to pay the scheduled cash amounts for fractional shares.
NO ENCUMBRANCE. No Escrow Assets or any beneficial interest may be pledged,
sold, assigned or transferred, including by operation of law, by a Knights
Shareholder or be taken or reached by any legal or equitable process in
satisfaction of any debt or other liability of the Knights Shareholders (other
than the Knights Shareholders obligations under the Agreement), prior to the
delivery to the Knights Shareholders of the Escrow Assets by the Escrow Agent.
UNCONTESTED CLAIMS. In the event that the Representatives do not contest a
Notice of Claim in writing to the Escrow Agent and Electroglas, the Escrow Agent
will immediately deliver to Electroglas that number of Escrow Shares for
cancellation and/or an amount of Escrow Cash having a value equal to the amount
of Damages specified in the Notice of Claim, which will be allocated among the
Knights Shareholders in proportion to their percentage interests in the Escrow
Assets set forth on Attachment A to the Escrow Agreement at the time of Closing,
and will notify the Representatives of such transfer.
CONTESTED CLAIMS; ARBITRATION. If the Representatives give written notice
contesting all, or a portion of, a Notice of Claim to Electroglas and the Escrow
Agent (a "Contested Claim") within 30 calendar days, matters that are subject to
third party claims brought against Electroglas or Knights in a litigation or
arbitration will await the final decision, award or settlement of such
litigation or arbitration, while matters that arise between Electroglas on the
one hand and Knights on the other hand ("Arbitrable Claims"),will be settled by
binding arbitration. Any portion of the Notice of Claim that is not contested
will be resolved as set forth above in "Uncontested Claims." After notice that
the Representatives contest a Notice of Claim, the Escrow Agent will continue to
hold sufficient
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Escrow Assets to cover the Claim after the Final Release Date until either a
settlement by Electroglas and the Representatives of the Notice of Claim or the
final determination of the arbitrator. Any Arbitrable Claim shall be settled by
arbitration in San Francisco, California, and, except as specifically stated in
the Escrow Agreement, in accordance with the commercial arbitration rules of the
American Arbitration Association (the "AAA") then in effect. Any amount owed to
Electroglas, determined pursuant to "Uncontested Claims" or "Contested Claims"
above, will be immediately payable to Electroglas out of the Escrow Assets then
held by the Escrow Agent on a pro rata basis among the Knights Shareholders at a
per share value for all Escrow Shares equal to the Closing Price of Electroglas
Common Stock. In asserting any claim, Electroglas need not exhaust any other
remedies that may be available to it, but shall proceed directly in accordance
with the provisions of the Escrow Agreement; the assertion of any single Claim
for indemnification under the Escrow Agreement will not bar Electroglas from
asserting other Claims under the Escrow Agreement.
LIMITATION OF ESCROW AGENT'S LIABILITY. The Escrow Agent will incur no
liability with respect to any action taken or suffered by it in reliance upon
any notice, direction, instruction, consent, statement or other document
believed by it to be genuine and duly authorized, nor for any other action or
inaction, except its own willful misconduct or gross negligence. The Escrow
Agent shall have no duty to inquire into or investigate the validity, accuracy
or content of any document delivered to it. In the event conflicting demands are
made or conflicting notices are served upon the Escrow Agent with respect to the
Escrow Assets, the Escrow Agent will have the absolute right, at the Escrow
Agent's election, to either resign so a successor can be appointed, or file a
suit in interpleader and obtain an order from a court of competent jurisdiction
requiring the parties to interplead and litigate in such court their several
claims and rights among themselves or do both.
The other parties to the Escrow Agreement agree to jointly and severally
reimburse, indemnify and hold harmless Escrow Agent, and its officers,
directors, employees, counsel and agents, from and against any damages,
liability or loss suffered arising out of the Escrow Agreement or Escrow Agent's
services thereunder, except for gross negligence and willful misconduct on
Escrow Agent's part.
KNIGHTS SHAREHOLDERS' REPRESENTATIVES. The Representatives will be
authorized to take any action deemed by them appropriate or necessary to carry
out the provisions of, and to determine the rights of the Knights Shareholders
under, the Escrow Agreement and the Agreement. The Representatives shall serve
as the agents of the Knights Shareholders for all purposes related to the Escrow
Agreement and the Agreement including, without limitation, receiving service of
process on behalf of the Knights Shareholders. The Representatives will not be
entitled to receive any compensation from Electroglas in connection with their
services under the Escrow Agreement.
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting
in accordance with generally accepted accounting principles. Under the
"purchase" method of accounting, the aggregate consideration paid by the
acquiring company, which is deemed to be Electroglas, is allocated to the
acquired assets and liabilities (in this instance, of the business of Knights)
based on their fair market values at the Effective Time with any excess being
treated as goodwill. Results of operations of the Knights business, including
the related amortization of intangible assets and write-off of in-process
research and development associated with the Merger, will be included in the
results of operations of Electroglas subsequent to the Effective Time. See "Risk
Factors -- Integration of the Business."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Electroglas has made offers of employment to four current employees of
Knights to serve as officers of the Knights Technology subsidiary of Electroglas
(the "Knights Subsidiary") after the Merger. The offers are all contingent on
the completion of the Merger by May 29, 1997. Thomas A. Sherby, currently
Chairman, President and CEO of Knights, has been offered the position of
President of the Knights Subsidiary. Mary P. Korn, currently Vice President of
Finance and Administration, Chief Financial Officer and Secretary of Knights,
has been offered the position of Vice President of Finance and Administration of
the Knights Subsidiary. Ankush Oberai, currently
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Vice President of Worldwide Sales and Strategic Marketing of Knights, has been
offered the position of Vice President of Sales and Strategic Marketing of the
Knights Subsidiary. Kuang-Hua Ken Huang, currently Vice President of Engineering
of Knights has been offered the position of Vice President of Engineering of the
Knights Subsidiary. See "Other Agreements."
Unvested options for 15,750 shares of Knights held by each of Robert
Anderson, Shao-Hung Gerald Liu and Dag Tellefsen and unvested options for 20,000
shares of Knights held by James Poitras, each a director of Knights, will vest
and become exercisable upon the consummation of the Merger. Unvested options for
51,780 shares and 137,860 shares held by Ms. Korn and Mr. Sherby will vest and
become exercisable upon the consummation of the Merger.
REGULATORY APPROVALS
Electroglas and Knights are aware of no governmental or regulatory
approvals required for consummation of the Merger, other than compliance with
the federal securities laws and applicable securities and "blue sky" laws of the
various states.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary addresses the material federal income tax
consequences of the Merger to the Knights Shareholders. However, Knights
Shareholders should be aware that this summary does not address all federal
income tax considerations that may be relevant to particular Knights
Shareholders in light of their particular circumstances, such as stockholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, who are tax-exempt
organizations, who are life insurance companies, who are other financial
institutions, who are partnership or other pass-through entities, who are
regulated investment companies, who do not hold their Knights common stock as
capital assets, or who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions. The summary also
does not address the tax consequences of the Merger under foreign, state or
local tax laws, the tax consequences of transactions effectuated prior or
subsequent, or concurrently with, the Merger (whether or not any such
transactions are undertaken in connection with the Merger), including without
limitation any transaction in which shares of Knights Stock are acquired or
shares of Electroglas Common Stock are disposed of, or the tax consequences of
the assumption by Electroglas of the options to acquire stock of Knights. The
summary reflects the opinion of counsel attached as exhibits to the Registration
Statement of which this Proxy Statement/Prospectus is a part (the "Exhibit
Opinion"). The Exhibit Opinion, which is based upon certain assumptions and
subject to certain limitations and qualifications as noted therein, was
delivered by Morrison & Foerster LLP.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, KNIGHTS SHAREHOLDERS AND HOLDERS OF OPTIONS TO ACQUIRE KNIGHTS
STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
The following summary is based upon Electroglas counsel's interpretation of
the Code, applicable Treasury Regulations, judicial authority and administrative
rulings and practice, as in effect on the date hereof. The Internal Revenue
Service (the "IRS") is not precluded from adopting a contrary position. In
addition, there can be no assurance that future legislative, judicial or
administrative changes or interpretations will not adversely affect the accuracy
of the statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the Merger.
The Merger is intended to constitute a Reorganization within the meaning of
Section 368(a) of the Code, and that Electroglas and Knights will each be a
party to that reorganization within the meaning of Section 368(b) of the Code.
Provided the Merger does so qualify as a Reorganization, then, subject to the
limitations and qualifications referred to herein, the Merger will generally
result in the following federal income tax consequences:
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(i) No gain or loss will be recognized by Electroglas or Knights as a
result of the Merger.
(ii) Except as described in (iii) below, no gain or loss will be
recognized by a Knights Shareholder upon the exchange of Knights Stock
for Electroglas Common Stock pursuant to the Merger.
(iii) Any cash received by a Knights Shareholder in exchange for
Knights Stock, including the Shareholder's share of the Knights
Shareholder Cash and any cash received in lieu of fractional shares of
Electroglas Common Stock, will be treated as if (A) such Knights
Shareholder received solely shares of Electroglas Common Stock,
including fractional shares, for his or her Knights Stock, and then (B)
such cash was received in a distribution in redemption of a portion of
such Electroglas Common Stock issued to the Knights Shareholder,
subject to the provisions of Section 302 of the Code. Accordingly, a
Knights Shareholder will generally recognize gain or loss in an amount
equal to the difference between the amount of cash received and the
basis of the shares of Electroglas Common Stock, including fractional
shares, deemed surrendered in exchange therefor.
(iv) The aggregate tax basis of the shares of Electroglas Common Stock
received by a Knights Shareholder pursuant to the Merger will be the
same as the aggregate tax basis of the Knights Stock exchanged in the
Merger, reduced by any basis allocable to shares of Electroglas Common
Stock, including fractional shares, treated as sold or exchanged under
Section 302 of the Code, as described in (iii) above.
(v) The holding period of the shares of Electroglas Common Stock
received by a Knights Shareholder in the Merger will include the
holding period for which shares of Knights Stock exchanged in the
Merger were held by the holder, provided the shares of Knights Stock
were held as capital assets on the date of the Merger.
Electroglas and Knights both intend that the Merger constitute a
"reorganization" within the meaning of Section 368(a) of the Code, and,
therefore, that the Merger results in the foregoing tax consequences to
Electroglas, Knights, and the Knights Shareholders. However, if, pursuant to the
Merger, the Knights Shareholders receive, in the aggregate, greater than twenty
percent (20%) of the total consideration for their shares of Knights Stock in
cash, including any cash paid to dissenting Knights Shareholders, any cash paid
in lieu in fractional shares, and any cash held pursuant to the Escrow
Agreement, then the Merger will not qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
If the Merger does not qualify as a "reorganization" within the meaning of
Section 368(a) of the Code, the Merger will not result in the tax consequences
as described above. Accordingly, a Knights Shareholder will be taxed on the
excess of the sum the fair market value (as of the Closing Date) of the shares
of Electroglas Common Stock and any cash received in the Merger over his or her
basis in the Knights Stock surrendered in exchanged therefor (irrespective of
whether or not such Knights Shareholder received solely Electroglas Common Stock
pursuant to the Merger). Furthermore, a Knights Shareholder's aggregate basis in
the Electroglas Common Stock received would equal its fair market value on the
Closing Date, and the stockholder's holding period for such Electroglas Common
Stock would begin on the day after the Merger.
Subject to waiver by Electroglas, it is a condition to the consummation of
the Merger that Electroglas receive an opinion from its counsel, Morrison &
Foerster LLP, substantially to the effect that the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code and that
Electroglas and Knights will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code (the "Closing Opinion"). The Exhibit
Opinion is not intended to satisfy this closing condition. The Closing Opinion
neither binds the IRS nor precludes the IRS from adopting a contrary position.
The Closing Opinion, as well as the Exhibit Opinion, will be subject to certain
assumptions and qualifications and will be based upon the truth and accuracy of
representations of Electroglas and Knights, including representations in certain
certificates of the respective management of Electroglas and Knights as of the
Closing Date. The Closing Opinion will be based upon the Code, its legislative
history, existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect at the Closing Date and all of which are
subject to change, possibly on a retroactive basis. In addition, counsel will
condition the Closing Opinion on the receipt from those Knights Shareholders
holding a substantial amount of
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Knights Stock (the "Major Stockholders") of certificates verifying that such
Major Stockholders have no plan or intention as of the Closing Date to sell,
exchange or otherwise dispose of the shares of Knights Stock to be received by
them in the Merger. A ruling from the IRS concerning the tax consequences of the
Merger will not be requested.
RESALE RESTRICTIONS
All shares of Electroglas Common Stock received by Knights Stockholders in
the Merger will be freely transferable, except shares of Electroglas Common
Stock received by persons who are deemed to be "affiliates" (as the term is
defined under the Securities Act) of Knights may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in the case of such persons who become
affiliates of Electroglas) or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Knights or Electroglas generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party.
TREATMENT OF SHARES OF DISSENTING HOLDERS
If holders of shares of Knights Stock are entitled to dissent from the
Merger and demand appraisal of any of their shares of Knights Stock in
accordance with the provisions of the CCC concerning the right of such holders
to dissent from the Merger and demand appraisal of their Knights Stock, (each a
"Dissenting Holder" and together the "Dissenting Holders"), any Knights Stock
held by a Dissenting Holder as to which appraisal has been so demanded
("Excluded Shares") will not be converted or purchased, but will, from and after
the Effective Time, represent only the right to receive such consideration as
may be determined to be due to such Dissenting Holder pursuant to the CCC;
provided, however, that each share of Knights Stock held by a Dissenting Holder
who will, after the Effective Time, lose his right of appraisal or withdraw his
demand for appraisal with respect to such shares of Knights Stock pursuant to
the CCC, will not be deemed Excluded Shares but will be deemed to be converted,
as of the Effective Time, into the right to receive shares of Electroglas Common
Stock and/or cash. IF MORE THAN FIVE PERCENT OF THE SHARES OF KNIGHTS COMMON
STOCK ARE EXCLUDED SHARES OR IF ANY OF THE HOLDERS OF KNIGHTS PREFERRED STOCK
ASSERT DISSENTERS' RIGHTS, ELECTROGLAS WILL NOT BE OBLIGATED TO CLOSE THE
TRANSACTION.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of Knights Stock into the right to receive Electroglas
Common Stock, the Knights Shareholders Cash or cash in lieu of fractional shares
will occur automatically at the Effective Time.
At and after the Effective Time, each certificate representing outstanding
shares of Knights Stock will represent the number of shares of Electroglas
Common Stock into which such shares of Knights Stock have been converted, and
the resulting shares of Electroglas Common Stock will be deemed registered in
the name of the holder of the original Knights Stock certificate. As soon as
practicable after the Effective Time, each Knights Shareholder will receive
instructions for surrendering his or her Knights stock certificates, together
with a letter of transmittal that the shareholder shall complete and submit
along with the Knights stock certificates surrendered in exchange for shares of
Electroglas Common Stock or cash. As soon as practicable after the Effective
Time, each holder of shares of Knights Stock will surrender (a) the certificates
for the holder's shares (the "Knights Certificates") to Electroglas for
cancellation or (b) an affidavit of lost certificate (or nonissued certificate)
and a bond in a form reasonably satisfactory to Electroglas (a "Bond"). Promptly
following the Effective Time and receipt of the Knights Certificates and/or the
Bonds, Electroglas will cause its transfer agent to issue to each surrendering
holder certificates for the number of shares of Electroglas Common Stock to
which such holder is entitled, and Electroglas will distribute any cash payable
with respect to fractional shares or pursuant to the Knights Shareholder Cash,
less approximately ten percent of such shares or cash deposited in Escrow.
All shares of Electroglas Common Stock (and, if applicable, cash )
delivered upon the surrender of Knights Certificates will be delivered to the
registered holder or placed in escrow with the Escrow Agent (as provided in the
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Escrow Agreement) as applicable. After the Effective Time, there will be no
further registration of transfers of the shares of Knights Stock on the stock
transfer books of Knights. If, after the Effective Time, Knights Certificates
are presented for transfer or for any other reason, they will be canceled and
exchanged and certificates therefor will be delivered or placed in escrow.
Except to the extent waived by Electroglas, any Knights Certificate that is not
properly submitted to Electroglas for exchange and cancellation within three
years after the Effective Time will no longer evidence ownership of or any right
to receive shares of Electroglas Common Stock or cash, and all rights of the
holder of such Knights Certificate with respect to the shares previously
evidenced by such Knights Certificate will cease.
Until Knights Certificates representing Knights Stock outstanding prior to
the Merger are surrendered, the certificates will be deemed, for all purposes,
to evidence ownership of (a) the number of shares of Electroglas Common Stock
into which the shares of Knights Stock will have been converted and (b) any cash
amount due, subject in each case to the obligation to place a portion thereof in
escrow as required.
If any issuance of shares of Electroglas Common Stock in exchange for
shares of Knights Stock is to be made to a person other than the Knights
shareholder in whose name the certificate is registered at the Effective Time,
it will be a condition of such exchange that the certificate so surrendered be
properly endorsed or otherwise be in proper form for transfer and that the
Knights Shareholder requesting such issuance either pay any transfer or other
tax required or establish to the satisfaction of the Electroglas that such tax
has been paid or is not payable.
No dividends or other distribution, if any, payable to holders of
Electroglas Common Stock will be paid to the holders of any certificates for
shares of Knights Stock until such certificates are surrendered. Upon surrender
of such certificates, all such declared dividends and distributions which shall
have become payable with respect to such Electroglas Common Stock in respect of
a record date after the Effective Time will be paid to the holder of record of
the full shares of Electroglas Common Stock represented by the certificate
issued in exchange therefor, without interest.
KNIGHTS SHAREHOLDERS WILL RECEIVE INSTRUCTIONS FOR
SURRENDERING THEIR SHARES AT A LATER DATE.
KNIGHTS SHAREHOLDERS SHOULD NOT RETURN STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
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DISSENTERS' RIGHTS OF APPRAISAL
If the transactions contemplated by the Agreement are not abandoned or
terminated, Knights Shareholders (holders of either Knights Common Stock or
Knights Preferred Stock) who abstain or vote "AGAINST" the proposal to approve
and adopt the Agreement, and the transactions contemplated thereby, may be
entitled to certain dissenters' rights of appraisal under Chapter 13 of the
California General Corporation Law ("GCL").
The following discussion is not a complete statement of the GCL relating to
dissenters' rights, and is qualified in its entirety by reference to sections
1300 through 1312 of the GCL attached to this Proxy/Prospectus as Appendix C and
incorporated herein by reference. This discussion and sections 1300 through 1312
of the GCL should be reviewed carefully by any Knights Shareholder who wishes to
exercise statutory dissenters' rights or wishes to preserve the right to do so,
since failure to take any necessary step may result in the loss of such rights.
If the Merger is consummated, those Knights Shareholders who elect to
exercise their dissenters' rights and who in a timely and proper fashion perfect
such rights may be entitled to receive the "fair market value" of their shares
in cash. Pursuant to section 1300(a) of the GCL, such "fair market value" would
be determined as of the day before the first announcement of the terms of the
Merger, excluding any appreciation or depreciation in consequence of the
proposed Merger, but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
Shares of Knights Stock must satisfy each of the following requirements to
qualify as dissenting shares ("Dissenting Shares") under the GCL: (i) the shares
of Knights Stock must have been outstanding on the Record Date; (ii) the
Shareholder must not vote any or all of the shares that the Shareholder is
entitled to vote to approve the Agreement; and (iii) the holder of such shares
of Knights Stock must, within thirty days after the date on which notice of
approval of the Merger is mailed to the holder, make a written demand upon
Knights or its transfer agent (as described below), and submit for endorsement
the certificates representing any shares in regard to which the demand is made.
If no instructions are indicated in a signed and returned proxy, shares of
Knights Stock subject to that proxy will be voted in favor of adoption of the
Agreement and the holder of the Knights Shares subject to the proxy will not be
entitled to assert dissenters' rights.
IF A KNIGHTS SHAREHOLDER VOTES AGAINST APPROVAL OF THE AGREEMENT, THAT VOTE
WILL NOT BE SUFFICIENT TO CONSTITUTE THE DEMAND DESCRIBED IN CLAUSE (iii) ABOVE.
If the Agreement is approved at the Knights Special Meeting, within ten
days thereafter Knights will mail to any Shareholder who may have a right to
require Knights to purchase his or her shares for cash as a result of making
such a demand (as described below) a notice that the required Shareholder
approval and adoption of the Agreement, the Merger and the transactions
contemplated by the Agreement was obtained (the "Notice of Approval")
accompanied by a copy of sections 1300 through 1304 of the GCL. The Notice of
Approval will set forth the price determined by Knights to represent the "fair
market value" of any Dissenting Shares, which shall constitute an offer by
Knights to purchase such Dissenting Shares at such stated price, and will set
forth a brief description of the procedures to be followed by such Shareholders
who wish to exercise their dissenters' rights.
Within 30 days after the date on which the Notice of Approval was mailed
(i) Knights must receive the demand of the dissenting Shareholder, which is
required by law to contain a statement concerning the number of shares of
Knights Stock held of record by such dissenting Shareholder which the dissenting
Shareholder claims to be the fair market value of the dissenting shares as of
the close of business on March 12, 1997, the day immediately preceding the
announcement of the proposed Merger (the statement of fair market value in such
demand by the dissenting Shareholder constitutes an offer by the dissenting
Shareholder to sell the Dissenting Shares at that price); and (ii) the
dissenting Shareholder must submit share certificate(s) representing the
Dissenting Shares to Knights at Knights's principal office. The certificate(s)
will be stamped or endorsed with a statement that the shares are Dissenting
Shares or will be exchanged for certificates of appropriate denomination so
stamped or endorsed. If the price contained in the Notice of Approval is
acceptable to the dissenting Shareholder, the dissenting Shareholder may
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demand the same price. THIS WOULD CONSTITUTE AN ACCEPTANCE OF THE OFFER BY
KNIGHTS TO PURCHASE THE DISSENTING SHAREHOLDER'S STOCK AT THE PRICE STATED IN
THE NOTICE OF APPROVAL.
If Knights and a dissenting Shareholder agree upon the price to be paid for
the Dissenting Shares, upon the dissenting Shareholder's surrender of the
certificates representing the Dissenting Shares, such price (together with
interest thereon at the legal rate on judgments from the date of the agreement
between Knights and the dissenting Shareholder) is required by law to be paid to
the dissenting Shareholder within 30 days after such agreement or within 30 days
after any statutory or contractual conditions to the Merger are satisfied,
whichever is later, subject to the surrender of the certificates therefor.
If Knights and a dissenting Shareholder do not agree upon the price to be
paid for the Dissenting Shares or disagree as to whether such Dissenting Shares
are entitled to be classified as Dissenting Shares, the holder may, within six
months after the Notice of Approval is mailed, file a complaint in the Superior
Court of the proper county requesting the court to make such determinations or,
alternatively, may intervene in any pending action brought by any other
dissenting Shareholder. Costs of such an action (including compensation of
appraisers) are required to be assessed as the court considers equitable, but
must be assessed against Knights if the appraised value as determined by the
court exceeds the price offered by Knights.
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the vote of the Shareholders in authorizing the Merger. Furthermore, no
Shareholder who has appraisal rights under Chapter 13 of the GCL shall have any
right to attack the validity of the Merger or to have the Merger set aside or
rescinded except in an action to test whether the number of shares required to
authorized or approve the Merger has been legally voted in favor of the Merger.
Dissenting Shares may lose their status as such and the right to demand
payment will terminate if (i) the Merger is abandoned (in which case Knights
shall pay on demand to any dissenting Shareholder who has initiated proceedings
in good faith as provided under Chapter 13 of the GCL all necessary expenses and
reasonable attorneys' fees incurred in such proceedings); (ii) the shares are
transferred before being submitted for endorsement or are surrendered for
conversion into shares of another class; (iii) the dissenting Shareholder and
Knights do not agree upon the status of the Dissenting Shares or upon the price
of such shares and the dissenting Shareholder fails to file suit against Knights
or intervene in a pending action within six months following the date on which
the Notice of Approval was mailed to the Shareholder; or (iv) the dissenting
Shareholder withdraws his or her demand for the purchase of the Dissenting
Shares with the consent of Knights.
IF MORE THAN FIVE PERCENT OF THE SHARES OF KNIGHTS COMMON STOCK ARE
DISSENTING SHARES OR IF ANY OF THE HOLDERS OF KNIGHTS PREFERRED STOCK ASSERT
DISSENTERS' RIGHTS, THEN ELECTROGLAS SHALL NOT BE OBLIGATED TO CLOSE THE MERGER.
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COMPARISON OF RIGHTS OF KNIGHTS SHAREHOLDERS AND ELECTROGLAS STOCKHOLDERS
The rights of Electroglas's Stockholders are governed by its Certificate of
Incorporation (the "Electroglas Certificate"), its Bylaws (the "Electroglas
Bylaws") and the laws of the State of Delaware. The rights of Knights's
Shareholders are governed by its Articles of Incorporation (the "Knights
Articles"), its Bylaws (the "Knights Bylaws") and the laws of the State of
California. After the Effective Time, the Knights Shareholders will become
Electroglas stockholders and will be governed by the Electroglas Certificate,
Electroglas Bylaws and the laws of the State of Delaware. In addition, because
holders of Series C Preferred Stock of Knights will become common Shareholders
of Electroglas, after the Merger they will rank pari passu with and have the
same rights and privileges as other common Shareholders of Electroglas.
While the rights and privileges of shareholders of a California corporation
such as Knights are, in many instances, comparable to those of stockholders of a
Delaware corporation such as Electroglas, there are certain differences. The
following is a summary of the material differences between the rights of holders
of Knights Stock and the rights of holders of Electroglas Common Stock at the
date hereof. These differences arise from differences between the Delaware
General Corporation Law (the "DGCL") and the California Corporations Code (the
"CCC"), between the Knights Articles and the Electroglas Certificate, between
the Electroglas Bylaws and the Knights Bylaws and, as to holders of Knights
Preferred Stock, between the rights, preferences and privileges of Knights
Preferred Stock and those of Electroglas Common Stock.
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
The CCC requires that the principal terms of a merger be approved by the
affirmative vote of a majority of the outstanding shares of each class entitled
to vote thereon, except that, unless required by its articles of incorporation,
no authorizing shareholder vote is required of a corporation surviving a merger
if the shareholders of such corporation shall own, immediately after the merger,
more than five-sixths of the voting power of the surviving corporation. The
Knights Articles do not require a greater percentage vote. The CCC further
requires the affirmative vote of a majority of the outstanding shares entitled
to vote thereon if (a) the surviving corporation's articles of incorporation
will be amended and would otherwise require shareholder approval or (b)
shareholders of such corporation will receive shares of the surviving
corporation having different rights, preferences, privileges or restrictions
(including shares in a foreign corporation) than the shares surrendered.
Shareholder approval is not required under the CCC for mergers or consolidations
in which a parent corporation merges or consolidates with a subsidiary of which
it owns at least 90% of the outstanding shares of each class of stock.
The DGCL requires the affirmative vote of a majority of the outstanding
stock entitled to vote thereon to authorize any merger or consolidation of a
corporation, except that, unless required by its certificate of incorporation,
no authorizing stockholder vote is required of a corporation surviving a merger
if (a) such corporation's certificate of incorporation is not amended in any
respect by the merger, (b) each share of stock of such corporation outstanding
immediately prior to the effective date of the merger will be an identical
outstanding or treasury share of the surviving corporation after the effective
date of the merger; and (c) the number of shares to be issued in the merger does
not exceed 20% of such corporation's outstanding common stock immediately prior
to the effective date of the merger. The Electroglas Certificate does not
require a greater percentage vote for such actions. Shareholder approval is also
not required under the DGCL for mergers or consolidation in which a parent
corporation merges or consolidates with a subsidiary of which it owns at least
90% of the outstanding shares of each class of stock.
DIRECTOR NOMINATIONS
The Knights Bylaws provide that directors be elected at each annual meeting
of the Shareholders, but do not set forth procedures for nominating directors.
Shareholders of Knights have therefore been entitled to make nominations for the
election of directors of Knights at the annual meeting of Shareholders without
restriction.
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The Electroglas By-Laws require stockholders to follow certain procedures
in making nominations for the election of directors. Nominations of directors
may be made by the Board of Directors, by a committee or person appointed by the
Board of Directors or by any stockholder entitled to vote in the election of
directors generally (the nominations are subject to the rights of holders of any
class or series of stock having a preference over the Electroglas Common Stock
as to dividends or upon liquidation, dissolution or winding-up). A stockholder
entitled to vote in the election of directors at an annual meeting may generally
nominate one or more persons for election as directors at the annual meeting (i)
by the procedures set out in Electroglas's notice of the annual meeting, or (ii)
by giving written notice of the intent to make the nomination or nominations to
the Secretary of Electroglas. The Secretary of Electroglas must receive written
notice of the intention to make the nomination or nominations, in the form
prescribed in the Electroglas By-Laws, not less than sixty nor more than ninety
days prior to the first anniversary of the preceding year's annual meeting. In
the event of a special meeting of stockholders for the purpose of electing one
or more directors, any stockholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at the
special meeting, but only (a) pursuant to the Electroglas's notice of meeting or
(b) if written notice of the stockholder's intent to make the nomination or
nominations, setting forth the information and complying with the form
prescribed in the Electroglas By-Laws, has been received by the Secretary of
Electroglas not earlier than the ninetieth day prior to the special meeting and
not later than the close of business on the later of (i) the sixtieth day prior
to the special meeting or (ii) the tenth day following the day on which notice
of the date of the special meeting was mailed or publicly disclosed by
Electroglas, whichever comes first.
AMENDMENT TO GOVERNING DOCUMENTS
Unless otherwise specified in a California corporation's articles of
incorporation, an amendment to the articles of incorporation requires the
approval of the corporation's board of directors and the affirmative vote of a
majority of the outstanding shares entitled to vote thereon, either before or
after the board approval. The Knights Articles do not require a greater level of
approval for an amendment thereto. Under the CCC, the holders of the outstanding
shares of a class are entitled to vote as a class if a proposed amendment to the
articles of incorporation would (i) increase or decrease the aggregate number of
authorized shares of such class; (ii) effect an exchange, reclassification or
cancellation of all or part of the shares of such class, other than a stock
split; (iii) effect an exchange, or create a right of exchange, of all or part
of the shares of another class into the shares of such class; (iv) change the
rights, preferences, privileges or restrictions of the shares of such class; (v)
create a new class of shares having rights, preferences or privileges prior to
the shares of such class, or increase the rights, preferences or privileges or
the number of authorized shares having rights, preference or privileges prior to
the shares of such class; (vi) in the case of preferred shares, divide the
shares of any class into series having different rights, preferences, privileges
or restrictions or authorize the board of directors to do so; or (vii) cancel or
otherwise affect dividends on the shares of such class which have accrued but
have not been paid. Under the CCC, a corporation's bylaws may be adopted,
amended or repealed either by the board of directors or the shareholders of the
corporation. The Articles and Bylaws of Knights do not modify the provisions of
the CCC.
The DGCL requires a vote of the corporation's board of directors followed
by the affirmative vote of a majority of the outstanding stock of each class
entitled to vote for any amendment to the certificate of incorporation, unless a
greater level of approval is required by the certificate of incorporation. The
Electroglas Certificate does not require a greater level of approval for an
amendment thereto. If an amendment would alter the powers, preferences or
special rights of a particular class or series of stock so as to affect them
adversely, the class or series shall be given the power to vote as a class
notwithstanding the absence of any specifically enumerated power in the
certificate of incorporation. The DGCL also states that the power to adopt,
amend or repeal the bylaws of a corporation shall be in the stockholders
entitled to vote, provided that the corporation in its certificate of
incorporation may confer such power on the board of directors in addition to the
stockholders. The Electroglas Certificate does confer the power to amend the
By-Laws of the corporation on the Electroglas Board.
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APPRAISAL RIGHTS
Generally, shareholders of a California corporation who dissent from a
merger or consolidation of the corporation are entitled to dissenters' rights.
Under the DGCL, holders of shares of any class or series have the right, in
certain circumstances, to dissent from a merger or consolidation by demanding
payment in cash for their shares equal to the fair value (excluding any
appreciation or depreciation as a consequence or in expectation of the
transaction) of such shares, as determined by agreement with the corporation or
by an independent appraiser appointed by a court in an action timely brought by
the corporation or the dissenters. The DGCL grants dissenters' appraisal rights
only in the case of mergers or consolidations and not in the case of a sale or
transfer of assets or a purchase of assets for stock regardless of the number of
shares being issued. Further, no appraisal rights are available for shares of
any class or series listed on a national securities exchange or designated as a
national market system security on the Nasdaq National Market or held of record
by more than 2,000 stockholders, unless the agreement of merger or consolidation
converts such shares into anything other than (a) stock of the surviving
corporation; (b) stock of another corporation which is either listed on a
national securities exchange or designated as a national market system security
on the Nasdaq National Market or held of record by more than 2,000 stockholders;
(c) cash in lieu of fractional shares; or (d) some combination of the above. In
addition, dissenters' rights are not available for any shares of the surviving
corporation if the merger did not require the vote of the stockholders of the
surviving corporation. See "Dissenters' Rights of Appraisal Rights."
DERIVATIVE ACTION
The CCC provides that a shareholder bringing a derivative action on behalf
of the corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. The CCC also
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to furnish
a security bond.
Derivative actions may be brought in Delaware by a stockholder on behalf
of, and for the benefit of, the corporation. The DGCL provides that a
stockholder must aver in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he first makes a demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that such demand would have been futile.
STOCKHOLDER CONSENT IN LIEU OF MEETING
Under the DGCL and the CCC, unless otherwise provided in the certificate or
articles of incorporation, any action required to be taken or which may be taken
at an annual or special meeting of stockholders may be taken without a meeting
if a consent in writing is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize such
action at a meeting at which all shares entitled to vote were present and voted.
The Electroglas Certificate provide that directors may not be elected by written
consent except by unanimous written consent of all shares entitled to vote for
the election of directors. The Knights Articles do not contain any special
provision relating to action by written consent.
FIDUCIARY DUTIES OF DIRECTORS
Directors of corporations incorporated or organized under the DGCL and the
CCC have fiduciary obligations to the corporation and its shareholders. Pursuant
to these fiduciary obligations, the directors must act in accordance with the
so-called duties of "due care" and "loyalty." Under the DGCL, the duty of care
requires that the directors act in an informed and deliberative manner and to
inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of loyalty may be summarized
as the duty to act in good faith, not out of self-interest and in a manner that
the directors reasonably believe to be in the best interests of
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<PAGE> 54
the corporation. Under the CCC, the duty of loyalty requires directors to
perform their duties in good faith in a manner that the directors reasonably
believe to be in the best interests of the corporation and its stockholders. The
duty of care requires that the directors act with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would
exercise under similar circumstances.
INDEMNIFICATION
Under the CCC, (i) a corporation has the power to indemnify present and
former directors, officers, employees and agents against expenses, judgments,
fines and settlements (other than in connection with actions by or in the right
of the corporation) if that person acted in good faith and in a manner the
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of the person was unlawful, and (ii) a corporation has the power to
indemnify, with certain exceptions, any person who is a party to any action by
or in the right of the corporation, against expenses actually and reasonably
incurred by that person in connection with the defense or settlement of the
action if the person acted in good faith and in a manner the person believed to
be in the best interests of the corporation and its shareholders.
The indemnification authorized by the CCC is not exclusive, and a
corporation may grant its directors, officers, employees or other agents certain
additional rights to indemnification. The Knights Articles and the Knights
Bylaws provide for the indemnification of its agents (as defined under the CCC)
to the maximum extent permitted by the CCC.
The DGCL provides that a corporation may indemnify its present and former
directors, officers, employees and agents (each an "indemnitee") against all
reasonable expenses (including attorneys' fees) and, except in actions initiated
by or in the right of the corporation, against all judgments, fines and amounts
paid in settlement in actions brought against them, if such individual acted in
good faith, and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the stockholders and, in the case of a
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The corporation shall indemnify an indemnitee to the extent that he or she is
successful on the merits or otherwise in the defense of any claim, issue or
matter associated with an action. The Electroglas Certificate provides for
indemnification of directors or officers to the fullest extent authorized by the
DGCL.
Both the DGCL and the CCC allow a corporation to advance funds for payment
of an indemnitee's legal expenses prior to the final disposition of an action,
provided that the indemnitee undertakes to repay any of the amount so advanced
if it is later determined that the indemnitee is not entitled to indemnification
with regard to the action for which the expenses were advanced.
DIRECTOR LIABILITY
The DGCL and the CCC each provide that the charter documents of the
corporation may include provisions which limit or eliminate the liability of
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided such liability does not arise from
certain proscribed conduct, including, in the case of the DGCL, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, breach of the duty of loyalty, the payment of unlawful
dividends or expenditure of funds for unlawful stock purchases or redemptions or
transactions from which such director derived an improper personal benefit, or,
in the case of the CCC, intentional misconduct or knowing and culpable violation
of law, acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence of
good faith on the part of the director, the receipt of an improper personal
benefit, acts or omissions that show reckless disregard for the director's duty
to the corporation or its shareholders, where the director in the ordinary
course of performing a director's duties should be aware of a risk of serious
injury to the corporation or its shareholders, acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders, interested transactions
between the corporation and a director in which a director has a material
financial interest and liability for improper distributions, loans or
guarantees. The Knights Articles contain a provision limiting the liability of
its directors to
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<PAGE> 55
the fullest extent provided by the CCC. The Electroglas Certificate contains a
provision limiting the liability of its directors to the fullest extent
permitted by the DGCL.
ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS
The DGCL prohibits, in certain circumstances, a "business combination"
between the corporation and an "interested stockholder" within three years of
the stockholder becoming an "interested stockholder." An "interested
stockholder" is a holder who, directly or indirectly, controls 15% or more of
the outstanding voting stock or is an affiliate of the corporation and was the
owner of 15% or more of the outstanding voting stock at any time within the
prior year period. A "business combination" includes a merger or consolidation,
a sale or other disposition of assets having an aggregate market value equal to
10% or more of the consolidated assets of the corporation or the aggregate
market value of the outstanding stock of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. This provision does not apply where: (i)
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the corporation's
board of directors prior to the date the interested stockholder acquired such
15% interest; (ii) upon the consummation of the transaction which resulted in
the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the outstanding voting stock of the corporation excluding
for the purposes of determining the number of shares outstanding shares held by
persons who are directors and also officers and by employee stock plans in which
participants do not have the right to determine whether shares held subject to
the plan will be tendered; (iii) the business combination is approved by a
majority of the board of directors and the affirmative vote of two-thirds of the
outstanding votes entitled to be cast by disinterested stockholders at an annual
or special meeting; (iv) the corporation does not have a class of voting stock
that is listed on a national securities exchange, authorized for quotation on an
inter-dealer quotation system of a registered national securities association,
or held of record by more than 2,000 stockholders unless any of the foregoing
results from action taken, directly or indirectly, by an interested stockholder
or from a transaction in which a person becomes an interested stockholder, or
(v) the corporation has opted out of this provision. Electroglas has not opted
out of this provision.
Under the CCC, there is no comparable provision. However, the CCC does
provide that, except where the fairness of the terms and conditions of the
transaction has been approved by the California Commissioner of Corporations and
except in a "short-form" merger (the merger of a parent corporation with a
subsidiary in which the parent owns at least 90% of the outstanding shares of
each class of the subsidiary's stock), if the surviving corporation or its
parent corporation owns, directly or indirectly, shares of the target
corporation representing more than 50% of the voting power of the target
corporation prior to the merger, the nonredeemable common stock of a target
corporation may be converted only into nonredeemable common stock of the
surviving corporation or its parent corporation, unless all of the shareholders
of the class consent. The effect of this provision is to prohibit a cash-out
merger of minority shareholders, except where the majority shareholders already
own 90% or more of the voting power of the target corporation and could,
therefore, effect a short-form merger to accomplish such a cash-out of minority
shareholders.
CUMULATIVE VOTING
Under the CCC, the Knights Shareholders have had the right to cumulate
their votes in elections of directors. Under the DGCL, shareholders of a
corporation may exercise cumulative voting only if the certificate of
incorporation specifically provides for it. The Electroglas Certificate makes no
such provision, and therefore Electroglas Stockholders may not cumulate their
votes in elections of directors.
CHANGE FROM PREFERRED SHARES TO COMMON SHARES
If the Merger is consummated, holders of Knights Preferred Stock who do not
receive cash for their shares will receive Electroglas Common Stock. Under the
Knights Articles holders of Knights Preferred Stock have enjoyed different
rights, preferences and privileges from those of the Knights Common Stock. After
exchanging their shares
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<PAGE> 56
for Electroglas Common Stock, these holders will rank pari passu with and have
the same rights, preferences and privileges as other common shareholders of
Electroglas, with no priority over those other shareholders in the right to
receive dividends and proceeds of liquidation. The following discussion
summarizes certain of the rights, preferences and privileges of the Knights
Preferred Stock, but does not purport to be a full description of the rights,
preferences and privileges, which are set forth in the Knights Certificate.
The Knights Preferred Stock has a dividend preference consisting of a right
to receive, if funds therefor are legally available, a noncumulative annual
dividend equal to the greater of $0.01125 per share and the amount of any
dividend distributed to any other outstanding shares. The Knights Preferred
Stock has a liquidation preference consisting of a right to receive upon
liquidation per share the sum of $0.125 plus the lesser of (x) 9% of the
original issue price of the share of Knights Preferred Stock for each year since
the issuance of the share and (y) 18% of the original issue price of the share
of Knights Preferred Stock; if the liquidation does not produce sufficient funds
to pay that sum to each holder of Knights Preferred Stock then the liquidation
proceeds shall be distributed on a pro rata basis to the holders of Knights
Preferred Stock. Upon any liquidation, if after payment of the liquidation
preference to holders of Knights Preferred Stock additional funds remain
available for distribution to Shareholders, the holders of shares of Knights
Common Stock will receive $.0125 per share, and then any funds remaining
available for distribution to Shareholders after that payment will be
distributed on a pro rata basis to the holders of Knights Common Stock and to
the holders of Knights Preferred Stock based on the then applicable ratio for
converting their shares to shares of Knights Common Stock. THE MERGER WOULD BE
DEEMED A "LIQUIDATION" UNDER THE TERMS OF THE KNIGHTS ARTICLES. HOWEVER, THE
CONVERSION RATIO UNDER THE MERGER HAS BEEN CALCULATED BASED ON AN "AS CONVERTED"
BASIS AND WITHOUT REFERENCE TO THE LIQUIDATION PREFERENCE OF THE KNIGHTS
PREFERRED STOCK SET FORTH IN THE KNIGHTS ARTICLES. EACH HOLDER OF SHARES OF
KNIGHTS PREFERRED STOCK WHO VOTES TO APPROVE AND ADOPT THE AGREEMENT WILL ALSO
BE DEEMED TO BE VOTING TO SUBSTITUTE THE CONSIDERATION FOR THOSE SHARES
DETERMINED UNDER THE TERMS OF AGREEMENT FOR THE LIQUIDATION PREFERENCE PAYABLE
IN ACCORDANCE WITH THE KNIGHTS ARTICLES.
The Knights Preferred Stock is also subject, under certain circumstances,
to the right of the corporation to redeem the shares of Knights Preferred Stock
at a price equal to their original issue price.
The foregoing discussion of certain similarities and material differences
between the rights of Knights Shareholders and the rights of Electroglas
Stockholders under the respective Articles, Certificate of Incorporation and
Bylaws is only a summary of certain provisions and does not purport to be a
complete description of such similarities and differences, and is qualified in
its entirety by reference to the CCC and the DGCL, the common law thereunder and
the full text of the Articles or Certificate of Incorporation and Bylaws of each
of Electroglas and Knights.
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OTHER AGREEMENTS
Electroglas has made offers of employment to four current employees of
Knights to serve as officers of the Knights Technology subsidiary of Electroglas
(the "Knights Subsidiary") after the Merger. The offers are all contingent on
the completion of the Merger by May 29, 1997. Thomas A. Sherby, currently
Chairman, President and CEO of Knights, has been offered the position of
President of the Knights Subsidiary. Mary P. Korn, currently Vice President of
Finance and Administration, Chief Financial Officer and Secretary of Knights,
has been offered the position of Vice President of Finance and Administration of
the Knights Subsidiary. Ankush Oberai, currently Vice President of Worldwide
Sales and Strategic Marketing of Knights, has been offered the position of Vice
President of Sales and Strategic Marketing of the Knights Subsidiary. Kuang-Hua
Ken Huang, currently Vice President of Engineering of Knights has been offered
the position of Vice President of Engineering of the Knights Subsidiary. If the
Merger is consummated and the offers of employment are accepted according to
their terms, each will work for the Knights Subsidiary on the terms summarized
below.
Thomas A. Sherby will be employed on a full-time basis, and, at
Electroglas's request at any time during Mr. Sherby's employment with
Electroglas, or at Mr. Sherby's request after six months from the date of hire,
will be employed on a part-time consultancy basis for up to three years after
Mr. Sherby's date of hire. While he is a full time employee, Mr. Sherby will be
entitled to receive an annual salary of $165,000, six weeks of vacation per year
and participate in a bonus plan that follows the same structure as Electroglas
Executive Bonus Plan, which will pay 50% of base salary if revenue and pretax
earnings meet the target amount and a maximum of 110% of base salary if revenue
and pretax earnings reach 115% of the target amount. As long as he is an active
employee of the Knights Subsidiary Mr. Sherby will also receive options to
purchase Electroglas Common Stock commensurate with options received by
employees in similar positions at Electroglas. If Mr. Sherby converts to
consulting status, he will continue to receive his base salary of $13,750 per
month for the first 18 months after conversion and $9,167 thereafter for the
remainder of the three-year period after initial hiring; he will not be eligible
for bonuses. Electroglas can terminate the employment agreement for any reason,
provided that Mr. Sherby will be entitled to written notice and payment of a
lump sum for the remainder of the three-year period beginning from the date of
hire if he is terminated without cause. The offer of employment is subject to
Mr. Sherby's agreement to restrictive covenants regarding confidentiality and
rights to inventions, and his agreement to certain noncompetition provisions.
Mary P. Korn will be employed full time on an at-will basis at a starting
base salary of $100,000 per year, subject to annual review. She will be eligible
in 1997 to participate in a bonus plan that follows the same structure as the
Electroglas Bonus Plan, which will pay 40% of base salary if revenue and pretax
earnings meet the target amount up to a maximum of 88% of base salary if revenue
and pretax earnings reach 115% of the target amount. As long as Ms. Korn is an
active employee of the Knights Subsidiary she will also receive options to
purchase Electroglas Common Stock commensurate with options received by
employees in similar positions at Electroglas. The offer of employment is
subject to Ms. Korn's agreement to restrictive covenants regarding
confidentiality and rights to inventions.
Ankush Oberai will be employed full time on an at-will basis at a starting
base salary of $74,984 per year, subject to annual review. He will initially be
eligible for commissions on the same basis as during his Knights employment in
lieu of any bonus plan, and receive a car allowance of $775 per month. As long
as Mr. Oberai is an active employee of the Knights Subsidiary he will also
receive options to purchase Electroglas Common Stock commensurate with options
received by employees in similar positions at Electroglas. The offer of
employment is subject to Mr. Oberai's agreement to restrictive covenants
regarding confidentiality and rights to inventions.
Kuang-Hua Ken Huang will be employed full time on an at-will basis at a
starting base salary of $130,000 per year, subject to annual review. He will be
eligible in 1997 to participate in a bonus plan that follows the same structure
as the Electroglas Bonus Plan, which will pay 40% of base salary if revenue and
pretax earnings meet the target amount up to a maximum of 88% of base salary if
revenue and pretax earnings reach 115% of the target amount. As long as Mr.
Huang is an active employee of the Knights Subsidiary he will also receive
options to purchase Electroglas Common Stock commensurate with options received
by employees in similar positions at
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Electroglas. The offer of employment is subject to Mr. Huang's agreement to
restrictive covenants regarding confidentiality and rights to inventions.
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PRINCIPAL STOCKHOLDERS OF ELECTROGLAS
The following table sets forth certain information known to Electroglas with
respect to beneficial ownership of Electroglas's Common Stock as of February 28,
1997, by (i) each stockholder known to Electroglas to own beneficially more than
5% of Electroglas's Common Stock, (ii) each of Electroglas's directors, (iii)
the Chief Executive Officer and the two other executive officers of Electroglas
(collectively, the "Named Executive Officers") and (iv) all executive officers
and directors of Electroglas as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
NAME NUMBER PERCENT(2)
------------------------------------------- ---------- ----------
<S> <C> <C>
State of Wisconsin Investment Board(3)..... 1,160,900 6.6%
121 East Wilson Street
Madison, Wisconsin 53707
EQSF Advisors, Inc.(4)..................... 1,070,000 6.1
767 Third Avenue
New York, New York 10017-2023
Neil R. Bonke(5)........................... 194,061 1.1
Curtis S. Wozniak(6)....................... 141,821 *
Armand J. Stegall(7)....................... 30,202 *
Joseph F. Dox(8)........................... 25,000 *
Roger D. Emerick(9)........................ 20,000 *
Robert J. Frankenberg(10).................. 20,000 *
All executive officers and directors
as a group (6 persons)(11)................ 431,084 2.5
</TABLE>
- ----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of February 28, 1997
are deemed outstanding. Such shares, however, are not deemed outstanding
for the purposes of computing the percentage ownership of each other
person. To Electroglas's knowledge, except as set forth in the footnotes to
this table and subject to applicable community property laws, each person
named in the table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2) Percentage beneficially owned is based on 17,585,201 shares of Common Stock
outstanding as of February 28, 1997, excluding shares held in the treasury
of Electroglas.
(3) Based on a Schedule 13G dated January 23, 1997, State of Wisconsin
Investment Board, a Wisconsin corporation, has sole voting power with
respect to 1,160,900 shares and sole dispositive power with respect to
1,160,900 shares of Electroglas's Common Stock as of December 31, 1996.
(4) Based on a Schedule 13G dated February 13, 1997, EQSF Advisors, Inc., A New
York corporation, has sole voting power with respect to 1,070,000 shares
and sole dispositive power with respect to 1,070,000 shares of
Electroglas's Common Stock as of December 31, 1996.
(5) Includes 192,501 options exercisable within 60 days of February 28, 1997.
(6) Includes 40,273 options exercisable within 60 days of February 28, 1997.
(7) Includes 15,364 options exercisable within 60 days of February 28, 1997.
(8) Includes 25,000 options exercisable within 60 days of February 28, 1997.
(9) Includes 20,000 options exercisable within 60 days of February 28, 1997.
(10) Includes 20,000 options exercisable within 60 days of February 28, 1997.
(11) Includes 313,138 options exercisable within 60 days of February 28, 1997.
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BUSINESS OF ELECTROGLAS
OVERVIEW
Electroglas is a leader in the development, manufacture, marketing and
servicing of automatic wafer probing equipment for use in the fabrication of
semiconductor devices. Electroglas'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. Electroglas 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. Electroglas's primary product offerings are its 2000 Series
wafer probers and its Horizon 4000 Series wafer probers. All of Electroglas's
wafer probers feature Electroglas'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, Electroglas assumed
the assets and liabilities of the Electroglas division in the asset transfer
and, following the IPO, Electroglas commenced operations as an independent
corporation. Electroglas, 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 Electroglas 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. Electroglas
estimates, based upon its experience, that wafer sort applications represent
approximately 80% of the market for
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automatic wafer probers. The remaining 20% is approximately equally divided
between in-line and end-of-line testing and laboratory applications.
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.
Electroglas 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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ELECTROGLAS 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. Electroglas has invested
heavily in engineering, research and development to add
features and functionality to its products. Electroglas 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. Electroglas 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. Electroglas has
long-standing relationships with its customers. Electroglas'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 Electroglas'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.
Electroglas expects to continue to strengthen its existing
customer relationships by continuing to provide high levels of
service and support.
o Emphasize Quality Products. Electroglas believes it has
developed a reputation as a leader in providing high quality
products. Electroglas was chosen in the most recent customer
survey conducted by VLSI Research Inc. as one of the
"Ten-Best" test and measurement equipment manufacturers.
Electroglas has received quality awards from its customers and
the SEMATECH Partnering for Total Quality award. Electroglas
has a company-wide quality program in place, headed by a
member of senior management. Electroglas's quality training
program emphasizes continuous improvement, data driven
decisions and close collaboration among Electroglas's
employees, customers and suppliers. Electroglas trains all of
its employees in basic quality skills. Electroglas 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. Electroglas is pursuing this
market segment aggressively through a focused sales and
marketing effort in Japan directed at selected key
manufacturers. Electroglas'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, Electroglas 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 Electroglas considers
strategic.
o Expand Product Lines and Applications. Electroglas 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. Electroglas also intends to take
advantage of available opportunities to sell its products for
new applications. For example, Electroglas 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, Electroglas 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
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<PAGE> 63
the test process. Electroglas believes this range of software
products will be highly complementary to the core product
lines.
OVERVIEW OF TECHNOLOGY
Electroglas 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. Electroglas'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. Electroglas believes
that the linear motor makes its probers faster and more durable than those of
its competitors, which use mechanical screws and bearings. Electroglas 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. Electroglas'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. Electroglas'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, Electroglas
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). Electroglas 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), Electroglas'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
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<PAGE> 64
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.
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, Electroglas 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,
Electroglas 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. Electroglas's 2000 Series products utilize Electroglas's Prober
Vision system software which was designed by Electroglas 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 all 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 the
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 Electroglas's
EGCommander(TM) system software. This software was developed by Electroglas 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
Electroglas's prober products into standard local area networks found in
semiconductor manufacturing operations. The network products allow manufacturers
to monitor the entire probing
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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.
ENGINEERING, RESEARCH AND DEVELOPMENT
The market for wafer probing equipment is characterized by continuous
technological development and product innovation. Electroglas believes that
continued and timely development of new products and enhancements to existing
products is necessary to maintain its competitive position. Accordingly,
Electroglas devotes a significant portion of its personnel and financial
resources to engineering, research and development programs. Electroglas 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 Electroglas's major customers' need for cleanroom compatible probers. In
addition, Electroglas 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.
Electroglas'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 Electroglas's ongoing efforts.
MARKETING, SALES AND SERVICE
Electroglas primarily sells its products directly to end users.
Electroglas believes that using a direct sales force provides it with a
significant competitive advantage in communicating with customers and responding
to market demands.
Electroglas 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. Electroglas 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. Electroglas'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 Electroglas's products. Electroglas
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, Electroglas
maintains sales and service locations in France, Germany and the United Kingdom.
In Asia, Electroglas maintains direct sales and service locations in Japan, Hong
Kong, Korea, People's Republic of China, Singapore and Taiwan. As of December
31, 1996, Electroglas 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 Electroglas'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.
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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).
MANUFACTURING AND SUPPLIERS
Electroglas'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 Electroglas;
however, some are standard products purchased from third parties. While
Electroglas uses standard components wherever possible, most mechanical parts,
metal fabrications and castings are made to Electroglas specifications.
Electroglas schedules production based upon firm customer commitments and
anticipated orders during the planning cycle. Electroglas 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. Electroglas 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 Electroglas's employees and its
customers and suppliers. Electroglas 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 Electroglas's
products are obtained from a single source. However, Electroglas believes that
alternative sources exist or can be developed, if necessary.
BACKLOG
At December 31, 1996, Electroglas's backlog was approximately $24.3
million as compared to approximately $53.2 million at December 31, 1995.
Electroglas 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 Electroglas's sales will often
reflect orders shipped in the same quarter received, Electroglas'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. Electroglas
believes that its products compete favorably with respect to each of these
factors in the non-Japanese market segment. Electroglas's major competitors are
Tokyo Electron Labs ("TEL") and Tokyo Semitsu ("TSK"). Some of Electroglas's
competitors have greater financial, engineering and manufacturing resources than
Electroglas and larger service organizations and long-standing customer
relationships. There can be no assurance that levels of competition in
Electroglas's particular product market will not intensify or that Electroglas'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
Electroglas 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,
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Electroglas 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. Electroglas 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, Electroglas owns thirteen
foreign patents, which expire through 2004. Electroglas also has 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).
Electroglas also relies upon trade secret protection for its
confidential and proprietary information. Electroglas 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 Electroglas's trade secrets or that Electroglas can
meaningfully protect its trade secrets.
EMPLOYEES
As of December 31, 1996, Electroglas employed approximately 607
persons. Many of Electroglas's employees are highly skilled, and Electroglas's
success will depend in part upon its ability to attract and retain such
employees, who are in great demand. Electroglas has never had a work stoppage or
strike and no employees are represented by a labor union or covered by a
collective bargaining agreement. Electroglas considers its employee relations to
be good.
PROPERTIES
Electroglas'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. Electroglas owns substantially all of the
machinery and equipment used in its facilities. In March 1997, Electroglas
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.
Electroglas also occupies office space in Arizona, California, New
Hampshire, Texas, the United Kingdom, France, Germany, Japan, Hong Kong, Taiwan,
Singapore and Korea.
Electroglas, like all manufacturing companies, is subject to various
federal, state and local environmental statutory requirements. Electroglas
believes that it is in material compliance with existing applicable
environmental laws and regulations.
LEGAL PROCEEDINGS
Electroglas is not currently involved in any material legal actions.
From time to time, however, Electroglas 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.
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INFORMATION REGARDING ELECTROGLAS MANAGEMENT AND COMPENSATION
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The following table sets forth certain information with respect to the
executive officers, directors and key personnel of Electroglas:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------- --- ------------------------------------------
<S> <C> <C>
Neil R. Bonke 55 Chairman of the Board
Curtis S. Wozniak 41 Chief Executive Officer and Director
Armand J. Stegall 53 Vice President -- Finance, Chief Financial
Officer,
Treasurer and Secretary
Joseph F. Dox 54 Director
Roger D. Emerick 56 Director
Robert J. Frankenberg 49 Director
</TABLE>
Key Personnel
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------- --- ------------------------------------------
<S> <C> <C>
Timothy Boyle 45 Vice President -- Engineering
Conor P. O'Mahony 40 Vice President -- Customer Operations
Joseph A. Savarese 59 Vice President -- Business Development
Phillip M. Truckle 41 Vice President -- Marketing
Daniel D. Welton 57 Vice President -- Manufacturing
Joe M. Reid, Jr. 51 Director of Quality
</TABLE>
Neil R. Bonke has been Chairman of the Board of Electroglas since April
1993, and Chief Executive Officer from April 1993 through April 1996. Mr. Bonke
was a Group Vice President of General Signal Corporation ("General Signal") and
President of General Signal's Semiconductor Equipment Operations from September
1991 to July 1993. From 1990 to 1991, he was Chief Operating Officer of Cognex
Corporation, a manufacturer of machine vision systems for the semiconductor and
electronics industries and, from 1987 to 1990, was President of General Signal's
Xynetics division, a group of semiconductor equipment manufacturing companies
which included Electroglas. Mr. Bonke holds a B.S. in Engineering and Technical
Marketing from Clarkson University, Potsdam, New York. He has nineteen years of
management assignments in the semiconductor equipment and semiconductor
materials industries with domestic and international experiences. Mr. Bonke
currently serves on the Board of Directors of FSI International, a semiconductor
equipment company, Sanmina, a contract electronics manufacturing company, and
Speedfam, a semiconductor equipment company.
Curtis S. Wozniak has been Chief Executive Officer of Electroglas since
April 1996 and has been a Director of Electroglas since October 1994. He was
President and Chief Operating Officer of Xilinx, Inc., a semiconductor
manufacturer, from August 1994 to April 1996. From February 1984 to August 1994,
Mr. Wozniak was employed by Sun Microsystems, Inc., a computer manufacturer,
where he held various management positions, including Vice President, Marketing
and Vice President, Engineering. Mr. Wozniak currently serves on the Board of
Trustees of GMI Engineering and Management Institute.
Armand J. Stegall has been Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary of Electroglas since April 1993. He was Vice
President -- Finance of General Signal's Semiconductor Equipment Operations from
September 1991 to July 1993 and Vice President -- Finance and Administration of
the Electroglas division of General Signal from July 1990 to July 1993. From
1982 to 1990, he was Vice President and Unit Financial Officer of General
Signal's Xynetics division.
Joseph F. Dox has been a Director of Electrolas since October 1993. From
June 1992 to December 1993, Mr. Dox was President and Chief Operating Officer of
Novellus. From June 1989 to April 1992, he served as Senior Vice President,
Finance and Administration and Secretary of Novellus, and from August 1987 to
June 1989, he served as Vice President, Finance and Administration and Secretary
of Novellus.
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Roger D. Emerick has been a Director of Electroglas since July 1993. He has
been President, Chief Executive Officer and Director of Lam Research Corporation
since 1982. In 1984, he was elected Chairman of the Board of Directors of Lam
Research. Mr. Emerick is currently a Director of SEMI/SEMATECH.
Robert J. Frankenberg has been a Director of Electroglas since July 1993. He
was Chairman of the Board, Chief Executive Officer and President of Novell, Inc.
from April 1994 to August 1996. From September 1991 to April 1994, he was Vice
President and General Manager of Hewlett-Packard Company's Personal Information
Products Group. From 1990 to 1992, he was Vice President and General Manager of
Hewlett-Packard's Personal Computation Business, from 1989 to 1991, was Vice
President and General Manager of Hewlett-Packard's Information Networks Group
and, from 1985 to 1989, was General Manager of Hewlett-Packard's Information
Systems Group. Mr. Frankenberg currently serves on the Board of Directors of
America Online, Caere Corporation, Daw Technologies, Metrix, Starlight Networks
and Wall Data.
Timothy Boyle joined Electroglas in May 1995 as Vice President --
Engineering. From 1983 to 1995, he was employed by Measurex, a process control
systems company, where he held a succession of key engineering and management
positions. From 1981 to 1983, he was Vice President of Engineering at American
Flow Systems, a flow meters company.
Conor P. O'Mahony has been Vice President -- Customer Operations of
Electroglas since March 1995 and was Director of Sales and Customer Operations
of Electroglas from July 1993 to March 1995. Mr. O'Mahony served in a similar
capacity in the Electroglas division of General Signal from June 1992 to July
1993. From 1989 to 1992, he was International Business Manager of the
Electroglas division and, from 1987 to 1989, was General Manager of the
photomask production facility at General Signal's Xynetics/Ultratech Photomask
unit.
Joseph A. Savarese joined Electroglas as Vice President -- Business
Development in June 1994. Mr. Savarese was President of General Signal's
Assembly Technologies division from 1989 to 1994. From 1986 to 1989, he was
Chief Operating Officer of Qualcorp, a test instrumentation manufacturer, and,
from 1983 to 1986, he was Vice President, Operations for Forox Corporation, a
manufacturer of precision photographic equipment. From 1968 to 1983, he was
employed by Perkin-Elmer Corporation where he held various management positions,
including Director of Engineering and Director of Microlithography Systems.
Phillip M. Truckle has been Vice President -- Marketing of Electroglas since
March 1996 and was Director of Marketing of Electroglas from July 1993 to March
1996. Mr. Truckle served in a similar capacity in the Electroglas division of
General Signal from April 1990 to July 1993. From 1987 to 1989, he was North
American Sales Manager for the Electroglas division.
Daniel D. Welton has been Vice President -- Manufacturing of Electroglas
since July 1993. Mr. Welton served in a similar capacity in the Electroglas
division of General Signal from 1989 to July 1993. He joined the manufacturing
department of the predecessor of the Electroglas division in 1965 and served as
Director of Manufacturing from 1984 to 1989.
Joe M. Reid, Jr. has been Director of Quality of Electroglas since July
1993. Mr. Reid served in a similar capacity in the Electroglas division of
General Signal from September 1989 to July 1993. From 1981 to 1989, he was
employed at Applied Materials, Inc., a manufacturer of semiconductor capital
equipment, where his various positions included Director of Quality, Director of
Corporate Engineering, Operations Manager and Corporate Controller.
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<PAGE> 70
RELATIONSHIPS AMONG DIRECTORS OR EXECUTIVE OFFICERS
There are no family relationships among any of the directors or executive
officers of Electroglas.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During 1996, the Board met five times. No director attended fewer than 75%
of all the meetings of the Board and its committees on which he served after
becoming a member of the Board. The Board has two committees: the Audit
Committee and the Compensation Committee. The Board does not have a nominating
committee or a committee performing the functions of a nominating committee.
The Audit Committee, which held four meetings in 1996, consists of Robert J.
Frankenberg and Joseph F. Dox. The Audit Committee recommends engagement of
Electroglas's independent auditors and is primarily responsible for approving
the services performed by Electroglas's independent auditors and for reviewing
and evaluating Electroglas's accounting principles and its system of internal
accounting controls.
The Compensation Committee, which held five meetings in 1996, consists of
Roger D. Emerick and Joseph F. Dox (beginning April 1996). Prior to April 1996
Curtis S. Wozniak was a member of the Compensation Committee and attended one
meeting. The Compensation Committee's functions are to establish and apply
Electroglas's compensation policies with respect to its executive officers and
administer Electroglas's Amended and Restated 1993 Employee Stock Purchase Plan
and its 1993 Long-Term Stock Incentive Plan (the "Plan").
COMPENSATION OF DIRECTORS
Directors who are employees of Electroglas do not receive any compensation
for their services as directors. Directors who are not employees of Electroglas
receive a $1,000 fee for attendance at each Board meeting (or committee meeting
held on a separate day). In addition, directors who are not employees of
Electroglas receive a $500 fee for attendance at each committee meeting
conducted by telephone. All directors are reimbursed for expenses incurred in
connection with attending Board and committee meetings.
Under the Plan, each non-employee director is, upon election or re-election,
automatically granted an option to purchase a number of shares of Common Stock
equal to the product of 10,000 multiplied by the full number of years remaining
in the non-employee director's current term. The exercise price per share of
such options will equal 100% of the Fair Market Value (as defined in the Plan)
of the Common Stock on the date of the grant of the option. Options granted have
a maximum term of three years and become exercisable ratably in annual
installments commencing on the date of grant over the number of full years in
the non-employee director's remaining term for which he or she is elected or
re-elected, or earlier in the event of death, disability or retirement after age
65.
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SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information on 1996,
1995 and 1994 compensation of each of the Named Executive Officers.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------------
---------------------------------- SECURITIES
RESTRICTED UNDERLYING ALL OTHER
SALARY BONUS STOCK OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) AWARD(S)($) (#) ($)
- ------------------------------ ---------- ---------- ---------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Curtis S. Wozniak(2).......... 1996 $212,500 $175,000 $1,612,500(3) 500,000(4) $4,750(5)
Chief Executive Officer and 1995 --- --- --- ---
Director 1994 --- --- --- ---
Neil R. Bonke(6).............. 1996 277,992 --- 163,334(7) 4,500(8)
Chairman 1995 273,146 400,000 100,000(9) 4,500(8)
1994 259,846 300,000 50,000(9) 4,620(8)
Armand J. Stegall............. 1996 159,815 51,000 91,668(10) 4,500(11)
Vice President - Finance, 1995 147,238 175,000 50,000(12) 4,500(11)
Chief Financial Officer,
Treasurer and Secretary 1994 139,582 135,000 20,000(12) 4,620(11)
</TABLE>
- ----------
(1) 1994 bonuses were earned in 1994 and paid in 1995, 1995 bonuses were earned
in 1995 and paid in 1996, and 1996 bonuses were earned in 1996 and paid in
1997. Mr. Wozniak's 1996 bonus was guaranteed at the time of his
appointments as Electroglas's Chief Executive Officer.
(2) Mr. Wozniak became Electroglas's Chief Executive Officer in April 1996, his
base annual salary for fiscal year 1996 was $325,000. Prior to becoming
Electroglas's Chief Executive Officer Mr. Wozniak was a director of
Electroglas.
(3) Represents a total of 100,000 shares granted to Mr. Wozniak pursuant to a
Restricted Stock Bonus Agreement. Value is based on the price of
Electroglas's Common Stock at December 31, 1996 ($16.125). The shares vest
in total on April 19, 2001, provided, however that the vesting shall be
accelerated such that all shares vest if the closing price of Electroglas's
Common Stock is greater or equal to the following closing price targets:
$57.00 on April 19, 1998, $42.75 on April 19, 1999 or $28.50 on April 19,
2000. Should Mr. Wozniak terminate his employment with Electroglas prior to
vesting of the shares, the shares shall be reconveyed to Electroglas in
total (See "Certain Transactions").
(4) This amount represents two stock option grants, each in the amount of
250,000 shares, one of which was canceled pursuant to a repricing of
Electroglas's stock options on July 1, 1996, to $14.25 per shares. See
"Option Grants in Last Fiscal Year" below.
(5) Represents $3,250 paid to Mr. Wozniak as contributions by Electroglas under
its 401(k) plan and $1,500 paid to Mr. Wozniak from January 1996 to April
1996 for services rendered as a director of Electroglas.
(6) Mr. Bonke's compensation for the period January 1994 to April 1996 was for
services rendered as Chairman and Chief Executive Officer of Electroglas.
From April 1996 to December 1996, Mr. Bonke's compensation was for services
rendered as Chairman.
(7) Includes options to purchase 133,334 shares of Electroglas's Common Stock
that were canceled on July 1, 1996 and repriced to $14.25 per share. See
"Option Grants in Last Fiscal Year" below.
(8) Represents amounts paid to Mr. Bonke as contributions by Electroglas under
its 401(k) plan.
(9) All such options were canceled on July 1, 1996 and repriced to $14.25 per
share. See "Option Grants in Last Fiscal Year" below.
(10) Includes options to purchase 61,668 shares of Electroglas's common stock
that were canceled on July 1, 1996 and repriced to $14.25 per share. See
"Option Grants in Last Fiscal Year" below.
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(11) Represents amounts paid to Mr. Stegall as contributions by Electroglas
under its 401(k) plan.
(12) All such options were canceled on July 1, 1996 and repriced to $14.25 per
share. See "Option Grants in Last Fiscal Year" below.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information with respect to the grant
of stock options under Electroglas's 1993 Long-Term Stock Incentive Plan (the
"Plan") to each of the Named Executive Officers during the fiscal year ended
December 31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS EXERCISE ASSUMED ANNUAL RATE OF STOCK PRICE
UNDERLYING GRANTED TO PRICE PER APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION -------------------------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SH)(2) DATE(3) 0%($) 5%($) 10%($)
- ------------------- ---------------- -------------- ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Curtis S. Wozniak. 250,000 (4) 16.1% $18.00 04/19/06 $ 62,500 $2,931,832 $7,333,950
250,000 (5) 16.1 14.25 04/19/06 140,750 2,411,128 5,861,415
Neil R. Bonke..... 30,000 (6) 1.9 20.25 05/20/99 11,250 108,685 215,841
33,334 (7) 2.2 14.25 07/26/04 18,767 256,965 590,377
100,000 (8) 6.5 14.25 05/16/05 56,300 858,896 2,026,124
Armand J. Stegall. 30,000 (9) 1.9 14.25 07/01/06 16,890 296,364 725,133
11,668 (10) 0.8 14.25 07/26/04 6,569 89,946 206,651
50,000 (11) 3.2 14.25 05/16/05 28,150 429,448 1,013,062
</TABLE>
- ----------
(1) Based on a total of 1,548,110 new options granted to employees of
Electroglas in 1996, including the Named Executive Officers, which total
includes options for 932,370 shares were repriced. Excluding such repriced
options, options for a total of 615,740 shares were granted during 1996.
The percent of total options granted to employees in the fiscal year based
on 615,740 non-repriced options granted and excluding all repriced options
is as follows: Mr. Wozniak -- 40.6% for the 250,000 non-repriced options;
Mr. Bonke -- 4.9% for the 30,000 non-repriced options; and Mr. Stegall --
4.9% for the 30,000 non-repriced options.
(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the date the
options were granted.
(3) The options granted have a term of ten years subject to earlier
termination upon the occurrence of certain events related to termination
of employment.
(4) Such option was canceled and repriced on July 1, 1996 to $14.25 per share.
See "Ten-Year Option/SAR Repricings" below.
(5) Options for of 1/16 of the total shares vest on January 19, 1997, and the
options for the remaining shares vest quarterly through January 19, 2001.
(6) Options vest annually over three years, with options for 1/3 of the shares
vesting on each anniversary date of the grant.
(7) Represents options granted on July 1, 1996 in connection with the
cancellation of an equal number of existing outstanding options with an
exercise price in excess of $14.25 per share. See "Ten-Year Option/SAR
Repricings" below. Option vests quarterly beginning July 26, 1995 through
July 26, 1997.
62
<PAGE> 73
(8) Represents options granted on July 1, 1996 in connection with the
cancellation of an equal number of existing outstanding options with an
exercise price in excess of $14.25 per share. See "Ten-Year Option/SAR
Repricings" below. Options for 1/3 of the total options granted vest on
May 16, 1997, and options for the remaining shares vest quarterly through
May 16, 1999.
(9) Options vest quarterly over four years through July 1, 2000.
(10) Represents options granted on July 1, 1996 in connection with the
cancellation of an equal number of existing outstanding options with an
exercise price in excess of $14.25 per share. See "Ten-Year Option/SAR
Repricings" below. Option vests quarterly beginning July 26, 1995 through
July 26, 1998.
(11) Represents options granted on July 1, 1996 in connection with the
cancellation of an equal number of existing outstanding options with an
exercise price in excess of $14.25 per share. See "Ten-Year Option/SAR
Repricings" below. Options for 1/3 of the total options granted vest on
May 16, 1997, and options for the remaining shares vest quarterly through
May 16, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table discloses for the Named Executive Officers information
regarding options to purchase Electroglas Common Stock exercised during 1996
and options to purchase Electroglas Common Stock held at the end of 1996.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DEC. 31, 1996(#) DEC. 31, 1996($)(1)
---------------- -------------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------- ----------------- ----------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Curtis S. Wozniak..... --- --- 10,000/250,000 0/$468,750
Neil R. Bonke......... --- --- 184,167/132,501 1,284,901/210,939
Armand J. Stegall..... 13,750 $109,147 13,242/87,426 81,079/163,924
</TABLE>
- ----------
(1) Value is based on the stock price of Electroglas Common Stock at
December 31, 1996 ($16.125), minus the exercise price.
63
<PAGE> 74
TEN-YEAR OPTION/SAR REPRICINGS(1)
The following table discloses for any Named Executive Officers during the
last four completed fiscal years information regarding all repricings of
options.
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDERLYING STOCK AT PRICE AT REMAINING AT
OPTIONS/SARS TIME OF TIME OF NEW DATE OF
DATE OF REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME REPRICING AMENDED (#) AMENDMENT ($) AMENDMENT ($) PRICE ($) AMENDMENT
- ------------------- --------- ----------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Curtis S. Wozniak. 07/01/96 250,000 $14.25 $18.000 $ 14.25 9 years 292 days
Neil R. Bonke..... 07/01/96 33,334 14.25 17.125 14.25 8 years 25 days
07/01/96 100,000 14.25 25.000 14.25 8 years 319 days
Armand J. Stegall. 07/01/96 11,668 14.25 17.125 14.25 8 years 25 days
07/01/96 50,000 14.25 25.000 14.25 8 years 319 days
William Cornwell(2) 07/01/96 33,334 14.25 17.125 14.25 8 years 25 days
07/01/96 80,000 14.25 25.000 14.25 8 years 319 days
</TABLE>
(1) Electroglas became a reporting company pursuant to section 13(a) or
section 15(d) of the Securities and Exchange Act of 1934 on July 1, 1993,
therefore this table represents only repricings of options during the last
four fiscal years by Electroglas.
(2) Mr. Cornwell served as President and Chief Operating Officer of
Electroglas from April 1993 to April 1996. Mr. Cornwell is currently
employed by Electroglas in a non-executive officer capacity.
EMPLOYMENT AGREEMENTS
On July 23, 1996, Electroglas entered into an Employment and Consulting
Agreement with Mr. Bonke. Mr. Bonke desired to reduce his time commitment to
Electroglas and Electroglas desired to retain his services. Pursuant to the
Employment and Consulting Agreement, Mr. Bonke will continue to serve as an
advisor to the Chief Executive Officer of Electroglas but shall not be required
to devote his full time to the affairs of Electroglas. Through December 1996,
Mr. Bonke's salary continued at the annual rate of $278,000. From January 1,
1997 through June 30, 1997, Mr. Bonke's salary shall be at the monthly rate of
$25,000. Mr. Bonke's salary will terminate after June 30, 1997, unless he
remains as Chairman of the Board and/or enters into a definitive consulting
agreement with Electroglas, in such instances Electroglas and Mr. Bonke will
agree to appropriate compensation. Pursuant to the Employment and Consulting
Agreement, Mr. Bonke shall continue to receive all benefits received by him at
the time of the Employment and Consulting Agreement, or made available to
executive officers on or after the date thereof, until December 31, 1997. Mr.
Bonke will not be eligible to receive an incentive bonus for 1996 or thereafter
under the terms of the Employment and Consulting Agreement. Mr. Bonke will
continue to serve as Chairman of the Board of Electroglas, with the consent of
the Board. Mr. Bonke may resign as Chairman at any time. Pursuant to the
Employment and Consulting Agreement, Mr. Bonke will retire from Electroglas on
January 1, 1998, which date shall be his retirement date for purposes of all
stock option agreements and other arrangements between Electroglas and him. Mr.
Bonke shall be entitled to receive any applicable company executive officer
retirement benefits
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Notwithstanding anything to the contrary set forth in any of Electroglas's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following report and
the Performance Graph which follows shall not be deemed to be incorporated by
reference into any such filings.
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<PAGE> 75
Compensation Policy. Electroglas's compensation policy as established by the
Compensation Committee is that executive officers' total annual cash
compensation should vary with the performance of Electroglas and that long-term
incentives awarded to such officers should be aligned with the interest of
Electroglas's stockholders. Electroglas's executive compensation program is
designed to attract and retain executive officers who will contribute to
Electroglas's long-term success, to reward executive officers who contribute to
Electroglas's financial performance and to link executive officer compensation
and stockholder interests through Electroglas's 1993 Long-Term Stock Incentive
Plan (the "Plan").
Compensation of Electroglas's executive officers consists of three principal
components: salary, bonus and long-term incentive compensation. In setting
compensation for all three components, the Compensation Committee consults
surveys that track the executive compensation of other leading companies in the
semiconductor and semiconductor equipment industries, many of which are included
in the Hambrecht & Quist Semiconductor Sector Index used in the Stock
Performance Graph.
Salary. Base salaries are reviewed annually and set by the Compensation
Committee. Salaries are set to be competitive within the semiconductor industry.
Bonus. The Compensation Committee met in March 1997 to evaluate the
performance and set bonuses payable to its executive officers for the 1996
fiscal year. The performance factors utilized by the Compensation Committee to
determine whether bonuses should be awarded to Electroglas's executive officers
for fiscal 1996 included the following: reduced sales of Electroglas's products
during the latter part fiscal 1996; the officer's overall individual performance
in his position and relative contribution to Electroglas performance during the
year; and the Board's desire to retain the executive officer in the face of
considerable competition for executive talent within the industry. The
Compensation Committee in the future may modify the foregoing criteria or select
other performance factors with respect to executive officer bonuses for a given
fiscal year.
For the 1996 fiscal year, the minimum level of bonus compensation of
Electroglas's Chief Executive officer was set forth in Mr. Wozniak's initial
employment agreement.
Long-Term Incentive Awards. The Compensation Committee periodically
considers whether to grant awards under the Plan to specific officers based on
factors including: the executive officer's position in Electroglas; his or her
performance and responsibilities; the extent to which he or she already holds an
equity stake in Electroglas; equity participation levels of comparable
executives and key employees at other similar companies; and the officer's
individual contribution to Electroglas's financial performance. The Plan does
not provide any formula for weighing these factors, and a decision to grant an
award is primarily based upon a subjective evaluation of the past as well as the
future anticipated performance and responsibilities of the officer in question.
Compensation Policy Regarding Deductibility. Electroglas is required to
disclose its policy regarding qualifying executive compensation for
deductibility under Section 162(m) of the Internal Revenue Code which provides
that, for purposes of the regular income tax and the alternative minimum tax,
the otherwise allowable deduction for compensation paid or accrued with respect
to a covered employee of a publicly-held corporation is limited to no more than
$1 million per year. It is not expected that the compensation to be paid to
Electroglas's executive officers for fiscal 1997 will exceed the $1 million
limit per officer. Electroglas's 1993 Long-Term Stock Incentive Plan is
structured so that any compensation deemed paid to an executive officer when he
exercises an outstanding option under the Plan, with an exercise price equal to
the fair market value of the option shares on the grant date, will qualify as
performance-based compensation which will not be subject to the $1 million
limitation.
In summary, it is the opinion of the Compensation Committee that the adopted
executive compensation policies and plans provide the necessary total
remuneration package to align properly Electroglas's performance and the
interests of Electroglas's stockholders with competitive and equitable executive
compensation in a balanced and reasonable manner, for both the short and
long-term.
65
<PAGE> 76
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
stockholder return on Electroglas's Common Stock from the date of Electroglas's
initial public offering (June 24, 1993) through the end of Electroglas's last
fiscal year (December 31, 1996), with the percentage change in the cumulative
total return for The Nasdaq Stock Market (U.S. Companies) and the Hambrecht &
Quist Semiconductor Sector Index. The comparison assumes an investment of $100
on June 24, 1993 in Electroglas's Common Stock and in each of the foregoing
indices and assumes reinvestment of dividends. The stock price performance shown
on the graph below is not necessarily indicative of future price performance.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
6/24/93 6/93 9/93 12/93 3/94 6/94 9/94 12/94
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Electroglas, $100 $100 $163 $156 $177 $215 $311 $209
Inc.
Nasdaq Stock
Market -- U.S. $100 $102 $111 $113 $108 $103 $112 $110
H&Q
Semi-conductor $100 $100 $126 $112 $127 $119 $130 $137
Sector
</TABLE>
<TABLE>
<CAPTION>
3/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Electroglas, $273 $358 $426 $306 $192 $178 $172 $202
Inc.
Nasdaq Stock
Market -- U.S. $120 $138 $154 $156 $164 $177 $183 $192
H&Q
Semi-conductor $166 $232 $263 $191 $180 $73 $196 $247
Sector
</TABLE>
66
<PAGE> 77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 9, 1995, Messrs. Bonke and Stegall, and on April 4, 1996, Mr.
Wozniak, each executive officers of Electroglas (the "Executive Officers"),
entered into agreements with Electroglas which provide for severance benefits
and acceleration of option vesting in the event of a change of control of
Electroglas. Pursuant to the terms of agreements, if the Executive Officer's
employment is terminated under certain circumstances during the one-year period
following a change in control of Electroglas, Electroglas will (i) continue
payment of the Executive Officer's base salary then in effect for one year, (ii)
pay the Executive Officer a bonus based on a calculation tied to a prior year's
bonus, (iii) provide for continuation of medical and dental benefits for one
year, (iv) pay the Executive Officer's life insurance premiums and car allowance
for one year, (v) pay accrued but unused vacation as of the date of termination,
(vi) accelerate vesting of stock options and restricted shares; provided that,
at least one year has elapsed between the date of the agreement and the date of
termination of employment and (vii) extend the expiration date of the Executive
Officer's vested stock options on the date of termination to six months after
the date of termination.
During 1996, each of Mssrs. Bonke, Wozniak and Stegall were granted
non-qualified stock options under Electroglas's 1993 Long-Term Incentive Plan in
the amount of 30,000 option shares, 250,000 option shares and 30,000 option
shares respectively, at an exercise price of $14.25 per share.
On April 1, 1996, Electroglas entered into a Severance Agreement and Release
of all Claims (the "Severance Agreement") with Mr. William J. Cornwell. Pursuant
to the terms of the Severance Agreement Mr. Cornwell resigned as Electroglas's
President and Chief Operating Officer effective April 1, 1996 and accepted a
special assignment as Special Assistant to the Chief Executive Officer until
March 31, 1997, at which time Mr. Cornwell will retire from Electroglas. During
the term of the Severance Agreement Mr. Cornwell's rate and terms of
compensation, including stock options and all benefits, remain in effect as of
April 1, 1996. In addition, Mr. Cornwell will receive a 1996 performance bonus
payable on March 1, 1997. Effective April 1, 1997, and continuing thereafter
until Mr. Cornwell reaches age 65, Electroglas will offer Mr. Cornwell and his
spouse, at his own expense, the same medical and dental benefits offered
Electroglas's employees. The indemnification provided under the Indemnification
Agreement entered into by Mr. Cornwell on August 10, 1993 will continue for any
action taken or not taken by Mr. Cornwell 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
any proceeding. Effective April 1, 1996, Mr. Cornwell was no longer covered by
the terms and conditions of the Change of Control Agreement between Electroglas
and Mr. Cornwell dated June 9, 1995.
On July 1, 1996, Electroglas entered into a Restricted Stock Bonus Agreement
pursuant to which Electroglas issued to Mr. Wozniak 100,000 shares of Common
Stock of Electroglas (the "Restricted Stock"). The fair market value of
Electroglas's stock on that date was $14.25. The Restricted Stock cannot be
sold, transferred by gift, pledged hypothecated or otherwise transferred or
disposed of by Mr. Wozniak prior to being vested on April 19, 2001; provided,
however, that the vesting for all Restricted Stock shall be accelerated if the
closing stock price of Electroglas's Common Stock is greater or equal to the
following closing price targets: (i) $57.00 on April 19, 1998; (ii) $42.75 on
April 19, 1999 or (iii) $28.50 on April 19, 2000. Should Mr. Wozniak, prior to
the vesting of all Restricted Stock, terminate his employment with Electroglas
for any reason, with or without cause as defined in the Restricted Stock Bonus
Agreement, other than death, total and permanent disability or retirement at
normal retirement age at a time when he holds any Restricted Stock, such
Restricted Stock shall be deemed reconveyed to Electroglas without payment of
any consideration by Electroglas. If Electroglas terminates Mr. Wonziak's
employment other than for Cause or if Mr. Wozniak terminates his employment for
Good Reason (both as defined in the Electroglas Change of Control Agreement
entered into between Mr. Wozniak and Electroglas -- see above description), and
the shares of Restricted Stock subject to the Restricted Stock Bonus Agreement
are unvested, the anniversary dates for vesting and acceleration shall in each
case be one year earlier.
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<PAGE> 78
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF KNIGHTS
The following table sets forth information as of _________ __, 1997 (the
"Record Date") as to the number of shares of Knights Common Stock beneficially
owned by (i) each person who is known by Knights to own beneficially more than
five percent of Knights Common Stock (ii) each of Knights's officers and
directors and (iii) all directors and executive officers of Knights as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED (1)
PERCENT OF ------------------------------
BENEFICIAL OWNER NUMBER TOTAL(2)
- ------------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Glenwood Ventures II (3) ............................................. 3,630,862 37.8
3000 Sand Hill Road
Building 4, Suite 320
Menlo Park, California 94025
Thomas A. Sherby (4) ................................................. 1,744,320 17.7
155 North Wolfe Road
Sunnyvale, California 94086
Shao-Hung Gerald Liu (5) ............................................. 1,130,600 11.7
155 North Wolfe Road
Sunnyvale, California 94086
Kuang-Hua Ken Huang (6) .............................................. 616,960 6.3
155 North Wolfe Road
Sunnyvale, California 84086
Robert Anderson (7)................................................... 312,000 3.2
Dag Tellefsen (8)..................................................... 3,652,862 37.9
James Poitras (9)..................................................... 20,000 *
Mary P. Korn (10)..................................................... 431,500 4.4
Ankush Oberai (11).................................................... 375,320 3.9
Jessee Ring........................................................... 0 *
All directors and officers as a group (12)............................ 8,283,562 80.2
</TABLE>
- -------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options, warrants and convertible notes currently exercisable
or convertible, or exercisable or convertible within 60 days, are deemed
outstanding for computing the percentage of the person holding such option
but are not outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws
were applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Percentage beneficially owned is based on 9,611,228 shares of Common Stock
outstanding at December 31, 1996, including the conversion of the
outstanding shares of Series C Preferred Stock into Common Stock on a 1:1
basis.
(3) Dag Tellefsen, a director of Knights, is President of Glenwood II
Management, Inc., the general partner of Glenwood Ventures II.
(4) Includes 265,720 shares represented by stock options exercisable within 60
days of the Record Date.
68
<PAGE> 79
(5) Includes 22,000 shares represented by stock options exercisable within 60
days of the Record Date and 66,664 shares held by Mr. Liu's children as to
which Mr. Liu disclaims beneficial ownership.
(6) Includes 226,760 shares represented by stock options exercisable within 60
days of the Record Date and 72,000 shares held by Mr. Huang as custodian
for his minor children.
(7) Includes 22,000 shares represented by stock options exercisable within 60
days of the Record Date.
(8) Includes 3,630,862 shares held by Glenwood Ventures II and 22,000 shares
represented by stock options exercisable within 60 days of the Record
Date.
(9) Constitutes shares represented by stock options exercisable within 60 days
of the Record Date.
(10) Includes 90,300 shares represented by stock options exercisable within 60
days of the Record Date.
(11) Includes 44,120 shares represented by stock options exercisable within 60
days of the Record Date.
(12) Includes 712,900 shares represented by stock options exercisable within 60
days of the Record Date.
69
<PAGE> 80
BUSINESS OF KNIGHTS
GENERAL
Knights develops, markets, and supports software solutions for
semiconductor manufacturing. Knights's software tools access and extract
inspection and measurement results for powerful, fast and robust yield
enhancement analysis in the wafer fab. Since its founding in 1987, Knights has
established its reputation as the leading software supplier of failure analysis
and yield enhancement tools to the semiconductor industry. Knights's principal
products are YieldManager(R) and Merlin's Framework(TM). YieldManager,
introduced in 1994, is an integrated enterprise, client-server yield enhancement
system for sub-micron semiconductor fabrication facilities ("fabs").
YieldManager takes the output from testers, process and inspection equipment
used at various points in the semiconductor fabrication process, correlates it
and manages it in a manner that enables the operator of the fab to maximize its
manufacturing yield. YieldManager provides an encompassing and integrated
approach to yield management and automates processes previously managed
separately and often manually. Merlin's Framework is Knights's principal CAD
navigation product which connects the CAD semiconductor design to the physical
attributes of the semiconductor itself. Merlin's Framework has been widely
accepted in the semiconductor industry for failure analysis and process
diagnostics and is the leading CAD navigation product. Knights sells its
software products directly to semiconductor manufacturers in the U.S. and
through OEMs, distributors and other sales representatives worldwide.
INDUSTRY BACKGROUND
Until relatively recently, yield enhancement for a fab was mostly a matter
of trying to "inspect in" quality and reliability by installing multi-million
dollar wafer inspection machines and manually classifying the defects these
machines found. Engineers had to sort through huge volumes of inspection and
test data, guess at which defects might be causing yield problems, and then send
problem wafers to failure analysis labs for evaluation.
As a result of the advent of deep submicron technology (less than 0.5(mu)m
minimum feature size), these wafer inspection machines became faster and the
sizes of identifiable defects became smaller, geometrically increasing the data
output of inspection and test machines. Yield enhancement engineers were
overwhelmed with the additional data, but actually had little real information
about yield loss available to them. A semiconductor fabrication facility
processing 6,000 wafer starts per week can generate as much as 1.5 gigabytes of
inspection and test data each week. The volume of the data presented a difficult
management problem. Much of the collected data had to be discarded or ignored
because of time and staff availability constraints.
The brute force solution to the problem of how to process the dramatically
increasing volume of test data is no longer practical. Fab personnel are under
intensifying pressure to increase yield quickly, as yield is one of the most
important components of fab profitability. A modern sub-micron fab represents an
investment of over $1 billion and even small changes in overall yield can
dramatically affect a fab's profitability. Moreover, the cost of inspection and
test hardware has dramatically increased. One industry observer has estimated
that the cost of inspection and measurement equipment has risen at a rate of
over twenty times as fast compared to the increase in cost for all fab
equipment.
The data processing bottleneck in fab test and inspection is further
complicated by the fact that most fabs use a mix of inspection and test
equipment from a variety of different suppliers. Although some vendors have
offered limited software solutions for the management of data produced by their
test equipment, they are largely hardware specific. No vendor supplied an
integrated equipment-independent solution that accommodates the range of test
and inspection equipment used in the modern fab.
Knights created YieldManager to address the problem of data accumulation
and analysis in a fab's test and inspection functions. YieldManager provides a
comprehensive open software environment for yield enhancement with interfaces to
a wide variety of hardware suppliers. Since Knights is not competing with
vendors of inspection and test hardware, it can provide multi-instrument
horizontal integration across design, process, and test disciplines.
70
<PAGE> 81
YieldManager enables a fab operator to build its own custom yield management
system with best of breed hardware.
PRODUCTS
Knights Technology is the only company focused on software that deals with
all three cardinal elements of fab yield: design, process, and test. Merlin's
Framework CAD navigation software and its related MegaLab(R)/MegaLink(TM)
networking software address design and process problems and are used by design,
procesS diagnostic, and failure analysis engineers. The YieldManager Defect
yield enhancement system and its related products are used by process and yield
analysis engineers for yield management and rapid yield learning. All of
Knights's software products are designed around industry standard open software
standards.
CAD NAVIGATION PRODUCTS
Knights CAD Navigation software products enable a design engineer to use
the CAD design database to navigate a wide variety of analysis and test
equipment to features of interest on a device for physical measurement of these
features. Knights's principal CAD Navigation product, Merlin's Framework, can
import CAD design data in a variety of formats, such as Cadence, Avant!, Mentor
Graphics, Lucent Technologies, Silicon Valley Research and several
user-proprietary formats. It can then be used by a test engineer to trace the
design to the physical measurements from a variety of testing tools, such as
in-line inspection devices, scanning electron microscopes, optical microscope
review stations and analytical probe stations.
Merlin's Framework is based upon industry standard open hardware and
software standards. License fees for Merlin's Framework can vary widely based
upon the intended usage of the customer, but a typical license fee is
approximately $80,000.
YIELDMANAGER
YieldManager collects, processes and displays data accumulated from
inspection and test equipment during the semiconductor fabrication process.
YieldManager takes the raw data from the inspection and test equipment and
processes them through a variety of routines including the following:
Partitioning. The data is partitioned to show which defects were added to
the wafer after each inspection. YieldManager can then generate step
contribution charts that illustrate both the relative and the total number of
defects found at each successive test or inspection point.
Cluster Analysis. This data analysis divides the data between random and
non-random, i.e. clustered, defects. Clustered defects only tend to affect a
small number of die on a wafer whereas random defects can have a much greater
effect on die loss and overall wafer yield. The proper characterization of the
defects observed makes it easier to track the sources of the defect.
Repeater Defect Detection. Repeating defects can often be caused by defects
in the lithography process and can cause heavy yield losses. To isolate such
defects, YieldManager automatically compares the relative location of each
defect within its die against the location of every other defect within its die.
Sample Selection. Many "defects" found by inspection devices are actually
normal slight variations in pattern edges or grain structure. YieldManager sorts
through the data to identify and cull out the false defects.
SPC System Links. The results of the processed data are then transmitted to
YieldManager's standard process control or other existing software which charts
it over time against pre-designated tolerances. It will automatically notify fab
personnel if the actual results exceed the pre-set tolerances.
71
<PAGE> 82
YieldManager incorporates a large number of visual tools and graphical and
statistical tools to allow the yield engineer to plot and visualize the data in
a variety of ways to assist in isolating and correcting yield problems. The
images created by the inspection and test tools themselves are also included in
the defect database and can be reviewed at any time. The physical defect data
can also be correlated to electrical test results of the die. YieldManager is
configurable in that its elements can be configured by the user who can also set
testing parameters and specify regular report generation.
YieldManager also runs on industry standard engineering workstations and
incorporates open software standards such as EtherNet/TCP/IP networking
protocols, MS Windows NT, SQL and Oracle 7.X database.
The sales price for YieldManager varies according to each installation,
but a single installation end-user list price is approximately $500,000.
MARKETING, SALES AND SUPPORT
Knights markets YieldManager and its related yield management products
through its direct sales force in the United States and through independent
sales agents and distributors in Asia and Europe. A defect management subset of
YieldManager is also marketed on an OEM basis by an established supplier of
wafer inspection equipment. Knights's CAD Navigation products are sold by its
direct sales force, through the direct sales forces of over 20 OEMs of
semiconductor inspection and analytical equipment, such as focused ion beam
instruments, design verification testers, emission microscopes, scanning
electron microscopes, and electron beam probers, and through independent sales
agents and distributors in Asia and Europe. In many cases Knights's distributor
for its YieldManager products in a particular country will be different from its
representative for CAD Navigation products.
Knights's YieldManager customers include Charter Semiconductor
Manufacturing, Motorola, National Semiconductor, Philips, SEMATECH, SGS
Thompson, Siemens and Taiwan Semiconductor Manufacturing Corporation. Knights
CAD Navigation customers include Advanced Micro Devices, Analog Devices,
Fujitsu, Harris Semiconductor, Hitachi, Hyundai, IBM, Intel, Macronix, Micron,
Mitsubishi, Mosel, Motorola, National Semiconductor, OKI, Philips, Ross
Technology, Samsung, Seiko, SGS Thomson, Texas Instruments, and Toshiba.
After receipt of the Merlin's Framework software, Knights customers almost
uniformly enter into Maintenance Agreements with Knights, as is customary in the
software business. After expiration of the initial one-year warranty period,
Knights's customers for its YieldManager products also almost uniformly enter
into Maintenance Agreements with Knights. Under the terms of the Maintenance
Agreements, Knights supplies the customer with enhancements and upgrades to the
software as well as "bug fixes," and the customer agrees to pay Knights a
maintenance fee generally fixed at between 12% and 15% of the original purchase
price of the software.
Knights believes that providing its customers with effective support in the
use of its software products is essential to its continued success. Accordingly,
Knights has established a sales and support facility in Austin, Texas. Knights,
working together with one of its distributors, has established Knights
Technology (Asia/Pacific) Pte. Ltd. in Singapore, a joint venture created to
meet the support needs of its customers in the Asia/Pacific region.
Knights has also established an engineering and quality assurance facility in
Mumbai, India.
RESEARCH & DEVELOPMENT
Knights undertakes substantial ongoing research and developments
activities. Knights research and development expenditures totaled $1,992,000,
$1,187,000 and $750,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The expenditures in 1996 and 1995 were primarily attributable to
the development of, and functional enhancement to, Knights's YieldManager
product.
Knights's current research and development efforts are directed toward
developing functional enhancements and extensions to its Merlin's Framework and
YieldManager products. These enhancements include extensions to
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<PAGE> 83
the product to make it compatible with a greater range of test and inspection
devices, more flexible user interfaces and to enhance its data management and
analysis capabilities. In particular, Knights is continually enhancing the
product's ability to recognize and classify defects so as to isolate and
therefore contain and manage defects.
In addition to its ongoing product development and enhancement activities,
Knights is continually engaged in a program to maintain the competitiveness of
its existing products. These efforts include extending Knights's products to be
compatible with new test and inspection devices as well as to incorporate
enhanced features of existing equipment. Moreover, the hardware and software
technologies around which Knights's products are built are constantly changing.
Knights incorporates into its products advanced computer and software
capabilities as they become available.
COMPETITION
Competition in the semiconductor manufacturing test and inspection industry
is intense. Knights's principal competitors are established suppliers of test
and inspection equipment such as KLA Instruments and Inspex. Many of the
established suppliers of inspection and test equipment also provide software
products which are designed to augment the performance of their equipment. These
companies have substantially greater technical, financial and sales resources
than Knights. In addition, since these companies provide equipment that is
necessary to establish and operate a competitive semiconductor fab, they exert
significant influence on Knights's customers. Knights also competes with the
product offerings and the announced product offerings of newly established
companies. Several companies have been established to provide software solutions
for semiconductor manufacturing which could compete with those offered by
Knights.
Knights believes that it holds a competitive advantage to its competitors
in that it is an independent supplier whose products are compatible with the
products of all the principal suppliers of semiconductor test and inspection
equipment. The software product offerings from the equipment suppliers
themselves may be generally specific to the equipment offered by that supplier
and, if so, are not easily integrated with other equipment used in a
semiconductor fab. Knights believes that its principle competitive disadvantages
are its limited financial resources and the lack of established support
resources.
PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY
Knights has been granted several patents and has applied for additional
patent protections for the technology incorporated in its products. Knights
believes, however, that its ultimate success will be dependent upon the
functionality offered its customers by its software products and the ability of
that functionality to enable its customers to address their yield problems.
Knights maintains unregistered copyrights in its software and also
maintains the source code for its products as trade secrets. Knights typically
licenses the object code version of its software to its customers only.
EMPLOYEES
At March 12, 1997, Knights employed 44 people including 27 in engineering,
7 in sales and sales support and 10 in finance and administration. None of
Knights employees is represented by a labor union. Knights believes that its
relations with its employees are good.
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<PAGE> 84
PROPERTIES
Knights headquarters is located in a leased 21,410 square foot building in
Sunnyvale, California. Knights has a sales and customer support facility in a
leased 4,132 square foot facility in Austin, Texas and also leases office space
in Mumbai, India where it maintains an engineering and quality assurance
operation.
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<PAGE> 85
SELECTED HISTORICAL FINANCIAL DATA AND COMPARATIVE PER SHARE DATA OF KNIGHTS
The following summary historical financial data of Knights has been derived from
its historical financial statements and should be read in conjunction with such
financial statements and the notes thereto.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
----------------- ---------------- -----------------
<S> <C> <C> <C>
Product revenues $ 4,807 $ 4,720 $ 3,506
Maintenance and other revenues 1,331 433 516
----------------- ---------------- -----------------
Total revenues 6,138 5,153 4,022
Cost of product revenues 399 390 628
Cost of maintenance and other revenues 387 155 92
----------------- ---------------- -----------------
Gross margin 5,352 4,608 3,302
Research and development 1,992 1,187 750
Marketing and sales 2,418 1,523 968
General and administrative 1,665 1,259 925
----------------- ---------------- -----------------
Total Operating Expenses 6,076 3,970 2,643
Operating income (loss) (724) 638 659
Other income 58 81 42
----------------- ---------------- -----------------
Income (loss) before income tax expense (benefit) (666) 719 700
Income tax expense (benefit) (260) 250 243
----------------- ---------------- -----------------
Net income (loss) (406) 470 457
Net income (loss) per share $(0.08) $0.05 $0.05
================= ================ =================
Shares used in computing net income (loss) per share 4,966 10,100 10,045
================= ================ =================
HISTORICAL BALANCE SHEET DATA
Working capital $ 1,181 $ 2,380 $ 2,078
Total assets 4,177 4,734 3,370
Short-term borrowings 313 0 0
Accumulated deficit (1,884) (1,478) (1,947)
Total shareholders' equity 2,554 2,814 2,337
</TABLE>
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<PAGE> 86
KNIGHTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements contained herein that are not purely historical are
forward-looking statements, including statements regarding Knights'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 herein are made as of the
date hereof, based on information available to Knights as of the date hereof,
and Knights assumes no obligation to update any forward-looking statement. It is
important to note that Knights actual results could differ materially from those
in the forward-looking statements.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The following tables sets forth for the periods indicated certain financial
data in dollar amounts and as a percentage of revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
-------------------------------------------------
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Product Revenues $ 4,807 $ 4,720 $ 3,506
Maintenance and other Revenues 1,331 433 516
Cost of Product Revenues 399 390 628
Cost of Maintenance and Other Revenues 387 155 92
Gross Margin 5,352 4,608 3,302
Research and Development 1,992 1,187 750
Marketing and Sales 2,418 1,523 968
General and Administrative 1,665 1,259 925
Operating income (loss) (724) 638 659
Other income 58 81 42
Net income (loss) (406) 470 457
</TABLE>
76
<PAGE> 87
As a Percentage of Revenues
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Product Revenues 78.3% 91.6% 87.2%
Maintenance and other Revenues 21.7% 8.4% 12.8%
Cost of Product Revenues 6.5% 7.6% 15.6%
Cost of Maintenance and Other Revenues 6.3% 3.0% 2.3%
Gross Margin 87.2% 89.4% 82.1%
Research and Development 32.5% 23.0% 18.6%
Marketing and Sales 39.4% 29.6% 24.1%
General and Administrative 27.1% 24.4% 23.0%
Operating income (loss) -11.8% 12.4% 16.4%
Other income 0.9% 1.6% 1.0%
Net income (loss) -6.6% 9.1% 11.4%
</TABLE>
Revenue. Revenue consists primarily of fees for licenses of Knights
software products, maintenance and customer support.
Knights's primary products are Merlin's Framework and YieldManager. Product
revenue comprised of the Merlin's Framework product (48.6%, 56.4% and 78.6% for
1996, 1995 and 1994, respectively as a percent of total revenues), and the
YieldManager product (29.7%, 35.2% and 8.6% for 1996, 1995 and 1994,
respectively as a percent of total revenues). The YieldManager product was
introduced during 1994.
Maintenance and other revenue was $1,331,000, $433,000 and $516,000 for
1996, 1995 and 1994 respectively or as a percentage of total revenue, 21.7%,
8.4% and 12.8% for 1996, 1995 and 1994, respectively. The increase during 1996
is due primarily to the establishment of the Yield Management Team program. The
Yield Management Team is a collaborative effort of software and equipment
semiconductor supplier companies to provide a total yield management solution.
The increase is also a result of the recognition in 1996 of YieldManager sales
deferred in 1995 and the first part of 1996.
Cost of Product Revenues. Costs of product revenue consist primarily of
expenses associated with software licenses of embedded software, product
documentation, hardware bundled with products and software production costs.
Costs of product revenues were $399,000, $390,000 and $628,000 for 1996, 1995
and 1994, respectively. The change in cost of product revenues was primarily due
to the termination of a software license agreement that was resold in Knights's
products.
Cost of Maintenance and Other Revenues. Costs of maintenance and other
revenue consist of maintenance and customer support, and direct costs with
providing other services. Maintenance includes activities undertaken after the
product is available for general release to customers to correct errors and make
routine changes and additions. Customer support includes any installation
assistance, training classes, telephone question and answer services, on-site
visits and software or data modifications. Costs of maintenance and other
revenue were $387,000, $155,000 and $92,000 in 1996, 1995 and 1994 respectively.
The increase was primarily due to an increase in software support personnel and
expenses necessary to support the company's growing base of installed software.
Gross Margin. Gross margin was 87.2%, 89.4% and 82.1% in 1996, 1995 and
1994 respectively. The absolute decline in gross profit in 1996 as compared to
1995 was primarily attributable to a change in the product mix and cost of
installation of software licenses for the YieldManager software. Knights
believes its gross profit will
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<PAGE> 88
continue to be affected by a number of factors, including the cost of
installation of the YieldManager software, reliance on computer vendors for
competitive pricing on computer hardware bundled with software sales and the
uncertainty in pricing that will be realized in the long-term.
Research and Development. Research and development expenses were
$1,992,000, $1,187,000 and $750,000 in 1996, 1995 and 1994, respectively and as
a percent of total revenues, 32.4%, 23.0%, 18.6%, for 1996, 1995 and 1994
respectively. Research and development expenses include all costs associated
with the development of new products and significant enhancement of existing
products. These consist primarily of salaries, expensed software development
tools, computer equipment depreciation and other costs associated with Knights
continuing efforts to develop new software products. For the past three years,
Knights continued to increase the amount of resources associated with research
and development necessary to take advantage of an emerging market.
Marketing and Sales. Marketing and sales expenses were $2,418,000,
$1,523,000 and $968,000 in 1996, 1995 and 1994, respectively and as a percent of
total revenues, 39.4%, 29.6% and 24.1% for 1996, 1995 and 1994, respectively.
These included sales representatives, product marketing engineers and field
application engineers. Marketing and sales expense also includes costs of
tradeshows and marketing collateral. During the past three years, Knights
continued to increase its sales and marketing staff in order to provide customer
support to an increased number of software installations. The increase in
expenses for 1996 was due to an increase in salaries and commissions on a higher
sales level.
General and administrative. General and administrative expenses were
$1,665,000, $1,259,000 and $925,000 in 1996, 1995 and 1994, respectively
representing 27.1%, 24.4% and 23.0% for 1996, 1995 and 1994, respectively as a
percent of total sales. The increase in general and administrative expenses over
the past three years reflects increase in personnel and related costs necessary
to support Knights growth.
Other income. Other income was $58,000, $81,000 and $42,000 in 1996, 1995
and 1994 respectively. The decrease in other income from 1996 as compared to
1995 and 1994 was the result of lower interest income attributable to a decrease
in cash balances, due to growth during the year, coupled with additional
interest expense resulting from the borrowing activity under the bank credit
line. The credit line balance was $313, 000 at the end of 1996. There was no
activity under the credit line during 1995 or 1994.
Income taxes. Due to the net loss in 1996, the company recorded a tax
benefit of $260,000 which represents an effective rate of 39% compared to 35% in
1995 and 1994, respectively. The increase in the effective tax rate for 1996 is
due to the impact of the research tax credit.
Factors that May Affect Results and Financial Conditions. Knights 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 semiconductors 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 skilled employees, timing of orders
received and introduction of competitor products having technological and/or
pricing advantages.
LIQUIDITY AND CAPITAL RESOURCES
Knights cash, cash equivalents and short-term investments were $724,000 at
December 31, 1996, a decrease of $1,418,000 from December 31, 1995. Cash was
used to purchase computer equipment, leasehold improvements and to pay increased
operating expenses incurred by the company during 1996.
Working capital items that significantly impacted cash balances were
accounts receivable, other current assets and income taxes. Accounts receivable
decreased $545,000, although sales volume increased, primarily due to an
improvement in days sales outstanding in 1996 and favorable payment terms on the
YieldManager software product that require a substantial portion of the purchase
price to be paid prior to installation of the software at the customer site. The
increase in other assets of $493,000 was due to a payment to acquire adjacent
space at Knights Sunnyvale headquarters location and to acquire rights to
software licenses that were prepaid during 1996. The 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 and an operating
loss carryback, resulting in an income tax receivable of $567,000. Knights used
$1,202,000 of cash for investing activities,
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<PAGE> 89
including $709,000 for capital expenditures on computer software and computer
equipment and on leasehold improvements to Knights facilities. Cash used in
financing activities was $415,000, including $313,000 advanced under the bank
credit line, $26,000 from repayment of shareholders notes, and $76,000 from the
exercise of common stock options.
On March 13, 1997, Knights announced the signing of the Agreement, pursuant
to which Knights will enter into the transactions described in this Proxy
Statement/Prospectus.
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<PAGE> 90
STOCKHOLDER PROPOSALS
To be considered for presentation to the annual meeting of Electroglas's
stockholders to be held in 1998, a stockholder proposal must be received by
Armand J. Stegall, Secretary, Electroglas, Inc., 2901 Coronado Drive, Santa
Clara, California 95054, no later than December 12, 1997.
EXPERTS
The consolidated financial statements of Electroglas incorporated by
reference in Electroglas, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1996, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon incorporated by reference therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of said firm as experts in accounting and auditing.
The financial statements and financial statement schedule of Knights as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 have been included herein and in the Registration
Statement of which this Prospectus/Proxy Statement is a part in reliance upon
the report of KPMG Peat Marwick, LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby, the federal
income tax consequences in connection with the Merger and certain other matters
relating to the Merger and the transactions contemplated therein will be passed
upon for Electroglas by Morrison & Foerster LLP, Palo Alto, California. Certain
legal matters with respect to the Merger and the transactions contemplated
thereby will be passed upon for Knights by John D. Arnold, Esquire, Woodside,
California.
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<PAGE> 91
Index to
KNIGHTS TECHNOLOGY, INC.
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants ..........................................................F-2
Balance Sheets as of December 31, 1996 and 1995 .............................................................F-3
Statements of Operations for the years ended December 31, 1996, 1995 and 1994 ...............................F-4
Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 .....................F-5
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ...............................F-6
Notes to Financial Statements ...............................................................................F-7
</TABLE>
F-1
<PAGE> 92
Report of Independent Certified Public Accountants
The Board of Directors
Knights Technology, Inc.:
We have audited the accompanying balance sheets of Knights Technology, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of Knights'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
misstatement. 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 financial position of Knights Technology, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Jose, California
March 3, 1997,
except as to Note 9,
which is as of March 13, 1997
F-2
<PAGE> 93
KNIGHTS TECHNOLOGY, INC.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 325,572 $ 1,741,751
Short-term investments 398,710 400,010
Accounts receivable, net of $130,000 allowance as
of December 31, 1996 and 1995 1,051,467 1,596,622
Refundable income taxes 567,103 -
Prepaid expenses and other assets 165,839 221,940
Deferred income taxes 295,600 338,870
------------- -------------
Total current assets 2,804,291 4,299,193
Property and equipment, net 798,763 389,185
Deferred income taxes 80,100 34,530
Other assets 493,673 10,640
------------- -------------
Total Asset $ 4,176,827 $ 4,733.548
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Bank borrowings $ 313,000 $ -
Accounts payable 381,339 303,998
Income taxes payable - 315,288
Accrued employee expenses 286,839 444,874
Other accrued expenses 234,968 132,424
Deferred revenue 406,861 723,045
------------- -------------
Total current liabilities 1,623,007 1,919,629
------------- -------------
Shareholders' equity:
Convertible preferred stock, no par value;
4,600,000 shares authorized;
4,599,978 shares issued and outstanding;
liquidation preference of $680,000 $ 4,174,107 $ 4,174,107
Common stock, no par value; 20,000,000
shares authorized; 5,011,250 and
4,881,242 shares issued and outstanding
in 1996 and 1995, respectively 402,822 143,318
Deferred stock compensation (139,182) -
Notes receivable from shareholders - (25,756)
Accumulated deficit (1,883,927) (1,477,750)
Total shareholders' equity 2,553,820 2,813,919
------------- -------------
Total liabilities and shareholders' equity $ 4,176,827 $ 4,733.548
============= =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 94
KNIGHTS TECHNOLOGY, INC.
Statements of Operations
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Product $ 4,807,377 $ 4,720,183 $ 3,506,238
Maintenance and other 1,330,832 433,263 515,816
------------- ------------- -------------
Total revenues 6,138,209 5,153,446 4,022,054
------------- ------------- -------------
Cost of revenues:
Product 399,454 389,778 628,189
Maintenance and other 387,060 155,474 92,181
------------- ------------- -------------
Total cost of revenues 786,514 545,252 720,370
------------- ------------- -------------
Gross margin 5,351,695 4,608,194 3,301,684
------------- ------------- -------------
Operating expenses:
Research and development 1,992,176 1,187,381 750,218
Marketing and sales 2,418,244 1,523,213 967,911
General and administrative 1,665,221 1,259,278 924,935
------------- ------------- -------------
Total operating expenses 6,075,641 3,969,872 2,643,064
------------- ------------- -------------
Operating income (loss) (723,946) 638,322 658,620
Other income 57,769 81,136 41,770
------------- ------------- -------------
Income (loss) before income tax expense (benefit) (666,177) 719,458 700,390
Income tax expense (benefit) (260,000) 249,800 243,000
------------- ------------- -------------
Net income (loss) $ (406,177) $ 469,658 $ 457,390
============= ============= =============
Net income (loss) per share $ (0.08) $ 0.05 $ 0.05
============= ============= =============
Shares used in per share computations 4,965,509 10,099,953 10,044,547
============= ============= =============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 95
KNIGHTS TECHNOLOGY, INC.
Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
----------------------------- -----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances of December 31, 1993 4,599,978 $ 4,174,107 4,372,868 $ 135,501
Exercise of stock options -- -- 9,374 117
Collection on -- -- -- --
Shareholder notes
receivable
Net income -- -- -- --
------------- ------------- ------------- -------------
Balances as of December 31, 1994 4,599,978 4,174,107 4,382,242 135,618
Exercise of stock options -- -- 499,000 7,700
Net income -- -- -- --
------------- ------------- ------------- -------------
Balances as of December 31, 1995 4,599,978 4,174,107 4,881,242 143,318
Exercise of stock options -- -- 6,100 2,239
Issuance of stock to -- -- 123,908 74,345
consultants
Compensation relating to -- -- -- 30,000
consultant stock options
Deferred compensation -- -- -- 152,920
relating to employee
stock options
Amortization of deferred -- -- -- --
stock compensation
Collection on -- -- -- --
shareholder notes
receivable
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balances as of December 31, 1996 4,599,978 $ 4,174,107 5,011,250 $ 402,822
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Notes
Deferred Receivable Total
Stock from Accumulated Shareholders'
Compensation Shareholders Deficit Equity
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balances of December 31, 1993 $ -- $ (28,404) $ (2,404,798) $ 1,876,406
Exercise of stock options -- -- -- 117
Collection on -- 2,648 -- 2,648
Shareholder notes
receivable
Net income -- -- 457,390 457,390
------------- ------------- ------------- -------------
Balances as of December 31, 1994 -- (25,756) (1,947,408) 2,336,561
Exercise of stock options -- -- -- 7,700
Net income -- -- 469,658 469,658
------------- ------------- ------------- -------------
Balances as of December 31, 1995 -- (25,756) (1,477,750) 2,813,919
Exercise of stock options -- -- -- 2,239
Issuance of stock to -- -- -- 74,345
consultants
Compensation relating to -- -- -- --
consultant stock options
Deferred compensation (152,920) -- -- 30,000
relating to employee
stock options
Amortization of deferred 13,738 -- -- 13,738
stock compensation
Collection on -- 25,756 -- 25,756
shareholder notes
receivable
Net loss -- -- (406,177) (406,177)
------------- ------------- ------------- -------------
Balances as of December 31, 1996 $ (139,182) $ -- $ (1,883,927) $ 2,553,820
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 96
KNIGHTS TECHNOLOGY, INC.
Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (406,177) $ 469,658 $ 457,390
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Depreciation and amortization 310,301 152,523 58,385
Deferred income taxes (2,300) (138,600) 107,600
Compensation expense relating to employee stock options 43,738 -- --
------------- ------------- -------------
Changes in operating assets and liabilities:
Accounts receivable 545,155 (297,312) (299,759)
Refundable income taxes (567,103) -- --
Prepaid expenses and other assets 56,101 (129,104) 271
Accounts payable 77,341 (37,726) 203,940
Accrued employee expenses (158,035) 210,390 108,411
Other accrued expenses 102,544 59,108 11,468
Income taxes payable (315,288) 243,418 (43,197)
Deferred revenue (316,184) 411,046 49,689
------------- ------------- -------------
Net cash provided by (used for) operating
activities (629,907) 943,401 654,198
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (709,379) (298,219) (233,954)
Purchases of short-term investments -- (100,010) --
Proceeds from sale of short-term investments 1,300 -- 189,971
Other assets (493,533) -- --
------------- ------------- -------------
Net cash used for investing activities (1,201,612) (398,229) (33,983)
------------- ------------- -------------
Cash flows from financing activities:
Bank borrowings 313,000 -- --
Collections on shareholder notes receivable 25,756 -- 2,648
Net proceeds from sale of common stock 76,584 7,700 117
------------- ------------- -------------
Net cash provided by financing activities 415,340 7,700 2,765
------------- ------------- -------------
Net change in cash and cash equivalents (1,416,179) 552,872 622,980
Cash and cash equivalents at beginning of year 1,741,751 1,188,879 565,899
------------- ------------- -------------
Cash and cash equivalents at end of year $ 325,572 $ 1,741,751 $ 1,188,879
============= ============= =============
Supplemental cash flow information:
</TABLE>
F-6
<PAGE> 97
<TABLE>
<S> <C> <C> <C>
Income taxes paid $ 662,000 $ 165,442 $ 247,638
============= ============= =============
Supplemental disclosure of noncash financing activities:
Deferred compensation relating to employee stock options $ 152,920 $ -- $ --
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 98
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1996, 1995, and 1994
(1) SUMMARY OF KNIGHTS AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Knights Technology, Inc. develops, markets, and supports client server
software products that automate, enhance, and accelerate the analysis of yield
loss and defects which occur during the manufacture of integrated circuits.
Through the use of leading edge technology, Knights provides software products
that enable customers to improve time-to-market and fabrication yields of
complex electronic devices.
Revenue Recognition
Knights recognizes revenues in accordance with the provisions of the
American Institute of Certified Public Accountants' Statement of Position No.
91-1, Software Revenue Recognition. Product revenues from the sale of software
licenses are recognized upon shipment to an end user if collection is probable
and remaining vendor obligations are insignificant. Product returns and sales
allowances are estimated and provided for at the time of sale. Maintenance
revenues from customer support and product upgrades, including maintenance
bundled with original software licenses, are deferred and recognized ratably
over the term of the maintenance agreement, typically 12 months. Revenues from
training are recognized when the services are performed.
Use of Estimates
Knights's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Net Income (Loss) Per Common Share
Net income (loss) per share data has been computed using the weighted
average number of shares of common stock outstanding, and, when dilutive, common
equivalent shares from stock options and warrants outstanding (using the
treasury stock method) and common equivalent shares resulting from the assumed
conversion of all outstanding shares of preferred stock when dilutive (using the
if converted method).
Cash and Cash Equivalents
Knights considers all highly liquid instruments with a remaining
maturity of 90 days or less at the date of acquisition to be cash equivalents.
Cash equivalents consist of certificates of deposit.
Short-Term Investments
Short-term investments consist of an investment in a floating-rate
mutual fund that invests in commercial debt securities with maturities up to 12
months. This investment is classified as "available-for-sale." Knights's
"available-for-sale" securities are carried at fair value with any unrealized
gains or losses reported as a separate component of shareholders' equity. The
costs of securities sold is based upon the specific identification method.
Unrealized gains and losses to date have not been material.
(Continued)
F-8
<PAGE> 99
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and are depreciated on a straight-line basis over their estimated
useful lives of three to five years.
Software Development Costs
Software development costs are expensed as incurred until technological
feasibility has been established. After technological feasibility has been
established, any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86. To date, amounts
subject to capitalization have not been significant.
Income Taxes
Knights uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
Concentration of Credit Risk
Knights sells its products principally to semiconductor manufacturers,
OEMs and distributors in North America, Asia, and Europe. Knights's credit risk
is concentrated primarily in North America.
Knights performs on-going credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
Knights maintains an allowance for doubtful accounts to cover potential credit
losses.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, and bank borrowings
approximates fair value due to the short maturities of these instruments.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which Knights adopted
effective January 1, 1996. Knights has elected to continue to use the intrinsic
value-based method under Accounting Principles Board (APB) Opinion No. 25, and
provide the pro forma disclosures of SFAS No. 123
Impairment of Long-Lived Assets
The Financial Accounting Standards Board recently issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This statement requires long-lived assets to be
(Continued)
F-9
<PAGE> 100
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
evaluated for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Knights adopted SFAS No.
121 in fiscal 1996. The adoption of SFAS No. 121 did not have a material effect
on Knights's results of operations.
Pursuant to SFAS No. 121, Knights assesses the recoverability of the
carrying amount of its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may be impaired. If
the estimated future undiscounted operating cash flows over the remaining useful
life of the long-lived asset is in excess of the carrying amount of the asset, a
charge to income would be recognized for the excess carrying amount of the asset
over its fair value.
Reclassifications
Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform with the 1996 presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1995, consisted of
the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computer equipment $1,143,100 $660,000
Computer software 126,300 78,900
Furniture and fixtures 158,100 49,900
---------- -----------
1,427,500 788,800
Less accumulated depreciation 628,800 399,600
---------- -----------
$ 798,700 $ 389,200
========== ===========
</TABLE>
(3) BANK BORROWINGS
Under the terms of Knights's bank line of credit agreement, Knights may
borrow up to a maximum of $1,000,000 based upon a specified percentage of
certain eligible accounts receivable. Knights must maintain certain financial
ratios and minimum net worth requirements. As of December 31, 1996, Knights was
not in compliance with certain of these covenants, for which a waiver from the
lending institution has been obtained.
Borrowings under the agreement, which expires May 15, 1997, are
collateralized by substantially all of the assets of Knights and bear interest
at the bank's prime rate plus .50% (8.25% as of December 31, 1996). As of
December 31, 1996, $313,000 was outstanding under the line of credit agreement.
In February 1997, the credit agreement was revised so that the line now bears
interest at the bank's prime rate plus 1.00%, and certain of the covenants have
been revised.
(4) LEASE OBLIGATIONS
Knights leases its facilities under noncancelable operating leases.
These agreements require Knights to pay property taxes, insurance, and normal
maintenance costs. The minimum future rentals under these leases are as follows:
(Continued)
F-10
<PAGE> 101
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $ 382,700
1998 382,900
1999 340,200
2000 291,200
2001 291,200
Thereafter 461,100
-----------
$ 2,149,300
===========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995, and 1994, was
$237,700, $115,600, and $83,200, respectively.
In 1996, Knights paid $250,000 to acquire the remaining term of a
favorable lease arrangement from a tenant which occupied space adjacent to
Knights's primary facility. The payment is included in other assets and is being
amortized over the remaining 10 year term of the lease.
(5) CONVERTIBLE PREFERRED STOCK
The Board of Directors has been authorized to issue preferred stock
with such designations, preferences, and relative rights and limitations as may
be stated in the resolution relating to each issue, of which 4,600,000 shares
have been designated Series C preferred stock with the rights and preferences
stated below.
Liquidation Preference
The Series C preferred stock has preference over common stock in
liquidation. The holders of Series C preferred stock are entitled to receive a
liquidation preference of $0.1475 per share, aggregating approximately $680,000.
Conversion
The Series C convertible preferred stock is convertible into common
stock on a one-for-one basis, subject to adjustments upon the occurrence of
certain dilutive events. Conversion of Series C preferred stock is automatic
upon either the closing of a public offering of Knights's common stock at a
purchase price of not less that $1.25 per share or at any time if approved by
two-thirds of the preferred shareholders.
Dividends and Voting
Holders of the Series C convertible preferred stock are entitled to
receive noncumulative cash dividends at the rate of $0.0225 per share, when and
as declared by the Board of Directors, in preference to cash dividends to common
stock shareholders. In addition, preferred stock shareholders are entitled to
the number of votes equal to the number of shares of common stock into which the
shares of preferred stock are convertible.
Redemption
Knights may redeem the Series C convertible preferred stock at the
Redemption Price.
(Continued)
F-11
<PAGE> 102
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
(6) COMMON STOCK
1989 Stock Purchase Plan
Knights has reserved 1,000,000 shares of its common stock for issuance
under the 1989 Stock Purchase Plan (the 1989 Plan). Under the terms of the 1989
Plan, Knights's common stock may be sold to officers, directors, employees, and
consultants designated by the Board of Directors at prices not lower than fair
value, as determined by the Board of Directors, on the date of approval of the
sale. Shares of common stock issued under the 1989 Plan are subject to such
terms and conditions, including the right to repurchase, as determined by the
Board of Directors. No shares of common stock were issued in 1996, 1995 or 1994
under the 1989 Plan. As of December 31, 1996, 1995 and 1994, no shares were
subject to repurchase, and 25,970 shares were available for issuance. The 1989
Plan terminates in 1999.
1987 Stock Option Plan
Knights's Board of Directors has reserved 2,712,800 shares of common
stock for issuance to employees, officers, directors and consultants of Knights
under the 1987 Stock Option Plan (the 1987 Plan). Under the 1987 Plan, incentive
stock options may be granted at prices not lower than the fair value of Common
Stock at the date of grant as determined by the Board of Directors and
supplemental stock options may be granted at prices not lower than 85% of this
value. Options granted under the 1987 Plan are exercisable at such times and
under such conditions as determined by the Board of Directors at the date of the
grant, but the term of the option and the right to exercise may not exceed 10
years from the date of grant. Unexercised options expire 3 months after
termination of employment with Knights. As of December 31, 1996, options to
purchase 1,038,750 shares were exercisable.
Stock Split
In March 1996, Knights's shareholders authorized a 2 for 1 stock split
of all preferred stock, common stock, and options outstanding. The stock split
has been retroactively reflected in all periods presented.
Accounting for Stock-Based Compensation Plans
Knights has elected to use the intrinsic value-based method of APB
Opinion No. 25 to account for all of its employee stock-based compensation
plans. Accordingly, deferred compensation cost aggregating $152,921 relating to
certain 1996 options granted has been recognized in the accompanying financial
statements because the fair value of the underlying common stock at the grant
date exceeded the exercise price of the options. This amount is being amortized
on a straight-line basis over the vesting period of the individual options,
generally three to four years.
Had compensation cost for Knights's stock-based compensation plans been
determined in a manner consistent with the fair value approach described in SFAS
No. 123, Knights's pro forma net income and pro forma net income per share as
reported would not have differed materially from those amounts as reported in
the accompanying financial statements.
The Company's computation of the pro forma amounts reflects only
options granted in 1995 and 1996. Therefore the full impact of calculating
compensation cost under SFAS No. 123 is not reflected in the computation of the
pro forma amounts because compensation cost is reflected over the vesting period
of three to four years and compensation cost for options granted prior to
January 1, 1995 is not considered.
(Continued)
F-12
<PAGE> 103
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
The fair value of each option was estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividends, an expected life of four years, and risk-free interest rates of 6.13%
for the year ended December 31, 1996, and 6.19% for the year ended December 31,
1995.
A summary of Knights's stock option activity for the years ended
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C>
Outstanding at beginning of year 1,534,572 $0.18 1,194,200 $0.02
Granted 508,931 1.10 901,136 0.31
Exercised (6,100) 0.37 (499,000) 0.015
Canceled (73,820) 1.25 (61,764) 0.015
--------- ---------
Outstanding at end of year 1,963,583 $0.38 1,534,572 $0.18
========= =========
Options exercisable at end of year 1,038,750 $0.11 645,062 $0.02
========= =========
Weighted average fair value of options
granted during the year with exercise prices
equal to fair value of common stock 140,000 $0.15 901,136 $0.07
Weighted average fair value of options
granted during the year with exercise prices
less than fair value of common stock 368,931 $0.70 -- --
</TABLE>
The following summarizes information about fixed stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.01-0.18 686,200 5.90 years $0.018 678,700 $0.017
$0.24-0.27 700,302 8.50 years $0.27 327,379 $0.27
$0.55-0.60 152,750 8.42 years $0.56 32,671 $0.55
$1.08 424,331 9.70 years $1.08 -- --
--------- ---------
1,963,583 7.84 years $0.38 1,038,750 $0.11
========= ========== ===== ========= =====
</TABLE>
(Continued)
F-13
<PAGE> 104
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
(7) INCOME TAXES
The components of income tax expense (benefit) as of December 31, 1996,
1995, and 1994, consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ (259,700) $ 328,200 $ 100,200
State 2,000 60,200 35,200
------------ ------------ ------------
(257,700) 388,400 135,400
------------ ------------ ------------
Deferred:
Federal 53,700 (116,100) 86,000
State (56,000) (22,500) 21,600
------------ ------------ ------------
(2,300) (138,600) 107,600
------------ ------------ ------------
$ (260,000) $ 249,800 $ 243,000
============ ============ ============
</TABLE>
The difference between the actual tax provision (benefit) and the
amount obtained by applying the U.S. federal statutory rate to income (loss)
before income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory rate $ (226,500) $ 244,600 $ 238,100
State taxes, net of federal tax effect (35,500) 25,300 37,100
Research and development tax credit (43,300) (23,900) (41,300)
Foreign sales corporation (23,100) - -
Other 68,400 3,800 9,100
------------ ------------ ---------
$ (260,000) $ 249,800 $ 243,000
============ ============ ===========
</TABLE>
The components of the deferred tax asset as of December 31, 1996 and
1995, were comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Allowances and accrued expenses $ 177,000 $ 228,400
Deferred compensation 18,800 -
Net operating loss carryforward 70,700 38,700
Research and development credits 104,700 -
Accruals and reserves not currently deductible 50,400 50,400
Other (45,900) 55,900
------------ ------------
Deferred tax asset $ 375,700 $ 373,400
============ ============
</TABLE>
No valuation allowance has been provided for the deferred tax asset as
management believes it is more likely than not that the deferred tax asset will
be utilized in the future based upon projected profitability. Knights has a
federal and state net operating loss carryforwards of approximately $90,000 and
$500,000, respectively, that expire primarily in 2005 and 2001. Federal and
California tax law provides for limitation on the operating loss carryforward
and
(Continued)
F-14
<PAGE> 105
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
utilization of such losses in the event of an ownership change, as defined.
Knights had such a change of ownership in 1991 that limits the utilization of
the net operating loss carryforward to $8,000 per year.
(8) SIGNIFICANT CUSTOMERS AND EXPORT SALES
Knights operates in one primary industry segment for the sale of
software to aid in the manufacture of integrated circuits.
Sales to major customers as a percentage of net revenues, and the
amount receivable as of December 31, 1996, from such customers were as follows:
<TABLE>
<CAPTION>
Accounts
receivable as of
December 31,
Customer 1996 1996 1995 1994
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
A (OEM) - 8% 20% -%
B (end user) 132,500 17 16 22
C (end user) 2,300 2 16 -
D (end user) 389,000 6 11 -
E (end user) - - 1 18
</TABLE>
(Continued)
F-15
<PAGE> 106
KNIGHTS TECHNOLOGY, INC.
Notes to Financial Statements
Knights's export sales are primarily to customers in Asia and Europe
and consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Asia $ 430,100 $ 748,000 $ 139,000
Europe 1,164,400 167,000 130,000
---------- ---------- ----------
Total export sales $1,594,500 $ 915,000 $ 269,000
========== ========== ==========
</TABLE>
(9) SUBSEQUENT EVENT
On March 13, 1997, Knights signed an Agreement and Plan of
Reorganization (the Agreement) with Electroglas, Inc. (Electroglas). The
Agreement provides for the combination of Electroglas and Knights through the
creation of a new Delaware corporation ("Newco"), organized as a wholly owned
subsidiary of Electroglas, followed by the merger of Newco with and into Knights
(the "Merger"). Knights will survive the Merger, thereby becoming a wholly owned
subsidiary of Electroglas. Pursuant to the Merger, each outstanding share of
Knights Common Stock, no par value, and each outstanding share of Knights Series
C Preferred Stock (collectively with Knights Common Stock, the "Knights Stock")
will automatically convert into the right to receive fully paid and
nonassessable Electroglas Common Stock, par value $.01, in an amount determined
by a conversion ratio described in the accompanying Proxy Statement/Prospectus,
and the right to receive on a pro rata basis an additional cash payment (the
"Knights Shareholder Cash") if the aggregate market value of the shares of
Electroglas Common Stock to be received does not meet a certain minimum level.
Cash will also be delivered in lieu of fractional shares. Holders of Knights
Preferred Stock will receive the Merger consideration described above in lieu of
the liquidation preference set forth in the Knights Articles of Incorporation.
Approximately ten percent of the aggregate Merger consideration that Electroglas
would otherwise deliver to the Knights Shareholders will, on a pro rata basis,
be placed in escrow for twelve months after the closing of the transaction as
collateral for the indemnification obligations of the Knights Shareholders under
the Agreement and for payment of certain claims and damages described in the
Agreement. The escrow assets will first be drawn from the Knights Shareholder
Cash, if any is payable, and then, if the Knights Shareholder Cash is
insufficient, from the shares of Electroglas Common Stock offered in exchange
for the Knights Stock surrendered in the Merger. Holders of outstanding options
to purchase shares of Knights Common Stock shall receive options to purchase
shares of Electroglas Common Stock, none of which shall be held in escrow.
F-16
<PAGE> 107
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
ELECTROGLAS, INC.,
KNIGHTS TECHNOLOGY, INC.
AND
CERTAIN SHAREHOLDERS OF KNIGHTS TECHNOLOGY, INC.
MARCH 12, 1997
<PAGE> 108
TABLE OF CONTENTS
PAGE
1. PLAN OF REORGANIZATION......................................................1
1.1 The Merger........................................................1
1.2 Fractional Shares.................................................3
1.3 Escrow Agreement..................................................3
1.4 Effects of the Merger.............................................3
1.5 Further Assurances................................................4
1.6 Tax-Free Reorganization...........................................4
1.7 Additional Cash Payment...........................................4
1.8 Stock Options.....................................................4
1.9 Appraisal Rights..................................................5
2. REPRESENTATIONS AND WARRANTIES OF KNIGHTS AND THE PRINCIPAL KNIGHTS
SHAREHOLDERS..........................................................6
2.1 Organization and Good Standing....................................6
2.2 Power, Authorization and Validity.................................6
2.3 Capitalization....................................................7
2.4 Subsidiaries......................................................8
2.5 No Violation of Existing Agreements...............................8
2.6 Litigation........................................................8
2.7 Knights Financial Statements......................................9
2.8 Tax Matters.......................................................9
2.9 Title to Properties..............................................12
2.10 Absence of Certain Changes......................................12
2.11 Agreements and Commitments......................................14
2.12 Intellectual Property...........................................15
2.13 Compliance with Laws............................................16
2.14 Certain Transactions and Agreements.............................17
2.15 Employee........................................................17
2.16 Corporate Documents.............................................19
2.17 No Brokers......................................................19
2.18 Disclosure......................................................20
2.19 Books and Records...............................................20
2.20 Insurance.......................................................20
2.21 Environmental Matters...........................................20
2.22 Government Contracts............................................21
2.23 Information in Registration Statement...........................22
3. REPRESENTATIONS AND WARRANTIES OF ELECTROGLAS..............................22
3.1 Organization and Good Standing...................................22
3.2 Power, Authorization and Validity................................22
3.3 No Violation of Certificate or Laws..............................23
3.4 Disclosure.......................................................23
i
<PAGE> 109
TABLE OF CONTENTS (CONTINUED)
PAGE
3.5 Information in Registration Statement............................24
4. KNIGHTS PRECLOSING COVENANTS...............................................24
4.1 Advice of Changes................................................24
4.2 Maintenance of Business..........................................24
4.3 Conduct of Business..............................................24
4.4 Certain Agreements...............................................26
4.5 Regulatory Approvals.............................................27
4.6 Necessary Consents...............................................27
4.7 Litigation.......................................................27
4.8 No Other Negotiations............................................27
4.9 Access to Information............................................27
4.10 Satisfaction of Conditions Precedent............................28
4.11 Blue Sky Laws...................................................28
4.12 Notification of Employee Problems...............................28
4.13 Section 368(a) Reorganization...................................28
4.14 Taxes, Consent..................................................28
5. ELECTROGLAS PRECLOSING COVENANTS...........................................29
5.1 Access to Information............................................29
5.2 Satisfaction of Conditions Precedent.............................29
5.3 Regulatory Approvals.............................................29
5.4 Share Repurchases................................................29
6. CLOSING MATTERS............................................................30
6.1 The Closing......................................................30
6.2 Exchange of Certificates.........................................30
7. CONDITIONS TO OBLIGATIONS OF KNIGHTS.......................................31
7.1 Accuracy of Representations and Warranties.......................31
7.2 Covenants........................................................31
7.3 Compliance with Law..............................................32
7.4 Government Consents..............................................32
7.5 Documents........................................................32
7.6 No Litigation....................................................32
7.7 Opinions of Electroglas' Counsel.................................32
7.8 Effectiveness of Registration Statement..........................32
8. CONDITIONS TO OBLIGATIONS OF ELECTROGLAS...................................32
8.1 Accuracy of Representations and Warranties.......................33
8.2 Covenants........................................................33
8.3 Compliance with Law..............................................33
8.4 Government Consents..............................................33
ii
<PAGE> 110
TABLE OF CONTENTS (CONTINUED)
PAGE
8.5 Opinion of Counsel for Electroglas..............................33
8.6 Opinion of Counsel for Knights..................................34
8.7 Requisite Approvals.............................................34
8.8 No Litigation...................................................34
8.9 Documents.......................................................34
8.10 Escrow..........................................................34
8.11 Effectiveness of Registration Statement.........................34
8.12 Excluded Shares.................................................35
8.13 Audited Knights Financial Statements............................35
9. TERMINATION OF AGREEMENT...................................................35
9.1 Termination......................................................35
9.2 Certain Continuing Obligations...................................36
10. SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES,
CONTINUING COVENANTS.................................................36
10.1 Survival of Representations.....................................36
10.2 Agreement to Indemnify; Damages.................................37
11. MISCELLANEOUS.............................................................39
11.1 Registration Statement.........................................39
11.2 Governing Law Dispute Resolution...............................40
11.3 Assignment: Binding Upon Successors and Assigns...............41
11.4 Severability...................................................41
11.5 Counterparts...................................................41
11.6 Other Remedies.................................................42
11.7 Amendment and Waivers..........................................42
11.8 No Waiver......................................................42
11.9 Expenses.......................................................42
11.10 Notices........................................................42
11.11 Construction of Agreement......................................43
11.12 No Joint Venture...............................................44
11.13 Further Assurances.............................................44
11.14 Absence of Third Party Beneficial Rights.......................44
11.15 Public Announcement............................................44
11.16 Confidential...................................................44
11.17 Time is of the Essence.........................................45
11.18 Entire Agreement...............................................45
iii
<PAGE> 111
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into as of March 12, 1997 by and among Electroglas, Inc., a Delaware corporation
("Electroglas") and Knights Technology, Inc., a California corporation
("Knights"), and the shareholders of Knights set forth on Schedule A hereto
("Principal Knights Shareholders").
RECITALS
The parties intend that, subject to the terms and conditions
hereinafter set forth, a new Delaware corporation that will be organized as a
wholly-owned subsidiary of Electroglas ("Newco") will merge with and into
Knights in a reverse triangular merger (the "Merger"), with Knights to be the
surviving corporation of the Merger, all pursuant to the terms and conditions of
this Agreement and a Certificate of Merger substantially in the form of Exhibit
A (the "Agreement of Merger") and the applicable provisions of the laws of
Delaware and California. Upon the effectiveness of the Merger, all the
outstanding shares of Common Stock and Preferred Stock of Knights will be
converted into Common Stock of Electroglas, in the manner and on the basis
determined herein and as provided in the Agreement of Merger.
The Merger is intended to be treated as a tax-free reorganization pursuant to
the provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), by virtue of the provisions of Section 368(a)(2)(E) of the
Code. Concurrently with the completion of the Merger Electroglas and Knights are
entering into an Escrow Agreement in substantially the form of Exhibit B hereto
(the "Escrow Agreement").
NOW, THEREFORE, the parties hereto agree as follows:
1. PLAN OF REORGANIZATION
1.1 THE MERGER.
The Agreement of Merger will be filed with the Secretaries of
State of the States of Delaware and California as soon as practicable after the
Closing (as defined in Section 6.1 below). The effective time of the Merger as
specified in the Agreement of Merger (the "Effective Time") will occur following
the Closing or on such other date as the parties hereto may mutually agree upon.
Subject to the terms and conditions of this Agreement and the Agreement of
Merger, Newco will be merged with and into Knights in a statutory merger
pursuant to the Agreement of Merger and in accordance with applicable provisions
of Delaware and California laws as follows:
1.1.1 CONVERSION OF KNIGHTS STOCK. Each share of Knights
Common Stock (the "Knights Common Stock"), no par
value, and each share of Knights Series C Preferred
Stock (the "Knights Preferred Stock") (the Knights
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Common Stock and the Knights Preferred Stock are
sometimes hereinafter referred to as the "Knights
Stock"), that is issued and outstanding immediately
prior to the Effective Time will, by virtue of the
Merger and at the Effective Time, and without further
action on the part of any holder thereof, be
converted into the number of fully paid and
nonassessable shares of Electroglas Common Stock,
$0.01 par value ("Electroglas Common Stock") equal to
the Conversion Ratio (determined in accordance with
Section 1.1.2 hereof).
1.1.2 DEFINITIONS. Unless there is an adjustment to the
shares to be issued in the Merger pursuant to Section
1.1.3 below, the "Conversion Ratio" for the
conversion of Knights Stock shall be equal to the
quotient of (i) the number of Total Shares divided by
(ii) the sum of (a) the aggregate number of shares of
Knights Stock issued and outstanding at the Effective
Time plus (b) the aggregate number of shares of the
Common Stock of Knights subject to all Vested Knights
Options (as defined below in Section 1.8) (the
Knights Stock and the Vested Knight Options are
sometimes hereinafter referred to collectively as the
"Effective Knights Shares"). As used herein, the term
"Total Shares" shall mean the total number of shares
of Electroglas Common Stock equal to the quotient of
$29,400,000 divided by (ii) the closing sale price of
Electroglas Common Stock as reported on the Nasdaq
National Market on the trading day prior to the
Closing Date (the "Closing Price"); provided,
however, the Total Shares shall not exceed 1,500,000
shares, subject to Electroglas' obligation to pay any
additional cash payment under Section 1.7 hereof.
1.1.3 ADJUSTMENTS FOR CAPITAL CHANGES. If prior to the
Merger, Electroglas recapitalizes either through a
split-up of its outstanding shares into a greater
number, or through a combination of its outstanding
shares into a lesser number, or reorganizes,
reclassifies or otherwise changes its outstanding
shares into the same or a different number of shares
of other classes (other than through a split-up or
combination of shares provided for in the previous
clause), or declares a dividend on its outstanding
shares payable in shares or securities convertible
into shares, the calculation of the Conversion Ratio
will be adjusted appropriately.
1.1.4 CONVERSION OF NEWCO SHARES. Each share of Newco
Common Stock, $0.001 par value ("Newco Common
Stock"), that is issued and outstanding immediately
prior to the Effective Time will, by virtue of the
Merger and without further action on the part of the
sole stockholder of Newco, be converted into and
become one (1) share of Knights Common Stock that is
issued and outstanding immediately after the
Effective Time, and the shares of Knights Common
Stock into which the shares of Newco Common Stock are
so converted shall be the only
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shares of Knights Stock that are issued and
outstanding immediately after the Effective Time.
1.2 FRACTIONAL SHARES.
No fractional shares of Electroglas Common Stock will be
issued in connection with the Merger, but in lieu thereof, the holder of any
shares of Knights Stock who would otherwise be entitled to receive a fraction of
a share of Electroglas Common Stock will receive from Electroglas, promptly
after the Effective Time, an amount of cash equal to the per share market value
of Electroglas Common Stock (based on the closing sale price of Electroglas
Common Stock on the last trading day prior to the Closing Date (as defined in
Section 6.1 hereof), as quoted on the Nasdaq National Market and as reported in
the Wall Street Journal (the "Closing Price")) multiplied by the fraction of a
share of Electroglas Common Stock to which such holder would otherwise be
entitled.
1.3 ESCROW AGREEMENT.
On the Closing Date, Electroglas will withhold, pro rata, from
the shareholders of Knights (the "Knights Shareholders") the total additional
cash payable thereto under Section 1.7 hereof (the "Knights Shareholder Cash");
provided, however, that the amount withheld (the "Escrow Cash") shall not exceed
10% of the sum of (i) the product of the aggregate number of shares of
Electroglas Common Stock issued upon the conversion of the Knights Stock as
provided in Section 1.1 hereof multiplied by the Closing Price plus (ii) the
Knights Shareholder Cash (the "Target Escrow Cash"). In addition, if the Escrow
Cash is less than the Target Escrow Cash, then Electroglas will withhold, pro
rata, from the Knights Shareholders the number of shares of Electroglas Common
Stock issued to them in the Merger equal to the quotient of (a) the Target
Escrow Cash minus the Escrow Cash divided by (b) the Closing Price (the "Escrow
Shares"). Electroglas shall deposit or cause to be deposited in escrow
certificates representing the Escrow Shares and the Escrow Cash thus withheld.
The Escrow Shares and the Escrow Cash withheld pursuant to this Section 1.3 at
the Closing (the "Escrow Assets") will be held and dispersed for a period
commencing at the Closing and ending 12 months after the Closing in accordance
with the terms of the Escrow Agreement as collateral for the indemnification
obligations of the Knights Shareholders and for payment of any Damages as set
forth in Section 10.2.1 hereof (subject to the limitations of Sections 10.2.2
and 10.2.3 hereof).
1.4 EFFECTS OF THE MERGER.
At the Effective Time: (a) the separate existence of Newco
will cease and Newco will be merged with and into Knights and Knights will be
the surviving corporation pursuant to the terms of the Agreement of Merger; (b)
the Articles of Incorporation and Bylaws of Knights will continue unchanged as
the Articles of Incorporation and Bylaws of the surviving corporation; (c) each
share of Knights Stock outstanding immediately prior to the Effective Time will
be converted as provided in this Section 1; (d) each share of Newco Common Stock
outstanding immediately prior to the Effective Time will be converted into one
(1) outstanding share of Knights Common Stock; (e) the Board of Directors and
executive officers of Electroglas will remain unchanged and the sole director of
Newco immediately prior to the Effective Time
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will become the sole director of the surviving corporation and the officers of
Newco will become the officers of the surviving corporation; and (f) the Merger
will, at and after the Effective Time, have all of the effects provided by
applicable law.
1.5 FURTHER ASSURANCES.
Knights agrees that if, at any time after the Effective Time,
Electroglas considers or is advised that any further deeds, assignments or
assurances are reasonably necessary or desirable to vest, perfect or confirm in
Electroglas title to any property or rights of Knights as provided herein,
Electroglas and any of its officers are hereby authorized by Knights to execute
and deliver all such proper deeds, assignments and assurances and do all other
things necessary or desirable to vest, perfect or confirm title to such property
or rights in Electroglas and otherwise to carry out the purposes of this
Agreement, in the name of Knights or otherwise.
1.6 TAX-FREE REORGANIZATION.
The parties intend to adopt this Agreement as a tax-free plan
of reorganization and to consummate the Merger in accordance with the provisions
of Section 368(a)(1)(A) of the Code, by virtue of the provisions of Section
368(a)(2)(E) of the Code. The shares of Electroglas Common Stock issued in the
Merger will be issued solely in exchange for the issued and outstanding shares
of Knights Stock pursuant to this Agreement, and no other transaction other than
the Merger represents, provides for or is intended to be an adjustment to the
consideration paid for the Knights Stock. Except for cash paid pursuant to
Sections 1.2, 1.7 and 1.9 hereof, no consideration that could constitute "other
property" or "money" within the meaning of Section 356 of the Code will be paid
by Electroglas for any shares of Knights Stock in the Merger. In addition,
Electroglas represents that it presently intends, and that at the Effective Time
it will intend, to continue Knights' historic business or use a significant
portion of Knights' business assets in a business. At the Closing (as defined in
Section 6.1 hereof), officers of Electroglas, officers of Knights and certain
Knights shareholders will execute and deliver certificates substantially in the
forms of Exhibits 1.6A-C, and the representations and other statements set forth
therein are incorporated in this Agreement by this reference to the same extent
as if Electroglas or Knights, respectively, had made such statements herein.
1.7 ADDITIONAL CASH PAYMENT
If the product of 1,500,000 shares multiplied by the Closing
Price (the "Target Consideration") is less than $29,400,000, then Electroglas
shall pay to the holder of the Effective Knights Shares, on a pro rata basis, an
aggregate cash amount equal to the difference of (a) $29,400,000 minus (b)
Target Consideration. For the purposes of this Section 1.7, the term "pro rata
basis" shall mean on a basis determined by reference to the aggregate number of
Effective Knights Shares held by each holder of Effective Knights Shares
compared to the aggregate number of shares of Effective Knights Shares.
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1.8 STOCK OPTIONS
At the Effective Time, each outstanding, unexercised and
vested Knights stock option ("Vested Knights Option") and each outstanding,
unexercised and unvested Knights Stock Option ("Unvested Knights Option") shall
cease to represent a right to acquire shares of Knights Stock and shall be
converted automatically into an option to purchase Electroglas Common Stock in
an amount and at an exercise price determined as provided below:
1.8.1 The number of Common Stock of Electroglas subject to
the new option shall be equal to the product of the
number of shares of Knights Common Stock subject to
the original option and the Conversion Ratio,
provided that any fractional Electroglas Common Stock
resulting from such multiplication shall be rounded
down to the nearest whole share; and
1.8.2 The exercise price per Electroglas Common Share under
the new option shall be substantially equal to the
quotient obtained by dividing the exercise price per
share of Knights Stock under the original option by
the Conversion Ratio, provided that such exercise
price shall be rounded to the nearest cent.
1.8.3 The adjustment provided herein with respect to any
options that are "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code")) shall be and is
intended to be effected in a manner consistent with
Section 424(a) or the Code. The duration and other
terms of the new option, including the vesting
schedule, shall be the same as the original option
except that all references to Knights shall be deemed
to be references to Electroglas.
1.9 APPRAISAL RIGHTS.
If holders of shares of Knight Stock are entitled to dissent
from the Merger and demand appraisal of any of their shares of Knights Stock in
accordance with the provisions of the California Corporations Code (the "CCC")
concerning the right of such holders to dissent from the Merger and demand
appraisal of their Knights Stock, (each a "Dissenting Holder" and together the
"Dissenting Holders"), any Knights Stock held by a Dissenting Holder as to which
appraisal has been so demanded ("Excluded Shares") shall not be converted or
purchased as described in Sections 1.1 and 1.7, but shall, from and after the
Effective Time, represent only the right to receive such consideration as may be
determined to be due to such Dissenting Holder pursuant to the CCC; provided,
however, that each share of Knights Stock held by a Dissenting Holder who shall,
after the Effective Time, withdraw his demand for appraisal or lose his right of
appraisal with respect to such shares of Knights Stock pursuant to the CCC,
shall not be deemed Excluded Shares but shall be deemed to be converted, as of
the Effective Time, into the right to receive shares of Electroglas Common Stock
and/or cash in accordance with Sections 1.1 and 1.7 hereof.
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2. REPRESENTATIONS AND WARRANTIES OF KNIGHTS AND
THE PRINCIPAL KNIGHTS SHAREHOLDERS
Knights and the Principal Knights Shareholders, jointly and severally,
but subject to Sections 10.2.2 and 10.2.3 hereof, hereby represent and warrant
that, and except as set forth in the Knights disclosure letter (the "Knights
Disclosure Letter") delivered by Knights to Electroglas herewith, including
items in the Knights Disclosure Letter referred to as "Items" below:
2.1 ORGANIZATION AND GOOD STANDING.
Knights is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, has the corporate
power and authority to own, operate and lease its properties and to carry on its
business as now conducted and is qualified as a foreign corporation in each
jurisdiction in which it conducts its business, except where the failure to be
so qualified would not have a material adverse effect on the business, results
of operations or financial condition of Knights. Except as disclosed in Item
2.1, Knights does not own or lease any real property, has no subsidiaries or
employees and does not maintain a place of business in any foreign country or in
any state of the United States other than California.
2.2 POWER, AUTHORIZATION AND VALIDITY.
2.2.1 Knights has the corporate right, power, legal
capacity and authority to enter into and perform its
obligations under this Agreement and all agreements
to which Knights is or will be a party that are
required to be executed pursuant to this Agreement
(the "Knights Ancillary Agreements"). This Agreement
and the Knights Ancillary Agreements have been duly
and validly approved by unanimous vote or unanimous
written consent of the Knights Board of Directors.
2.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable Knights to enter
into, and to perform its obligations under, this
Agreement and the Knights Ancillary Agreements,
except for (a) the filing of the Agreement of Merger
with the Secretaries of State of the States of
Delaware and California, the filing of such officers'
certificates and other documents as are required to
effectuate the Merger under Delaware and California
law and the filing of appropriate documents with the
relevant authorities of the states other than
California in which Knights is qualified to do
business, if any, (b) such filings as may be required
to comply with federal and state securities laws and
(c) consents required under contracts disclosed in
Item 2.5 as exceptions to the representation made in
the last sentence of Section 2.5 below.
2.2.3 This Agreement and the Knights Ancillary Agreements
are, or when executed and delivered by Knights and
the other parties thereto will be,
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valid and binding obligations of Knights and the
Principal Knights Shareholders enforceable against
Knights and the Principal Knights Shareholders in
accordance with their respective terms, except as to
the effect, if any, of (a) applicable bankruptcy and
other similar laws affecting the rights of creditors
generally and (b) rules of law governing specific
performance, injunctive relief and other equitable
remedies; provided, however, that the Knights
Ancillary Agreements will not be effective until the
earlier of the Effective Time or the date provided
for therein.
2.3 CAPITALIZATION.
(a) AUTHORIZED/OUTSTANDING CAPITAL STOCK. The
authorized capital stock of Knights consists
of 20,000,000 shares of Common Stock, no par
value, and 10,000,000 shares of Preferred
Stock, no par value, of which 4,600,000 are
designated Series C Preferred Stock.
5,011,238 shares of Common Stock are issued
and outstanding as of this date and as of
the Closing Date, which shares are held of
record and owned by the persons in the
amounts set forth on Item 2.3.a. There are
4,599,978 shares of Series C Preferred Stock
are issued and outstanding as of this date
and as of the Closing Date, which shares are
held of record and owned by the persons in
the amounts set forth on Item 2.3.a. All
issued and outstanding shares of Knights
Stock have been duly authorized and validly
issued, are fully paid and nonassessable,
are not subject to any right of rescission
and have been offered, issued, sold and
delivered by Knights in compliance with all
registration or qualification requirements
(or applicable exemptions therefrom) of
applicable federal and state securities
laws. Each share of Preferred Stock is
convertible into exactly one share of Common
Stock.
(b) OPTIONS/RIGHTS. Knights has reserved
2,712,800 shares of Common Stock for
issuance to employees and consultants
pursuant to its Employment Plans (as defined
below), of which options for 1,062,963
shares are issued, outstanding, vested and
unexercised and options for 922,245 shares
are issued, outstanding, unvested and
unexercised. Item 2.3.b sets forth the names
of all optionholders, the shares subject to
options held by each such person and the
vesting schedules of such options and
indicates the extent, if at all, to which
the vesting of each such option is
accelerated by the transactions contemplated
by this Agreement. Except as set forth on
Item 2.3.b, there are no (i) stock
appreciation rights, options, warrants,
conversion privileges or preemptive or other
rights or agreements
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outstanding to purchase or otherwise acquire
any of Knights' authorized but unissued
capital stock; (ii) no options, warrants,
conversion privileges or preemptive or other
rights or agreements to which Knights is a
party involving the purchase or other
acquisition of any shares of Knights capital
stock; (iii) no liability for dividends
accrued but unpaid; and there are no voting
agreements, registration rights, rights of
first refusal or other restrictions (other
than normal restrictions on transfer under
applicable federal and state securities
laws) applicable to any of Knights'
outstanding securities.
2.4 SUBSIDIARIES.
Knights does not have any subsidiaries or any equity interest,
direct or indirect, in any corporation, partnership, joint venture or other
business entity.
2.5 NO VIOLATION OF EXISTING AGREEMENTS.
Neither the execution and delivery of this Agreement or any
Knights Ancillary Agreement, nor the consummation of the transactions provided
for herein or therein, will conflict with, or (with or without notice or lapse
of time, or both) result in a termination, breach, impairment or violation of,
(a) any provision of the Articles of Incorporation or Bylaws of Knights, as
currently in effect, (b) any material instrument or contract to which Knights is
a party or by which Knights is bound (including, but not limited to, any
license, development or similar agreement) or (c) any federal, state, local or
foreign judgment, writ, decree, order, statute, rule or regulation applicable to
and that would have a material adverse effect on Knights or its assets or
properties. The consummation of the Merger and succession by Electroglas to all
rights (including, but not limited to, any source code rights), licenses,
franchises, leases and agreements of Knights in and of themselves will not
require the consent of any third party and will not have a material adverse
effect upon any such rights, licenses, franchises, leases or agreements pursuant
to the terms of those agreements other than as set forth in Item 2.5.
2.6 LITIGATION.
Except as set forth in Item 2.6, there is no action,
proceeding or investigation pending or, to Knights' actual knowledge, threatened
against Knights before any court or administrative agency that, if determined
adversely to Knights, may reasonably be expected to have a material adverse
effect on the present or future operations or financial condition of Knights or
in which the adverse party or parties seek to recover in excess of $10,000
against Knights. Except as set forth on Item 2.6, there is no basis for any
person, firm, corporation or entity to assert a claim against Knights or
Electroglas as successor in interest to Knights based upon: (a) ownership or
rights to ownership of any shares of Knights Stock, (b) any rights as an Knights
securities holder, including, without limitation, any option or other right to
acquire any Knights securities, any preemptive rights or any rights to notice or
to vote, or (c) any rights under any agreement between Knights and any Knights
securities holder or former Knights securities holder in such holder's capacity
as such.
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2.7 KNIGHTS FINANCIAL STATEMENTS.
Knights has delivered to Electroglas in Item 2.7 Knights'
unaudited balance sheet as of December 31, 1996 (the "Balance Sheet Date") and
Knights' unaudited income statement for the period from January 1, 1996 through
December 31, 1996 collectively, the "Knights Financial Statements"). The Knights
Financial Statements, in all material respects, (a) are in accordance with the
books and records of Knights and (b) fairly and accurately represent the
financial condition of Knights at the respective dates specified therein and the
results of operations for the respective periods specified therein in conformity
with GAAP. Except as set forth in Item 2.7, Knights has no material debt,
liability or obligation of any nature, whether accrued, absolute, contingent or
otherwise, and whether due or to become due, that is not reflected, reserved
against or disclosed in the Knights Financial Statements, except for those that
may have been incurred after the Balance Sheet Date in the ordinary course of
Knights' business.
2.8 TAX MATTERS.
2.8.1 DEFINITIONS. For purposes of this Agreement, the
following definitions shall apply:
(a) The term "Taxes" shall mean all taxes,
however, denominated, including any
interest, penalties or other additions to
tax that may become payable in respect
thereof, imposed by any federal,
territorial, state, local or foreign
government or any agency or political
subdivision of any such government, which
taxes shall include, without limiting the
generality of the foregoing, all income or
profits taxes (including, but not limited
to, federal income taxes and state income
taxes), payroll and employee withholding
taxes, unemployment insurance, social
security taxes, sales and use taxes, ad
valorem taxes, excise taxes, franchise
taxes, gross receipts taxes, business
license taxes, occupation taxes, real and
personal property taxes, stamp taxes,
environmental taxes, transfer taxes,
workers' compensation, Pension Benefit
Guaranty Corporation premiums and other
governmental charges, and other obligations
of the same or of a similar nature to any of
the foregoing, which Knights is required to
pay, withhold or collect.
(b) The term "Returns" shall mean all reports,
estimates, declarations of estimated tax,
information statements and returns relating
to, or required to be filed in connection
with, any Taxes, including information
returns or reports with respect to backup
withholding and other payments to third
parties.
2.8.2 RETURNS FILED AND TAXES PAID. All Returns required to
be filed by or on behalf of Knights have been duly
filed on a timely basis and such Returns are true,
complete and correct. All Taxes shown to be payable
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on the Returns or on subsequent assessments with
respect thereto have been paid in full on a timely
basis, and no other Taxes are payable by the Knights
with respect to items or periods covered by such
Returns (whether or not shown on or reportable on
such Returns) or with respect to any period prior to
the date of this Agreement. Knights has withheld and
paid over all Taxes required to have been withheld
and paid over, and complied with all information
reporting and backup withholding requirements,
including maintenance of required records with
respect thereto, in connection with amounts paid or
owing to any employee, creditor, independent
contractor, or other third party. There are no liens
on any of the assets of Knights with respect to
Taxes, other than liens for Taxes not yet due and
payable or for Taxes that Knights is contesting in
good faith through appropriate proceedings and for
which appropriate reserves have been established.
2.8.3 TAX RESERVES. The amount of Knights' liability for
unpaid Taxes for all periods ending on or before the
date of this Agreement do not, in the aggregate,
exceed the amount of the current liability accruals
for Taxes (excluding reserves for deferred Taxes), as
such accruals are reflected on the Knights Financial
Statements.
2.8.4 RETURNS FURNISHED. Electroglas has been furnished by
Knights true and complete copies of (i) relevant
portions of income tax audit reports, statements of
deficiencies, closing or other agreements received by
Knights relating to Taxes, and (ii) all federal and
state income or franchise tax returns for Knights for
all periods ending on and after 1992. Knights has
never been a member of an affiliated group filing
consolidated returns. Knights does not conduct any
business in or derive income from any state, local,
territorial or foreign taxing jurisdiction other than
those for which all Returns have been furnished to
Electroglas.
2.8.5 TAX DEFICIENCIES; AUDITS; STATUTES OF LIMITATIONS.
The Returns of Knights have never been audited by a
government or taxing authority, nor is any such audit
in process, pending or threatened (either in writing
or verbally, formally or informally). No deficiencies
exist or have been asserted (either in writing or
verbally, formally or informally) or are expected to
be asserted with respect to Taxes of Knights, and
Knights has not received notice (either in writing or
verbally, formally or informally) or expects to
receive notice that it has not filed a Return or paid
Taxes required to be filed or paid by it. Knights is
not a party to any action or proceeding for
assessment or collection of Taxes or no such event
been asserted or threatened (either in writing or
verbally, formally or informally) against Knights or
any of its assets. No waiver or extension of any
statute of limitations is in effect with respect to
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Taxes or Returns of Knights. Knights has disclosed on
its federal income tax returns all positions taken
therein that could give rise to a substantial
understatement penalty within the meaning of Section
6662 of the Code.
2.8.6 TAX SHARING AGREEMENTS. Knights is not nor has it
ever been a party to any tax sharing agreement.
2.8.7 TAX ELECTIONS AND SPECIAL TAX STATUS. Knights is not
a party to any safe harbor lease within the meaning
of Section 168(f)(8) of the Code, as in effect prior
to amendment by the Tax Equity and Fiscal
Responsibility Act of 1982. Knights is not nor has it
ever been a United States real property holding
corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code and Knights is
not required to withhold tax on the conversion of
Knights Stock by reason of Section 1445 of the Code.
Knights is not a "consenting corporation" under
Section 341(f) of the Code. Knights has not entered
into any compensatory agreements with respect to the
performance of services which payment thereunder
would result in a nondeductible expense to it
pursuant to Section 280G of the Code. Knights has not
participated in an international boycott as defined
in Code Section 999. Knights has not agreed and its
not required to make, any adjustment under Code
Section 481(a) by reason of a change in accounting
method or otherwise. Knights does not have a
permanent establishment in any foreign country, as
defined in any applicable Tax treaty or convention
between the United States of America and such foreign
country, and Knights is not a party to any joint
venture, partnership, or other agreement, contract,
or arrangement (either in writing or verbally,
formally or informally) which could be treated as a
partnership for federal income tax purposes.
2.8.8 TAX BASIS AND TAX ATTRIBUTES. Knights has delivered
to Electroglas in Item 2.8.8 a schedule containing
accurate and complete descriptions of the basis in
its assets, its current and accumulated earnings and
profits, its tax carryovers, its excess loss
accounts, and its tax elections. Knights has no net
operating losses or other tax attributes presently
subject to limitation under Code Sections 269, 382,
383, or 384, or any other provision the Code.
2.8.9 SECTION 6038A COMPLIANCE. Knights has filed all
reports and has created and/or retained all records
required under Section 6038A of the Code with respect
to its ownership by and transactions with related
parties. Each related foreign person required to
maintain records under Section 6038A with respect to
transactions between Knights and the
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related foreign person has maintained such records.
All documents that are required to be created and/or
preserved by the related foreign person with respect
to transactions with the member are either maintained
in the United States, or the member is exempt from
the record maintenance requirements of Section 6038A
with respect to such transactions under Treasury
Regulation Section 1.6038A-1. Knights is not a party
to any record maintenance agreement with the Internal
Revenue Service with respect to Section 6038A. Each
related foreign person that has engaged in
transactions with Knights has authorized Knights to
act as its limited agent solely for purposes of
Sections 7602, 7603, and 7604 of the Code with
respect to any request by the Internal Revenue
Service to examine records or produce testimony
related to any transaction with Knights, and each
such authorization remains in full force and effect.
2.9 TITLE TO PROPERTIES.
Knights has good and marketable title to all of its assets as
shown on the balance sheet as of the Balance Sheet Date included in the Knights
Financial Statements, free and clear of all liens, charges or encumbrances
(other than for taxes not yet due and payable and Permitted Liens as defined
below), other than such assets, set forth on Item 2.9, as were sold by Knights
in the ordinary course of business since the Balance Sheet Date or which are
subject to capitalized leases. "Permitted Liens" means any lien, mortgage,
encumbrance or restriction which is reflected in the Knights Financial
Statements and is not in excess of $10,000 and which does not materially detract
from the value or materially interfere with the use, as currently utilized, of
the properties subject thereto or affected thereby or otherwise materially
impair the business operations being conducted thereon. Except as set forth in
Item 2.9, there are no UCC financing statements of record with the State of
California naming Knights as debtor and Knights owns no property in any other
state. The machinery and equipment included in such assets are in all material
respects in good condition and repair, normal wear and tear excepted, and all
leases of real or personal property to which Knights is a party are fully
effective and afford Knights peaceful and undisturbed possession of the subject
matter of the lease. To its knowledge, Knights is not in violation of any
material zoning, building, safety or environmental ordinance, regulation or
requirement or other law or regulation applicable to the operation of owned or
leased properties, and Knights has not received any notice of such violation
with which it has not complied or had waived.
2.10 ABSENCE OF CERTAIN CHANGES.
Since the Balance Sheet Date, Knights has carried on its
business in the ordinary course substantially in accordance with the procedures
and practices in effect on the Balance Sheet Date, and except as set forth in
Item 2.10, since the Balance Sheet Date there has not been with respect to
Knights:
(a) any change in the financial condition,
properties, assets, liabilities, business,
results of operations or prospects of
Knights,
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which change by itself or in conjunction
with all other such changes, whether or not
arising in the ordinary course of business,
has had or can reasonably be expected to
have a material adverse effect on the
business, financial condition or results of
operations for Knights;
(b) any contingent liability incurred by Knights
as guarantor or surety with respect to the
obligations of others;
(c) any mortgage, encumbrance or lien placed on
any of the properties of Knights;
(d) any material obligation or liability
incurred by Knights other than in the
ordinary course of business;
(e) any purchase or sale or other disposition,
or any agreement or other arrangement
(including, but not limited to, any joint
venture agreement) for the purchase, sale or
other disposition, of any of the properties
or assets of Knights other than in the
ordinary course of business or in
nonmaterial amounts;
(f) any damage, destruction or loss, whether or
not covered by insurance, materially and
adversely affecting the properties, assets
or business of Knights;
(g) any declaration, setting aside or payment of
any dividend on, or the making of any other
distribution in respect of, the capital
stock of Knights, any split, stock dividend,
combination or recapitalization of the
capital stock of Knights or any direct or
indirect redemption, purchase or other
acquisition by Knights of the capital stock
of Knights;
(h) any labor dispute or claim of material
unfair labor practices, any change in the
compensation payable or to become payable to
any of Knights' officers, employees or
agents earning compensation at an
anticipated annual rate in excess of
$10,000, or any bonus payment or arrangement
made to or with any of such officers,
employees or agents (except as previously
disclosed in writing to and approved in
writing by Electroglas); or any change in
the compensation payable or to become
payable to any of Knights' other officers,
employees or agents other than normal annual
raises in accordance with past practice or
any bonus payment or arrangement made to or
with any of such officers, employees or
agents other than normal bonuses or
compensation increases noted in Item 2.10(h)
hereof or other arrangements made in
accordance with past practices;
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(i) any change with respect to the management,
supervisory, development or other key
personnel of Knights (the management,
supervisory, development and other key
personnel of Knights are listed on Item
2.10(i) hereof);
(j) any payment or discharge of a material lien
or liability thereof, which lien or
liability was not either (i) shown on the
balance sheet as of the Balance Sheet Date
included in the Knights Financial Statements
or (ii) incurred in the ordinary course of
business after the Balance Sheet Date; or
(k) any obligation or liability incurred by
Knights to any of its officers, directors or
shareholders, or any loans or advances made
to any of its officers, directors,
shareholders or affiliates, except normal
compensation and expense allowances payable
to officers.
2.11 AGREEMENTS AND COMMITMENTS.
Except as set forth in Item 2.11 delivered by Knights to
Electroglas herewith, or as listed in Item 2.12, Item 2.15.3 or Item 2.15.6 as
required by Section 2.12, Section 2.15.3 or Section 2.15.6, as the case may be,
Knights is not a party or subject to any oral or written executory agreement,
obligation or commitment that is material to Knights, its financial condition,
business or prospects or which is described below and is not terminable within
60 days without cost or penalty to Knights, including but not limited to the
following:
(a) Any contract, commitment, letter agreement,
quotation or purchase order providing for
payments by or to Knights in an aggregate
amount of (i) $25,000 or more in the
ordinary course of business or (ii) $10,000
or more not in the ordinary course of
business;
(b) Any license agreements under which Knights
is licensor (i) for the Yield Manager
products, (ii) not made in the ordinary
course of business in accordance with
reasonable business practices, (iii) which
specify that Knights must provided a level
of support for the licensed product that is
above what is reasonable and customary or
(iv) which are material in amount or
significance;
(c) Any license agreements under which Knights
is licensee;
(d) Any agreement by Knights to encumber,
transfer or sell rights in or with respect
to any Knights Intellectual Property (as
defined in Section 2.12 hereof);
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(e) Any agreement for the sale or lease of real
or personal property involving more than
$10,000 per year;
(f) Any dealer, distributor, sales
representative, original equipment
manufacturer, value added remarketer or
other agreement for the distribution of
Knights' products;
(g) Any franchise agreement or financing
statement;
(h) Any stock redemption or purchase agreement;
(i) Any joint venture contract or arrangement or
any other agreement that involves a sharing
of profits with other persons or the payment
of royalties to any other person;
(j) Any instrument evidencing indebtedness for
borrowed money by way of direct loan, sale
of debt securities, purchase money
obligation, conditional sale, guarantee or
otherwise, except for trade indebtedness or
any advance to any employee of Knights
incurred or made in the ordinary course of
business, and except as disclosed in the
Knights Financial Statements; or
(k) Any contract containing covenants purporting
to limit Knights' freedom to compete in any
line of business in any geographic area.
All agreements, obligations and commitments listed in Item 2.11, Item
2.12, Item 2.15.3 or Item 2.15.6 as required by Section 2.11, Section 2.12,
Section 2.15.3 or Section 2.15.6, as the case may be, are valid and in full
force and effect, and except as expressly noted, a true and complete copy of
each has been delivered to Electroglas or Electroglas' counsel. Except as noted
on Item 2.11, neither Knights nor, to the knowledge of Knights, any other party
is in breach of or default under any material term of any such agreement,
obligation or commitment. Knights is not a party to any contract or arrangement
that it reasonably expects will have a material adverse effect on its business
or prospects. Knights has no liability for renegotiation of government contracts
or subcontracts which are material to Knights, its financial condition, business
or prospects.
2.12 INTELLECTUAL PROPERTY.
Knights owns all right, title and interest in, or has the
right to use, all patent applications, patents, trademark applications,
trademarks, service marks, trade names, copyright applications, copyrights,
trade secrets, know-how, technology and other intellectual property and
proprietary rights used in or reasonably necessary to the conduct of its
business as presently conducted and the business of the development, production,
marketing, licensing and sale of commercial products using such intellectual
property and proprietary rights ("Knights Intellectual Property"). Knights has
not entered into any agreement, and is not subject to any
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obligation, to place in escrow, pledge or otherwise encumber any source code for
any of its products. Knights has taken all reasonable measures to protect all
Knights Intellectual Property, and, except as set forth on Item 2.12, Knights is
not aware of any infringement of any Knights Intellectual Property by any third
party. Set forth on Item 2.12 delivered to Electroglas herewith is a true and
complete list of all copyright, mask work and trademark registrations and
applications and all patents and patent applications for Knights Intellectual
Property owned by Knights. Knights is not aware of any material loss,
cancellation, termination or expiration of any such registration or patent
except as set forth on Item 2.12. The business of Knights as conducted as of the
date hereof does not, and the business of the development, production,
marketing, licensing and sale of commercial products using such intellectual
property and proprietary rights after the Effective Time will not cause Knights
to, infringe or violate any of the patents, trademarks, service marks, trade
names, mask works, copyrights, trade secrets, proprietary rights or other
intellectual property of any other person, and Knights has not received any
written or oral claim or notice of infringement or potential infringement of the
intellectual property of any other person which could be expected to have a
material adverse effect on Knights' business. Knights has the unrestricted,
worldwide right to reproduce, manufacture, sell, license and distribute all of
its products (such products being set forth in Item 2.12) and the right to use
all of its registered user lists, and is not using any confidential information
or trade secrets of any former employer of any past or present employees.
2.13 COMPLIANCE WITH LAWS.
Knights has complied, or prior to the Closing Date (as defined
in Section 6.1 hereof) will have complied, and is or will be at the Closing Date
(as defined in Section 6.1 hereof) in full compliance, in all respects material
to Knights, with all applicable laws, ordinances, regulations and rules, and all
orders, writs, injunctions, awards, judgments and decrees, applicable to Knights
or to the assets, properties and business of Knights, including, without
limitation: (a) all applicable federal and state securities laws and
regulations, (b) all applicable federal, state and local laws, ordinances and
regulations, and all orders, writs, injunctions, awards, judgments and decrees,
pertaining to (i) the sale, licensing, leasing, ownership or management of
Knights' owned, leased or licensed real or personal property, products or
technical data, (ii) employment or employment practices, terms and conditions of
employment, or wages and hours or (iii) safety, health, fire prevention,
environmental protection (including toxic waste disposal and related matters
described in Section 2.21 hereof), building standards, zoning or other similar
matters, (c) the Export Administration Act and regulations promulgated
thereunder or other laws, regulations, rules, orders, writs, injunctions,
judgments or decrees applicable to the export or re-export of controlled
commodities or technical data or (d) the Immigration Reform and Control Act.
Knights has received all material permits and approvals from, and has made all
material filings with, third parties, including government agencies and
authorities, that are necessary to the conduct of its business as presently
conducted.
2.14 CERTAIN TRANSACTIONS AND AGREEMENTS.
No person who is an officer or director of Knights, or a
member of any officer's or director's immediate family, has any direct or
indirect ownership interest in or any
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employment or consulting agreement with any firm or corporation that competes
with Knights or Electroglas (except with respect to any interest in less than 1%
of the outstanding voting shares of any corporation whose stock is publicly
traded). Except as set forth in Item 2.14, no person who is an officer or
director of Knights, or any member of any officer's or director's immediate
family, is directly or indirectly interested in any material contract or
informal arrangement with Knights, including, but not limited to, any loan
arrangements, except for compensation for services as an officer (listed in Item
2.15.3), director or employee of Knights and except for the normal rights of a
shareholder or optionholder. Except as set forth in Item 2.14, none of such
officers or directors or family members has any interest in any property, real
or personal, tangible or intangible, including, without limitation, inventions,
patents, copyrights, trademarks, trade names or trade secrets, used in the
business of Knights, except for the normal rights of a shareholder.
2.15 EMPLOYEE.
2.15.1 Except as set forth in Item 2.15.1, (i) Knights has
no employment contract or consulting agreement
currently in effect that is not terminable at will
without penalty or payment of compensation by Knights
(other than agreements with the sole purpose of
providing for the confidentiality of proprietary
information or assignment of inventions) and (ii) all
employees and consultants of Knights have executed
Knights' standard form of assignments of copyright
and other intellectual property rights to Knights.
2.15.2 Knights (a) has never been and is not now subject to
a union organizing effort, (b) is not subject to any
collective bargaining agreement with respect to any
of its employees, (c) is not subject to any other
contract, written or oral, with any trade or labor
union, employees' association or similar
organization, and (d) has no current labor dispute.
Knights has good labor relations, and Knights has no
knowledge of any facts indicating that the
consummation of the transactions provided for herein
will have a material adverse effect on its labor
relations, and has no knowledge that any of its key
development employees (each of whom is listed on Item
2.15.2) intends to leave its employ.
2.15.3 Item 2.15.3 delivered by Knights to Electroglas
herewith contains a list of all employment and
consulting agreements, pension, retirement,
disability, medical, dental or other health plans,
life insurance or other death benefit plans, profit
sharing, deferred compensation agreements, stock,
option, bonus or other incentive plans, vacation,
sick, holiday or other paid leave plans, severance
plans or other similar employee benefit plans
maintained by Knights (the "Employee Plans"),
including without limitation all "employee benefit
plans" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"). Knights has delivered true and complete
copies or
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descriptions of all the Employee Plans to Electroglas
and Electroglas' counsel. Except as set forth in Item
2.15.3, each of the Employee Plans, and its operation
and administration, is, in all material respects, in
compliance with all applicable, federal, state, local
and other governmental laws and ordinances, orders,
rules and regulations, including the requirements of
ERISA and the Code. Except as set forth in Item
2.15.3, all such Employee Plans that are "employee
pension benefit plans" (as defined in Section 3(2) of
ERISA) which are intended to qualify under Section
401(a)(8) of the Code have received favorable
determination letters that such plans satisfy the
qualification requirements of the Tax Equity and
Fiscal Responsibility Act of 1982, the Deficit
Reduction Act of 1984 and the Retirement Equity Act
of 1984. In addition, Knights has never been a
participant in any "prohibited transaction," within
the meaning of Section 406 of ERISA with respect to
any employee pension benefit plan (as defined in
Section 3(2) of ERISA) which Knights sponsors as
employer or in which Knights participates as an
employer, which was not otherwise exempt pursuant to
Section 408 of ERISA (including any individual
exemption granted under Section 408(a) of ERISA), or
which could result in an excise tax under the Code.
The group health plans, as defined in Section 4980(g)
of the Code, that benefit employees of Knights are in
material compliance with the continuation coverage
requirements of subsection 4980B of the Code. There
are no outstanding violations of Section 4980B of the
Code with respect to any Employee Plan, covered
employees or qualified beneficiaries. Except as set
forth in Item 2.15.3, no employee of Knights and no
person subject to any Knights health plan has made
medical claims through such health plan during the
twelve months preceding the date hereof for more than
$10,000 or more, in the aggregate, or, to the
knowledge of the Knights or the Principal Knights
Shareholders, has any catastrophic illness.
2.15.4 No employee of Knights is in material violation of
any term of any employment contract, patent
disclosure agreement or noncompetition agreement or
any other contract or agreement, or any restrictive
covenant, relating to the right of any such employee
to be employed by Knights or to use trade secrets or
proprietary information of others, and the employment
of any employee of Knights does not subject Knights
to any liability to any third party.
2.15.5 Except as set forth in Item 2.15.5, Knights is not a
party to any (a) agreement with any executive officer
or other key employee of Knights (i) the benefits of
which are contingent, or the terms of which are
materially altered, upon the occurrence of a
transaction involving Knights in the nature of any of
the transactions contemplated by this Agreement and
the Agreement of Merger, (ii) providing any term of
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employment or compensation guarantee or (iii)
providing severance benefits or other benefits after
the termination of employment of such employee
regardless of the reason for such termination of
employment, or (b) agreement or plan, including,
without limitation, any stock option plan, stock
appreciation rights plan or stock purchase plan, any
of the benefits of which will be materially
increased, or the vesting of benefits of which will
be materially accelerated, by the occurrence of any
of the transactions contemplated by this Agreement
and the Agreement of Merger or the value of any of
the benefits of which will be calculated on the basis
of any of the transactions contemplated by this
Agreement and the Agreement of Merger. Knights is not
obligated to make any excess parachute payment, as
defined in Section 280G(b)(1) of the Code, nor will
any excess parachute payment be deemed to have
occurred as a result of or arising out of the Merger
to the extent Section 280G of the Code is applicable
to Knights.
2.15.6 A list of all employees, officers and development
consultants of Knights and their current compensation
and benefits as of the date of this Agreement is set
forth on Item 2.15.6, which Knights has delivered to
Electroglas.
2.15.7 All contributions due from Knights with respect to
any of the Employee Plans have been made or accrued
on Knights' financial statements, and no further
contributions will be due or will have accrued
thereunder as of the Closing Date.
2.16 CORPORATE DOCUMENTS.
Knights has made available to Electroglas for examination all
documents and information listed in Items 2.1 through 2.22 or other exhibits
called for by this Agreement which have been requested by Electroglas' legal
counsel, including, without limitation, the following: (a) copies of Knights'
Articles of Incorporation and Bylaws as currently in effect; (b) Knights' minute
book containing all records of all proceedings, consents, actions and meetings
of Knights' directors and shareholders; (c) Knights' stock ledger, journal and
other records reflecting all stock issuances and transfers; and (d) all permits,
orders and consents issued by any regulatory agency with respect to Knights, or
any securities of Knights, and all applications for such permits, orders and
consents.
2.17 NO BROKERS.
Except as listed on Item 2.17, Knights is not obligated for
the payment of fees or expenses of any investment banker, broker or finder in
connection with the origin, negotiation or execution of this Agreement or the
Agreement of Merger or in connection with any transaction provided for herein or
therein.
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2.18 DISCLOSURE.
This Agreement, its exhibits and schedules, and any of the
certificates or documents to be delivered by Knights to Electroglas under this
Agreement, taken together, do not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances under which such
statements were made, not misleading.
2.19 BOOKS AND RECORDS.
The books, records and accounts of Knights (a) are in all
material respects true and complete, (b) have been maintained in accordance with
reasonable business practices on a basis consistent with prior years, (c) are
stated in reasonable detail and accurately and fairly reflect the transactions
and dispositions of the assets of Knights and (d) accurately and fairly reflect
the basis for the Knights Financial Statements.
2.20 INSURANCE.
Knights maintains fire and casualty, workers compensation and
general liability insurance as listed on Item 2.20.
2.21 ENVIRONMENTAL MATTERS.
2.21.1 During the period that Knights has leased the
premises currently occupied by it and those premises
occupied by it since the date of its incorporation,
there have been no disposals, releases or threatened
releases of Hazardous Materials (as defined below) on
any such premises that would have a material adverse
effect upon the business or financial statements of
Knights. Knights has no knowledge of any presence,
disposals, releases or threatened releases of
Hazardous Materials on or from any of such premises,
which may have occurred prior to Knights having taken
possession of any of such premises that would have a
material adverse effect upon the business or
financial statements of Knights. For purposes of this
Agreement, the terms "disposal," "release," and
"threatened release" have the definitions assigned
thereto by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980,42
U.S.C.Section 9601 et seq., as amended ("CERCLA").
For the purposes of this Section 2.22, "Hazardous
Materials" mean any hazardous or toxic substance,
material or waste which is or becomes prior to the
Closing Date (as defined in Section 6.1 hereof)
regulated under, or defined as a "hazardous
substance," "pollutant," "contaminant," "toxic
chemical," "hazardous material," "toxic substance" or
"hazardous chemical" under (i) CERCLA; (ii) the
Emergency Planning and Community Right-to-Know Act,
42 U.S.C. Section 11001 et seq.; (iii) the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801,
et seq., (iv) the
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Toxic Substances Control Act, 15 U.S.C. Section 2601
et seq.; (v) the Occupational Safety and Health Act
of 1970, 29 U.S.C. Section 651 et seq.; (vi)
regulations promulgated under any of the above
statutes; or (vii) any applicable state or local
statute, ordinance, rule or regulation that has a
scope or purpose similar to those identified above.
2.21.2 During the time that Knights has leased the premises,
none of the premises currently leased by Knights or
any premises previously occupied by Knights is in
violation of any federal, state or local law,
ordinance, regulation or order relating to industrial
hygiene or to the environmental conditions in such
premises.
2.21.3 During the time that Knights has leased the premises
currently occupied by it or any premises previously
occupied by Knights, neither Knights nor, to Knights'
knowledge, any third party, has used, generated,
manufactured or stored in such premises or
transported to or from such premises any Hazardous
Materials that would have a material, adverse effect
upon the business or financial statements of Knights.
2.21.4 During the time that Knights has leased the premises
currently occupied by it or any premises previously
occupied by Knights, there has been no litigation,
proceeding or administrative action brought or
threatened in writing against Knights, or any
settlement reached by Knights with, any party or
parties alleging the presence, disposal, release or
threatened release of any Hazardous Materials on,
from or under any of such premises.
2.21.5 During the period that Knights has leased the
premises currently occupied by it or any premises
previously occupied by Knights, no Hazardous
Materials have been transported from such premises to
any site or facility now listed or proposed for
listing on the National Priorities List, at 40 C.F.R.
Part 300, or any list with a similar scope or purpose
published by any state authority.
2.22 GOVERNMENT CONTRACTS.
All representations, certifications and disclosures made by
Knights to any Government Contract Party (as defined below) have been in all
material respects current, complete and accurate at the times they were made.
There have been no acts, omissions or noncompliance with regard to any
applicable public contracting statute, regulation or contract requirement
(whether express or incorporated by reference) relating to any of Knights'
contracts with any Government Contract Party (as defined below) in either case
that have led to or could lead to, either before or after the Closing Date (as
defined in Section 6.1 hereof), (a) any claim or dispute involving Knights
and/or Electroglas as successor in interest to Knights and any Government
Contract Party or (b) any suspension, debarment or contract termination, or
proceeding related thereto. There has been no act or omission that relates to
the marketing,
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licensing or selling to any Government Contract Party (as defined below) of any
of Knights technical data and computer software and that has led to or could
lead to, either before or after the Closing Date (as defined in Section 6.1
hereof), any material cloud on any of Knights' rights in and to its technical
data and computer software. All of Knights' development of technical data and
computer software was developed exclusively at private expense. For purposes of
this Section 2.22, the term "Government Contract Party" means any independent or
executive agency, division, subdivision, audit group or procuring office of the
federal government, including any prime contractor of the federal government and
any higher level subcontractor of a prime contractor of the federal government,
and including any employees or agents thereof, in each case acting in such
capacity.
2.23 INFORMATION IN REGISTRATION STATEMENT.
The information relating to Knights to be contained in the
Registration Statement on Form S-4 to be filed with the SEC by Electroglas under
the Securities Act of 1933, as amended (the "Securities Act") for the purpose of
registering the Electroglas Common Stock to be issued in the Merger (the
"Registration Statement") will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
3. REPRESENTATIONS AND WARRANTIES OF ELECTROGLAS
Electroglas hereby represents and warrants, that, except as set forth
on the Electroglas disclosure letter delivered to Knights herewith:
3.1 ORGANIZATION AND GOOD STANDING.
Electroglas is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has the
corporate power and authority to own, operate and lease its properties and to
carry on its business as now conducted and as proposed to be conducted.
3.2 POWER, AUTHORIZATION AND VALIDITY.
3.2.1 Electroglas has the corporate right, power, legal
capacity and authority to enter into and perform its
obligations under this Agreement, and all agreements
to which Electroglas is or will be a party that are
required to be executed pursuant to this Agreement
(the "Electroglas Ancillary Agreements"). The
execution, delivery and performance of this Agreement
and the Electroglas Ancillary Agreements have been
duly and validly approved and authorized by
Electroglas' Board of Directors. No vote of
Electroglas' stockholders is required under
applicable law or under the Certificate of
Incorporation or Bylaws of Electroglas.
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3.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable Electroglas to
enter into, and to perform its obligations under,
this Agreement and the Electroglas Ancillary
Agreements, except for (a) the filing of the
Agreement of Merger with the Delaware Secretary of
State and the California Secretary of State, the
recording of the Agreement of Merger in the office of
the Recorder of the Delaware county in which
Electroglas' registered office is located and the
filing of appropriate documents with the relevant
authorities of other states in which Electroglas is
qualified to do business, if any, and (b) such
post-closing filings as may be required to comply
with federal and state securities laws.
3.2.3 This Agreement and the Electroglas Ancillary
Agreements are, or when executed by Electroglas will
be, valid and binding obligations of Electroglas,
enforceable against Electroglas in accordance with
their respective terms, except as to the effect, if
any, of (a) applicable bankruptcy and other similar
laws affecting the rights of creditors generally, and
(b) rules of law governing specific performance,
injunctive relief and other equitable remedies;
provided, however, that the Agreement of Merger and
the Electroglas Ancillary Agreements will not be
effective until the earlier of the Effective Time or
the date provided for therein.
3.3 NO VIOLATION OF CERTIFICATE OR LAWS.
Neither the execution nor delivery of this Agreement or any
Electroglas Ancillary Agreement, nor the consummation of the transactions
contemplated hereby or thereby, will conflict with, or (with or without notice
or lapse of time, or both) result in a termination, breach, impairment or
violation of (a) any provision of the Certificate of Incorporation or Bylaws of
Electroglas, as currently in effect, or (b) any contract that is material to
Electroglas' business or (c) any federal, state, local or foreign judgment,
writ, decree, order, statute or regulation applicable to and that would have a
material adverse effect on Electroglas or its assets or properties.
3.4 DISCLOSURE.
Electroglas has furnished Knights with its annual report on
Form 10-K for its fiscal year ended December 31, 1995, its proxy statement for
its annual stockholders meeting held on May 21, 1996, its quarterly reports on
Form 10-Q for the fiscal quarters ended March 31, 1996, June 30, 1996 and
September 30, 1996 and all other reports or documents required to be filed by
Electroglas pursuant to Section 13(a) or 15(d) of the 1934 Act since the filing
of the most recent quarterly report on Form 10-Q (the "Electroglas Disclosure
Package"). The Electroglas Disclosure Package, this Agreement, the exhibits and
schedules hereto, and any certificates or documents to be delivered to Knights
pursuant to this Agreement, when taken together, do not contain any untrue
statement of a material fact or omit to state any material fact
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necessary in order to make the statements contained herein and therein, in light
of the circumstances under which such statements were made, not misleading.
3.5 INFORMATION IN REGISTRATION STATEMENT.
The information relating to Electroglas to be contained in the
Registration Statement will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
4. KNIGHTS PRECLOSING COVENANTS
During the period from the date of this Agreement until the Effective
Time, Knights covenants to and agrees with Electroglas as follows:
4.1 ADVICE OF CHANGES.
Knights will promptly advise Electroglas in writing, to the
extent of the knowledge of Knights' President, Chief Executive Officer or Chief
Financial Officer, (a) of any event occurring subsequent to the date of this
Agreement that would render any representation or warranty of Knights contained
in this Agreement, if made on or as of the date of such event or the Closing
Date (as defined in Section 6.1 hereof), untrue or inaccurate in any material
respect and (b) of any material adverse change in Knights' financial condition,
properties, assets, liabilities, business, results of operations or prospects.
4.2 MAINTENANCE OF BUSINESS.
The parties hereto understand and acknowledge that it is their
intent to work closely together during the period from the date hereof until the
Closing Date (as defined in Section 6.1 hereof). If Knights becomes aware of a
material deterioration in the relationship with any material customer, supplier
or key employee, it will promptly bring such information to the attention of
Electroglas in writing and, if requested by Electroglas, will exert all
reasonable efforts to restore the relationship.
4.3 CONDUCT OF BUSINESS.
Except as provided otherwise herein or as approved or
recommended by Electroglas, Knights will not, without the prior written consent
of the President of Electroglas, not to be unreasonably withheld:
(a) borrow any money;
(b) enter into any transaction not in the
ordinary course of business or enter into
any transaction or make any commitment
involving an expense of Knights or capital
expenditure by Knights in excess of $10,000;
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(c) encumber or permit to be encumbered any of
its assets except in the ordinary course of
its business consistent with past practice
and to an extent which is not material;
(d) dispose of any of its material assets except
in the ordinary course of business
consistent with past practice;
(e) enter into any material lease or contract
for the purchase or sale of any property,
real or personal, tangible or intangible,
except in the ordinary course of business
consistent with past practice or enter into
any agreement of the types described in
Section 2.11;
(f) fail to maintain its equipment and other
assets in good working condition and repair
according to the standards it has maintained
to the date of this Agreement, subject only
to ordinary wear and tear;
(g) pay any bonus, royalty, increased salary
(except for annual increases in the ordinary
course of business consistent with past
practice and disclosed to Electroglas in
writing) or special remuneration to any
officer, employee or consultant (except
pursuant to existing arrangements heretofore
disclosed in writing to Electroglas) or
enter into any new employment or consulting
agreement with any such person, or enter
into any new agreement or plan of the type
described in Section 2.15.3;
(h) change accounting methods;
(i) declare, set aside or pay any cash or stock
dividend or other distribution in respect of
capital stock, or redeem or otherwise
acquire any of its capital stock;
(j) amend or terminate any contract, agreement
or license to which it is a party except
those amended or terminated in the ordinary
course of business, consistent with past
practice, and which are not material in
amount or effect;
(k) lend any amount to any person or entity,
other than advances for travel and expenses
which are incurred in the ordinary course of
business consistent with past practice, not
material in amount, which travel and
expenses shall be documented by receipts for
the claimed amounts;
(l) guarantee or act as a surety for any
obligation except for the endorsement of
checks and other negotiable instruments in
the ordinary course of business, consistent
with past practice;
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(m) waive or release any material right or claim
except in the ordinary course of business,
consistent with past practice;
(n) issue or sell any shares of its capital
stock of any class or any other of its
securities, or issue or create any warrants,
obligations, subscriptions, options,
convertible securities, stock appreciation
rights or other commitments to issue shares
of capital stock, or accelerate the vesting
of any outstanding option or other security;
(o) split or combine the outstanding shares of
its capital stock of any class or enter into
any recapitalization affecting the number of
outstanding shares of its capital stock of
any class or affecting any other of its
securities;
(p) except for the Merger, merge, consolidate or
reorganize with, or acquire any entity;
(q) amend its Articles of Incorporation or
Bylaws;
(r) license any of Knights' technology or any of
Knights' Intellectual Property, except in
the ordinary course of business consistent
with past practice;
(s) change any insurance coverage or issue any
certificates of insurance, except for
issuances of certificates of insurance in
the ordinary course of business;
(t) terminate the employment of any key employee
listed in Item 2.15.2; or
(u) agree to do any of the things described in
the preceding clauses 4.3(a) through 4.3(u).
4.4 CERTAIN AGREEMENTS.
Knights will cause any present employees and consultants of
Knights who have not previously executed Knights' forms of assignments of
copyright and other intellectual property rights to Knights to execute such
forms, copies of which are attached hereto as Exhibit 4.4.
4.5 REGULATORY APPROVALS.
Knights will execute and file, or join in the execution and
filing, of any application or other document that may be necessary in order to
obtain the authorization, approval or consent of any governmental body, federal,
state, local or foreign, which may be reasonably required, or which Electroglas
may reasonably request, in connection with the
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consummation of the transactions provided for in this Agreement. Knights will
use all reasonable efforts to obtain or assist Electroglas in obtaining all such
authorizations, approvals and consents.
4.6 NECESSARY CONSENTS.
Knights will use its best efforts to obtain such written
consents and take such other actions as may be necessary or appropriate for
Knights, in addition to those set forth in Section 4.5, to facilitate and allow
the consummation of the transactions provided for herein and to facilitate and
allow Electroglas to carry on Knights' business after the Closing Date (as
defined in Section 6.1 hereof).
4.7 LITIGATION.
Knights will notify Electroglas in writing promptly after
learning of any action, suit, proceeding or investigation by or before any
court, board or governmental agency, initiated by or against Knights or
threatened against it.
4.8 NO OTHER NEGOTIATIONS.
From the date hereof until the termination of this Agreement
(provided such termination is not in breach of this Agreement) or the
consummation of the Merger, Knights will not, and will not authorize any
officer, director, employee or affiliate of Knights, or any other person, on its
behalf, directly or indirectly, to (a) solicit, facilitate, discuss or encourage
any offer, inquiry or proposal received from any party other than Electroglas,
concerning the possible disposition of all or any substantial portion of
Knights' business, assets or capital stock by merger, sale or any other means or
to otherwise solicit, facilitate, discuss or encourage any such disposition
(other than the Merger), or (b) provide any confidential information to or
negotiate with any third party other than Electroglas in connection with any
offer, inquiry or proposal concerning any such disposition. Knights will
immediately notify Electroglas of any such offer, inquiry or proposal.
4.9 ACCESS TO INFORMATION.
Until the Closing Date (as defined in Section 6.1 hereof) and
subject to the terms and conditions hereof relating to the confidentiality and
use of confidential and proprietary information, Knights will provide
Electroglas and its agents with reasonable access to the files, books, records
and offices of Knights, including, without limitation, any and all information
relating to Knights taxes, commitments, contracts, leases, licenses, real,
personal and intangible property, and financial condition, and specifically
including, without limitation, access to any Knights intellectual property
reasonably necessary for Electroglas to complete its diligence review of the
Knights products and technology; provided, however, access to any Knights source
code shall be limited to four full-time Electroglas employees at a site
reasonably agreed to by Knights and Electroglas. Knights will cause its
accountants to cooperate with Electroglas and its agents in making available all
financial information reasonably requested, including without
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limitation the right to examine all working papers pertaining to all financial
statements prepared or audited by such accountants.
4.10 SATISFACTION OF CONDITIONS PRECEDENT.
Knights will use all reasonable efforts to satisfy or cause to
be satisfied all the conditions precedent which are set forth in Section 8, and
Knights will use all reasonable efforts to cause the transactions provided for
in this Agreement to be consummated, and, without limiting the generality of the
foregoing, to obtain all consents and authorizations of third parties and to
make all filings with, and give all notices to, third parties that may be
necessary or reasonably required on its part in order to effect the transactions
provided for herein.
4.11 BLUE SKY LAWS.
Knights shall use its best efforts to assist Electroglas to
the extent necessary to comply with the securities and Blue Sky laws of all
jurisdictions applicable in connection with the Merger.
4.12 NOTIFICATION OF EMPLOYEE PROBLEMS.
Knights will promptly notify Electroglas if any of Knights'
officers becomes aware that any of the key employees listed in Item 2.15.2
intends to leave its employ.
4.13 SECTION 368(a) REORGANIZATION
Knights shall not knowingly take, or allow to be taken, any
action which would jeopardize qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code; and
4.14 TAXES, CONSENT
Knights shall prepare and timely file all Returns and
amendments thereto required to be filed by it on or before the Effective Time.
Electroglas shall have a reasonable opportunity to review all Returns and
amendments thereto. Knights shall pay and discharge all Taxes, assessments and
governmental charges upon or against it or any of its properties or assets, and
all liabilities at any time existing, before the same shall become delinquent
and before penalties accrue thereon, except to the extent and as long as: (a)
the same are being contested in good faith and by appropriate proceedings
pursued diligently and in such a manner as not to cause any material adverse
effect upon the condition (financial or otherwise) or operations of Knights; and
(b) Knights shall have set aside on its books reserves (segregated to the extent
required by sound accounting practice) in the amount of the demanded principal
imposition (together with interest and penalties relating thereto, if any).
Knights shall, as of the Effective Time, terminate all tax allocation agreements
or tax sharing agreements and shall ensure that such agreements are of no
further force or effect on and after the Effective Time and there shall be no
further liability of such member under any such agreement.
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5. ELECTROGLAS PRECLOSING COVENANTS
During the period from the date of this Agreement until the Effective
Time, Electroglas covenants to and agrees with Knights as follows:
5.1 ACCESS TO INFORMATION.
Until the Closing Date (as defined in Section 6.1 hereof),
Electroglas will allow Knights and its agents reasonable access to its
management and officers and material information regarding Electroglas,
including, without limitation, material information relating to Electroglas'
business, intellectual property and financial condition. Electroglas will cause
its accountants to cooperate with Knights' accountants in making available all
financial information reasonably requested to evaluate Electroglas' financial
package.
5.2 SATISFACTION OF CONDITIONS PRECEDENT.
Electroglas will use all reasonable efforts to satisfy or
cause to be satisfied all the conditions precedent which are set forth in
Section 7, and Electroglas will use all reasonable efforts to cause the
transactions provided for in this Agreement to be consummated, and, without
limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions provided for herein.
5.3 REGULATORY APPROVALS.
Electroglas will execute and file, or join in the execution
and filing, of any application or other document that may be necessary in order
to obtain the authorization, approval or consent of any governmental body,
federal, state, local or foreign, which may be reasonably required, or which
Knights may reasonably request, in connection with the consummation of the
transactions provided for in this Agreement. Electroglas will use all reasonable
efforts to obtain all such authorizations, approvals and consents.
5.4 SHARE REPURCHASES.
Electroglas agrees not to repurchase at a price greater than
$18.00 any publicly traded shares of Electroglas Common Stock from the date
hereof until the Closing Date.
6. CLOSING MATTERS
6.1 THE CLOSING.
Subject to termination of this Agreement as provided in
Section 9 below, the closing of the transactions provided for herein (the
"Closing") will take place at the offices of Morrison & Foerster LLP, 755 Page
Mill Road, Palo Alto, California 94304 at 10:00 a.m., Pacific Time on the date
all conditions to Closing have been satisfied or waived or such other place,
time and date as Knights and Electroglas may mutually select (the "Closing
Date"). Prior to or
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concurrently with the Closing, the Agreement of Merger and such officers'
certificates or other documents as may be required to effectuate the Merger will
be filed in the office of the California Secretary of State and the Agreement of
Merger and such certificates of approval or other documents as may be required
to effectuate the Merger will be filed in the office of the Delaware Secretary
of State. Accordingly, the Merger will become effective at the Effective Time.
6.2 EXCHANGE OF CERTIFICATES.
6.2.1 As of the Effective Time, all shares of Knights Stock
that are outstanding immediately prior thereto will,
by virtue of the Merger and without further action,
cease to exist, and all such shares will be converted
into the right to receive from Electroglas the number
of shares of Electroglas Common Stock and cash
determined as set forth in Sections 1.1, 1.2, 1.3,
and 1.7 hereof.
6.2.2 At and after the Effective Time, each certificate
representing outstanding shares of Knights Stock will
represent the number of shares of Electroglas Common
Stock into which such shares of Knights Stock have
been converted, and such shares of Electroglas Common
Stock will be deemed registered in the name of the
holder of such certificate. As soon as practicable
after the Effective Time, each holder of shares of
Knights Stock will surrender (a) the certificates for
such shares (the "Knights Certificates") to
Electroglas for cancellation or (b) an affidavit of
lost certificate (or nonissued) and a bond in form
reasonably satisfactory to Electroglas (a "Bond").
Promptly following the Effective Time and receipt of
the Knights Certificates and/or the Bonds,
Electroglas will cause its transfer agent to issue to
such surrendering holder certificates for the number
of shares of Electroglas Common Stock to which such
holder is entitled as determined as set forth in
Sections 1.1 and 1.2 hereof, and Electroglas will
distribute any cash payable under Sections 1.2 and
1.7, less any such shares or such cash deposited in
Escrow pursuant to Section 1.3 hereof.
6.2.3 All shares of Electroglas Common Stock (and, if
applicable, cash in accordance with Sections 1.2 and
1.7 hereof) delivered upon the surrender of Knights
Certificates in accordance with the terms hereof will
be delivered to the registered holder or placed in
escrow with the Escrow Agent, as applicable. After
the Effective Time, there will be no further
registration of transfers of the shares of Knights
Stock on the stock transfer books of Knights. If,
after the Effective Time, Knights Certificates are
presented for transfer or for any other reason, they
will be canceled and exchanged and certificates
therefor will be delivered or placed in escrow as
provided in this Section 6.2. Notwithstanding
anything herein to the contrary, except to the extent
waived by Electroglas, any Knights Certificate that
is not properly submitted to
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Electroglas for exchange and cancellation within
three years after the Effective Time shall no longer
evidence ownership of or any right to receive shares
of Electroglas Common Stock or cash pursuant to
Sections 1.2 or 1.7 hereof and all rights of the
holder of such Knights Certificate, with respect to
the shares previously evidenced by such Knights
Certificate, shall cease.
6.2.4 Until Knights Certificates representing Knights Stock
outstanding prior to the Merger are surrendered
pursuant to Section 6.2.2 above, such certificates
will be deemed, for all purposes, to evidence
ownership of (a) the number of shares of Electroglas
Common Stock into which the shares of Knights Stock
will have been converted pursuant to Sections 1.1 and
1.2 hereof and (b) any cash amount due pursuant to
Section 1.7 hereof, subject in each case to the
obligation pursuant to Section 1.3 hereof to place a
portion thereof in escrow as required hereby.
7. CONDITIONS TO OBLIGATIONS OF KNIGHTS
Knights' obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Knights, but only in a writing signed on
behalf of Knights by its President):
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Electroglas set forth in
this Agreement shall be true and accurate in every material respect on and as of
the Closing Date with the same force and effect as if they had been made at the
Closing, and Knights shall have received a certificate to such effect executed
on behalf of Electroglas by its Chief Financial Officer.
7.2 COVENANTS.
Electroglas shall have performed and complied in all material
respects with all of its covenants contained in this Agreement on or before the
Closing Date, and Knights shall have received a certificate to such effect
executed on behalf of Electroglas by its Chief Financial Officer.
7.3 COMPLIANCE WITH LAW.
There shall be no order, decree, or ruling by any court or
governmental agency or threat thereof, or any other fact or circumstance, which
would prohibit or render illegal the transactions contemplated by this
Agreement.
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7.4 GOVERNMENT CONSENTS.
There shall have been obtained at or prior to the Closing Date
such permits or authorizations, and there shall have been taken such other
actions, as may be required to consummate the Merger by any regulatory authority
having jurisdiction over the parties and the actions herein proposed to be
taken, including but not limited to satisfaction of all requirements under
applicable federal and state securities laws.
7.5 DOCUMENTS.
Knights shall have received all written consents, assignments,
waivers, authorizations or other certificates reasonably deemed necessary by
Knights' legal counsel to consummate the transactions provided for herein.
7.6 NO LITIGATION.
No litigation or proceeding shall be pending which will have
the probable effect of enjoining or preventing the consummation of any of the
transactions provided for in this Agreement.
7.7 OPINIONS OF ELECTROGLAS' COUNSEL.
Knights shall have received a copy of an opinion, dated the
Closing Date, of Morrison & Foerster LLP, counsel for Electroglas, reasonably
satisfactory to Knights covering matters typical for a transaction such as the
one contemplated by this Agreement.
7.8 EFFECTIVENESS OF REGISTRATION STATEMENT.
The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and shall be effective at
the Effective Time, and no stop order suspending effectiveness of the
Registration Statement shall have been issued, no action, suit, proceedings or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and any necessary approvals under state securities
laws relating to the issuance or trading of the Electroglas Common Stock to be
issued to Knights Shareholder in connection with the Merger shall have been
received.
8. CONDITIONS TO OBLIGATIONS OF ELECTROGLAS
The obligations of Electroglas hereunder are subject to the fulfillment
or satisfaction on, and as of the Closing, of each of the following conditions
(any one or more of which may be waived by Electroglas, but only in a writing
signed on behalf of Electroglas by its President or Chief Financial Officer):
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8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Knights set forth in
this Agreement shall be true and complete in all material respects as of the
Closing with the same force and effect as if they had been made at the Closing,
and Electroglas shall have received a certificate to such effect executed on
behalf of Knights by its Chief Financial Officer.
8.2 COVENANTS.
Knights shall have performed and complied in all material
respects with all of its covenants contained in the Agreement on or before the
Closing and Electroglas have received a certificate to such effect signed on
behalf of Knights by its Chief Financial Officer. Knights shall have delivered
to Electroglas a certificate signed on behalf of Knights by its Chief Financial
Officer containing a true and complete list, current as of immediately prior to
the Effective Time, setting forth Unvested Knights Options and Vested Knights
Options and the holders thereof.
8.3 COMPLIANCE WITH LAW.
There shall be no order, decree, or ruling by any court or
governmental agency or threat thereof, or any other fact or circumstance, which
would prohibit or render illegal the transactions provided for in this
Agreement.
8.4 GOVERNMENT CONSENTS.
There shall have been obtained at or prior to the Closing Date
such permits or authorizations and there shall have been taken such other
action, as may be required to consummate the Merger by any regulatory authority
having jurisdiction over the parties and the actions herein proposed to be
taken, including but not limited to satisfaction of all requirements under
applicable federal and state securities laws.
8.5 OPINION OF COUNSEL FOR ELECTROGLAS.
Electroglas shall have received the opinion of Morrison &
Foerster LLP, counsel to Electroglas, dated the Closing Date and addressed to
Electroglas, to the effect that, on the basis of facts, representations, and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the Effective Time, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code, and that Electroglas and Knights will each be a party to the
reorganization within the meaning of Section 368(b) of the Code. In rendering
any such opinion, such counsel may require and, to the extent they deem
necessary and appropriate, may rely upon representations made in certificates of
officers of Knights, Electroglas, Newco, affiliates of the foregoing and others.
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8.6 OPINION OF COUNSEL FOR KNIGHTS.
Electroglas shall have received a copy of an opinion, dated
the Closing Date, of John Arnold, counsel for Knights, reasonably satisfactory
to Electroglas covering matters typical for a transaction such as the one
contemplated by this Agreement.
8.7 REQUISITE APPROVALS.
The principal terms of this Agreement and the Agreement of
Merger shall have been approved and adopted by the written consent or vote of
the Knights Shareholders in accordance with the CCC.
8.8 NO LITIGATION.
No litigation or proceeding shall be pending which will have
the probable effect of enjoining or preventing the consummation of any of the
transactions provided for in this Agreement. No litigation or proceeding shall
be pending which could reasonably be expected to have a material adverse effect
on the financial condition or results of operations of Knights that has not been
previously disclosed to Electroglas herein.
8.9 DOCUMENTS.
Electroglas shall have received all written consents,
assignments, waivers, authorizations or other certificates reasonably deemed
necessary by Electroglas' legal counsel to provide for the continuation in full
force and effect of any and all material contracts and leases of Knights, except
as disclosed in the Knights Disclosure Letter, and for Electroglas to consummate
the transactions contemplated hereby.
8.10 ESCROW.
Electroglas shall have received the Escrow Agreement,
substantially in the form attached hereto as Exhibit B, executed by the Knights
and the Principal Knights Shareholders, which agreement provides for the escrow
of the Escrow Assets on the terms and conditions of the Escrow Agreement.
8.11 DUE DILIGENCE REVIEW
The business of Knights shall not have undergone or suffered
any material adverse change (other than on account of matters which affect
generally the economy or the industry in which Knights is engaged or events
triggered by Electroglas' statements as to its intentions regarding its future
management of Knights), and Electroglas shall have not become aware of, nor
shall its due diligence investigation of Knights have revealed, any facts or
circumstances or conditions specific to Knights that have or would have a
material adverse effect on the business of Knights.
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8.12 EFFECTIVENESS OF REGISTRATION STATEMENT
The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and shall be effective at
the Effective Time, and no stop order suspending effectiveness of the
Registration Statement shall have been issued, no action, suit, proceedings or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and any necessary approvals under state securities
laws relating to the issuance or trading of the Electroglas Common Stock to be
issued to the Knights Shareholders in connection with the Merger shall have been
received.
8.13 EXCLUDED SHARES
The Excluded Shares of Common Stock shall not exceed five
percent of the shares of Common Stock issued and outstanding on the Closing Date
and no holders of Preferred Stock shall have exercised dissenters' rights under
the CCC.
8.14 AUDITED KNIGHTS FINANCIAL STATEMENTS
Knights shall have delivered to Electroglas Knights' audited
balance sheet as of December 31, 1996 (the "Balance Sheet Date") and Knights'
audited income statement for the period from January 1, 1995 through December
31, 1996.
9. TERMINATION OF AGREEMENT
9.1 TERMINATION.
This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the
shareholders of Knights:
(a) by the mutual written consent of Electroglas
and Knights;
(b) Unless otherwise specifically provided
herein or agreed in writing by Electroglas
and Knights, upon notice by either party,
this Agreement will be terminated if all the
conditions to Closing have not been
satisfied or waived on or before July 15
1997, (the "Final Date") other than as a
result of a breach of this Agreement by the
terminating party.
(c) by Knights, if there has been a breach by
Electroglas of any representation, warranty,
covenant or agreement set forth in this
Agreement on the part of Electroglas, or if
any representation of Electroglas will have
become untrue, in either case which has or
can reasonably be expected to have a
material adverse effect on Electroglas and
which Electroglas fails to cure within a
reasonable time, not to exceed thirty (30)
days, after written
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notice thereof (except that no cure period
will be provided for a breach by Electroglas
which by its nature cannot be cured);
(d) by Electroglas, if there has been a breach
by Knights of any representation, warranty,
covenant or agreement set forth in this
Agreement on the part of Knights, or if any
representation of Knights will have become
untrue, in either case which has or can
reasonably be expected to have a material
adverse effect on Knights and which Knights
fails to cure within a reasonable time not
to exceed thirty (30) days after written
notice thereof (except that no cure period
will be provided for a breach by Knights
which by its nature cannot be cured); or
(e) by either party, if a permanent injunction
or other order by any federal or state court
which would make illegal or otherwise
restrain or prohibit the consummation of the
Merger will have been issued and will have
become final and nonappealable.
Any termination of this Agreement under this Section 9.1 will be
effective by the delivery of written notice of the terminating party to the
other party hereto.
9.2 CERTAIN CONTINUING OBLIGATIONS.
Following any termination of this Agreement pursuant to this
Section 9, the parties hereto will continue to perform their respective
obligations under Sections 11.2 through 11.8 but will not be required to
continue to perform their other covenants under this Agreement.
10. SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION AND REMEDIES,
CONTINUING COVENANTS
10.1 SURVIVAL OF REPRESENTATIONS.
10.1.1 REPRESENTATIONS OF KNIGHTS AND THE PRINCIPAL KNIGHTS
SHAREHOLDERS. All representations, warranties and
covenants of Knights and the Principal Knights
Shareholders contained in this Agreement will remain
operative and in full force and effect (but only as
of the date they were made and as of the date of
Closing) after the Closing, regardless of any
investigation made by or on behalf of the parties to
this Agreement; provided, however, that no claim for
violations of representations and warranties by
Knights contained in this agreement shall be made
unless Electroglas gives written notice to Knights on
or prior to the day one year after the Closing (the
"Applicable Expiration Date.").
Except for the obligations of Knights and the Principal Knights
Shareholders under Sections 11.2 through 11.8, the representations, warranties
and covenants of Knights and the Principal Knights Shareholders contained in
this Agreement will terminate as of the termination
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of this Agreement in accordance with its terms.
10.1.2 REPRESENTATIONS OF ELECTROGLAS. Except for
Electroglas' obligations pursuant to Sections 11.2
through 11.8, Electroglas' representations,
warranties and covenants contained in this Agreement
will terminate as of the termination of this
Agreement in accordance with its terms or, if the
Closing occurs, such representations, warranties and
covenants will remain operative and in full force and
effect after the Closing until the termination of the
Escrow as provided below.
10.2 AGREEMENT TO INDEMNIFY; DAMAGES.
10.2.1 GENERAL INDEMNIFICATION BY KNIGHTS SHAREHOLDERS;
DAMAGES. Subject to the limitations set forth in this
Section 10.2, the Knights Shareholders will indemnify
and hold harmless Electroglas and its respective
officers, directors, agents and employees, and each
person, if any, who controls or may control
Electroglas within the meaning of the Securities Act
(hereinafter in this Section 10.2 referred to
individually as an "Indemnified Person" and
collectively as "Indemnified Persons") from and
against any and all claims, demands, actions, causes
of action, losses, costs, damages, liabilities and
expenses including, without limitation, reasonable
legal fees (collectively, "Damages"):
(a) Arising out of any misrepresentation or
breach of or default in connection with any
of the representations, warranties or
covenants given or made by Knights or the
Principal Knights Shareholders in this
Agreement or any certificate, document or
instrument delivered by or on behalf of
Knights or by one of the Knights
Shareholders pursuant hereto; or
(b) Resulting from any failure of any Knights
Shareholder to have good, valid and
marketable title to the issued and
outstanding Knights capital stock held by
such shareholders, free and clear of all
liens, claims, pledges, options, adverse
claims, assessments or charges of any nature
whatsoever, or to have full right, capacity
and authority to vote such Knights capital
stock in favor of the Merger and the other
transactions contemplated by the Agreement
of Merger.
10.2.2 LIMITATIONS. Except as provided under
Section 10.2.3, this Section sets forth the
sole and exclusive remedies of the
Indemnified Persons for misrepresentation or
breach of or default in connection with any
of the representations, warranties or
covenants given by or on behalf of Knights
or by one of the Knights Shareholders
pursuant hereto. The Knights Shareholders
shall not incur liability under Sections
10.2.1, beyond the Escrow Assets. The
Indemnified Persons shall exercise their
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remedies only with respect to the Escrow
Assets and any other assets deposited in
escrow pursuant to the Escrow Agreement. The
Knights Shareholders shall settle any claims
for indemnification or payment by returning
to Electroglas shares of Electroglas Common
Stock valued at the Closing Price and/or
cash from the Escrow Assets.
10.2.3 EXCEPTIONS TO LIMITATIONS. None of the
provisions of this Section 10 or of the
Escrow Agreement shall in any manner limit
the liability or indemnification obligations
of the Principal Knights Shareholders with
respect to (i) claims of intentional
misrepresentation or fraud or (ii) any
criminal matters.
10.2.4 SURVIVAL OF CLAIMS. Notwithstanding anything
to the contrary, if, prior to the expiration
of a particular representation or warranty,
an Indemnified Person makes a claim for
indemnification or Damages under either this
Agreement or the Escrow Agreement with
respect to a misrepresentation or breach of
such representation or warranty, then the
Indemnified Person's rights to
indemnification under this Section 10.2 for
such claim shall survive any expiration of
such representation or warranty.
10.2.5 INDEMNIFICATION AND PAYMENT PROCEDURES.
Thomas Sherby, Dag Tellefsen and Gerald Liu
shall act as representatives of the Knights
Shareholders ("Representatives") for
purposes of the Escrow Agreement and the
provisions of Section 1.3 hereof and this
Section 10.2, are duly authorized to act as
Representatives and may bind the Knights
Shareholders. Promptly after the receipt by
Electroglas of notice or discovery of any
claim, damage or legal action or proceeding
giving rise to indemnification or payment
rights for Damages under this Agreement,
Electroglas will give the Representatives
and the Escrow Agent written notice of such
claim, damage, legal action or proceeding (a
"Claim") in accordance with Section 3 of the
Escrow Agreement. Electroglas may assert a
claim at any time prior to the Expiration
Date. Within ten days of delivery of such
written notice, the Representatives may, at
the expense of the Knights Shareholders,
elect to take all necessary steps properly
to contest any Claim involving third parties
or to prosecute such Claim to conclusion or
settlement satisfactory to the
Representatives. If the Representatives make
the foregoing election, Electroglas will
have the right to participate at its own
expense in all proceedings. If the
Representatives do not make such election,
Electroglas shall be free to handle the
prosecution or defense of any such Claim,
will take all necessary steps to contest the
Claim involving third parties or to
prosecute such Claim to conclusion or
settlement satisfactory to Electroglas, and
will notify the Representatives of the
progress of any such Claim, will permit the
Representatives, at the sole
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cost of the Knights Shareholders, to
participate in such prosecution or defense
and will provide the Knights Shareholders
with reasonable access to all relevant
information and documentation relating to
the Claim and Electroglas' prosecution or
defense thereof. In any case, the party not
in control of the Claim will cooperate with
the other party in the conduct of the
prosecution or defense of such Claim.
Neither party will compromise or settle any
such Claim without the written consent of
either Electroglas (if the Representatives
defend the Claim) or the Representatives (if
Electroglas defends the Claim), such consent
not to be unreasonably withheld.
11. MISCELLANEOUS
11.1 REGISTRATION STATEMENT.
11.1.1 PROXY STATEMENT/PROSPECTUS. As promptly as
practicable after the execution of this Agreement,
Knights and Electroglas shall prepare, and
Electroglas shall file with the SEC, a Registration
Statement on Form S-4 with respect to the Merger and
Electroglas Common Stock constituting the merger
consideration, which shall include necessary proxy
materials relating to the approval of the Merger and
the transactions contemplated hereby by the
shareholders of Knights. The Registration Statement
on Form S-4 shall comply in form with applicable SEC
requirements and Electroglas shall use all reasonable
efforts to cause the Registration Statement to become
effective as soon thereafter as practicable. The
Proxy Statement shall include the recommendation of
the Board of Directors of Knight in favor of the
Merger which shall not be changed unless the Board of
Directors of Knights, upon written advice of its
outside legal counsel following receipt of a written
proposal or offer for an acquisition similar to the
transactions contemplated herein, shall determine
that to include such recommendation or not withdraw
such recommendation if previously included would
constitute a breach of the Board's fiduciary duty
under applicable law.
11.1.2 MEETING OF KNIGHTS' SHAREHOLDERS. Knights shall
promptly after the date hereof take all action
necessary in accordance with California Law and its
Articles of Incorporation and Bylaws to convene
Knights' Shareholders' Meeting as soon as
practicable. Knights shall not postpone or adjourn
(other than for the absence of a quorum) Knights
Shareholders' Meeting without the consent of
Electroglas. Knights shall use its best efforts to
solicit from shareholders of Knight proxies in favor
of the Merger and shall take all other action
necessary or advisable to secure the vote or consent
of shareholders required by California Law to effect
the Merger.
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11.2 GOVERNING LAW DISPUTE RESOLUTION.
The internal laws of the State of California (irrespective of
its choice of law principles) will govern the validity of this Agreement, the
construction of its terms, and the interpretation and enforcement of the rights
and duties of the parties hereto. Any dispute hereunder ("Dispute") shall be
settled by arbitration in San Francisco, California, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve a Dispute.
11.2.1 COMPENSATION OF ARBITRATOR. Any such arbitration will
be conducted before a single arbitrator who will be
compensated for his or her services at a rate to be
determined by the parties or by the American
Arbitration Association, but based upon reasonable
hourly or daily consulting rates for the arbitrator
in the event the parties are not able to agree upon
his or her rate of compensation.
11.2.2 SELECTION OF ARBITRATOR. The American Arbitration
Association will have the authority to select an
arbitrator from a list of arbitrators who are lawyers
familiar with California contract law; provided,
however, that such lawyers cannot work for a firm
then performing services for either party, that each
party will have the opportunity to make such
reasonable objection to any of the arbitrators listed
as such party may wish and that the American
Arbitration Association will select the arbitrator
from the list of arbitrators as to whom neither party
makes any such objection. In the event that the
foregoing procedure is not followed, each party will
choose one person from the list of arbitrators
provided by the American Arbitration Association
(provided that such person does not have a conflict
of interest), and the two persons so selected will
select from the list provided by the American
Arbitration Association the person who will act as
the arbitrator.
11.2.3 PAYMENT OF COSTS. Electroglas and Knights or the
Knights Shareholders after the Closing will bear the
expense of deposits and advances required by the
arbitrator in equal proportions, but either party may
advance such amounts, subject to recovery as an
addition or offset to any award. The arbitrator will
award to the prevailing party, as determined by the
arbitrator, all costs, fees and expenses related to
the arbitration, including reasonable fees and
expenses of attorneys, accountants and other
professionals incurred by the prevailing party.
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11.2.4 BURDEN OF PROOF. For any Dispute submitted to
arbitration, the burden of proof will be as it would
be if the claim were litigated in a judicial
proceeding.
11.2.5 AWARD. Upon the conclusion of any arbitration
proceedings hereunder, the arbitrator will render
findings of fact and conclusions of law and a written
opinion setting forth the basis and reasons for any
decision reached and will deliver such documents to
each party to this Agreement along with a signed copy
of the award.
11.2.6 TERMS OF ARBITRATION. The arbitrator chosen in
accordance with these provisions will not have the
power to alter, amend or otherwise affect the terms
of these arbitration provisions or the provisions of
this Agreement.
11.2.7 EXCLUSIVE REMEDY. Except as specifically otherwise
provided in this Agreement, arbitration will be the
sole and exclusive remedy of the parties for any
Dispute arising out of this Agreement.
11.3 ASSIGNMENT: BINDING UPON SUCCESSORS AND ASSIGNS.
Neither party hereto may assign any of its rights or
obligations hereunder without the prior written consent of the other party
hereto. This Agreement will be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
11.4 SEVERABILITY.
If any provision of this Agreement, or the application
thereof, is for any reason held to any extent to be invalid or unenforceable,
the remainder of this Agreement and application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
11.5 COUNTERPARTS.
This Agreement may be executed in counterparts, each of which
will be an original as regards any party whose name appears thereon and all of
which together will constitute one and the same instrument. This Agreement will
become binding when one or more counterparts hereof, individually or taken
together, bear the signatures of both parties reflected hereon as signatories.
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11.6 OTHER REMEDIES.
Except as otherwise provided herein, any and all remedies
herein expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on such party, and the
exercise of any one remedy will not preclude the exercise of any other.
11.7 AMENDMENT AND WAIVERS.
Any term or provision of this Agreement may be amended, and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only by a
writing signed by the party to be bound thereby. The waiver by a party of any
breach hereof or default in the performance hereof will not be deemed to
constitute a waiver of any other default or any succeeding breach or default.
This Agreement may be amended by the parties hereto at any time before or after
approval of the Knights shareholders.
11.8 NO WAIVER.
The failure of any party to enforce any of the provisions
hereof will not be construed to be a waiver of the right of such party
thereafter to enforce such provisions. The waiver by any party of the right to
enforce any of the provisions hereof on any occasion will not be construed to be
a waiver of the right of such party to enforce such provision on any other
occasion.
11.9 EXPENSES.
Each party will bear its respective expenses and fees of its
own accountants, attorneys, investment bankers and other professionals incurred
with respect to this Agreement and the transactions contemplated hereby;
provided, however, that if the Merger is consummated, Electroglas will pay at or
immediately before the Closing the reasonable accounting and attorneys' fees and
expenses incurred by Knights in connection with the Merger. Knights will not
incur in connection with the Merger expenses of more than $125,000 for fees and
expenses of lawyers and accountants, unless in either case any such fees or
expenses incurred by Knights in excess of the applicable amount set forth for
above are paid by the Knights Shareholders on or before the Closing (if such
payment is not made, Electroglas will pay such excess fees or expenses, in which
event Electroglas will be entitled to be reimbursed by the Knights Shareholders
for such payment and, if not so reimbursed, Electroglas will be entitled to
treat the amount of payment as Damages recoverable under Section 10.2 and the
Escrow Agreement).
11.10 NOTICES.
Any notice or other communication required or permitted to be
given under this Agreement will be in writing, will be delivered personally or
by mail or express delivery, postage
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prepaid, and will be deemed given upon actual delivery or, if mailed by
registered or certified mail, on the third business day following deposit in the
mails, addressed as follows:
It to Electroglas:
Electroglas, Inc.
3045 Stender Way
Santa Clara, CA 95054
Attention: Curtis S. Wozniak, Chief Executive Officer
with a copy to:
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
Attention: Stephen M. Tennis
Phone: (415) 813-5600
Fax: (415) 494-0792
If to Knights:
Thomas A. Sherby, President and Chief Executive Officer
Knights Technology, Inc.
155 North Wolfe Road
Sunnyvale, CA 95086
with a copy to:
John Arnold
104 Highland Terrace
Woodside, CA 94062
or to such other address as the party in question may have furnished to
the other party by written notice given in accordance with this Section 11.9.
11.11 CONSTRUCTION OF AGREEMENT.
The language hereof will not be construed for or against
either party. A reference to an article, section or exhibit will mean an article
or section in, or an exhibit to, this Agreement, unless otherwise explicitly set
forth. The titles and headings in this Agreement are for reference purposes only
and will not in any manner limit the construction of this Agreement. For the
purposes of such construction, this Agreement will be considered as a whole.
11.12 NO JOINT VENTURE.
Nothing contained in this Agreement will be deemed or
construed as creating a joint venture or partnership between the parties hereto.
No party is by virtue of this Agreement authorized as an agent, employee or
legal representative of any other party. No party will have
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the power to control the activities and operations of any other, and the
parties' status is, and at all times, will continue to be, that of independent
contractors with respect to each other. No party will have any power or
authority to bind or commit any other. No party will hold itself out as having
any authority or relationship in contravention of this Section.
11.13 FURTHER ASSURANCES.
Each party agrees to cooperate fully with the other party and
to execute such further instruments, documents and agreements and to give such
further written assurances as may be reasonably requested by the other party to
evidence and reflect the transactions provided for herein and to carry into
effect the intent of this Agreement.
11.14 ABSENCE OF THIRD PARTY BENEFICIAL RIGHTS.
No provisions of this Agreement are intended, nor will be
interpreted, to provide or create any third party beneficiary rights or any
other rights of any kind in any client, customer, affiliate, partner or employee
of any party hereto or any other person or entity, unless specifically provided
otherwise herein, and, except as so provided, all provisions hereof will be
personal solely between the parties to this Agreement.
11.15 PUBLIC ANNOUNCEMENT.
Electroglas and Knights will issue a press release approved by
both parties announcing the Merger as soon as practicable following the
execution of this Agreement. Electroglas may issue such press releases, and make
such other disclosures regarding the Merger, as it determines to be required or
appropriate under applicable securities laws or NASD rules after reasonable
consultation, where possible, with Knights. Knights will not make any other
public announcement or disclosure of the transactions contemplated by this
Agreement. Knights will take all reasonable precautions to prevent any trading
in the securities of Electroglas by officers, directors, employees and agents of
Knights, having knowledge of any material information regarding Electroglas
provided hereunder until the information in question has been publicly
disclosed.
11.16 CONFIDENTIAL.
Except as expressly authorized by Electroglas in writing,
Knights will not directly or indirectly divulge to any person or entity or use
any Electroglas Confidential Information, except as required for the performance
of its duties under this Agreement. Except as expressly authorized by Knights in
writing, Electroglas will not directly or indirectly divulge to any person or
entity or use any Knights Confidential Information, except as required for the
performance of its duties under this Agreement. As used herein, "Electroglas
Confidential Information" consists of (a) any information designated by
Electroglas as confidential whether developed by Electroglas or disclosed to
Electroglas by a third party, (b) the source code to any Electroglas software
and any trade secrets relating to any of the foregoing, and (c) any information
relating to Electroglas' product plans, product designs, product costs, product
prices, product names, finances, marketing plans, business opportunities,
personnel, research development or know-
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how. As used herein, "Knights Confidential Information" consists of (x) any
information designated by Knights as confidential whether developed by Knights
or disclosed to Knights by a third party, (y) the source code to any Knights
software, and any trade secrets related to any of the foregoing, and (z) any
information relating to Knights product plans, product designs, product costs,
product prices, product names, finances, marketing plan, business opportunities,
personnel, research, development or know-how. "Electroglas Confidential
Information" and "Knights Confidential Information" also include the terms and
conditions of this Agreement, except as disclosed in accordance with Section
11.14 above. The foregoing restriction will apply to information about a party
whether or not it was obtained from such party's employees, acquired or
developed by the other party during such other party's performance under this
Agreement, or otherwise learned. The foregoing restrictions will not apply to
information that (i) has become publicly known through no wrongful act of the
receiving party, (ii) has been rightfully received from a third party authorized
by the party which is the owner, creator or compiler to make such disclosure
without restriction, (iii) has been approved or released by written
authorization of the party which is the owner, creator or compiler, or (iv) is
being or has therefore been disclosed pursuant to a valid court order after a
reasonable attempt has been made to notify the party which is the owner, creator
or compiler.
11.17 ENTIRE AGREEMENT.
This Agreement, the exhibits hereto constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, express or implied, written or oral,
between the parties with respect to the subject matter hereof. The express term
is hereof control and supersede any course of performance or usage of trade
inconsistent with any of the terms hereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ELECTROGLAS, INC. KNIGHTS TECHNOLOGY, INC.
By. /s/ Curtis S. Wozniak By: /s/ Thomas A. Sherby
--------------------------- -----------------------------------------
Curtis S. Wozniak Thomas A. Sherby, President and Chief
Chief Executive Officer Executive Officer
PRINCIPAL KNIGHTS SHAREHOLDERS
/s/ Thomas A. Sherby
---------------------------------------------
Thomas A. Sherby
/s/ Mary P. Korn
---------------------------------------------
Mary P. Korn
/s/ Shao-Hung Gerald Liu
---------------------------------------------
Shao-Hung Gerald Liu
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VERSION 1.3
3/11/97
EXHIBIT B
ESCROW AGREEMENT
This Escrow Agreement (this "AGREEMENT") is entered into as of April
__, 1997, by and among Electroglas, Inc., a Delaware corporation
("ELECTROGLAS"), Knights Technology, Inc., a California corporation ("KNIGHTS")
and Thomas Sherby, Dag Tellefsen and Gerald Liu, as representatives
("REPRESENTATIVES") of the shareholders of Knights (collectively, the
"HOLDERS"), and _____________________________________, as "ESCROW AGENT."
A. Knights, certain shareholders of Knights and Electroglas have
entered into an Agreement and Plan of Reorganization dated as of March __, 1997
(the "PLAN") pursuant to which Newco, a wholly-owned subsidiary of Electroglas
is to merge with and into Knights in a reverse triangular merger (the "MERGER"),
with Knights to be the surviving corporation. The capitalized terms used in this
Agreement and not otherwise defined herein will have the meanings given them in
the Plan. A copy of the Plan is simultaneously being delivered to the Escrow
Agent.
B. Pursuant to the Plan, _________ shares of Electroglas Common Stock
and funds in the aggregate amount $________ are to be distributed to the
Holders.
C. The Plan provides that on the Closing Date, that Electroglas will
withhold, pro rata, from the Holders the total additional cash payable thereto
under Section 1.7 of the Plan (the "KNIGHTS SHAREHOLDER CASH"); provided,
however, that such amount withheld (the "ESCROW CASH") shall not exceed 10% of
the sum of (i) the product of the aggregate number of shares of Electroglas
Common Stock issued upon the conversion of the Knights Stock as provided in
Section 1.1 of the Plan multiplied by the Closing Price plus (ii) the Knights
Shareholder Cash (the "TARGET ESCROW CASH") . In addition, the Plan provides
that if the Escrow Cash is less than the Target Escrow Cash, then Electroglas
will withhold, pro rata, from the Holders the number of shares of Electroglas
Common Stock issued to them in the Merger equal to the quotient of (a) the
Target Escrow Cash minus the Escrow Cash divided by (b) the Closing Price (the
"ESCROW SHARES"). The Plan further provides that the Escrow Cash and Escrow
Shares (the "ESCROW ASSETS") shall be placed in an escrow account (the "ESCROW
ACCOUNT") to secure certain indemnification and payment obligations of the
Holders to Electroglas and other Indemnified Persons (as defined in Section 10.2
of the Plan) under the Plan on the terms and conditions set forth herein. The
Escrow Assets required to be deposited in the Escrow Account pursuant to this
Agreement are shown on Attachment A attached hereto.
D. The parties hereto desire to establish the terms and conditions
pursuant to which the Escrow Assets will be deposited, held in, and disbursed
from the Escrow Account.
NOW, THEREFORE, the parties hereto hereby agree as follows:
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1. ESCROW AND INDEMNIFICATION
(a) ESCROW OF ASSETS. Promptly after the Effective Time
of the Merger, Electroglas and/or its transfer agent will deposit the Escrow
Assets deducted from the shares and any cash to be distributed to the Holders in
the Merger with the Escrow Agent, who will hold such shares and any cash in
escrow as collateral for the indemnification and payment obligations of the
Holders under Sections 1.3 and 10.2 of the Plan until Electroglas is required to
release such Escrow Assets pursuant to the terms of this Agreement. The Escrow
Assets will include "ADDITIONAL ESCROW SHARES" as that term is defined in
Section 2(a) of this Agreement. The Escrow Agent agrees to accept delivery of
the Escrow Assets and to hold such Escrow Assets in escrow subject to the terms
and conditions of this Agreement. The Escrow Agent further agrees that any
Escrow Cash shall be invested in short term treasury bills and/or certificates
of deposit of a major commercial bank.
(b) INDEMNIFICATION. Electroglas and the other
Indemnified Persons are indemnified pursuant to the terms of Section 10.2 of the
Plan (which terms are incorporated herein by reference) from and against any
Damages, subject to the limitations and conditions set forth in Section 10.2 of
the Plan and herein. (For purposes of this Agreement, references to Electroglas
will include all other Indemnified Persons, as applicable.) The Escrow Assets
will be security for this indemnity obligation and payment of Damages, subject
to the limitations, and in the manner provided, in Section 10.2 of the Plan and
this Agreement. Thomas Sherby, Dag Tellefsen and Gerald Liu shall act as
Representatives of the Holders for purposes of this Agreement and each are duly
authorized to be such Representatives. The Representatives may bind the Holders
for the purpose of this Agreement and take any other action hereunder as
Representatives that is approved by a majority of the Representatives. Promptly
after the receipt by Electroglas of notice or discovery of any claim, damage or
legal action or proceeding giving rise to indemnification rights under the Plan,
Electroglas will give the Representatives and the Escrow Agent written notice of
such claim, damage, legal action or proceeding (a "CLAIM") in accordance with
Section 3 hereof. Electroglas may assert a claim at any time prior to the
Applicable Expiration Date. Within thirty calendar days of delivery of such
written notice, the Representatives may, at the expense of the Holders, elect to
take all necessary steps properly to contest any Claim involving third parties
or to prosecute such Claim to conclusion or settlement satisfactory to the
Representatives. If the Representatives make the foregoing election, Electroglas
will have the right to participate at its own expense in all proceedings. If the
Representatives do not make such election, Electroglas shall be free to handle
the prosecution or defense of any such Claim, will take all necessary steps to
contest the Claim involving third parties or to prosecute such Claim to
conclusion or settlement satisfactory to Electroglas, and will notify the
Representatives of the progress of any such Claim, will permit the
Representatives, at the sole cost of the Holders, to participate in such
prosecution or defense and will provide the Representatives with reasonable
access to all relevant information and documentation relating to the Claim and
Electroglas' prosecution or defense thereof. In any case, the party not in
control of the Claim will cooperate with the other party in the conduct of the
prosecution or defense of such Claim. Neither party will compromise or settle
any such Claim without the written consent of either Electroglas (if the
Representatives defend the Claim)
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or the Representatives (if Electroglas defends the Claim), such consent not to
be unreasonably withheld.
(c) LIMITATIONS ON LIABILITY. Except as provided under
Section 10.2.3 of the Plan, Section 10.2 of the Plan sets forth the sole and
exclusive remedies of the Indemnified Persons for misrepresentation or breach of
or default in connection with any of the representations, warranties or
covenants given by or on behalf of Knights or by one of the Principal Holders
pursuant to the Plan. The Holders shall not incur liability under Section 10.2
of the Plan or under this Agreement beyond the Escrow Assets and the Indemnified
Persons shall exercise their remedies under the Plan and this Agreement only
with respect to the number of Escrow Shares and any cash amount set forth next
to each Holder's name on Attachment A.
2. VOTING OF ESCROW SHARES; RELEASE OF ESCROW ASSETS.
(a) DIVIDENDS, VOTING AND RIGHTS OF OWNERSHIP. Except for
tax-free dividends paid in stock declared with respect to the Escrow Shares
pursuant to Section 305(a) of the Code ("ADDITIONAL ESCROW SHARES"), any cash
dividends, dividends payable in securities or other distributions of any kind
made in respect of the Escrow Shares will be distributed currently by
Electroglas to each Holder. The Holder will have the right to vote the Escrow
Shares deposited in the Escrow Account for the account of such Holder so long as
such Escrow Shares are held in escrow, and Electroglas will take all reasonable
steps necessary to allow the exercise of such rights. While the Escrow Shares
remain in the Escrow Agent's possession pursuant to this Agreement, the Holder
will retain and will be able to exercise all other incidents of ownership of
said Escrow Shares that are not inconsistent with the terms and conditions
hereof.
(b) DISTRIBUTIONS TO HOLDERS. Twelve months after the
Closing Date (the "FINAL RELEASE Date"), the Escrow Agent will release from
escrow to each Holder such Holder's Escrow Assets as set forth in Attachment A,
plus that portion of all Additional Escrow Shares related to the Escrow Shares,
less (A) any Escrow Assets delivered to Electroglas in accordance with Section 4
hereof in satisfaction of Claims by Electroglas and (B) any Escrow Assets
subject to delivery to Electroglas in accordance with Section 4 hereof with
respect to any then pending but unresolved Claims of Electroglas. Any Escrow
Assets held as a result of clause (B) will be released to the Holder or released
to Electroglas (as appropriate) promptly upon resolution of each specific Claim
involved. Notwithstanding anything to the contrary in this Escrow Agreement, the
Escrow Agent shall not deliver any Escrow Assets out of the Escrow to
Electroglas until Claims exceed $50,000, and then shall deliver to Electroglas
the full amount of such Claims in accordance with Section 4 hereof.
(c) RELEASE OF ESCROW ASSETS. The Escrow Assets will be
held by Escrow Agent until required to be released pursuant to Section 2(b)
above. Within five business days after the applicable release condition is met,
Escrow Agent will deliver to the Holders the requisite number of Escrow Shares
and any amount of Escrow Cash to be released on such date as identified by
Electroglas and the Representatives to the Escrow Agent in writing. Such
delivery will be in the form of stock certificates issued in the name of such
Holders and cash, as applicable. Electroglas and the Representatives undertake
to deliver a timely notice to Escrow
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Agent identifying the number of Escrow Shares and any amount of Escrow Cash to
be released within such five-day period. Electroglas will take such action as
may be necessary to cause stock certificates and checks, as applicable, to be
issued in the name of the Holders. Escrow Agent will have such stock
certificates and checks, as applicable, in its possession no later than three
business days prior to the day on which Escrow Agent is to deliver such
certificates to the Holders. CERTIFICATES REPRESENTING ESCROW SHARES SHALL BEAR
THE FOLLOWING LEGEND DURING THE ESCROW PERIOD, BEFORE THE FINAL RELEASE DATE,
INDICATING THAT THEY ARE SUBJECT TO THE AGREEMENT:
"THE SECURITIES REPRESENTED HEREBY MAY ONLY BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN ACCORDANCE WITH THE
TERMS OF AN ESCROW AGREEMENT AMONG THE HOLDER THEREOF, ELECTROGLAS,
INC. AND ________________________________. A COPY OF SUCH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICE OF ELECTROGLAS, INC."
Cash will be paid in lieu of fractions of Escrow Shares in an amount equal to
the Closing Price. Within five business days after written request from the
Representative, Electroglas will submit a certified schedule of the cash amounts
payable for fractional shares and will deposit with Escrow Agent sufficient
funds to pay such cash amounts for fractional shares.
(d) NO ENCUMBRANCE. No Escrow Assets or any beneficial
interest may be pledged, sold, assigned or transferred, including by operation
of law, by a Holder or be taken or reached by any legal or equitable process in
satisfaction of any debt or other liability of the Holder (other than such
Holder's obligations under Section 10.2 of the Plan), prior to the delivery to
such Holder of the Escrow Assets by the Escrow Agent.
(e) POWER TO TRANSFER ESCROW ASSETS. The Escrow Agent is
hereby granted the power to effect any distribution of Escrow Assets
contemplated by this Agreement. Electroglas will cooperate with the Escrow Agent
in promptly issuing stock certificates to effect such transfers.
3. NOTICE OF CLAIM.
(a) Each notice of a Claim by Electroglas pursuant to
Section 1(b) (the "NOTICE OF CLAIM") will be in writing and will contain the
following information to the extent it is reasonably available to Electroglas:
(i) Electroglas' good faith estimate of the
reasonably foreseeable maximum amount of the alleged Damages (which amount may
be the amount of damages claimed by a third party plaintiff in an action brought
against Electroglas or Knights based on alleged facts, which if true, would
constitute a breach of Knights' representations and warranties); and
(ii) A brief description in reasonable detail of
the facts, circumstances or events giving rise to the alleged Damages based on
Electroglas' good faith belief thereof,
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including, without limitation, the identity and address of any third-party
claimant (to the extent reasonably available to Electroglas) and copies of any
formal demand or complaint.
(b) The Escrow Agent will not transfer any of the Escrow
Assets held in the Escrow Account to Electroglas pursuant to a Notice of Claim
until such Notice of Claim has been resolved in accordance with Section 4 below.
4. RESOLUTION OF NOTICE OF CLAIM AND DISTRIBUTION OF ESCROW
ASSETS.
Any Notice of Claim received by the Representatives and the Escrow
Agent pursuant to Section 3 above will be resolved as follows:
(a) UNCONTESTED CLAIMS. In the event that the
Representatives do not contest a Notice of Claim in writing to the Escrow Agent
and Electroglas, the Escrow Agent will immediately deliver to Electroglas that
number of Escrow Shares for cancellation and an amount of Escrow Cash, if
applicable, having a value (where the value of the Escrow Shares is determined
pursuant to Section 4(c) hereof) equal to the amount of Damages specified in the
Notice of Claim, which will be allocated among the Holders in proportion to
their percentage interests in the Escrow Assets set forth on Attachment A, and
will notify the Representatives of such transfer.
(b) CONTESTED CLAIMS. To recover Claims under this Escrow
it will not be necessary to institute an arbitration pursuant to Section 11.2 of
the Plan; the arbitrator hereunder being authorized to determine the existence
of Claims, as well as the amount of Damages associated therewith. In the event
that the Representatives give written notice contesting all, or a portion of, a
Notice of Claim to Electroglas and the Escrow Agent (a "CONTESTED CLAIM") within
the 30-day period provided above, matters that are subject to third party claims
brought against Electroglas or Knights in a litigation or arbitration will await
the final decision, award or settlement of such litigation or arbitration, while
matters that arise between Electroglas on the one hand and Knights on the other
hand ("ARBITRABLE CLAIMS"), will be settled by binding arbitration. Any portion
of the Notice of Claim that is not contested will be resolved as set forth above
in Section 4(a). The final decision of the arbitrator will be furnished to the
Escrow Agent, the Representatives and Electroglas in writing and will constitute
a conclusive determination of the issue in question, binding upon the Holders
and Electroglas. After notice that the Notice of Claim is contested by the
Representatives, the Escrow Agent will continue to hold in the Escrow Account
Escrow Assets having a value (where the value of Escrow Shares is determined
pursuant to Section 4(c) hereof) sufficient to cover such Claim (notwithstanding
the expiration of the Final Release Date) until (i) execution of a settlement
agreement by Electroglas and the Representatives setting forth a resolution of
the Notice of Claim, or (ii) receipt of a copy of the final award of the
arbitrator.
(i) ARBITRATION. Any Arbitrable Claim shall be
settled by arbitration in San Francisco, California, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA RULES") then in effect. However, in all
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
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award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof.
(ii) COMPENSATION OF ARBITRATOR. Any such
arbitration will be conducted before a single arbitrator who will be compensated
for his or her services at a rate to be determined by the parties or by the
American Arbitration Association, but based upon reasonable hourly or daily
consulting rates for the arbitrator in the event the parties are not able to
agree upon his or her rate of compensation.
(iii) SELECTION OF ARBITRATOR. The American
Arbitration Association will have the authority to select an arbitrator from a
list of arbitrators who are partners in a nationally recognized firm of
independent certified public accountants from the management advisory services
department (or comparable department or group) of such firm; provided, however,
that such firm cannot be the firm of certified public accountants then auditing
the books and records of either party or providing management or advisory
services for either party, that each party will have the opportunity to make
such reasonable objection to any of the arbitrators listed as such party may
wish and that the American Arbitration Association will select the arbitrator
from the list of arbitrators as to whom neither party makes any such objection.
In the event that the foregoing procedure is not followed, each party will
choose one person from the list of arbitrators provided by the American
Arbitration Association (provided that such person does not have a conflict of
interest), and the two persons so selected will select from the list provided by
the American Arbitration Association the person who will act as the arbitrator.
(iv) PAYMENT OF COSTS. Electroglas and the
Holders will each pay 50% of the initial compensation to be paid to the
arbitrator in any such arbitration and 50% of the costs of transcripts and other
normal and regular expenses of the arbitration proceedings; provided however,
that the prevailing party in any arbitration will be entitled to an award of
attorneys' fees and costs, and all costs of arbitration, including those
provided for above, will be paid by the losing party, and the arbitrator will be
authorized to make such determinations. The Holders' liability for such fees and
expenses of arbitration will be paid by Electroglas and will be recovered as a
Claim hereunder out of the Escrow Assets.
(v) BURDEN OF PROOF. For any Arbitrable Claim
submitted to arbitration, the burden of proof will be as it would be if the
claim were litigated in a judicial proceeding.
(vi) AWARD. Upon the conclusion of any
arbitration proceedings hereunder, the arbitrator will render findings of fact
and conclusions of law and a written opinion setting forth the basis and reasons
for any decision reached and will deliver such documents to each party to this
Agreement along with a signed copy of the award.
(vii) TERMS OF ARBITRATION. The arbitrator chosen
in accordance with these provisions will not have the power to alter, amend or
otherwise affect the terms of these arbitration provisions or the provisions of
this Agreement or the Plan.
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(viii) EXCLUSIVE REMEDY. Except as specifically
otherwise provided in this Agreement or the Plan, arbitration will be the sole
and exclusive remedy of the parties for any Arbitrable Claim arising out of this
Agreement.
(c) DETERMINATION OF AMOUNT OF CLAIMS. Any amount owed to
Electroglas hereunder, determined pursuant to Section 4(a) or (b) above, will be
immediately payable to Electroglas out of the Escrow Assets then held by the
Escrow Agent on a pro rata basis between the Holders at a per share value for
all Escrow Shares equal to the Closing Price of Electroglas Common Stock.
(d) NO EXHAUSTION OF REMEDIES. Electroglas need not
exhaust any other remedies that may be available to it except as otherwise
provided in the Plan but shall proceed directly in accordance with the
provisions of this Agreement. Electroglas may institute Claims against the
Escrow Assets and in satisfaction thereof may recover Escrow Assets, in
accordance with the terms of this Agreement, without making any other Claims
directly against the Holders and without rescinding or attempting to rescind the
transactions consummated pursuant to the Plan. The assertion of any single Claim
for indemnification hereunder will not bar Electroglas from asserting other
Claims hereunder.
5. LIMITATION OF ESCROW AGENT'S LIABILITY.
(a) The Escrow Agent will incur no liability with respect
to any action taken or suffered by it in reliance upon any notice, direction,
instruction, consent, statement or other document believed by it to be genuine
and duly authorized, nor for any other action or inaction, except its own
willful misconduct or gross negligence. The Escrow Agent shall have no duty to
inquire into or investigate the validity, accuracy or content of any document
delivered to it. The Escrow Agent will not be responsible for the validity or
sufficiency of this Agreement. In all questions arising under this Agreement,
the Escrow Agent may rely on the advice or opinion of counsel, and for anything
done, omitted or suffered in good faith by the Escrow Agent based on such
advice, the Escrow Agent will not be liable to anyone. The Escrow Agent will not
be required to take any action hereunder involving any expense unless the
payment of such expense is made or provided for in a manner satisfactory to it.
(b) In the event conflicting demands are made or
conflicting notices are served upon the Escrow Agent with respect to the Escrow
Account, the Escrow Agent will have the absolute right, at the Escrow Agent's
election, to do either or both of the following: (i) resign so a successor can
be appointed pursuant to Section 9 hereof or (ii) file a suit in interpleader
and obtain an order from a court of competent jurisdiction requiring the parties
to interplead and litigate in such court their several claims and rights among
themselves. In the event such interpleader suit is brought, the Escrow Agent
will thereby be fully released and discharged from all further obligations
imposed upon it under this Agreement, and Electroglas will pay the Escrow Agent
all costs, expenses and reasonable attorney's fees expended or incurred by the
Escrow Agent pursuant to the exercise of Escrow Agent's rights under this
Section 5 (such costs, fees and expenses will be treated as extraordinary fees
and expenses for the purposes of Section 8 hereof). Electroglas shall be
entitled to reimbursement from the Holders of any extraordinary
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fees and expenses of Escrow Agent in the event Electroglas prevails in such
dispute pursuant to Section 8 hereof.
(c) Each other party hereto, jointly and severally (each
an "INDEMNIFYING PARTY" and together the "INDEMNIFYING PARTIES"), hereby
covenants and agrees to reimburse, indemnify and hold harmless Escrow Agent,
Escrow Agent's officers, directors, employees, counsel and agents (severally and
collectively, "ESCROW AGENT"), from and against any loss, damage, liability or
loss suffered, incurred by, or asserted against Escrow Agent (including amounts
paid in settlement of any action, suit, proceeding, or claim brought or
threatened to be brought and including reasonable expenses of legal counsel)
arising out of, in connection with or based upon any act or omission by Escrow
Agent (and/or any of its officers, directors, employees, counsel or agents)
relating in any way to this Agreement or Escrow Agent's services hereunder. This
indemnity shall exclude gross negligence and willful misconduct on Escrow
Agent's part. Anything in this Agreement to the contrary notwithstanding, in no
event shall the Escrow Agent be liable for special, indirect or consequential
loss or damage of any kind whatsoever (including but not limited to lost
profits), even if the Escrow Agent has been advised of the likelihood of such
loss or damage and regardless of the form of action.
(d) Each Indemnifying Party may participate at its own
expense in the defense of any claim or action that may be asserted against
Escrow Agent, and if the Indemnifying Parties so elect, the Indemnifying Parties
may assume the defense of such claim or action; PROVIDED, HOWEVER, that if there
exists a conflict of interest that would make it inappropriate, in the sole
discretion of the Escrow Agent, for the same counsel to represent both Escrow
Agent and the Indemnifying Parties, Escrow Agent's retention of separate counsel
shall be reimbursable as herein above provided. Escrow Agent's right to
indemnification hereunder shall survive Escrow Agent's resignation or removal as
Escrow Agent and shall survive the termination of this Agreement by lapse of
time or otherwise.
(e) Escrow Agent hereby warrants that Escrow Agent will
notify each Indemnifying Party by letter, or by telephone or telecopy confirmed
by letter, of any receipt by Escrow Agent of a written assertion of a claim
against Escrow Agent, or any action commenced against Escrow Agent, within ten
business days after Escrow Agent's receipt of written notice of such claim.
However, Escrow Agent's failure to so notify each Indemnifying Party shall not
operate in any manner whatsoever to relieve an Indemnifying Party from any
liability that it may have otherwise than on account of this Section 5.
(f) Escrow Agent may execute any of its powers or
responsibilities hereunder and exercise any rights hereunder either directly or
by or through its agents or attorneys. The Escrow Agent shall have no liability
for the conduct of any outside attorneys, accountants or other similar
professionals it retains. Nothing in this Agreement shall be deemed to impose
upon Escrow Agent any duty to qualify to do business or to act as a fiduciary or
otherwise in any jurisdiction other than the State of California.
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6. NOTICES.
All notices, instructions and other communications required or
permitted to be given hereunder or necessary or convenient in connection
herewith must be in writing and will be deemed delivered (i) when personally
served or when delivered by telex or facsimile (to the telex or facsimile number
of the person to whom the notice is given), (ii) the first business day
following the date of deposit with an overnight courier service or (iii) on the
earlier of actual receipt or the third business day following the date on which
the notice is deposited in the United States mail, first class certified,
postage prepaid, addressed as follows:
If to the Escrow Agent: ___________________________
___________________________
___________________________
Attn.: ___________________
Fax: _______________
If to Electroglas: Electroglas, Inc.
3045 Stender Way
Santa Clara, California 95054
Attn.: Chief Executive Officer
Fax: (408) 982-8011
With a copy to: Stephen M. Tennis
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, California 94304
Fax: (415) 494-0792
If to the Representatives: Thomas A. Sherby
Knights Technology, Inc.
155 North Wolfe Road
Sunnyvale, California 95086
With a copy to: John Arnold
104 Highland Terrace
Woodside, California 94062
Fax: (415) 851-7374
or to such other address as Electroglas, the Representatives or the Escrow
Agent, as the case may be, designates in a writing delivered to each of the
other parties hereto.
7. GENERAL.
(a) GOVERNING LAW, ASSIGNS. This Agreement will be
governed by and construed in accordance with the internal laws of the State of
California without regard to
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conflict-of-law principles and will be binding upon, and inure to the benefit
of, the parties hereto and their respective successors and permitted assigns.
(b) COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(c) ENTIRE AGREEMENT. Except as otherwise set forth in
the Plan and the Agreement of Merger, this Agreement constitutes the entire
understanding and agreement of the parties with respect to the subject matter of
this Agreement and supersedes all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof.
(d) WAIVERS. No waiver by any party hereto of any
condition or of any breach of any provision of this Agreement will be effective
unless in writing. No waiver by any party of any such condition or breach, in
any one instance, will be deemed to be a further or continuing waiver of any
such condition or breach or a waiver of any other condition or breach of any
other provision contained herein.
(e) TAX IDENTIFICATION NUMBERS. Each party hereto, other
than the Escrow Agent, shall provide the Escrow Agent with its Tax
Identification Number (TIN) as assigned by the Internal Revenue Service prior to
the execution of this Agreement.
8. EXPENSES OF ESCROW AGENT.
All fees and expenses of the Escrow Agent incurred in the ordinary
course of performing its responsibilities hereunder will be paid by Electroglas
upon receipt of a written invoice by Escrow Agent. Any extraordinary fees and
expenses, including without limitation any fees or expenses (including the fees
or expenses of counsel to the Escrow Agent) incurred by the Escrow Agent in
connection with a dispute over the distribution of Escrow Assets or the validity
of a Notice of Claim, will be paid by Electroglas upon receipt of a written
invoice by Escrow Agent. The Holders will be liable for any extraordinary fees
and expenses of the Escrow Agent arising in connection with a dispute hereunder,
in the event Electroglas prevails in such dispute. Such extraordinary fees and
expenses will be paid by Electroglas and recovered as a Claim hereunder out of
the Escrow Assets. The Escrow Agent shall have no duty to solicit any payments
which may be due it hereunder.
9. SUCCESSOR ESCROW AGENT.
In the event the Escrow Agent becomes unavailable or unwilling to
continue in its capacity herewith, the Escrow Agent may resign and be discharged
from its duties or obligations hereunder by giving notice of its resignation to
the parties to this Agreement, specifying a date not less than ten days
following such notice date of when such resignation will take effect.
Electroglas will designate a successor Escrow Agent prior to the expiration of
such ten-day period by giving written notice to the Escrow Agent and the
Representatives; provided, however, that Electroglas may only appoint a
successor Escrow Agent without the consent of the Representatives so long as
such successor is a bank or trust company which, together with its
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parent, has assets of at least $50 million, and may appoint any other successor
Escrow Agent with the consent of the Representatives, which will not be
unreasonably withheld. The Escrow Agent will promptly transfer the Escrow Assets
to such designated successor.
10. MERGER OF ESCROW AGENT.
In the event the Escrow Agent is merged with, acquired or otherwise
combined with another entity, such successor shall be the Escrow Agent hereunder
without any further action by the parties hereto.
11. LIMITATION OF RESPONSIBILITY.
The Escrow Agent's duties are limited to those set forth in this
Agreement, and Escrow Agent, acting as such under this Agreement, is not charged
with knowledge of or any duties or responsibilities under any other document or
agreement, including without limitation the Plan. Escrow Agent may execute any
of its powers or responsibilities hereunder and exercise any rights hereunder
either directly or by or through its agents or attorneys. Nothing in this Escrow
Agreement shall be deemed to impose upon the Escrow Agent any duty to qualify to
do business or to act as a fiduciary or otherwise in any jurisdiction other than
California. Escrow Agent shall not be responsible for and shall not be under a
duty to examine into or pass upon the validity, binding effect, execution or
sufficiency of this Escrow Agreement or of any agreement amendatory or
supplemental hereto.
12. AMENDMENT.
This Agreement may be amended by the written agreement of Electroglas,
the Escrow Agent and the Representatives, provided that, if the Escrow Agent
does not agree to an amendment agreed upon by Electroglas and the
Representatives, the Escrow Agent will resign and Electroglas will appoint a
successor Escrow Agent in accordance with Section 9 above. No amendment of the
Plan shall increase Escrow Agent's responsibilities or liability hereunder
without Escrow Agent's written agreement.
13. HOLDERS' REPRESENTATIVE.
The Representatives are authorized to take any action deemed by them
appropriate or necessary to carry out the provisions of, and to determine the
rights of the Holders under this Agreement and the Plan. The Representatives
shall serve as the agent of the Holders for all purposes related to this
Agreement and the Plan, including ,without limitation, service of process upon
the Holders. By their execution of this Agreement, each Representative accepts
and agrees to diligently discharge their duties and responsibilities as a
Representative as set forth in this Agreement. The authorization and designation
of the Representatives under this Section 13 shall be binding upon the
successors and assigns of each Holder. Electroglas and the Escrow Agent shall be
entitled to rely upon such authorization and designation and shall be fully
protected in dealing with the Representatives, and shall have no duty to inquire
into the authority of any person reasonably believed by any of them to be a
Representative. The Representatives will not be entitled to receive any
compensation from Electroglas in connection with this Agreement.
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[REST OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first-above written.
ELECTROGLAS, INC. REPRESENTATIVES
By: ____________________________ ________________________________
Curtis S. Wozniak Thomas A. Sherby
Chief Executive Officer Representative
ESCROW AGENT ________________________________
Dag Tellefsen
Representative
_________________________________
________________________________
Gerald Liu
By:______________________________ Representative
Authorized Signatory
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ATTACHMENT A
<TABLE>
<CAPTION>
TOTAL TOTAL
KNIGHTS ELECTROGLAS CASH ESCROW ESCROW TAX I.D.
HOLDER AND ADDRESS SHARES SHARES PAYMENT SHARES CASH NUMBER
- ------------------ ------ ------ ------- ------ ---- ------
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 171
APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. Dissenters' Rights
SECTION 1300. SHAREHOLDER IN SHORT-FORM MERGER; PURCHASE AT FAIR MARKET VALUE;
"DISSENTING SHARES"; "DISSENTING SHAREHOLDER"
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e)or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
Shareholders to act upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision does not apply
to any shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
Shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
SECTION 1301. NOTICE TO HOLDER OF DISSENTING SHARES OF REORGANIZATION APPROVAL;
DEMAND FOR PURCHASE OF SHARES; CONTENTS OF DEMAND
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the
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shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. STAMPING OR ENDORSING DISSENTING SHARES
Within 30 days after the date on which notice of the approval by the outstanding
shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to
the shareholder, the shareholder shall submit to the corporation at its
principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST
THEREON; WHEN PRICE TO BE PAID
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. ACTION BY DISSENTERS TO DETERMINE WHETHER SHARES ARE DISSENTING
SHARES OR FAIR MARKET VALUE OF DISSENTING SHARES OR BOTH; JOINDER OF
SHAREHOLDERS; CONSOLIDATION OF ACTIONS; DETERMINATION OF ISSUES; APPOINTMENT OF
APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to
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determine whether the shares are dissenting shares or the fair market value of
the dissenting shares or both or may intervene in any action pending on such a
complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. DUTY AND REPORT OF APPRAISERS; COURT'S CONFIRMATION OF REPORT;
DETERMINATION OF FAIR MARKET VALUE BY COURT; JUDGMENT, AND PAYMENT; APPEAL;
COSTS OF ACTION
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. PREVENTION OF PAYMENT TO HOLDERS OF DISSENTING SHARES OF FAIR
MARKET VALUE; EFFECT
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DISPOSITION OF DIVIDENDS UPON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting shares
after the date of approval of the reorganization by the outstanding shares
(Section 152) and prior to payment for the shares by the corporation shall be
credited against the total amount to be paid by the corporation therefor.
C-3
<PAGE> 174
SECTION 1308. RIGHTS AND PRIVILEGES OF DISSENTING SHARES; WITHDRAWAL OF DEMAND
FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SECTION 1309. WHEN DISSENTING SHARES LOSE THEIR STATUS
Dissenting shares lose their status as dissenting shares and the holders thereof
cease to be dissenting shareholders and cease to be entitled to require the
corporation to purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR COMPENSATION OR VALUATION PENDING
LITIGATION
If litigation is instituted to test the sufficiency or regularity of the votes
of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. SHARES TO WHICH CHAPTER INAPPLICABLE
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. ATTACK ON VALIDITY OF REORGANIZATION OR SHORT-FORM MERGER; RIGHTS
OF SHAREHOLDERS; BURDEN OF PROOF
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action
C-4
<PAGE> 175
attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-5
<PAGE> 176
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms not defined herein shall have the same meanings as in
the Prospectus.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 ("Section 145") of the Delaware General Corporation Law
("DGCL") provides a detailed statutory framework covering indemnification of
officers and directors against liabilities and expenses arising out of legal
proceedings brought against them by reason of their being or having been
directors or officers. Section 145 generally provides that a director or officer
of a corporation (i) shall be indemnified by the corporation for all expenses of
such legal proceedings when he is successful on the merits, (ii) may be
indemnified by the corporation for the expenses, judgments, fines and amounts
paid in settlement of such proceedings (other than a derivative suit), even if
he is not successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, and (iii) may be
indemnified by the corporation for the expenses of a derivative suit (a suit by
a stockholder alleging a breach by a director or officer of a duty owed to the
corporation), even if he is not successful on the merits, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made under clause (iii)
above, however, if the director or officer is adjudged liable for negligence or
misconduct in the performance of his duties to the corporation, unless a
corporation determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction. Electroglas's Certificate of Incorporation provides that
Electroglas shall indemnify to the fullest extent permitted by Section 145, as
it now exists or as amended, all persons whom it may indemnify pursuant thereto.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. Electroglas's Certificate of Incorporation provides for the elimination
of personal liability of a director for breach of fiduciary duty, as permitted
by Section 102(b)(7) of the DGCL.
Electroglas maintains liability insurance insuring Electroglas's
officers and directors against liabilities that they may incur in such
capacities.
See also the undertakings set out in response to Item 22.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The financial statement schedule information is incorporated by reference to
the Electroglas Annual Report on Form 10-K for the year ending December 31,
1996.
(b) The following is a complete list of exhibits filed as part of the
Registration Statement. Exhibit numbers correspond to the numbers in the Exhibit
Table of Item 601 of Regulation S-K.
KNIGHTS TECHNOLOGY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Deductions End of Period
----------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year Ended December 31, 1996 $130,300 - - $130,300
Year Ended December 31, 1995 $100,400 $55,000 $25,100 $130,300
Year Ended December 31, 1994 $ 20,400 $80,000 - $100,400
</TABLE>
II-1
<PAGE> 177
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of Electroglas.
3.2 Bylaws of Electroglas.
*5.1 Opinion of Morrison & Foerster LLP regarding validity of the issuance of the Securities.
*8.1 Opinion of Morrison & Foerster LLP regarding certain federal income tax matters.
11.1 Knights Computation of Net Income (Loss) Per Common Share.
*23.1 Consent of Morrison & Foerster LLP (included in their opinion to be filed as Exhibit 5.01).
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of KPMG Peat Marwick LLP, independent certified public accountants.
24 Power of Attorney (see page II-4)
+27 Financial Data Schedule.
</TABLE>
- -----------------------------
* To be filed by Amendment.
+ The Financial Data Schedule is incorporated by reference to the Annual Report
of Electroglas on Form 10-K for the year ending December 31, 1996.
II-2
<PAGE> 178
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, an increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the Commission
pursuant to rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) that, for the purpose of determining liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering;
(4) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(5) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form;
(6) that every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to this
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(7) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request
(8) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-3
<PAGE> 179
The undersigned registrant hereby undertakes to supply by means of a
post effective amendment all the information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, Electroglas has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion to its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 180
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on April 4, 1997.
ELECTROGLAS, INC.
By: /s/ Curtis S. Wozniak
---------------------------------------
Curtis S. Wozniak
Chief Executive Officer and Director
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Neil R. Bonke and
Curtis S. Wozniak as his or her true and lawful attorneys-in-fact and agents,
jointly and severally, with full power of substitution and resubstitution, for
and in his of her stead, in any and all capacities, to sign on his or her behalf
this Registration Statement on Form S-4 and to execute any and all amendments
thereto (including post-effective amendments) or certificates that may be
required in connection with this Registration Statement, and to file the same,
with all exhibits thereto, and all other documents in connection therewith, with
the Securities and Exchange Commission and grants unto said attorneys-in-fact
and agents, jointly and severally, the full power and authority to do and
perform each and every act and thing necessary or advisable to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, jointly and severally, or
his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<us,2>
<lr,1p,,8.><QC>
<us,1>
--------- ----- ----
<S> <C> <C>
/s/ Neil R. Bonke Chairman of the Board April 4, 1997
--------------------------
Neil R. Bonke
/s/ Curtis S. Wozniak Chief Executive Officer and Director April 4, 1997
--------------------------
Curtis S. Wozniak
/s/ Armand J. Stegall Vice President, Chief Financial Officer April 4, 1997
-------------------------- (principal financial and accounting officer)
Armand J. Stegall
/s/ Joseph F. Dox Director April 4, 1997
--------------------------
Joseph F. Dox
/s/ Roger D. Emerick Director April 4, 1997
--------------------------
Roger D. Emerick
/s/ Robert J. Frankenberg Director April 4, 1997
--------------------------
Robert J. Frankenberg
</TABLE>
II-5
<PAGE> 181
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page Number
- ------ ---------------------- -----------
<S> <C> <C>
Exhibit No. Description of Exhibit
3.1 Certificate of Incorporation of Electroglas.
3.2 Bylaws of Electroglas.
*5.1 Opinion of Morrison & Foerster LLP regarding validity of the
issuance of the Securities.
*8.1 Opinion of Morrison & Foerster LLP regarding certain federal
income tax matters.
11.1 Knights Computation of Net Income (Loss) Per Common Share.
*23.1 Consent of Morrison & Foerster LLP (included in their opinion
to be filed as Exhibit 5.01).
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of KPMG Peat Marwick LLP, independent certified
public accountants.
24 Power of Attorney (see page II-4)
+ 27 Financial Data Schedule.
</TABLE>
- -----------------------------
* To be filed by Amendment.
+ The Financial Data Schedule is incorporated by reference to the Annual Report
of Electroglas on Form 10-K for the year ending December 31, 1996.
II-6
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
ELECTROGLAS, INC.
ARTICLE I
NAME
The name of the Corporation is Electroglas, Inc.
ARTICLE II
REGISTERED OFFICE
The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of the
registered agent at such address is The Corporation Trust Company.
ARTICLE III
PURPOSE; DURATION
The nature of the business or purposes to be conducted or promoted by
the Corporation is to conduct any lawful business, to exercise any lawful
purpose and power and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware, as the same may be amended from time to time. The Corporation is to
have perpetual existence.
ARTICLE IV
CAPITALIZATION
The total number of shares of stock which the Corporation shall have
authority to issue is 35,000,000 shares, with a par value of $.01 each. Said
shares shall consist of 5,000,000 shares of preferred stock and 30,000,000
shares of common stock.
A. Preferred Stock
1. The preferred stock of the Corporation may be issued from time to
time in one or more series of any number of shares, provided that the aggregate
number of shares
1
<PAGE> 2
issued and not cancelled in any and all such series shall not exceed the total
number of shares of preferred stock hereinabove authorized.
2. Subject to the provisions hereof and the limitations prescribed by
law or any regulation of any national securities exchange, the Board of
Directors is expressly authorized by adopting resolutions to issue the shares,
fix the number of shares, and change the number of shares constituting any
series of preferred stock of the Corporation, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights, dividend rates, rights and terms of redemption
(including sinking fund provisions), redemption price or prices, conversion
rights and liquidation preferences of the shares constituting any series of
preferred stock of the Corporation, without any further action or vote by the
stockholders.
B. Common Stock. The holders of record of the common stock of the
Corporation (the "Common Stock") shall be entitled to the following rights:
1. to vote at all meetings of stockholders of the Corporation, and such
holders shall have one vote at all such meetings in respect of each share
of Common Stock held of record by them;
2. subject to the prior rights of the holders of all classes or series
of capital stock of the Corporation at the time outstanding having prior
rights as to dividends, to receive when, if and as declared by the Board of
Directors out of the assets of the Corporation legally available therefor,
such dividends as may be declared by the Corporation from time to time to
holders of Common Stock; and
3. subject to the prior rights of the holders of all classes or series
of capital stock of the Corporation at the time outstanding having prior
rights as to distribution of assets upon liquidation, dissolution or
winding-up, to receive the remaining assets of the Corporation upon
liquidation, dissolution or winding-up.
ARTICLE V
INCORPORATOR
The name and mailing address of the Sole Incorporator is as follows:
Name Mailing Address
---- ---------------
Joseph M. Fernandez 80 Pine Street
New York, New York 10005
2
<PAGE> 3
ARTICLE VI
BOARD OF DIRECTORS
A. Number, Tenure and Qualifications of Directors; Removal.
1. The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of such number of
directors as is determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors; provided,
however, that in no event shall the number of directors be less than three. The
directors shall be divided into three classes, designated Class I, Class II and
Class III. Each class shall consist, as nearly as may be possible, of one-third
(1/3) of the total number of directors constituting the entire Board of
Directors. The initial classes shall be elected as follows: Class I directors
shall be elected for a one-year term, Class II directors for a two-year term and
Class III directors for a three-year term. At each succeeding annual meeting of
stockholders, successors to the class of directors whose term expires at that
annual meeting shall be elected for three-year terms. If the number of directors
is changed, any increase or decrease shall be apportioned among the classes so
as to maintain the number of directors in each class as nearly equal as
possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which his or
her term expires and until his or her successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Except as otherwise required by law,
any vacancy on the Board of Directors that results from an increase in the
number of directors and any other vacancy occurring in the Board of Directors
shall be filled by a majority of the directors then in office, even if less than
a quorum, or by a sole remaining director. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of his or her predecessor.
2. Any director, or the entire Board of Directors, may be removed from
office only for cause and only by the affirmative vote of not less than a
majority of the votes entitled to be cast by the holders of all the then
outstanding shares of Voting Stock (as defined in Article VIII, Section C),
voting together as one class; provided, however, that if a proposal to remove a
director is made at any time when there is an Interested Person (as defined in
Article VIII, Section C) or a director who is not an Independent Director (as
defined in Article VIII, Section C), then such removal shall require the
affirmative vote of not less than a majority of the votes entitled to be cast by
the holders of all the then outstanding shares of Voting Stock, voting together
as one class, excluding Voting Stock beneficially owned by such Interested
Person.
3. Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of stock issued by the Corporation shall have the right,
voting separately
3
<PAGE> 4
by class or series, to elect directors, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, as amended, and
such directors so elected shall not be divided into classes pursuant to this
Article VI, Section A unless expressly provided by such terms.
B. Additional Authority of Board. In furtherance and not in limitation
of the powers conferred by statute, the Board of Directors is expressly
authorized:
1. To make, alter, amend or repeal the By-laws of the Corporation. The
holders of shares of Voting Stock shall, to the extent such power is at the
time conferred on them by applicable law, also have the power to make,
alter, amend or repeal the By-laws of the Corporation, provided that any
proposal by any stockholder at any time when there is an Interested Person
or by a director who is not an Independent Director to make, alter, amend
or repeal the By-laws shall require approval by the affirmative vote
described in article VIII, Section A, unless either (a) such action has
been approved by a majority of the Board of Directors prior to such
Interested Person first becoming an Interested Person or (b) prior to such
Interested Person first becoming an Interested Person, a majority of the
Board of Directors has approved such Interested Person becoming an
Interested Person and, subsequently, a majority of the Independent
Directors has approved such action.
2. To authorize and cause to be executed mortgages and liens upon the
real and personal property of the Corporation.
3. To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
4. By a majority of the whole Board of Directors, to designate one or
more committees, each committee to consist of one or more of the directors
of the Corporation. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. The By-laws may
provide that in the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified
from voting, whether or not constituting a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place
of any such absent disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, or in the By-laws of
the Corporation, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of
the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall
have the power or authority in reference to amending the Certificate of
Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of
4
<PAGE> 5
shares of stock adopted by the Board of Directors as provided in
Article VI hereof, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any
other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize
the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the By-laws of
the Corporation; and, unless the resolution or By-laws expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law
of the State of Delaware.
5. When and as authorized by the stockholders in accordance with
statute, to sell, lease or exchange all or substantially all of the
property and assets of the Corporation, including its goodwill and its
corporate franchises, upon such terms and conditions and for such
consideration, which may consist in whole or in part of money or property
including shares of stock in, and/or other securities of, any other
corporation or corporations, as the Board of Directors shall deem expedient
and for the best interests of the Corporation.
C. In addition to any other considerations which the Board of Directors
may lawfully take into account, in determining whether to take or to refrain
from taking corporate action on any matter, including proposing any matter to
the stockholders of the Corporation, the Board of Directors may take into
account the long-term as well as the short-term interests of the Corporation and
its stockholders (including the possibility that these interests may be best
served by the continued independence of the Corporation), customers, employees
and other constituencies of the Corporation and its subsidiaries, including the
effect upon communities in which the Corporation and its subsidiaries do
business. In so evaluating any such determination, the Board of Directors shall
be deemed to be performing their duties and acting in good faith and in the best
interests of the Corporation within the meaning of Section 145 of the General
Corporation Law of the State of Delaware, or any successor provision.
D. Nomination and Election of Directors. Subject to the rights of
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, dissolution or winding-up,
nominations for the election of directors may be made by the Board of Directors
or a committee or person appointed by the Board of Directors or by any
stockholder entitled to vote in the election of directors generally. However,
any stockholder entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at an annual meeting only
pursuant to the Corporation's notice of such meeting or if written notice of
such stockholder's
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<PAGE> 6
intent to make such nomination or nominations has been received by the Secretary
of the Corporation not less than sixty nor more than ninety days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
thirty days or delayed by more than sixty days from such anniversary, notice by
the stockholder to be timely must be so received not earlier than the ninetieth
day prior to such annual meeting and not later than the close of business on the
later of (1) the sixtieth day prior to such annual meeting or (2) the tenth day
following the day on which notice of the date of the annual meeting was mailed
or public disclosure thereof was made by the Corporation, whichever first
occurs. For purposes of calculating the first such notice period following
adoption of this Certificate of Incorporation, the first anniversary of the 1993
annual meeting shall be deemed to be April 1, 1994. Each such notice shall set
forth: (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
relating to the nomination or nominations; (d) the class and number of shares of
the Corporation which are beneficially owned by such stockholder and the person
to be nominated as of the date of such stockholder's notice and by any other
stockholders known by such stockholder to be supporting such nominees as of the
date of such stockholder's notice; (e) such other information regarding each
nominee proposed by such stockholder as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission; and (f) the consent of each nominee to serve as a director of the
Corporation if so elected.
In addition, in the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors, any stockholder
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at a special meeting only pursuant to the
Corporation's notice of meeting or if written notice of such stockholder's
intent to make such nomination or nominations, setting forth the information and
complying with the form described in the immediately preceding paragraph, has
been received by the Secretary of the Corporation not earlier than the ninetieth
day prior to such special meeting and not later than the close of business on
the later of (i) the sixtieth day prior to such special meeting or (ii) the
tenth day following the day on which notice of the date of the special meeting
was mailed or public disclosure thereof was made by the Corporation, whichever
comes first.
No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Article VI, Section D. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Article VI, Section D, and if
he or she should so determine, the defective nomination shall be disregarded.
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Elections of directors need not be by written ballot unless the By-laws
of the Corporation shall so provide.
ARTICLE VII
STOCKHOLDERS
A. Meetings of Stockholders; Books. Meetings of the stockholders may be
held within or without the State of Delaware, as the By-laws may provide. Any
action required or permitted to be taken by the stockholders of the Corporation
must be effected either at a duly called annual or special meeting of such
stockholders or by a consent in writing executed by all such stockholders.
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
dissolution or winding-up, special meetings of the stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors. The books of
the Corporation may be kept (subject to any provision contained in the statutes)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the By-laws of the Corporation.
Except as otherwise required by law or by this Certificate of
Incorporation, the holders of not less than a majority in voting power of the
shares entitled to vote at any meeting of stockholders, present in person or by
proxy, shall constitute a quorum, and the act of the holders of a majority in
voting power of the shares present in person or by proxy and entitled to vote on
the subject matter shall be deemed the act of the stockholders in all matters
other than the election of directors. Directors shall be elected by a plurality
of the vote of the shares present in person or by proxy and entitled to vote on
the election of directors. If a quorum shall fail to attend any meeting, the
presiding officer may adjourn the meeting to another place, date or time. If a
notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with
one-third (1/3) in voting power of the shares entitled to vote thereat
constituting a quorum, then except as otherwise required by law, one-third (1/3)
in voting power of the shares entitled to vote at such adjourned meeting,
present in person or by proxy, shall constitute a quorum, and, except as
otherwise required by law or this Certificate of Incorporation, all matters
other than the election of directors shall be determined by the holders of a
majority in voting power of the shares present in person or by proxy and
entitled to vote on the subject matter. Directors shall be elected by a
plurality of the vote of the shares present in person or by proxy and entitled
to vote on the election of directors.
B. Proposals of Stockholders. At any meeting of the stockholders, only
such business shall be conducted as shall have been properly brought before such
meeting. To be properly brought before an annual meeting, business must be (1)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (2) otherwise properly brought before
the meeting by or at the direction of the
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<PAGE> 8
Board of Directors or (3) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
received not less than sixty days nor more than ninety days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than thirty
days or delayed by more than sixty days from such anniversary, notice by the
stockholder to be timely must be so received not earlier than the ninetieth day
prior to such annual meeting and not later than the close of business on the
later of (1) the sixtieth day prior to such annual meeting or (2) the tenth day
following the date on which notice of the date of the annual meeting was mailed
or public disclosure thereof was made, whichever first occurs. For purposes of
calculating the first such notice period following adoption of this Certificate
of Incorporation, the first anniversary of the 1993 annual meeting shall be
deemed to be April 1, 1994. Each such notice shall set forth as to each matter
the stockholder proposes to bring before the annual meeting: (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the meeting; (b) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (c) the class, series and number of shares of the Corporation
which are beneficially owned by the stockholder and (d) any material interest of
the stockholder in such business. To be properly brought before a special
meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors or
(ii) otherwise properly brought before the meeting by or at the direction of the
Board of Directors.
No business shall be conducted at any meeting of the stockholders
except in accordance with the procedures set forth in this Article VII, Section
B. The presiding officer of the meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Article VII, Section B,
and if he or she should so determine, any such business not properly brought
before the meeting shall not be transacted. Nothing herein shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor
provision.
ARTICLE VIII
BUSINESS TRANSACTIONS
A. In addition to any affirmative vote required by law or this
Certificate of Incorporation or the By-laws of the Corporation, and except as
otherwise expressly provided in Section B of this Article VIII, a Business
Transaction (as hereinafter defined) with, or proposed by or on behalf of, any
Interested Person (as hereinafter defined) or any Affiliate (as hereinafter
defined) of any Interested Person or any person who thereafter would be an
Affiliate of such Interested Person shall require approval by the affirmative
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<PAGE> 9
vote of not less than two-thirds (2/3) of the votes entitled to be cast by
holders of all the then outstanding Voting Stock (as hereinafter defined),
voting together as one class, excluding Voting Stock beneficially owned by such
Interested Person. Such affirmative vote shall be required notwithstanding the
fact that no vote may be required, or that a lesser percentage may be specified,
by law or in any agreement with any national securities exchange or otherwise.
B. The provisions of Section A of this Article VIII shall not be
applicable to any particular Business Transaction, and such Business Transaction
shall require only such affirmative vote, if any, as is required by law or by
any other provision of this Certificate of Incorporation or the By-laws of the
Corporation, or any agreement with any national securities exchange, if all of
the conditions specified in either of the following paragraphs (1) or (2) of
this Section B are met:
1. Prior to such person becoming an Interested Person, either
(a) the Business Transaction shall have been approved by a majority of
the Board of Directors or (b) a majority of the Board of Directors
shall have approved such Interested Person becoming an Interested
Person and, subsequently, a majority of the Independent Directors (as
hereinafter defined) shall have approved the Business Transaction.
2. The aggregate amount of the cash and the Fair Market Value
(as hereinafter defined) as of the date of the consummation of the
Business Transaction of consideration other than cash to be received
per share by holders of the Common Stock in such Business Transaction
shall be at least equal to the higher of the following (it being
intended that the requirements of this paragraph (2) shall be required
to be met with respect to every share of outstanding Common Stock,
whether or not the Interested Person has previously acquired any shares
of Common Stock):
(a) (if applicable) the highest per-share price (including
any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Person for any shares of Common Stock
of the Corporation acquired by it (i) within the five-year period
immediately prior to the first public announcement of the terms of
the proposed Business Transaction (the "Announcement Date") or
(ii) in the transaction in which it became an Interested Person,
whichever is higher; and
(b) the Fair Market Value per share of the Common Stock on
the Announcement Date or on the date on which the Interested
Person became an Interested Person, whichever is higher.
C. The following definitions shall apply with respect to this Article
VIII:
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<PAGE> 10
1. The term "Affiliate" shall mean a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, a specified person.
2. A person shall be a "beneficial owner" of any Capital Stock (a)
which such person or any of its Affiliates beneficially owns, directly or
indirectly; (b) which such person or any of its Affiliates has, directly or
indirectly, (i) the right to acquire (whether such right is execrable
immediately or subject only to the passage of time or the occurrence of one or
more events), pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or
understanding; provided, however, that a person shall not be deemed the
beneficial owner of any security if the agreement, arrangement or understanding
to vote such security arises solely from a revocable proxy or consent
solicitation made pursuant to and in accordance with the Exchange Act, and is
not also then reportable on Schedule 13D under the Exchange Act (or a comparable
or successor report); or (c) which is beneficially owned, directly or
indirectly, by any other person with which such person or any of its Affiliates
has any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Capital Stock (except to the
extent permitted by the proviso of clause (b) (ii) above). For the purposes of
determining whether a person is an Interested Person pursuant to paragraph (6)
of this Section C, the number of shares of Capital Stock deemed to be
outstanding shall include authorized, but unissued or treasury shares of Capital
Stock deemed beneficially owned by such person through application of this
paragraph (2) of Section C, but shall not include any other authorized, but
unissued or treasury shares of Capital Stock that may be issuable pursuant to
any agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
3. The term "Business Transaction" shall mean any of the following
transactions when entered into by the Corporation or a subsidiary of the
Corporation with, or upon a proposal by or on behalf of, any Interested Person
or any Affiliate of any Interested Person:
(a) any merger or consolidation of the Corporation or any
subsidiary with (i) any Interested Person, or (ii) any other
corporation which is, or after such merger or consolidation would
be, an Affiliate of an Interested Person;
(b) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one transaction or a series of
transactions), except proportionately as a stockholder of the
Corporation, to or with the Interested Person of assets of the
Corporation (other than Capital Stock (as hereinafter defined)) or
of any subsidiary of the Corporation which assets have an
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aggregate market value equal to ten percent (10%) or more of the
aggregate market value of all the outstanding stock of the Corporation;
(c) any reclassification of securities, recapitalization or other
transaction involving the Corporation or any subsidiary of the Corporation
which has the effect, directly or indirectly, of (i) increasing the
proportionate share of the stock of any class or series, or securities
convertible into the stock of any class or series, of the Corporation or of
any such subsidiary which is owned by the Interested Person, except as a
result of immaterial changes due to fractional share adjustments or as a
result of any purchase or redemption of any shares of stock not caused,
directly or indirectly, by the Interested Person or (ii) increasing the
proportionate voting power, whether or not then exercisable, of an
Interested Person in any class or series of stock of the Corporation or any
subsidiary of the Corporation; or
(d) the adoption of any plan or proposal by or on behalf of an
Interested Person for the liquidation or dissolution of the Corporation.
4. The term "Capital Stock" shall mean all capital stock of the
Corporation authorized to be issued from time to time under Article IV of this
Certificate of Incorporation.
5. The term "Fair Market Value" shall mean (a) in the case of stock,
the highest closing sale price during the 30-day period immediately preceding
the date in question of a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite
Tape, on the New York Stock Exchange, or if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which such stock is listed or, if such stock is not listed
on any such exchange, the highest closing bid quotation with respect to a share
of such stock during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations System or
any similar system then in use, or if no such quotations are available, the fair
market value on the date in question of a share of such stock as determined by a
majority of the Independent Directors in good faith, in each case with respect
to any class or series of such stock, appropriately adjusted for any dividend or
distribution in shares of such stock or any subdivision or reclassification of
outstanding shares of such stock into a greater number of shares of such stock
or any combination or reclassification of outstanding shares of such stock into
a smaller number of shares of such stock; and (b) in the case of property other
than cash or stock, the fair market value of such property on the date in
question as determined by a majority of the Independent Directors in good faith.
6. The term "Independent Directors" shall mean the members of the Board
of Directors who are not Affiliates or representatives of, or associated with,
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an Interested Person and who were either directors of the Corporation
prior to any person becoming an Interested Person or were recommended
for election or elected to succeed such directors by a vote which
includes the affirmative vote of a majority of the Independent
Directors.
7. The term "Interested Person" shall mean any person (other
than the Corporation, any subsidiary, any profit-sharing, employee
stock ownership or other employee benefit plan of the Corporation or
any subsidiary or any trustee of or fiduciary with respect to any such
plan when acting in such capacity) who (a) is the beneficial owner of
Voting Stock representing ten percent (10%) or more of the votes
entitled to be cast by the holders of all then outstanding shares of
Voting Stock; or (b) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in question
was the beneficial owner of Voting Stock representing ten percent (10%)
or more of the votes entitled to be cast by holders of all then
outstanding shares of Voting Stock.
8. The term "person" shall mean any individual, corporation,
partnership, unincorporated association, trust or other entity.
9. The term "subsidiary" means any company of which a
majority of the voting securities are owned, directly or indirectly, by
the Corporation.
10. The term "Voting Stock" shall mean Capital Stock of any
class or series entitled to vote in the election of directors
generally.
D. A majority of the Independent Directors shall have the power and
duty to determine, on the basis of information known to them after reasonable
inquiry, for the purposes of (1) this Article VIII, all questions arising under
this Article VIII including, without limitation (a) whether a person is an
Interested Person, (b) the number of shares of Capital Stock or other securities
beneficially owned by any person; and (c) whether a person is an Affiliate of
another; and (2) this Certificate of Incorporation, the question of whether a
person is an Interested Person. Any such determination made in good faith shall
be binding and conclusive on all parties.
E. Nothing contained in this Article VIII shall be construed to relieve
any Interested Person from any fiduciary obligation imposed by law.
ARTICLE IX
LIMITED LIABILITY; INDEMNIFICATION
A. Limited Liability. No person shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided, however, that the foregoing shall not eliminate or
limit the liability of a director (1) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a
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knowing violation of law, (3) under Section 174 of the General
Corporation Law of the State of Delaware or (4) for any transaction
from which the director derived an improper personal benefit. If the
General Corporation Law of the State of Delaware is amended hereafter
to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent
permitted by the general Corporation Law of the State of Delaware, as
so amended. Any amendment, repeal or modification of this Article IX,
Section A shall not adversely affect any right or protection of a
director of the Corporation existing hereunder with respect to any act
or omission occurring prior to such amendment, repeal or modification.
B. Indemnification. Each person who is or was a director or
officer of the Corporation, and each such person who is or was serving
at the request of the Corporation as a director or officer of another
corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans
maintained or sponsored by the Corporation (including the heirs,
executors, administrators and estate of such person) shall be
indemnified and advanced expenses by the Corporation to the fullest
extent permitted from time to time by the General Corporation Law of
the State of Delaware or any other applicable laws as presently or
hereafter in effect. The Corporation may, to the extent authorized in
the By-laws of the Corporation or from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation or any other
person to the fullest extent of the provisions of this Article with
respect to the indemnification and advancement of expenses of directors
and officers of the Corporation. Without limiting the generality or the
effect of the foregoing, the Corporation may enter into one or more
agreements with any person which provide for indemnification greater or
different than that provided in this Article IX, Section B. Any
amendment, repeal or modification of this Article IX, Section B shall
not adversely affect any right or protection existing hereunder or
pursuant hereto immediately prior to such amendment, repeal or
modification.
ARTICLE X
AMENDMENTS
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights
conferred upon stockholders herein are granted subject to this
reservation; provided, however, that notwithstanding any other
provisions of this Certificate of Incorporation or the By-laws of the
Corporation (and notwithstanding the fact that a lesser percentage or
separate class vote may be specified by law, this Certificate of
Incorporation or the By-laws of the Corporation), any proposal by any
stockholder at any time when there is an Interested Person or by a
director who is not an Independent Director to amend, alter, change or
repeal any provision of paragraph 2 of Section A of Article VI, Article
VIII, or Article IX or to adopt any provision inconsistent
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<PAGE> 14
with any of such provisions, shall require approval by the affirmative vote
described in Section A of Article VIII unless either (1) such action has been
approved by a majority of the Board of Directors prior to such Interested Person
first becoming an Interested Person or (2) prior to such Interested Person first
becoming an Interested Person, a majority of the Board of Directors has approved
such Interested Person becoming an Interested Person and, subsequently, a
majority of the Independent Directors has approved such action.
ARTICLE XI
BY-LAWS
The original By-laws of the Corporation shall be adopted by the Sole
Incorporator.
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for
the purpose of forming a corporation under the laws of the State of Delaware, do
make this certificate, hereby declaring and certifying that this is my act and
deed and the facts herein stated are true, and accordingly have hereunto set my
hand this 1st day of April, 1993.
/s/ Joseph M. Fernandez
------------------------------
Joseph M. Fernandez
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<PAGE> 15
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
ELECTROGLAS, INC.
Electroglas, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Electroglas, Inc.
resolutions were duly adopted setting forth a proposed amendment to the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the first paragraph of Article IV thereof to read
in its entirety as follows:
"The total number of shares of stock which the Corporation shall have
authority to issue is 21,000,000 shares, with a par value of $.01 each.
Said shares shall consist of 1,000,000 shares of preferred stock and
20,000,000 shares of common stock."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, an annual meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE> 16
IN WITNESS WHEREOF, Electroglas, Inc. has caused this certificate to be
signed by William J. Cornwell, its President, and attested by Armand J. Stegall,
its Secretary, this 24th day of May, 1994.
ELECTROGLAS, INC.
By: /s/ William J. Cornwell
---------------------------------
William J. Cornwell
President
ATTEST:
/s/ Armand J. Stegall
- --------------------------------
Armand J. Stegall, Secretary
<PAGE> 17
CERTIFICATE OF CORRECTION
TO
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION
BEFORE PAYMENT OF CAPITAL
OF
ELECTROGLAS, INC.
Pursuant to Section 107 of the General Corporation Law of the State of
Delaware, the undersigned, being the Sole Incorporator named in the Certificate
of Incorporation filed in the office of the Secretary of State of the State of
Delaware, does hereby certify as follows:
FIRST. A Certificate of Amendment to Certificate of Incorporation
Before Payment of Capital was filed with the Secretary of State of the State of
Delaware on April 12, 1993 and that said Certificate of Amendment requires
correction as permitted by Section 103 of the General Corporation Law of the
State of Delaware.
SECOND. The inaccuracy of said Certificate of Amendment to be corrected
is that the deletion and substitution referred to therein is made to Article VI,
not Article Fourth, of the Certificate of Incorporation of the Corporation.
THIRD: Article Third of the Certificate of Amendment is corrected by
deleting the words "Article Fourth of the Certificate of Incorporation" and
substituting therefor the words "Article VI of the Certificate of
Incorporation."
I, THE UNDERSIGNED, being the Sole Incorporator named in the
Certificate of Incorporation of the Corporation, do make this certificate,
hereby declaring and certifying
<PAGE> 18
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 13th day of April, 1993.
/s/ Joseph M. Fernandez
--------------------------------
Joseph M. Fernandez
Sole Incorporator
80 Pine Street
New York, New York 10005
<PAGE> 19
CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION
BEFORE PAYMENT OF CAPITAL
OF
ELECTROGLAS, INC.
Pursuant to Section 107 of the General Corporation Law of the State of
Delaware, the undersigned, being the Sole Incorporator named in the Certificate
of Incorporation filed in the office of the Secretary of State of the State of
Delaware, does hereby certify as follows:
FIRST. This Corporation has not yet received any payment for any of its
capital stock.
SECOND. Directors were not named in the original Certificate of
Incorporation of the Corporation, nor have they yet been elected.
THIRD. The Sole Incorporator of the Corporation pursuant to Section 241
of the General Corporation Law of the State of Delaware has adopted a resolution
providing for the deletion in its entirety of Paragraph 1 of Section A of
Article Fourth of the Certificate of Incorporation and the substitution of the
following in lieu thereof:
1. The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of such number of
directors as is determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors; provided,
however, that in no event shall the number of directors be less than two. The
directors shall be divided into three classes, designated Class I, Class II and
Class III. So long as there are more than two directors, each class shall
consist, as nearly as may be possible, of one-third (1/3) of the total number of
directors constituting the entire Board of Directors. The initial classes shall
be elected as follows: Class I directors shall be elected for a one-year term,
Class II directors for a two-year term and Class III directors for a three-year
term. At each succeeding annual meeting of stockholders, successors to the class
of directors whose term expires at that annual meeting shall be elected for
three-year terms. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible, and any additional director
of any class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of that
class, but in no case will a
<PAGE> 20
decrease in the number of directors shorten the term of any incumbent director.
A director shall hold office until the annual meeting for the year in which his
or her term expires and until his or her successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Except as otherwise required by law,
any vacancy on the Board of Directors that results from an increase in the
number of directors and any other vacancy occurring in the Board of Directors
shall be filled by a majority of the directors then in office, even if less than
a quorum, or by a sole remaining director. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of his or her predecessor.
I, THE UNDERSIGNED, being the Sole Incorporator named in the
Certificate of Incorporation of the Corporation, do make this certificate,
hereby declaring and certifying that this is my act and deed and the facts
herein stated are true, and accordingly have hereunto set my hand this 9th day
of April, 1993.
/s/ Joseph M. Fernandez
----------------------------------
Joseph M. Fernandez
Sole Incorporator
80 Pine Street
New York, New York 10005
<PAGE> 1
BY-LAWS
OF
ELECTROGLAS, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meeting. The annual meeting of the stockholders of
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Board of
Directors, for the purpose of electing Directors and for the transaction of such
other business as may be properly brought before the meeting.
SECTION 2. Special Meetings. Any special meeting of the stockholders
shall be held on such date, at such time and at such place within or without the
State of Delaware as the Board of Directors may designate.
SECTION 3. Notice of Meetings. Except as otherwise provided in these
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) calendar days before the
date of the meeting to each stockholder of the Corporation entitled to vote at
such meeting at such stockholder's address as it appears on the records of the
Corporation. The notice shall state the place, date and hour of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called.
SECTION 4. Adjourned Meetings. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the stockholders, or the holders of any class of stock
entitled to vote separately as a class, as the case may be, may transact any
business which might have been transacted
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<PAGE> 2
by them at the original meeting. If the adjournment is for more than thirty (30)
calendar days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting.
SECTION 5. Organization. The Chairman shall act as chairman of all
meetings of the stockholders. In the absence of the Chairman, the President or,
in his or her absence, any Vice Chairman or Vice President designated by the
Board or, in the absence of any such officer, any person designated by the
holders of a majority in number of the shares of stock of the Corporation
present in person or represented by proxy and entitled to vote at such meeting
shall act as chairman of the meeting.
The Secretary of the Corporation shall act as secretary of all meetings
of the stockholders, but, in the absence of the Secretary, the chairman of the
meeting may appoint any person to act as secretary of the meeting. It shall be
the duty of the Secretary to prepare and make, at least ten (10) calendar days
before every meeting of stockholders, a complete list of stockholders entitled
to vote at such meeting, arranged in alphabetical order and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held,
for the ten (10) calendar days next preceding the meeting, to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, and shall be produced and kept at the time and place of the
meeting during the whole time thereof and subject to the inspection of any
stockholder who may be present.
SECTION 6. Voting. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of
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<PAGE> 3
the capital stock of the Corporation registered in the name of such stockholder
upon the books of the Corporation. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. When
directed by the presiding officer or upon the demand of any stockholder, the
vote upon any matter before a meeting of stockholders shall be by ballot. Except
as otherwise provided by law or by the Certificate of Incorporation, (a)
Directors shall be elected by a plurality of the votes cast at a meeting of
stockholders by the stockholders entitled to vote in the election, and (b)
whenever any corporate action other than the election of Directors is to be
taken, it shall be authorized by a majority of the votes cast at a meeting of
stockholders by the stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.
SECTION 7. Procedure. At each meeting of stockholders, the chairman of
the meeting shall fix and announce the date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at
the meeting and shall determine the order of business and all other matters of
procedure. Except to the extent inconsistent with any such rules and regulations
as adopted by the Board of Directors, the chairman of the meeting may establish
rules, which need not be in writing, to maintain order and safety and for the
conduct of the meeting. Without limiting the foregoing, he or she may:
(a) restrict attendance at any time to bon fide stockholders
of record and their proxies and other persons in attendance at the invitation of
the chairman;
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<PAGE> 4
(b) restrict dissemination of solicitation materials and use
of audio or visual recording devices at the meeting;
(c) establish seating arrangements;
(d) adjourn the meeting without a vote of the stockholders,
whether or not there is a quorum present; and
(e) make rules governing speeches and debate including time
limits and access to microphones.
The chairman of the meeting acts in his or her absolute discretion and
his or her rulings are not subject to appeal.
SECTION 8. Inspectors. The Board of Directors by resolution shall, in
advance of any meeting of stockholders, appoint one or more inspectors, which
inspector or inspectors may include individuals who serve the Corporation in
other capacities, including, without limitation, as officers, employees, agents
or representatives of the Corporation, to act at the meeting and make a written
report thereof. One or more persons may be designated by the Board as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the chairman of the
meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before discharging his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall have the
duties prescribed by the General Corporation Law of the State of Delaware.
4
<PAGE> 5
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. Place of Meeting. The Board of Directors may hold its
meetings in such place or places in the State of Delaware or outside the State
of Delaware as the Board from time to time shall determine.
SECTION 2. Regular Meeting. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors, but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five (5) calendar days before the first meeting held in pursuance thereof.
SECTION 3. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by direction of the Chairman, the President, a
Vice Chairman or by any three (3) of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting
shall be given (i) by mailing the same at least four (4) calendar days before
the meeting or (ii) by causing the same to be transmitted by telecopier,
telegraph or cable (A) at least twenty-four (24) hours before the meeting or (B)
in the case of a meeting held in accordance with Section 7 of this Article II,
at least six (6) hours before the meeting, in each case to each Director. Unless
otherwise indicated in the notice thereof, any and all business other than an
amendment of these By-Laws may be transacted at any special meeting, and an
amendment of these By-Laws may be acted upon if the notice of the meeting shall
have stated that the amendment of these By-Laws is one of the purposes of the
meeting. At any meeting at which every Director shall be present, even though
without any notice, any business may be transacted, including the amendment of
these By-Laws.
5
<PAGE> 6
SECTION 4. Quorum. A majority of the members of the Board of Directors
in office (but in no case less than two (2) Directors) shall constitute a quorum
for the transaction of business, and, except as otherwise provided in the
Certificate of Incorporation, the vote of the majority of the Directors present
at any meeting of the Board of Directors at which a quorum is present shall be
the act of the Board of Directors. If at any meeting of the Board there is less
than a quorum present, a majority of those present may adjourn the meeting from
time to time.
SECTION 5. Organization. The Chairman shall act as chairman and preside
at all meetings of the Board of Directors. In the absence of the Chairman, the
President or, in his or her absence, any Vice Chairman or Vice President shall
act as chairman of the meeting. The Secretary of the Corporation shall act as
secretary of all meetings of the Directors, but, in the absence of the
Secretary, the chairman of the meeting may appoint any person to act as
secretary of the meeting.
SECTION 6. Committees. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
SECTION 7. Conference Telephone Meetings. Unless otherwise restricted
by the Certificate of Incorporation or by these By-Laws, the members of the
Board of Directors or any committee designated by the Board may participate in a
meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
6
<PAGE> 7
SECTION 8. Consent of Directors or Committee in Lieu of Meeting. Unless
otherwise restricted by the Certificate of Incorporation or by these By-Laws,
any action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
SECTION 9. Compensation. For their services as Directors or as members
of committees, every Director shall receive such compensation, attendance fees
and other allowances as determined by resolution of the Board.
ARTICLE III
OFFICERS
SECTION 1. Officers. The officers of the Corporation shall be a
Chairman, a President, one or more Vice Presidents, a Secretary, a Treasurer and
a Controller, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 2 of this Article III.
A chief executive officer shall be designated by the Board from among the
officers. The Chairman, the President, one or more Vice Presidents, the
Secretary, the Treasurer and the Controller shall be elected by the Board of
Directors at its first meeting after each annual meeting of the stockholders.
The failure to hold such election shall not of itself terminate the term of
office of any officer. All officers shall hold office at the pleasure of the
Board of Directors. Any officer may resign at any time upon written notice to
the Corporation. Officers may, but need not, be Directors. Any number of offices
may be held by the same person.
All officers shall be subject to removal, with or without cause, at any
time by the Board of Directors. The removal of an officer without cause shall be
without prejudice to his or her contract rights, if any. The election or
appointment of an officer shall not of
7
<PAGE> 8
itself create contract rights. Any vacancy caused by the death of any officer,
his or her resignation, his or her removal, or otherwise, may be filled by the
Board of Directors, and any officer so elected shall hold office at the pleasure
of the Board of Directors.
The officers shall have such authority and shall perform such duties as
from time to time may be determined by the Board of Directors, the Chairman, the
President or a Vice Chairman or as shall be confirmed or required by law or
these By-Laws or as shall be incidental to the office.
SECTION 2. Additional Officers. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including
Vice Chairmen, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable, and such officers shall have such
authority and shall perform such duties as may from time to time be assigned to
them by the Board of Directors, the Chairman, the President or a Vice Chairman
or as shall be conferred or required by law or these By-Laws or as shall be
incidental to the office.
ARTICLE IV
STOCK, SEAL AND FISCAL YEAR
SECTION 1. Transfer of Shares. Shares of stock of the Corporation shall
be transferred on the books of the Corporation by the record holder thereof, in
person or by such holder's attorney duly authorized in writing, upon surrender
and cancellation of certificates for the number of shares of stock to be
transferred, except as otherwise required by law.
SECTION 2. Regulations. The Board of Directors, the Chairman, the
President, a Vice Chairman or the Secretary shall have power and authority to
make such rules and
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<PAGE> 9
regulations as it or such officer may deem expedient concerning the issue,
transfer, registration or replacement of certificates for shares of stock of the
Corporation.
SECTION 3. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, as the case may be, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) calendar days
nor less than ten (10) calendar days before the date of such meeting, nor more
than sixty (60) calendar days prior to any other action.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 4. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
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<PAGE> 10
Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors shall determine. If the date fixed for
the payment of any dividend shall in any year fall upon a legal holiday, then
the dividend payable on such date shall be paid on the next day not a legal
holiday.
SECTION 5. Corporate Seal. The Corporation shall have a suitable seal,
containing the name of the Corporation. The Secretary shall have custody of the
seal, but he or she may authorize others to keep and use a duplicate seal.
SECTION 6. Fiscal Year. The fiscal year of the Corporation shall be
such fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE V
MISCELLANEOUS PROVISIONS
SECTION 1. Waivers of Notice. Whenever any notice whatever is required
to be given by law, by the Certificate of Incorporation or by these By-Laws to
any person or persons, a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time stated therein,
shall be deemed equivalent thereto. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened.
SECTION 2. Indemnification of Employees. Each person who is or was an
employee of the Corporation, and each such person who is or was serving at the
written request of the Corporation as an employee of another corporation, or of
a partnership, joint venture, trust or other enterprise (including the heirs,
executors, administrators and
10
<PAGE> 11
estate of such person), shall be indemnified by the Corporation to the fullest
extent permitted from time to time by the General Corporation Law of the State
of Delaware or any other applicable laws as presently or hereafter in effect.
11
<PAGE> 1
Exhibit 11.1
KNIGHTS TECHNOLOGY, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding 4,965,509 4,522,493 4,381,608
Common stock equivalents
Preferred stock - 4,599,978 4,599,978
Employee stock options - 977,482 1,062,961
---------- ----------- -----------
Shares used in computation of net income (loss) per common share 4,965,509 10,099,953 10,044,547
========== =========== ===========
Net income (loss) $ (406,177) $ 469,568 $ 457,390
========== =========== ===========
Net income (loss) per common share $(0.08) $0.05 $0.05
========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-4) and related Prospectus of Electroglas,
Inc. for the registration of 1,500,000 shares of its common stock and to the
incorporation by reference therein of our reports dated January 21, 1997 (except
for Note 11, as to which the date is March 12, 1997), with respect to the
consolidated financial statements of Electroglas, Inc. incorporated by reference
in its Annual Report (Form 10-K) for the year ended December 31, 1996 and the
related financial statement schedule included therein, filed with the Securities
and Exchange Commission.
/s/ Ernst & Young LLP
San Jose, California
April 2, 1997
<PAGE> 1
EXHIBIT 23.3
Report on Financial Statement Schedule and
Consent of Independent Certified Public Accountants
The Board of Directors
Knights Technology, Inc.:
The audits referred to in our report dated March 3, 1997, except as to Note 9,
which is as of March 13, 1997, included the related financial statement schedule
as of December 31, 1996, and for each of the years in the three-year period
ended December 31, 1996, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, 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 use of our report included herein and to the reference to our
firm under the heading "Experts" in the registration statement
/s/ KPMG PEAT MARWICK LLP
San Jose, California
April 4, 1997
