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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended June 30, 1998
Commission File Number 0-21626
ELECTROGLAS, INC.
(exact name of registrant as specified in its charter)
DELAWARE 77-0336101
(state or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
2901 Coronado Drive
Santa Clara, CA 95054
Telephone: (408) 727-6500
(address of principal executive
offices and telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
--- ---
As of July 31, 1998, 19,723,435 shares of the Registrant's common stock, $0.01
par value, were issued and outstanding.
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INDEX
ELECTROGLAS, INC.
<TABLE>
<CAPTION>
Page No.
-------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Consolidated Condensed Financial Statements
Consolidated Condensed Statements of Operations -- Three months
and six months ended June 30, 1998 and June 30, 1997 .......... 3
Consolidated Condensed Balance Sheets -- June 30, 1998
and December 31, 1997 ......................................... 4
Consolidated Condensed Statements of Cash Flows -- Six months
ended June 30, 1998 and June 30, 1997 ......................... 5
Notes to Consolidated Condensed Financial Statements --
June 30, 1998 ................................................. 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations ................. 9
Item 3 Quantitative and Qualitative Disclosure About Market Risks ..... 14
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security-Holders ............ 15
--
Item 5 Other Information .............................................. 15
Item 6 Exhibits and Reports on Form 8-K ............................... 15
SIGNATURES ............................................................. 16
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 27,538 $ 36,075 $ 64,403 $ 61,626
Cost of sales 20,652 20,211 41,830 35,878
------- ------- ------- -------
Gross profit 6,886 15,864 22,573 25,748
------- ------- ------- -------
Operating expenses:
Engineering, research and development 7,948 5,310 16,463 9,795
Selling, general and administrative . 8,935 7,590 18,007 13,925
In-process research and development . -- 23,500 -- 23,500
------- ------- ------- -------
Total operating expenses 16,883 36,400 34,470 47,220
------- ------- ------- -------
Operating loss (9,997) (20,536) (11,897) (21,472)
Interest income 1,350 1,246 2,711 2,468
Other income (expense), net 68 (54) (86) (300)
------- ------- ------- -------
Loss before income taxes (8,579) (19,344) (9,272) (19,304)
Provision (benefit) for income taxes (3,432) 1,371 (3,709) 1,385
------- ------- ------- -------
Net loss $ (5,147) $(20,715) $ (5,563) $(20,689)
======= ======= ======= =======
Net loss per share $ (0.26) $ (1.14) $ (0.29) $ (1.16)
======= ======= ======= =======
Shares used in calculations 19,450 18,138 19,411 17,800
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements
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ELECTROGLAS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Unaudited) (1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 26,119 $ 20,259
Short-term investments 106,583 104,719
Accounts receivable, net 22,413 35,852
Inventories 19,490 26,032
Prepaid expenses and other current assets 7,847 4,577
Deferred income taxes 7,613 7,613
--------- ---------
Total current assets 190,065 199,052
Deferred income taxes 1,214 1,214
Equipment and leasehold improvements, net 14,500 16,392
Intangible assets, net 11,198 12,525
Other assets 805 950
--------- ---------
Total assets $ 217,782 $ 230,133
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings $ 2,219 $ 1,160
Accounts payable 4,998 7,424
Accrued liabilities 13,059 18,045
--------- ---------
Total current liabilities 20,276 26,629
Deferred income taxes 3,767 3,770
Stockholders' equity:
Preferred stock, $0.01 par value;
authorized 1,000; none outstanding -- --
Common stock, $0.01 par value;
authorized 40,000; issued and outstanding 19,784 at June 30,
1998 and 20,543 at December 31, 1997 198 205
Additional paid-in capital 130,186 133,600
Deferred stock compensation (835) (983)
Retained earnings 64,200 78,736
Accumulated other comprehensive loss (10) (32)
--------- ---------
193,739 211,526
Less cost of common stock in treasury;
none at June 30, 1998 and 800 at
December 31, 1997 -- 11,792
--------- ---------
Total stockholders' equity 193,739 199,734
--------- ---------
Total liabilities and stockholders' equity $ 217,782 $ 230,133
========= =========
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated financial statements for the year ended December 31, 1997.
See accompanying notes to consolidated condensed financial statements
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ELECTROGLAS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30 ,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,563) $ (20,689)
Changes to income not affecting cash 5,999 26,831
Changes in current assets and current liabilities
net of effects from acquisition 9,299 (9,163)
--------- ---------
Cash provided by (used in) operating activities 9,735 (3,021)
Cash flow from investing activities:
Capital expenditures (1,862) (5,055)
Purchases of investments (76,459) (86,919)
Maturities of investments 74,058 106,757
Other assets (138) (139)
Cash acquired in acquisition -- 973
--------- ---------
Cash provided by (used in) investing activities (4,401) 15,617
Cash flow from financing activities:
Proceeds from short-term borrowings 1,059 1,048
Payments of short-term borrowings -- (1,250)
Sales of common stock, net of issuance costs 2,669 2,368
Purchases of treasury stock (3,271) (473)
--------- ---------
Cash provided by financing activities 457 1,693
Effect of exchange rate changes 69 (75)
--------- ---------
Net increase in cash and cash equivalents 5,860 14,214
Cash and cash equivalents at beginning of period 20,259 11,141
--------- --------
Cash and cash equivalents at end of period $ 26,119 $ 25,355
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements
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ELECTROGLAS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE: 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. These consolidated condensed financial statements should be read
in conjunction with the audited consolidated financial statements for the year
ended December 31, 1997, included in the Company's Annual Report on Form 10-K.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
The Company's fiscal year end is December 31. The Company's fiscal quarters end
on the Saturday nearest the end of the calendar quarters. For convenience, the
Company has indicated that its quarters end on March 31, June 30 and September
30.
USE OF ESTIMATES - The preparation of the accompanying unaudited consolidated
condensed financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
NOTE: 2 - INVENTORIES
Inventories were comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1998 1997
- -------------- ---- ----
<S> <C> <C>
Raw materials $ 8,044 $11,571
Work in process 6,968 8,499
Finished goods 4,478 5,962
------- -------
$19,490 $26,032
======= =======
</TABLE>
NOTE: 3 - NET LOSS PER SHARE
Basic and diluted net loss per share amounts were computed using the weighted
average number of shares of common stock outstanding during the period. The
effect of stock options and restricted stock were not included in the
calculation of diluted net loss per share for the three and six months ended
June 30, 1998 and 1997 as the effect would be antidilutive. The following table
sets forth the computation of basic and diluted net loss per share:
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in thousands, except per share data) --------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (5,147) $ (20,715) $ (5,563) $ (20,689)
--------- ----------- ---------- ----------
Denominator:
Denominator for basic and diluted net loss per
share - weighted average shares 19,450 18,138 19,411 17,800
--------- ----------- ---------- ----------
Basic and diluted net loss per share $ (0.26) $ (1.14) $ (0.29) $ (1.16)
========= =========== ========== ==========
</TABLE>
Options to purchase 2,305,000 shares of common stock and 100,000 shares of
restricted common stock were outstanding at June 30, 1998, but were not included
in the computation of diluted net loss per share as the effect would be
antidilutive.
In connection with the acquisition of Techne Systems, Inc., 120,000 shares of
common stock have been placed in escrow through December 1999 subject to certain
representations and warranties. Related to the Knights acquisition 44,000 shares
of common stock remain in escrow. The escrow shares related to both acquisitions
were not included in the computation of diluted net loss per share as the effect
would be antidilutive.
NOTE: 4 - LEASE AGREEMENT
In March 1997, the Company entered into a five-year operating lease for
approximately 21.5 acres of undeveloped land in San Jose, California. The lease
documentation includes terms and provisions for further funding for construction
of buildings.
During the quarter, the Company and a bank signed an agreement committing the
latter party to provide a construction allowance of $43.0 million and committing
both parties to certain revisions to the financial covenants set forth in the
lease dated March 31, 1997. The monthly payments are based on the London
Interbank Offering Rate (LIBOR). At current rates, the annual lease payments
represent approximately $0.7 million on the current lease amount of $12.0
million and such annual lease payments will increase as construction funding
increases throughout the estimated construction period of 18 to 24 months. At
the end of the lease, the Company has the option to acquire the property
(parcels of land and buildings) at its projected cost of approximately $55.0
million. Construction began on August 5, 1998.
The guaranteed residual payment on the lease is approximately $55.0 million. The
lease contains certain restrictive covenants. The Company was in compliance with
these covenants at June 30, 1998. The lease also contains a collateral option
which would allow the Company to reduce rent expense. The Company has exercised
the collateral option and at June 30, 1998, the Company had pledged cash of
$12.0 million which is included in cash and cash equivalents, since the Company
can withdraw the cash within ten days notice.
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NOTE:5 - ENVIRONMENTAL REMEDIATION
In 1997, the Company performed an environmental investigation on its leased
property in Santa Clara, California, in cooperation with the California Regional
Water Quality Board, and will be performing clean up activities on the
property's soil. In the fourth quarter of 1997, the Company accrued $1.6 million
for environmental remediation costs which was the Company's best estimate of its
obligation. The Company has since incurred actual costs of $0.5 million. It is
possible that the Company's recorded estimate of its obligations may change in
the near term.
NOTE:6 - STOCKHOLDERS EQUITY
Stock repurchase program. On March 14, 1996, the Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's stock on the open
market. The Company has since completed the repurchase program and retired the
1,000,000 shares of its common stock held in treasury at a cost of $15.1
million. On May 19, 1998, the Board of Directors authorized the repurchase of an
additional 1,000,000 shares of the Company's stock beyond the initial program to
reduce the dilution resulting from its employee stock option and stock purchase
plans. Subsequent to the quarter ended June 30, 1998, the Company repurchased
62,400 shares of its common stock at a cost of $0.8 million.
Stock option plan. On May 19, 1998, the Company's stockholders approved an
amendment to the Company's 1997 Stock Incentive Plan to increase the number of
shares reserved for issuance from 750,000 to 1,050,000.
Employee stock purchase plan. On May 19, 1998, the Company's stockholders
approved the 1998 Employee Stock Purchase Plan replacing the 1993 Employee Stock
Purchase Plan that expired in June 1998. Under the new plan, 500,000 shares were
reserved for issuance to eligible employees who may purchase stock at 85% of its
fair value on specified dates through payroll deductions.
NOTE: 7 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income (loss) or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale investments and
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive income
(loss). Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
For the quarters ended June 30, 1998 and 1997, total comprehensive loss amounted
to $5.2 million and $20.7 million, respectively. For the six months ended June
30, 1998 and 1997, total comprehensive loss amounted to $5.5 million and $20.9
million, respectively.
NOTE: 8 - INCOME TAXES
The difference between the federal statutory rate of 35.0% and the benefit rate
of 40.0% was primarily due to the benefit of refundable taxes due to losses and
tax exempt income on lower pretax earnings, offset by non-deductible goodwill
amortization and foreign losses not benefited.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Form 10-Q that are not purely historical are
forward-looking statements, including statements regarding the Company's
expectations, hopes or intentions regarding the future. Forward-looking
statements include, but are not limited to, statements about gross profits, cash
flow, liquidity, anticipated cash needs and availability. All forward-looking
statements included in this document are made as of the date hereof, based on
information available to the Company as of the date hereof, and Electroglas
assumes no obligation to update any forward-looking statement. It is important
to note that the Company's actual results could differ materially from those in
such forward-looking statements. You should consult the risk factors listed from
time to time in the Company's Annual Report on Form 10-K, as well as those
disclosed in this discussion and analysis included under the sections titled
"Factors That May Affect Results and Financial Condition" and "Volatility of
Stock Price."
The components of the Company's statements of operations, expressed as a
percentage of net sales, are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.0 56.0 65.0 58.2
----- ----- ----- -----
Gross profit 25.0 44.0 35.0 41.8
----- ----- ----- -----
Operating expenses:
Engineering, research and development 28.9 14.7 25.6 15.9
Selling, general and administrative 32.4 21.0 27.9 22.6
In-process research and development -- 65.2 -- 38.1
----- ----- ----- -----
Total operating expenses 61.3 100.9 53.5 76.6
----- ----- ----- -----
Operating loss (36.3) (56.9) (18.5) (34.8)
Interest income 4.9 3.5 4.2 4.0
Other income (expense), net 0.2 (0.2) (0.1) (0.5)
----- ----- ----- -----
Loss before income taxes (31.2) (53.6) (14.4) (31.3)
Provision (benefit) for income taxes (12.5) 3.8 (5.8) 2.3
----- ----- ----- -----
Net loss (18.7)% (57.4)% (8.6)% (33.6)%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Net Sales
The Company, along with the semiconductor equipment industry in general, is
currently experiencing a downturn caused by a number of factors, including
economic conditions in Asia, excess capacity in the DRAM market, semiconductor
pricing pressures, and the growth of the sub-$1000 PC. These factors have all
combined to reduce customer spending on new capital equipment which has affected
the Company's sales during the current quarter.
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Net sales for the quarter ended June 30, 1998 were $27.5 million, a 23.7%
decline from net sales of $36.1 million in the comparable period last year. The
decrease was due primarily to lower system unit sales of the older Horizon 4000
models. Net sales for the first six months of 1998 were $64.4 million, a 4.5%
increase from net sales of $61.6 million for the same period last year. The
increase was due principally to higher system unit sales of the newer Horizon
4090 models and revenues generated from the acquired yield management and
inspection system businesses, offset by a decline in lower system unit sales of
the older Horizon 4000 models.
For the quarters ended June 30, 1998 and 1997, net sales comprised of the
Horizon 4000 series (52.0% and 66.5%, respectively), the 2000 series (11.0% and
12.7%, respectively), Knights software and Techne inspection systems (17.3% and
3.5%, respectively) and aftermarket sales, consisting primarily of service,
spare parts and upgrades (19.7% and 17.3%, respectively).
For the six months ended June 30, 1998 and 1997, net sales comprised of the
Horizon 4000 series (61.5% and 66.6%, respectively), the 2000 series (10.4% and
12.5%, respectively), Knights software and Techne inspection systems (10.6% and
2.1%, respectively) and aftermarket sales (17.5% and 18.8%, respectively).
For the quarter ended June 30, 1998, international sales accounted for 43.7% of
net sales as compared to 37.7% for the same period last year. The increase in
the percentage of international sales was due principally to higher European
sales in 1998 from 1997. Except for an increase in European sales, the Company
experienced sales declines, in absolute dollars, across its major geographic
markets.
For the first six months of 1998, international sales accounted for 42.7% of net
sales as compared to 40.8% for the same period last year. The increase in the
percentage of international sales was attributable primarily to higher European
sales in 1998 from 1997. In absolute dollars, the increase in European sales
were partially offset by a decrease in Korean sales, while North American and
other Asian Pacific sales remained relatively flat during the first six months
of 1998 from 1997.
The Company's international sales will likely continue to account for a
significant portion of net sales in 1998. However, current Asian economic
conditions may continue to have an adverse impact on international sales for the
year.
The ongoing uncertainty surrounding the Asian financial conditions, along with
volatility in product demand and pricing, have caused semiconductor
manufacturers to exercise caution in making capital equipment decisions. As a
result of the uncertainties in this market environment, any rescheduling or
cancellations of planned capital purchases by semiconductor manufacturers will
cause the Company's sales to fluctuate on a quarterly basis.
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<PAGE> 11
Gross Profit
Gross profit, as a percentage of sales, was 25.0% for the second quarter of
1998, compared to 44.0% for the second quarter of 1997. Gross profit was
negatively impacted by an inventory adjustment of $2.5 million recorded in the
second quarter of 1998 resulting from the rapid product transition from the
older Horizon 4000 models to the newer 4090 models. In addition, gross profit
was reduced by $1.2 million during the current quarter related to capitalized
profit in inventory on shipped inspection systems. Gross profit was also
negatively impacted by reduced leveraging of fixed overhead costs from lower
sales in the prober business. These decreases in gross profit were offset
partially by higher margin yield management software sales in the current
quarter.
For the first six months of 1998, gross profit, as a percentage of sales, was
35.0% compared to 41.8% for the same period last year. Gross profit was
negatively impacted by an inventory adjustment of $2.5 million recorded in the
second quarter of 1998 resulting from rapid product transition. In addition,
gross profit was reduced by $1.2 million during the current quarter related to
capitalized profit in inventory on shipped inspection systems. These decreases
in gross profit were offset partially by higher margin yield management software
sales, and the transfer of labor and related overhead to support research and
development efforts for the next-generation prober in the first half of 1998.
The Company believes that its gross profit will continue to be affected by a
number of factors, including competitive pressures, changes in demand for
semiconductors, changes in product mix, level of software sales, and excess
manufacturing capacity costs.
Engineering, Research and Development
Engineering, research and development expenses were $7.9 million in the second
quarter of 1998, up 49.7% from $5.3 million in the second quarter of 1997. As a
percentage of sales, these expenses increased to 28.9% in the second quarter of
1998 from 14.7% in the same period last year.
For the first six months of 1998, these expenses were $16.5 million, up 68.1%
from $9.8 million in the comparable quarter of a year ago. As a percentage of
sales, these expenses increased to 25.6% in the first six months of 1998 from
15.9% in the same period last year.
The increase in both periods was primarily a result of accelerated spending,
which consisted of project materials and absorbed manufacturing labor and
related overhead, in the 300mm and the 4090 Horizon 4090u (micro) programs. In
addition, incremental research and development costs related to the acquired
yield management software and inspection products businesses contributed to the
increase.
Engineering, research and development expenses consist primarily of salaries,
project materials, and other costs associated with the Company's ongoing efforts
in hardware and software product development and enhancement.
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<PAGE> 12
Selling, General and Administrative
Selling, general and administrative expenses were $8.9 million for the second
quarter of 1998, up 17.7% from $7.6 million in the comparable quarter last year.
For the first six months of 1998, these expenses were $18.0 million, up 29.3%
from $13.9 million in the comparable period of a year ago. The increase in both
periods was due primarily to higher incremental operational expenses and
goodwill amortization related to the acquired yield management software and
inspection products businesses. In addition, $0.3 million of costs associated
with severance compensation and facilities consolidation were charged during the
second quarter of 1998.
Acquired In-Process Research and Development
Acquired in-process research and development costs of $23.5 million in the
second quarter of 1997 were attributable to the Company's purchase of Knights
Technology, Inc.
Income Taxes
The Company's estimated effective tax rate for the three and six months ended
June 30, 1998 was a benefit rate of 40.0% compared to the tax rate of 33.0%,
before in-process research and development write-offs, for the comparable
periods of 1997. The Company's benefit rate for 1998 included the impact of
estimated refundable taxes available in the carryback period due to the
Company's projected losses for the year. Compared to 1998, the 1997 tax rate of
33.0%, before in-process R&D write-offs, reflected higher foreign and state
taxes offset by greater benefits for tax exempt investment income, tax exempt
foreign sales, and research and development credits. The 1997 charge for the
in-process research and development was a non-deductible expense for tax
purposes. Management concluded that a valuation allowance of approximately $1.3
million is required for acquired net operating losses that are significantly
limited due to change of ownership rules and foreign tax credit carryforwards.
FACTORS THAT MAY AFFECT RESULTS AND FINANCIAL CONDITION
The Company's future operating results may be affected by inherent uncertainties
that exist in the worldwide semiconductor equipment industry. Such uncertainties
include, but are not limited to, unexpected additional environmental remediation
expenses in the event the current remediation efforts need to be expanded or
ongoing investigation reveals additional contamination, timely availability and
acceptance of new hardware and software products, capital expenditures of
semiconductor manufacturers, changes in demand for semiconductor products,
competitive pricing pressures, product volume and mix, development of new
products, enhancement of existing products, global economic conditions,
availability of needed components, availability of skilled employees, timing of
orders received, fluctuations in foreign exchange rates, financial instability
in Asian markets, introduction of competitors' products having technological
and/or pricing advantages, and integration of the businesses of Knights and
Techne into the Company. In addition, the Company has experienced, and may in
the future experience, significant fluctuations in its quarterly financial
results. Accordingly, recent historical operating results should only be one
source of information when evaluating the future financial performance of the
Company.
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<PAGE> 13
The Company has determined that it will need to modify, upgrade or replace
significant portions of its software so that its computer systems will function
properly in the year 2000 and beyond. The Company is engaged in discussions with
its significant suppliers, large customers and financial institutions to ensure
that those parties have appropriate plans to remediate Year 2000 issues where
their systems interface with the Company's systems or otherwise impact its
operations. The Company is in the process of assessing the extent to which its
operations are vulnerable should those organizations fail to remediate properly
their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff and outside consultants. The team's activities are designed to
ensure that there is no material adverse effect on the Company's core business
operations and that transactions with customers, suppliers and financial
institutions are fully supported. The Company is well under way with these
efforts and they are scheduled to be completed in early 1999. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no assurance that the systems of other companies, including
suppliers and customers on which the Company's systems, operations and sales
rely, and with which they interact, will be converted on a timely basis and
failures to effect such conversion could have a material effect on the Company.
The cost of the Year 2000 initiatives is currently not expected to be material
to the Company's results of operations or financial position. There can be no
assurance, however, that the Year 2000 issues will be successfully resolved,
that the failure to, or cost of, resolving Year 2000 issues will not
significantly impact the Company's results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments were $132.7
million at June 30, 1998, an increase of $7.7 million from $125.0 million at
December 31, 1997.
Operating activities generated cash of $9.7 million during the first six months
of 1998. This was due to a decrease in net current assets of $9.3 million and
noncash charges to income of $6.0 million, offset by a net loss of $5.6 million.
Accounts receivable decreased by $13.4 million due primarily to a decline in
sales from the December 1997 quarter. Inventories were reduced by $6.5 million
due to inventory adjustments and lower production levels in the first half of
1998. These cash generating assets were partially offset by a decrease in
accrued liabilities and accounts payable of $5.0 million and $2.4 million,
respectively, and an increase in income taxes receivable of $3.0 million.
Cash used in investing activities was $4.4 million due primarily from net
purchases of investments of $2.4 million and capital expenditures of $1.9
million for engineering design and test equipment, manufacturing leasehold
improvements, and enhancement of the Company's information technology
infrastructure.
Cash provided by financing activities was $0.5 million. This resulted from the
sale of common stock of $2.7 million under employee stock plans and additional
short-term borrowings of $1.1 million by the Company's Japanese subsidiary,
offset by the repurchase of an additional 200,000 shares of the Company's common
stock at a cost of $3.3 million.
At June 30, 1998, the Company's Japanese subsidiary had lines of credit with
Japanese banks with a total borrowing capacity of approximately $4.4 million
(denominated in Yen). Amounts outstanding under these facilities at June 30,
1998 were $2.2 million. These facilities enable the Company's Japanese
subsidiary to finance its working capital requirements locally.
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<PAGE> 14
On July 1, 1998, the Company amended its lease agreement dated March 31, 1997 to
provide a construction allowance of $43.0 million to build its new campus in San
Jose. Based on current rates, the annual lease payments represent approximately
$0.7 million on the current lease amount of $12.0 million and such annual lease
payments will increase as construction funding increases throughout the
estimated construction period of 18 to 24 months. At the end of the lease, the
Company has the option to acquire the property (parcels of land and buildings)
at its projected cost of approximately $55.0 million.
In July 1998, the Company repurchased 62,400 shares of its common stock at a
cost of $0.8 million.
Historically, the Company has generated cash in an amount sufficient to fund its
operations. The Company anticipates that its existing capital resources and cash
flow generated from future operations will enable it to maintain its current
level of operations and its planned operations including capital expenditures
for the foreseeable future.
VOLATILITY OF STOCK PRICE
The Company believes that any of the following factors can cause the price of
the Company's Common Stock to fluctuate, perhaps substantially: announcements of
developments related to the Company's business, fluctuations in the Company's
operating results, sales of substantial amounts of securities of the Company in
the marketplace, general conditions in the semiconductor industry or worldwide
economy, particularly softness in demand for semiconductor equipment related to
continued or worsened economic conditions in Asia, a shortfall in revenue or
earnings from or changes in analysts' expectations, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, developments in patents or other intellectual property rights, and
changes in the Company's relationships with certain customers and suppliers. In
addition, in recent years, the stock market in general, and the market for the
shares of small capitalization stocks in particular, including the Company's,
have experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. There can be no assurance that
the market price of the Company's Common Stock will not continue to experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
At the Company's Annual Meeting of Stockholders held on May 19, 1998, the
stockholders:
(1) elected Roger D. Emerick and Robert J. Frankenberg as Class II directors.
Roger D. Emerick received 16,592,328 affirmative votes, 669,069 negative
votes and no abstentions. Robert J. Frankenberg received 16,592,628
affirmative votes, 668,769 negative votes and no abstentions. The
following directors continued in office after the meeting - Neil R.
Bonke, Joseph F. Dox and Curtis S. Wozniak.
(2) ratified and approved an amendment to the Company's 1997 Stock Incentive
Plan to increase the number of shares reserved for issuance thereunder
from 750,000 to 1,050,000, with 11,257,681 affirmative votes, 5,505,489
negative votes, 269,866 abstentions and 228,361 broker non-votes.
(3) approved the Company's 1998 Employee Stock Purchase Plan, with 14,671,482
affirmative votes, 2,101,078 negative votes, 260,476 abstentions and
228,361 broker non-votes.
(4) ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1998, with
17,181,388 affirmative votes, 44,962 negative votes and 35,047
abstentions.
Item 5. Other Information
Any stockholder proposal submitted outside of the processes of Rule 14a-8 under
the Securities Exchange Act of 1934 for presentation to the Registrant's 1999
Annual Meeting of Stockholders will be considered untimely for the purposes of
Rules 14a-4 and 14a-5 if notice thereof is received by the Registrant after
February 22, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Construction Funding Agreement (First Amendment to
Lease) Between BNP Leasing Corporation and Electroglas,
Inc. dated July 1, 1998
10.2 Electroglas, Inc. 1998 Employee Stock Purchase Plan
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-15-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTROGLAS, INC.
DATE: August 12, 1998 BY: /s/ Armand J. Stegall
----------------- ---------------------
Armand J. Stegall
Chief Financial Officer
-16-
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Construction Funding Agreement (First Amendment to Lease)
Between BNP Leasing Corporation and Electroglas, Inc. dated
July 1, 1998
10.2 Electroglas, Inc. 1998 Employee Stock Purchase Plan
27 Financial Data Schedule
<PAGE> 1
Exhibit 10.1
CONSTRUCTION FUNDING AGREEMENT
(FIRST AMENDMENT TO LEASE)
This CONSTRUCTION FUNDING AGREEMENT (FIRST AMENDMENT TO LEASE) (this
"AMENDMENT") is made as of July 1, 1998, by and between BNP LEASING CORPORATION,
a Delaware corporation ("BNPLC"), and ELECTROGLAS, INC., a Delaware corporation
("ELECTROGLAS").
R E C I T A L S
A. BNPLC and Electroglas executed a Lease Agreement dated as of March
31, 1997 (the "LEASE"), evidenced by a Short Form of Lease recorded on March 31,
1997, as Document No. 13654987 of the Official Records of Santa Clara County,
California. Capitalized terms used in this Amendment and not otherwise defined
herein shall have the meanings given to them in the Lease, unless amended
herein.
B. The Lease contemplates that, following the execution by BNPLC and
Electroglas of a Construction Funding Agreement, BNPLC shall provide
Construction Advances as reimbursement to Electroglas for the cost of
Improvements, subject to the conditions set forth in Paragraph 6 of the Lease
(the "CONDITIONS TO ADVANCES"). This Amendment is intended by the parties to
constitute the Construction Funding Agreement contemplated by the Lease.
C. During the term of the Lease, Electroglas intends to construct or
arrange for the construction of certain improvements (constituting the "INITIAL
CONSTRUCTION PROJECT" under and as defined in the Lease), which are described in
Exhibit A attached hereto. The plans and renderings for the initial Construction
Project described in the attached Exhibit A, and the site plan attached to and
made a part of the attached Exhibit A, (collectively, the "PROJECT RELATED
CONSTRUCTION DOCUMENTS") have already been submitted to BNPLC by Electroglas for
BNPLC's approval as provided by subparagraph 6(b)(i) of the Lease.
D. To obtain funds for the Initial Construction Project, Electroglas
asked BNPLC to increase the Maximum Construction Allowance available under the
Lease from $0 to $43,000,000. Responding to such request, BNPLC delivered a
letter agreement (the "CONSTRUCTION COMMITMENT LETTER") to Electroglas, which
both BNPLC and Electroglas executed on or before dated May 21, 1998. The
Construction Commitment Letter sets forth and establishes the commitment of both
BNPLC and Electroglas to enter into an amendment of the Lease in order to
increase the Maximum Construction Allowance to $43,000,000 and to otherwise
modify the Lease as therein set forth. It is the intent of the undersigned
parties that this Amendment confirm and formalize the commitments and agreements
set forth in the Construction Commitment Letter.
E. In connection with the Lease, BNPLC executed a Participation
Agreement (herein so called), dated as of March 31, 1997 with BNPLC's Parent
(together with any other parties that may from time to time become parties to
the Participation Agreement as contemplated therein, the "PARTICIPANTS").
Section 6.1.1 of the Participation Agreement requires the Participants' consents
to this Amendment, and BNPLC's Parent, as the only Participant at this time, is
executing a separate agreement (the "PARTICIPATION AGREEMENT AMENDMENT")
evidencing such consent contemporaneously with the execution of this Amendment.
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants provided
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, BNPLC and Electroglas agree as follows:
1. Amendments. As of the date of this Amendment, the Lease and, as indicated
below, the Purchase Agreement and Pledge Agreement, are amended as follows:
A. Extension of the Term and the Scheduled Designated Sale Date. The
references to "FIRST BUSINESS DAY OF APRIL, 2002" in Paragraph 1 of the Lease
and in the definition of "Designated Sale Date" set forth in the List of Defined
Terms attached to the Lease are changed to "FIRST BUSINESS DAY OF JULY, 2003".
(Also, the reference to "FIRST BUSINESS DAY OF APRIL, 2002" in the definition of
"Designated Sale Date" set forth in the List of Defined Terms attached to the
Purchase Agreement is changed to "FIRST BUSINESS DAY OF JULY, 2003".)
B. Increase in the Maximum Construction Allowance; Approval of initial
Construction Project. The Maximum Construction Allowance under (and as defined
in) the Lease is hereby increased from $0 to $43,000,000. BNPLC acknowledges
approval of the Project-Related Construction Documents as contemplated in
subparagraph 6(b)(i) of the Lease, with the understanding that - as expressly
provided in subparagraph 6(b)(i) - such approval shall not constitute a waiver
by BNPLC of subparagraph 6(b)(v) or any other provision of the Lease.
C. Conditions to Funding the Construction Allowance. Without limiting
other Conditions to Advances already set forth in the Lease, it is agreed that:
(1) Funding by Participants. Subparagraph 6(c)(x) of the Lease
is deleted and in lieu thereof is substituted the following:
(IX) FUNDING BY PARTICIPANTS. NONE OF THE
PARTICIPANTS OR THEIR SUCCESSORS UNDER THE PARTICIPATION
AGREEMENT SHALL HAVE FAILED TO ADVANCE TO BNPLC THEIR PRO RATA
SHARES OF THE CONSTRUCTION ADVANCE BEING REQUESTED. HOWEVER,
ANY SUCH FAILURE SHALL EXCUSE BNPLC'S OBLIGATION TO PROVIDE
THE CONSTRUCTION ADVANCE REQUESTED ONLY TO THE EXTENT OF THE
FUNDS THAT THE APPLICABLE PARTICIPANT OR PARTICIPANTS SHOULD
HAVE ADVANCED (BUT DID NOT ADVANCE) TO BNPLC, AND IN THE EVENT
OF ANY SUCH FAILURE:
a) BNPLC WILL IMMEDIATELY NOTIFY ELECTROGLAS
IF ANY PARTICIPANT REFUSES OR FAILS TO ADVANCE ITS
PRO RATA SHARE OF ANY CONSTRUCTION ADVANCE, BUT BNPLC
WILL NOT IN ANY EVENT BE LIABLE TO ELECTROGLAS FOR
BNPLC'S FAILURE TO DO SO.
b) BNPLC WILL, TO THE EXTENT POSSIBLE,
POSTPONE REDUCTIONS OF CONSTRUCTION ADVANCES BECAUSE
OF THE FAILURE BY ANY ONE OR MORE PARTICIPANTS
("NONFUNDING PARTICIPANTS") TO MAKE REQUIRED ADVANCES
UNDER THE PARTICIPATION AGREEMENT (A "PARTICIPANT
DEFAULT") BY ADJUSTING (AND READJUSTING FROM TIME TO
TIME, AS REQUIRED) THE FUNDING "PERCENTAGES" OF OTHER
PARTICIPANTS, AND BY REQUESTING THE OTHER
PARTICIPANTS TO MAKE ADVANCES TO BNPLC ON THE BASIS
OF SUCH ADJUSTED PERCENTAGES, IN EACH CASE AS
PROVIDED IN THE PARTICIPATION AGREEMENT; HOWEVER, SO
LONG AS A PARTICIPANT DEFAULT CONTINUES, NO
CONSTRUCTION ADVANCE SHALL BE REQUIRED THAT WOULD
CAUSE THE OUTSTANDING CONSTRUCTION ALLOWANCE TO
EXCEED (1) THE MAXIMUM CONSTRUCTION ALLOWANCE
AVAILABLE UNDER THIS LEASE, LESS (2) ALL AMOUNTS THAT
SHOULD HAVE BEEN, BUT BECAUSE OF A CONTINUING
PARTICIPANT DEFAULT HAVE NOT BEEN, ADVANCED BY ANY
ONE OR MORE OF THE PARTICIPANTS TO BNPLC UNDER THE
PARTICIPATION AGREEMENT WITH RESPECT TO CONSTRUCTION
ADVANCES.
c) FURTHER, AFTER A PARTICIPANT DEFAULT, AND
SO LONG AS NO EVENT OF DEFAULT HAS OCCURRED AND IS
CONTINUING, BNPLC SHALL DO THE FOLLOWING AS
REASONABLY REQUESTED BY
2
<PAGE> 3
ELECTROGLAS, PROVIDED THAT NOTHING IN THIS PROVISION
SHALL REQUIRE BNPLC TO TAKE ANY ACTION THAT WOULD
VIOLATE APPLICABLE LAWS, THAT WOULD CONSTITUTE A
BREACH OF BNPLC'S OBLIGATIONS UNDER THE PARTICIPATION
AGREEMENT, OR THAT WOULD REQUIRE BNPLC TO WAIVE ANY
RIGHTS OR REMEDIES IT HAS UNDER THIS LEASE, THE
PURCHASE AGREEMENT, THE PLEDGE AGREEMENT OR BNPLC'S
OTHER AGREEMENTS WITH ELECTROGLAS CONCERNING THE
PROPERTY:
(1) BNPLC SHALL PROMPTLY MAKE A
WRITTEN DEMAND UPON THE NONFUNDING
PARTICIPANTS FOR THE CURE OF THE PARTICIPANT
DEFAULT.
(2) BNPLC SHALL, TO THE EXTENT
BNPLC HAS THE RIGHT TO DO SO UNDER THE
PARTICIPATION AGREEMENT, DECLINE TO ALLOW
THE NONFUNDING PARTICIPANTS TO EXERCISE
VOTING, CONSENT OR NOTIFICATION RIGHTS UNDER
THE PARTICIPATION AGREEMENT.
(3) BNPLC SHALL NOT UNREASONABLY
WITHHOLD ITS APPROVAL FOR THE SUBSTITUTION
OF ANY NEW PARTICIPANT PROPOSED BY
ELECTROGLAS FOR NONFUNDING PARTICIPANTS (AND
TO ACCOMPLISH THE SUBSTITUTION, BNPLC SHALL
TERMINATE THE RIGHTS OF THE NONFUNDING
PARTICIPANTS TO RECEIVE FURTHER PAYMENTS
UNDER THE PARTICIPATION AGREEMENT PURSUANT
TO SECTION 6.4 THEREOF), IF (A) THE PROPOSED
SUBSTITUTION DOES NOT REQUIRE BNPLC TO WAIVE
RIGHTS AGAINST THE NONFUNDING PARTICIPANTS,
(B) THE NEW PARTICIPANT WILL AGREE (BY
EXECUTING SUPPLEMENT TO THE PARTICIPATION
AGREEMENT AS PROVIDED IN THE PARTICIPATION
AGREEMENT) TO PROVIDE FUNDS TO REPLACE THE
PAYMENTS THAT WOULD OTHERWISE BE REQUIRED OF
THE NONFUNDING PARTICIPANTS WITH RESPECT TO
FUTURE CONSTRUCTION ADVANCES, (C) THE NEW
PARTICIPANT (OR ELECTROGLAS) PROVIDES THE
FUNDS (IF ANY) NEEDED TO TERMINATE THE
NONFUNDING PARTICIPANTS' RIGHTS TO RECEIVE
PAYMENTS OF "NET CASH FLOW" (AS DEFINED IN
THE PARTICIPATION AGREEMENT) THAT BNPLC WILL
BE REQUIRED TO PAY THE NEW PARTICIPANT UNDER
THE TERMS OF THE SUBSTITUTION REASONABLY
PROPOSED BY ELECTROGLAS, (D) THE NEW
PARTICIPANT (OR ELECTROGLAS) PROVIDES AND
AGREES IN WRITING TO PROVIDE FUNDS NEEDED TO
REIMBURSE BNPLC FOR ANY AND ALL LOSSES
INCURRED BY BNPLC IN CONNECTION WITH OR
BECAUSE OF THE SUBSTITUTION OF THE NEW
PARTICIPANT FOR THE NONFUNDING PARTICIPANTS,
INCLUDING ANY COST OF DEFENDING AND PAYING
ANY CLAIM ASSERTED BY NONFUNDING
PARTICIPANTS BECAUSE OF THE SUBSTITUTION
(BUT NOT INCLUDING ANY LIABILITY OF BNPLC TO
THE NONFUNDING PARTICIPANTS FOR DAMAGES
CAUSED BY BNPLC'S BAD FAITH OR GROSS
NEGLIGENCE IN THE PERFORMANCE OF BNPLC'S
OBLIGATIONS TO THE NONFUNDING PARTICIPANTS),
(E) THE OBLIGATIONS OF BNPLC TO THE NEW
PARTICIPANT PER DOLLAR OF THE NEW
PARTICIPANT'S "INVESTMENT" (IT BEING
UNDERSTOOD THAT SUCH INVESTMENT WILL BE
COMPUTED IN A MANNER CONSISTENT WITH THE
EXAMPLES SET FORTH IN EXHIBIT A OF THE
PARTICIPATION AGREEMENT, BUT NET OF
REIMBURSEMENTS TO BNPLC UNDER CLAUSE (D)
PRECEDING) SHALL NOT EXCEED THE OBLIGATIONS
PER DOLLAR OF INVESTMENT BY THE NONFUNDING
PARTICIPANTS THAT BNPLC WOULD HAVE HAD TO
THE NONFUNDING PARTICIPANTS IF THERE HAD
BEEN NO PARTICIPANT DEFAULT, AND (F) THE NEW
PARTICIPANT SHALL BE A REPUTABLE FINANCIAL
INSTITUTION HAVING A NET WORTH OF NO LESS
THAN SEVEN AND ONE HALF PERCENT (7.5%) OF
TOTAL ASSETS AND TOTAL ASSETS OF NO LESS
THAN $10,000,000,000.00 (ALL ACCORDING TO
THEN RECENT AUDITED FINANCIAL STATEMENTS).
Further, recognizing that BNPLC will seek additional Participants to
participate in the funding of the Construction Allowance, Electroglas
agrees not to unreasonably withhold or delay its approval of any party
that BNPLC proposes as a Participant, provided the party proposed as a
Participant is a reputable financial institution having a net worth of
no less than seven and one half percent (7.5%) of total assets and
total assets of no less than $10,000,000,000.00 (all according to then
recent audited financial statements). (As indicated in the definition
of "Participant" in the List of Defined Terms attached to the Lease,
such approval of Electroglas
3
<PAGE> 4
will be required for any party [other than BNPLC's Parent] to become a
Participant for purposes of the Lease.)
(2) Limit Dependent Upon the Collateral Percentage and the
Value of Collateral Provided. Electroglas shall not be entitled to
require any Construction Advance that, if paid to Electroglas, would
cause the product of Stipulated Loss Value calculated immediately after
such payment times the Collateral Percentage then in effect to exceed
the Value (as defined in the Pledge Agreement) of all Collateral then
the subject of a Qualified Pledge pursuant to (and as defined in) the
Pledge Agreement.
D. Administrative Fees. On the date hereof, and on each anniversary of
the date hereof, Electroglas shall pay BNPLC an Administrative Fee under (and as
defined in) the Lease. The amount of the Administrative Fees shall be as set
forth under the heading "Administrative Agency Fees" in the Construction
Commitment Letter. As contemplated in subparagraph 6(a)(ii) of the Lease, and
subject to the other terms and conditions set forth in the Lease, Electroglas
may receive reimbursement for Administrative Fees from Construction Advances.
E. Modification and Extension Fee. Contemporaneous with the
effectiveness of this Amendment, Electroglas is paying to BNPLC (or authorizing
BNPLC to pay itself from a Construction Advance) a one time fee (the
"MODIFICATION AND EXTENSION FEE") as provided under the heading "Upfront Fee" in
the Construction Commitment Letter. BNPLC's receipt of the Modification and
Extension Fee will not reduce the Stipulated Loss Value, and any income taxes
payable on the Modification and Extension Fee by BNPLC shall constitute
"Excluded Taxes" under the Lease, as amended hereby.
F. Commitment Fees. From and after the date of this Amendment,
Commitment Fees will accrue and be payable by Electroglas to BNPLC under the
Lease, calculated as described in Subparagraph 4(g) of the Lease. The percentage
to be used to calculate such fees, referenced in clause (i) of Subparagraph 4(g)
of the Lease, will be .3% (30 basis points) per annum. Accrued, unpaid
Commitment Fees will be due in arrears on the first Business Day of each
October, January, April and July of each calendar year, beginning on the first
Business Day of October, 1998. As contemplated in subparagraph 6(a)(ii) of the
Lease, and subject to the other terms and conditions set forth in the Lease,
Electroglas may receive reimbursement for Commitment Fees from Construction
Advances.
G. Amendment and Restatement of Schedule 2. Schedule 2 attached to the
Lease is replaced in its entirety by Schedule 2 attached to this Amendment.
Also, from and after the date of this Amendment, all references in the Pledge
Agreement to "Schedule 2" (regardless of whether such references are followed by
"attached to the Lease") shall constitute references to Schedule 2 attached to
this Amendment.
H. Carrying Costs. To provide for the accrual of Carrying Costs as
contemplated in Subparagraph 6(a)(ii) of the Lease, the parties agree that:
(1) New Definitions. For purposes of the Lease and this
Amendment:
4
<PAGE> 5
"BASE RENT RESUMPTION DATE" shall mean the latest
Base Rent Date that occurs on or before the earlier of the
following dates: (a) any Failed Collateral Test Date; (b) the
second anniversary of the date of this Amendment; (c) the date
upon which the Outstanding Construction Allowance, plus any
Qualified Payments deducted in computing the Outstanding
Construction Allowance, equals or exceeds the Maximum
Construction Allowance; or (d) the date upon which any notice
is given by Electroglas or BNPLC to accelerate the Designated
Sale Date as described in the definition of "Designated Sale
Date" set forth in the List of Defined Terms attached to the
Lease.
"BASIC CARRYING COSTS" means Carrying Costs that
accrue and are added to the Outstanding Construction Allowance
pursuant to subsection 1.H.(2) below.
"CONSTRUCTION PERIOD BASE RENT" shall mean any Base
Rent that, if paid as provided in the Lease without abatement
or reduction because of subsection 1.H.(2) below, would become
due after the date of this Amendment and on or prior to the
Base Rent Resumption Date.
"SUPPLEMENTAL CARRYING COSTS" means Carrying Costs
that are in addition to Basic Carrying Costs and that accrue
and are added to the Outstanding Construction Allowance
pursuant to subsection 1.H.(3)(B)(i) below.
(2) Accrual of Carrying Costs in lieu of Base Rent.
Notwithstanding subparagraph 4(a) of the Lease, except as provided in
subsection 1.I below, on each Base Rent Date occurring after the date
of this Amendment and on or prior to the Base Rent Resumption Date,
Basic Carrying Costs will accrue and be added to the Outstanding
Construction Allowance in lieu of and in an amount equal to the
Construction Period Base Rent that would otherwise become due on such
Base Rent Date. Consistent with the foregoing, the first sentence of
the definition of "BASE RENT DATE" in the List of Defined Terms
attached to the Lease is modified by inserting "or upon which Carrying
Costs are to be added to the Outstanding Construction Allowance" after
"means a date upon which Base Rent must be paid under the Lease". Also,
the definition of "ADVANCE DATE" in the List of Defined Terms attached
to the Lease is modified to mean each Base Rent Date, upon which
commences a Base Rent Period, falling on or after the date of this
Amendment and on or prior to the Base Rent Resumption Date.
(3) Effective Rate Components of Base Rent and Carrying Costs.
(A) Explanation of Base Rent Formula. To ease the
administrative burden of the Lease and the Pledge Agreement,
the formula set forth in subparagraph 4(b)(iv) of the Lease
for calculating Base Rent reflects a reduction equal to the
interest that would accrue on any Collateral required by the
Pledge Agreement from time to time if the Accounts (as defined
in the Pledge Agreement) bore interest at the Effective Rate.
BNPLC has agreed to such reduction to provide Electroglas with
the economic equivalent of periodic payments of interest on
such Collateral, and in return Electroglas has agreed to the
provisions of the Pledge Agreement that excuse the actual
payment of interest on the Accounts. By incorporating such
reduction into the formula in subparagraphs 4(b)(iv) of the
Lease, and by providing for noninterest bearing Accounts in
the Pledge Agreement, the parties avoid an unnecessary and
cumbersome periodic exchange of equal periodic payments.
However, it has never been the intent of BNPLC or Electroglas
to understate Base Rent or the interest income of Electroglas
for financial reporting purposes. Accordingly, for purposes of
determining Electroglas's compliance
5
<PAGE> 6
with the affirmative financial covenants set forth in Schedule
2 attached to this Amendment, and for purposes of any
financial reports that the Lease requires of Electroglas from
time to time, it is expected that after the Base Rent
Resumption Date Electroglas will report Base Rent as if there
had been no such reduction and as if the Collateral from time
to time required by the Pledge Agreement had been maintained
in Accounts bearing interest at the Effective Rate.
(B) Adjustments to Formulas For Purposes of Carrying
Cost Calculations. If total Carrying Costs for any Base Rent
Period during which the Collateral Percentage is greater than
zero were limited only to the Basic Carrying Costs that will
accrue pursuant to subsection 1.H.(2) above (calculated based
upon the Base Rent formulas in the original Lease), then such
total Carrying Costs would reflect the same reduction as the
reduction of Base Rent described in the preceding subsection.
However, unlike Base Rent, Carrying Costs will not be paid
directly from Electroglas to BNPLC in periodic payments as
they accrue, so a reduction of Carrying Costs cannot provide
Electroglas with the economic equivalent of periodic payments
of interest accruing at the Effective Rate on the Collateral.
Thus, rather than agree to so limit total Carrying Costs,
BNPLC and Electroglas agree as follows:
(i) Basic Carrying Costs added to the
Outstanding Construction Allowance as described in
subsection 1.H.(2) above will constitute only one of
two components of total Carrying Costs accruing for
any Base Rent Period prior to the Base Rent
Resumption Date during which the Collateral
Percentage is greater than zero. In addition to Basic
Carrying Costs, a second component of Carrying Costs
(i.e., Supplemental Carrying Costs) will accrue for
any such Base Rent Period and be added to the
Outstanding Construction Allowance on the same Base
Rent Date or Dates when the Basic Carrying Costs for
such period are added. Subject to subsection 1.I
below, the amount of Supplemental Carrying Costs
added will equal:
- Stipulated Loss Value on the first day of
such Base Rent Period, times
- the Collateral Percentage for such Base Rent
Period, times
- the Effective Rate with respect to such Base
Rent Period, times
- the number of days in the period from and
including the preceding Base Rent Date to
but not including the Base Rent Date upon
which the Supplemental Carrying costs are to
be added, divided by
- three hundred sixty.
(ii) Each time BNPLC adds Supplemental
Carrying Costs to the Outstanding Construction
Allowance pursuant to the preceding subsection
1.H.(3)(B)(i), BNPLC will also make a deposit into
one or more Accounts (as defined in the Pledge
Agreement) for Electroglas in an amount equal the
Supplemental Carrying Costs so added. Such
6
<PAGE> 7
deposit will be added to and constitute Collateral
pledged on and subject to the terms and conditions
set forth in the Pledge Agreement as if it had been
deposited by Electroglas itself. Accordingly, any
withdrawal from the Accounts of any such deposits by
BNPLC for Electroglas will be subject to the same
terms and conditions of the Pledge Agreement that
apply to other Collateral. By providing for such
deposits on behalf of Electroglas equal to
Supplemental Carrying Costs, Electroglas will get the
economic equivalent of periodic payments of interest
on the Collateral as if the interest accrued from
time to time at the Effective Rate. In no event,
however, shall any such deposit (or any advance by a
Participant to fund any such deposit) constitute a
"Construction Advance" under and as defined in the
Lease, it being understood that, although the
Supplemental Carrying Costs used to compute the
amount of such a deposit will be added to the
Outstanding Construction Allowance, the deposit
itself will not be added to the Outstanding
Construction Allowance.
I. Limits on Accrual of Carrying Costs.
(1) Limits Related to the Maximum Construction Allowance. In no event
will the total Carrying Costs accrued and added to the Outstanding Construction
Allowance on any Base Rent Date exceed the amount that can be added without
causing the Outstanding Construction Allowance, plus any Qualified Payments
deducted in calculating such Outstanding Construction Allowance, to exceed the
Maximum Construction Allowance. If on any Base Rent Date the Basic Carrying
Costs that would have accrued and been added to the Outstanding Construction
Allowance, but for the preceding sentence, exceed the actual Basic Carrying
Costs accrued and added to the Outstanding Construction Allowance in accordance
with the preceding sentence, then such excess shall be payable as Base Rent on
such Base Rent Date.
(2) Limits Related to Funding by Participants. Notwithstanding anything
in subsection 1.H.(3) above, the addition of Supplemental Carrying Costs to the
Outstanding Construction Allowance on any Base Rent Date, and BNPLC's obligation
in connection therewith to make a deposit for Electroglas equal to such
Supplemental Carrying Costs, shall be subject to the condition that none of the
Participants shall have failed to advance its pro rata share of the funds needed
to make such deposits as contemplated by the Participation Agreement, as
modified by the Participation Agreement Amendment. In this regard, it is
understood that BNPLC will not be responsible for any Participant's breach of
its obligation to make advances required by the Participation Agreement and
that, without breaching the Participation Agreement, a Participant shall have
the right (pursuant to Section 3.2.1 of the Participation Agreement, as modified
by the Participation Agreement Amendment) to postpone any advance otherwise
required of it when the following conditions remain unsatisfied:
(A) the condition to BNPLC's obligation to make Construction
Advances set forth in subparagraph 6(c)(vi) of the Lease, to the extent
that such condition is unsatisfied because of the occurrence and
continuation of any Event of Default under the Lease;
(B) the condition to BNPLC's obligation to make Construction
Advances set forth in subparagraph 6(c)(vii) of the Lease, which
concerns a prior sale of the Property by BNPLC under the Purchase
Agreement; and
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<PAGE> 8
(C) the condition to BNPLC's obligation to make Construction
Advances set forth in subparagraph 6(c)(viii) of the Lease, which
concerns whether BNPLC shall have been provided with a certificate from
an officer of Electroglas and whether a copy of such certificate shall
have been provided to the Participants.
J. Calculation of Unsecured Spread. As used in the Lease, "UNSECURED
SPREAD" shall continue to mean one hundred thirty-five basis points (135/100 of
1%); provided, however, that if Electroglas achieves the Net Income Target (as
defined in the next sentence), then the Unsecured Spread under (and as defined
in) the Lease shall thereafter be reduced during the remaining Term of the Lease
to one hundred basis points (100/100 of 1%) effective as of the first Base Rent
Date after Electroglas has (a) publicly released its financial statements
showing that it has achieved the Net Income Target and (b) delivered such
financial statements to BNPLC with a notice to BNPLC that the Net Income Target
has been achieved and that Electroglas is therefore entitled to a reduction of
the Unsecured Spread. As used in the preceding sentence, "NET INCOME TARGET"
shall mean that the net income of Electroglas and its Subsidiaries, computed on
a consolidated basis before any nonrecurring noncash charges related to
acquisitions, (1) is positive in each of three consecutive fiscal quarters
ending after the date of this Amendment, and (2) equals or exceeds $10,000,000
during the same three consecutive fiscal quarters.
K. Limited Representations by BNPLC Concerning Accounting Matters.
BNPLC is not expected or required to represent or warrant that this Lease or the
Purchase Documents will qualify for any particular accounting treatment under
GAAP. However, to permit Electroglas to determine for itself the appropriate
accounting for this Lease and the Purchase Documents, BNPLC does represent to
Electroglas the following as of the date of this Amendment:
1 Equity capital invested in BNPLC is greater than three
percent (3%) of the aggregate of all lease funding amounts (including
participations) of BNPLC. Such equity capital investments constitute
equity in legal form and are reflected as shareholders' equity in the
financial statements and accounting records of BNPLC.
2 BNPLC is one hundred percent (100%) owned by French American
Bank Corporation, which is one hundred percent (100%) owned by BNPLC's
Parent.
3 BNPLC leases properties of substantial value to more than
fifteen tenants.
4 All parties to whom BNPLC has any material obligations known
to BNPLC are (and are expected to be) Affiliates of BNPLC's Parent,
Participants, or participants with BNPLC in other leasing deals or
loans made by BNPLC, or other tenants or borrowers in such other
leasing deals or loans.
5 BNPLC has substantial assets in addition to the Property,
assets which BNPLC believes to have a value far in excess of the value
of the Property.
6 Other than any Funding Advances provided from time to time
by Participants under the Participation Agreement, BNPLC expects to
obtain all Funding Advances from Banque Nationale de Paris or other
Affiliates of BNPLC (including Funding Advances to cover Carrying Costs
and other amounts to be capitalized as part of the Outstanding
Construction Allowance, and assuming that Electroglas uses the Maximum
Construction Allowance under this Lease), and to the extent that Banque
Nationale de Paris or such other Affiliates themselves borrow or accept
bank deposits to obtain the funds needed to provide such Funding
Advances, the obligation to
8
<PAGE> 9
repay such funds shall not be limited, by agreement or corporate
structure, to payments collected from Electroglas or otherwise
recovered from the Property.
7 BNPLC has not obtained residual value insurance or a
residual value guarantee from any third party to ensure the recovery of
its investment in the Property.
8 BNPLC does not presently intend to take any action during
the term of this Lease that would change, or anticipate any change in,
any of the facts listed above in this subparagraph.
2. Authorization of Electroglas. In connection with the increase in the Maximum
Construction Allowance and other changes provided for in the preceding Part I,
Electroglas shall provide to BNPLC no later than thirty days after the effective
date hereof evidence (including one or more legal opinions and a certificate of
Electroglas's corporate secretary) in form and substance satisfactory to BNPLC
of the approval or ratification of this Amendment by Electroglas's board of
directors and of the enforceability of the Lease as modified hereby.
3. Ratification; Prior Calculations. The Lease, as amended by this Amendment, is
hereby ratified and confirmed in all respects. To the extent that Base Rent or
other amounts have accrued under the Lease on or prior to the effective date of
this Amendment, the calculation of such amounts shall not be affected by
anything above.
4. Entire Agreement. The Lease, as amended hereby, and the documents and
agreements referred to in the Lease set forth the entire agreement between the
parties concerning the subject matter of the Lease, and no further amendment of
the Lease or this Amendment shall be binding or valid unless expressed in a
writing executed by both parties hereto.
5. Successors and Assigns. All of the covenants, agreements, terms and
conditions to be observed and performed by the parties hereto shall be
applicable to and binding upon their respective heirs, personal representatives,
successors and, to the extent assignment is permitted under the Lease, their
respective assigns.
6. References and Definitions in Other Documents. From and after the date of
this Amendment, in all documents related to this transaction references to the
"Lease" or the "Purchase Agreement" or the "Pledge Agreement" or the
"Participation Agreement" are intended to mean the Lease, Purchase Agreement,
Pledge Agreement or Participation Agreement, as the case may be, as amended
hereby and by the Participation Agreement Amendment, unless the context of such
a reference shall otherwise require. In addition, all documents related to this
transaction using capitalized terms, the definitions of which terms are modified
hereby, shall be deemed amended hereby to incorporate the same modifications to
such capitalized terms.
7. Execution in Counterparts. To facilitate execution, this Amendment may be
executed in as many identical counterparts as may be required. It shall not be
necessary that the signature of, or on behalf of, each party, or that the
signature of all persons required to bind any party, appear on each counterpart.
All counterparts, taken together, shall collectively constitute a single
instrument. It shall not be necessary in making proof of this Amendment to
produce or account for more than a single counterpart containing the respective
signatures of, or on behalf of, each of the parties hereto. Any signature page
to any counterpart may be detached from such counterpart without impairing the
legal effect of the signatures thereon and thereafter attached to another
counterpart identical thereto except having attached to it additional signature
pages.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
BNP LEASING CORPORATION,
a Delaware corporation
By: /s/ Lloyd G. Cox
-------------------------------
Lloyd G. Cox, Vice President
<PAGE> 11
[Continuation of signature pages to CONSTRUCTION FUNDING AGREEMENT (FIRST
AMENDMENT TO LEASE) dated as of July 1, 1998]
ELECTROGLAS, INC.,
a Delaware corporation
By: /s/ Armand Stegall
-------------------------------
Armand Stegall, Chief Financial
Officer and
Vice President of Finance
<PAGE> 12
Exhibit A
DESCRIPTION OF INITIAL CONSTRUCTION PROJECT
Buildings to be used for offices and manufacturing facilities, together with
driveway, parking areas and other appurtenant facilities, all substantially as
shown on the site plan attached to and made a part of this Exhibit.
Such buildings and appurtenant facilities will also be substantially consistent
with the following:
1. Elevations of the buildings, copies of which are attached, which were
previously submitted by Electroglas to BNPLC (and/or to an appraiser
designated by BNPLC) to permit BNPLC to evaluate the initial
Construction Project.
2. The descriptions of "Phase I" of a development project set forth in the
attached excerpts taken from an appraisal prepared for BNPLC. As stated
in the appraisal, such descriptions are based in part on preliminary
plans and renderings dated March 26, 1997, submitted by or on behalf of
Electroglas, prepared by Kenneth Rodrigues & Partners Incorporated
(architect), Kier & Wright (civil engineer) and Guzzardo & Associates
(landscape architect).
<PAGE> 13
EXCERPTS FROM BNPLC'S APPRAISAL
Proposed Building Improvements
At current status, the subject property represents ... vacant industrial land.
According to the available information, the entire subject site is proposed for
development with a 400,000 square foot campus headquarters R&D facility.... The
five-building, steel frame, two and three-story, proposed facility will include
approximately 77 percent office space and 23 percent highly improved
manufacturing area. It is anticipated to be of good-to-excellent overall
quality, and will be in new condition upon completion. Upon completion as
proposed, the subject site will provide 1,277 asphalt paved parking spaces, or
approximately 3.2 spaces per 1,000 square feet of building area. The floor area
ration (FAR) of the proposed facility will be 44.7 percent.
The proposed R&D facility will be constructed in two phases. As requested by the
client, this appraisal only values the first planned phase (Phase I) of 263,824
square feet of building area, together with the remaining excess land with
approvals for the second phase (Phase II) of 136,176 square feet of building
area. Based on the overall project FAR of 44.7 percent, Phase I requires
approximately 590,210 square feet of site area, with the remaining [land]
considered to be vacant excess land.
The entire facility will be 100 percent HVAC served, with all interiors
projected to be of high quality. The entire facility will provide approximately
73 percent high quality office space and 27 percent high quality engineering and
manufacturing area.
Phase I is proposed for a four-building, steel frame, two and three-story, R&D
facility, containing approximately 73 percent office space and 27 percent highly
improved manufacturing area. The facility will be 100 percent HVAC served, with
all interiors projected to be of high quality. The high quality of the proposed
interiors is best reflected by [Electroglas's] projected interior improvements
cost of $40.42 per square foot of building area for this portion of the
facility....
The building foundations will reportedly be concrete slab, seismically
reinforced with 30-foot pilings. Exterior walls will be combination of precast
concrete panels with integral color and sandblasting; stone veneer; and tinted
windows set in aluminum frames. As can be seen from [exterior elevation
renderings provided by Electroglas], the facility will include extensive use of
exterior windows, which is generally typical of higher quality office/R&D space.
The roof will predominately comprise built-up composition material, supported by
a steel beam and girder system and metal decking. Portions of the roofs will
comprise either clay tile or copper shingles. The facility will be 100 percent
HVAC served, and fully sprinklered, with all buildings being elevator served.
Additional upper floor access will be provided by multiple stairways throughout
the structures. There will be two dock high loading doors and two grade level
loading doors, with additional man-doors along all building elevations.
The proposed facility is reportedly in the preliminary design phase and floor
plans had reportedly not been prepared as of the date of this appraisal. The
accompanying plans provide the best representation of the proposed configuration
and exterior elevations of each building. The interiors of the entire facility
will reportedly comprise approximately 77 percent high quality office space and
23 percent high quality engineering and manufacturing area. The Phase I portion
will reportedly provide approximately 73 percent high quality office space and
27 percent high quality engineering and manufacturing area. The facility will
reportedly be utilized for administrative, engineering and manufacturing
functions.
Typical of higher quality office space, the office portion of the proposed
subject property is anticipated to comprise high quality carpet and tile floor
coverings; acoustic tile ceilings with inset flourescent lighting; painted and
textured gypsum board interior walls; and multiple multi-fixture restrooms. The
engineering and manufacturing portions will reportedly include acoustic tile
ceilings with inset flourescent lighting.
Attachment to Exhibit A - Page 1
<PAGE> 14
The proposed subject structures are outlined as follows:
<TABLE>
<CAPTION>
Percentage
Building Size (Sq. Ft.) Percentage Office Warehouse
-------- -------------- ----------------- ---------
<S> <C> <C> <C>
Phase I:
A: Consumer Pavilion 16,339 100% 0%
B: Prober Operations 143,812 50% 50%
C: Technology Center 88,473 100% 0%
D: Employee Pavilion 15,200 100% 0%
------- ------- -------
Total Phase I: 263,824 73% 27%
Phase II:
E: Corporate Administration 96,176 100% 0%
B: (Expansion) 40,000 50% 50%
------- ------- -------
Total Phase II: 136,176 85% 15%
Total Project 400,000 77% 23%
</TABLE>
Proposed Building A (Phase I)
Proposed subject building A is a two-story, "customer pavilion", containing
16,339 square feet of building area. The locations of this and the other
proposed structures are delineated on the accompanying Site Plan. The reader is
referred to the elevation plans provided in the Addenda for the best
illustration of the proposed building exteriors. This building will supply
demonstration and conference rooms for customers. It will include an expansive
open lobby area and will be highly improved, with high quality carpeting, tile
and fixtures. Upper floor access will be available via internal staircases and
an elevator, in the lobby area. The upper floor will include two balconies.
Proposed Building B (Phase I)
Proposed subject building A is a two-story, "prober operations" facility,
containing 143,812 square feet of building area. This building will supply
ground floor manufacturing space and second floor office area, with an interior
buildout of 50 percent manufacturing and 50 percent office. This building will
include three internal staircases, and two freight elevators. Interior
improvements will be of high quality. There will be two, dock high, loading
doors and two, grade level, loading doors at the southwest corner of the
structure. A punch-out will at the southeast corner of this structure will allow
for a 40,000 square foot, two-story, expansion of this building as part of Phase
II of the larger project.
Attachment to Exhibit A - Page 2
<PAGE> 15
Proposed Building C (Phase I)
Proposed subject building C is a three-story, "technology center" facility,
containing 88,742 square feet of building area. This building will supply 100
percent highly improved office space. this building will include one passenger
elevator, one freight elevator, and two internal staircases.
Proposed Building D (Phase I)
Proposed subject building D is a two-story, "employee pavilion" facility,
containing 15,200 square feet of building area. This building will also supply
highly improved interior improvements, with two internal staircases, an
elevator, and an open-air lobby. This structure will include office space; an
employee cafeteria; an employee fitness center, and employee day-care
facilities. This is considered to be typical of higher quality campus R&D
developments in the current market.
Proposed Building E and Building B Expansion (Phase II - Not Appraised Herein)
Proposed subject building E is a three-story, "corporate administration"
facility, containing 96,176 square feet of building area. This building will
provide 100 percent highly improved office space, with two internal staircases
and an elevator. The building B expansion area will consist of a two-story,
40,000 square foot, expansion to building B, at the southeast corner of the
structure. The ground floor of the expansion space will be manufacturing area,
while the upper floor will be office space.
Proposed Site Improvements
The orientation of the proposed building and site improvements is best
illustrated by the accompanying plans. The site ... will be attractively
landscaped. The western portion of the site will ultimately house asphalt paved
parking areas, after the construction of Phase II of the larger project. Until
that time, this portion of the site will be graded and regularly disked. The
footprint area for building E of Phase II will be hydroseeded and irrigated
until the building is constructed. Phase II building B expansion footprint site
area will be utilized for asphalt paved surface parking until construction of
the expansion building.
As can be seen from the accompanying Landscape Plan, the subject's proposed site
improvements constructed as part of Phase I will be extensive. A circular
walkway, with stone columns and a wood arbor, will surround waterscaping,
walkways, an employee plaza, and an open lawn amphitheater. Numerous trees and
shrubs will be located throughout the site. Extensive exterior lighting will
also be provided throughout the site.
Vehicular access will be available via three access driveways along Silver Creek
Valley Road, and three along Piercy Road. The proposed buildings will be
oriented toward the approximate center of the parcel, with vehicle circulation
and asphalt paved surface parking throughout all of the site perimeters, except
a small portion of the northern site perimeter. The entire site will provide
1,283 asphalt paved parking areas, or 3.2 spaces per 1,000 square feet of
building area (for the entire 400,000 square foot proposed campus). Regarding
the subject 262,824 square foot Phase I portion of the campus, a similar parking
ratio will reportedly be provided, with the remaining excess land site area (the
western portion of the site) graded and disked, but otherwise unimproved.
Overall, the layout of the site improvements and appearance of the landscaping
will be functional for the intended office/R&D use.
......
The proposed R&D facility will be constructed in two phases. As requested by the
client, this appraisal only values the first planned phase (Phase I) of 263,824
square feet of building area, together with the remaining excess land with
approvals for the second phase (Phase II) of 136,176 square feet of building
area. Based on the overall project FAR of 44.7 percent, Phase I requires
approximately 590,210 square feet of site area, with the remaining 304,672
square feet of site area considered to be vacant excess land. As discussed
above, this vacant land area comprises the western portion of the larger subject
site.
Attachment to Exhibit A - Page 3
<PAGE> 16
Schedule 2
FINANCIAL COVENANTS
This Schedule 2 is attached to and made a part of (a) the Lease
Agreement (the "LEASE") dated effective March 31, 1997, between BNP Leasing
Corporation, a Delaware corporation ("BNPLC") and Electroglas, Inc., a Delaware
corporation ("ELECTROGLAS") and (b) the Pledge Agreement (the "PLEDGE
AGREEMENT") dated effective March 31, 1997, among BNPLC, Electroglas, and Banque
Nationale de Paris, as a Participant and as agent for any financial institutions
that become Participants thereunder from time to time.
PART I - DEFINED TERMS
In this Schedule 2, capitalized terms used but not defined herein shall
have the meaning assigned to them in the Lease or the List of Defined Terms
attached to the Lease; and the following capitalized terms shall have the
following meanings:
"ADJUSTED NET LOSSES" means, for any fiscal period of Electroglas, the
aggregate net losses (if any) incurred during such period by
Electroglas and its Subsidiaries (determined on a consolidated basis),
plus the amounts (if any) which, in the determination of net loss for
such fiscal period, have been deducted for non-cash charges related to
acquisitions that do not exceed an aggregate, cumulative amount of
fifteen percent of Electroglas' Consolidated Tangible Net Worth
(measured at the end of such fiscal period).
"ADJUSTED EBIT" means, for any accounting period, net income (or net
loss) determined in accordance with GAAP, plus the amounts (if any)
which, in the determination of net income (or net loss) for such
period, have been deducted for (a) gross interest expense, (b) tax
expense (c) rent expense under leases of property, (d) depreciation,
and (e) non-cash charges related to acquisitions that do not exceed an
aggregate, cumulative amount of fifteen percent of Electroglas'
Consolidated Tangible Net Worth (measured at the end of such accounting
period).
"COLLATERAL TEST DATES (QUARTERLY)" shall mean the earlier of the
following dates after each fiscal quarter of Electroglas ending on or
after June 30, 1998: (1) the seventh Business Day after the release by
Electroglas of its financial statements for the fiscal quarter; or (2)
the first Business Day of the third calendar month following the end of
the fiscal quarter. Thus, for example, the first Collateral Test Date
(Quarterly) shall be the earlier of the seventh Business Day after
Electroglas' release of its financial statements for its fiscal quarter
ending June 30, 1998 or the first Business Day of September, 1998.
"COLLATERAL TEST DATES (AFTER JUNE, 2000/SEMI-ANNUAL)" shall mean the
earlier of the following dates after the latest fiscal quarter of
Electroglas that ends prior to the first Business Day of every January
and July, commencing with the first Business Day of July, 2000: (1) the
seventh Business Day after the release by Electroglas of its financial
statements for the fiscal quarter; or (2) the first Business Day of the
third calendar month following the end of the fiscal quarter. Thus, for
example, the first Collateral Test Date (After June, 2000/Semi-annual)
shall be the earlier of the seventh Business Day after Electroglas'
release of its financial statements for its fiscal quarter ending June
30, 2000 or the first Business Day of September, 2000.
"COLLATERAL" shall have the meaning assigned to it in the body of the
Pledge Agreement.
Schedule 2 - Page 1
<PAGE> 17
"CONSOLIDATED TANGIBLE NET WORTH" means, with respect to any Person,
the excess of the total assets of such Person and its Subsidiaries
(determined on a consolidated basis) over the total Liabilities of such
Person and its Subsidiaries (determined on a consolidated basis);
provided, however, that Intangible Assets on such date shall be
excluded from any determination of consolidated total assets on such
date.
"CURRENT LIABILITIES" means, with respect to any Person, all
liabilities of such Person treated as current liabilities in accordance
with GAAP, including without limitation (a) all obligations payable on
demand or within one year after the date in which the determination is
made and (b) installment and sinking fund payments required to be made
within one year after the date on which determination is made, but
excluding all such liabilities or obligations which are renewable or
extendable at the option of such Person to a date more than one year
from the date of determination.
"FISCAL YEAR 1998 COLLATERAL TEST DATES (QUARTERLY)" shall mean the
first, second and third Collateral Test Dates (Quarterly). Accordingly,
all Collateral Test Dates (Quarterly) prior to and including the
earliest Collateral Test Date (Quarterly) to follow the fiscal quarter
of Electroglas ending December 31, 1998 shall constitute Fiscal Year
1998 Collateral Test Dates (Quarterly).
"FISCAL YEAR 1999 COLLATERAL TEST DATES (QUARTERLY)" shall mean the
fourth, fifth, sixth, and seventh Collateral Test Dates (Quarterly).
Accordingly, all Collateral Test Dates (Quarterly) - after the Fiscal
Year 1998 Collateral Test Dates (Quarterly) - prior to and including
the earliest Collateral Test Date (Quarterly) to follow the fiscal
quarter of Electroglas ending December 31, 1999 shall constitute Fiscal
Year 1999 Collateral Test Dates (Quarterly).
"FIXED CHARGES" means, for any accounting period, the sum of (a) gross
interest expense, plus (b) amortization of principal or debt discount
in respect of all Debt during such period, plus (c) rent payable under
all leases of property during such period, plus (d) taxes payable
during such period.
"INTANGIBLE ASSETS" means, as of the date of any determination thereof,
the total amount of all assets of Electroglas and its consolidated
Subsidiaries that are properly classified as "INTANGIBLE ASSETS" in
accordance with GAAP and, in any event, shall include, without
limitation, goodwill, patents, trade names, trademarks, copyrights,
franchises, experimental expense, organization expense, unamortized
debt discount and expense, and deferred charges other than prepaid
insurance and prepaid taxes and current deferred taxes which are
classified on the balance sheet of Electroglas and its consolidated
Subsidiaries as a current asset in accordance with GAAP and in which
classification Electroglas' independent public accountants concur.
"LIABILITIES" means, with respect to any Person, the sum (without
duplication of any item) of (A) all liabilities of such Person and its
Subsidiaries (determined on a consolidated basis), determined in
accordance with GAAP, and (B) the obligations of such Person and its
Subsidiaries (determined on a consolidated basis), contingent or
otherwise, under any lease of real property or related documents
(including a separate purchase agreement) which provide that such
Person or its Subsidiaries must purchase or cause another to purchase
any interest in the leased property and thereby guarantee a minimum
residual value of the leased property to the lessor. For purposes of
this definition (and for purposes of determining the amount of "Debt"
relevant to any requirements established by this Schedule 2), the
amount of the obligations described in clause (B) of the preceding
sentence with respect to any lease classified according to GAAP as an
"operating lease," shall equal the sum of (1) the present value of
rentals and other
Schedule 2 - Page 2
<PAGE> 18
minimum lease payments required in connection with such lease
[calculated in accordance with FASB Statement 13 and other GAAP
relevant to the determination of the whether such lease must be
accounted for as an operating lease or capital lease], plus (2) the
fair value of the property covered by the lease; provided, however,
that such amount shall not exceed the price for which the lessee can
purchase the leased property pursuant to any valid ongoing purchase
option if, upon such a purchase, the lessee shall be excused from
paying rentals or other minimum lease payments that would otherwise
accrue after the purchase.
"LONG-TERM INVESTMENTS" means those investments described below (to the
extent that they are not classified as short term investments in
accordance with GAAP), provided that such investments shall have
maturities of not longer than two years, and shall be rated not less
than A- by Standard & Poor's Corporation or less than A by Moody's
Investors Service, Inc.:
(1) Securities issued or fully guaranteed or fully insured by
the United States government or any agency thereof and backed by the
full faith and credit of the United States;
(2) Certificates of deposit, time deposits, eurodollar time
deposits, repurchase agreements, or banker's acceptances that are
issued by either one of the 50 largest (in assets) banks in the United
States or by one of the 100 largest (in assets) banks in the world; and
(3) Notes and municipal bonds.
"MANDATORY COLLATERAL PERIODS" means periods during which,
notwithstanding any contrary designation of a Collateral Percentage by
Electroglas under the Pledge Agreement, the Collateral Percentage for
purposes of the Pledge Agreement shall be one hundred percent (100%),
determined as set forth in Part III of this Schedule 2.
"POST-FISCAL YEAR 1998 COLLATERAL TEST DATES (QUARTERLY)" shall mean
all Collateral Test Dates (Quarterly) after the Fiscal Year 1998
Collateral Test Dates (Quarterly).
"POST-FISCAL YEAR 1999 COLLATERAL TEST DATES (QUARTERLY)" shall mean
all Collateral Test Dates (Quarterly) after the Fiscal Year 1999
Collateral Test Dates (Quarterly).
"QUICK ASSETS" means the sum (without duplication of any item) of the
Collateral held subject to a Qualified Pledge under and as defined in
the Pledge Agreement, plus unencumbered cash, plus unencumbered short
term cash investments, plus other unencumbered marketable securities
which are classified as short term investments according to GAAP, plus
the fair market value of unencumbered Long-Term Investments, plus
unencumbered current net accounts receivable.
PART II - FINANCIAL COVENANTS FOR LEASE AGREEMENT
1. Quick Ratio. Electroglas shall maintain a ratio of (a) Quick Assets of
Electroglas and its Subsidiaries (determined on a consolidated basis)
to (b) Current Liabilities of Electroglas and its Subsidiaries
(determined on a consolidated basis), of not less than 2.50 to 1.00.
2. Maximum Ratio of Liabilities to Tangible Net Worth. Electroglas shall
maintain a ratio of (a) the Liabilities of Electroglas to (b) the
Consolidated Tangible Net Worth of Electroglas, of not less than 0.70
to 1.00.
Schedule 2 - Page 3
<PAGE> 19
3. Minimum Tangible Net Worth. Electroglas shall not permit its
Consolidated Tangible Net Worth, at the end of any fiscal quarter of
Electroglas, to be less than the sum of: (a) eighty-five percent of the
Consolidated Tangible Net Worth of Electroglas as of March 31, 1998;
plus (b) seventy-five percent of Electroglas' net income (computed
without deduction for net losses in any fiscal quarter) earned in each
fiscal quarter of Electroglas after March 31, 1998; plus (c)
one-hundred percent of the net proceeds of sales of stock in
Electroglas after March 31, 1998; less (d) non-cash charges relating to
acquisitions after March 31, 1998 that do not exceed an aggregate,
cumulative amount of fifteen percent of Electroglas' Consolidated
Tangible Net Worth at the end of such fiscal quarter.
4. Minimum Unencumbered Cash, Cash Equivalents and Collateral. Electroglas
shall not permit the sum (without duplication of any item) of the
Collateral held subject to a Qualified Pledge under and as defined in
the Pledge Agreement, plus, to the extent unencumbered, the total of
all cash, short term cash investments and marketable securities
classified as short term investments according to GAAP of Electroglas
and its Subsidiaries (determined on a consolidated basis) to be less
than $40,000,000 prior to the first Business Day of July, 2000.
PART III - TESTS FOR MANDATORY COLLATERAL PERIODS
1 Minimum Ratio of Unencumbered Cash and Cash Equivalents to Debt. The
period commencing on any Collateral Test Date (After June,
2000/Semi-annual), and ending on the next Collateral Test Date (After
June, 2000/Semi-annual), shall constitute a Mandatory Collateral Period
if, at the end of the latest fiscal quarter of Electroglas ending
before such period, Electroglas shall have failed to maintain a ratio
of (a) the sum (without duplication of any item) of the Collateral held
subject to a Qualified Pledge under and as defined in the Pledge
Agreement, plus, to the extent unencumbered, the total of all cash,
short term cash investments and marketable securities classified as
short term investments according to GAAP of Electroglas and its
Subsidiaries (determined on a consolidated basis) to (b) Debt of
Electroglas and its Subsidiaries (determined on a consolidated basis),
of at least 2.00 to 1.00.
2 Maximum Ratio of Debt to Tangible Net Worth. The period commencing on
any Collateral Test Date (After June, 2000/Semi-annual), and ending on
the next Collateral Test Date (After June, 2000/Semi-annual), shall
constitute a Mandatory Collateral Period if, at the end of the latest
fiscal quarter of Electroglas ending before such period, Electroglas
shall have failed to maintain a ratio of (a) Debt of Electroglas and
its Subsidiaries (determined on a consolidated basis) to (b)
Consolidated Tangible Net Worth of Electroglas, of no more than 0.40 to
1.00.
3 Maximum Net Loss During the Four Fiscal Quarters in the 1998 Fiscal
Year. The period commencing on each Fiscal Year 1998 Collateral Test
Date (Quarterly) and ending on the next Collateral Test Date
(Quarterly) shall constitute a Mandatory Collateral Period if, in the
fiscal quarter or quarters of Electroglas ending after January 1, 1998
and before such period, Electroglas has incurred cumulative Adjusted
Net Losses in excess of $10,000,000.
4 Maximum Net Loss During Subsequent Fiscal Quarters. The period
commencing on any Post-Fiscal Year 1998 Collateral Test Date
(Quarterly), and ending on the next Collateral Test Date (Quarterly),
shall constitute a Mandatory Collateral Period if either (a) during
each of the two latest fiscal quarters of Electroglas ending before
such period, Electroglas shall have incurred Adjusted Net Losses of any
amount in each such quarter, or (b) during the latest fiscal quarter of
Electroglas ending before such period, Electroglas shall have incurred
an Adjusted Net Loss
Schedule 2 - Page 4
<PAGE> 20
greater than five percent of Electroglas' Consolidated Tangible Net
Worth as of the beginning of such period.
5 Maximum Fixed Charge Coverage Ratio During the Four Fiscal Quarters in
the 1999 Fiscal Year. The period commencing on each Fiscal Year 1999
Collateral Test Date (Quarterly), and ending on the next Collateral
Test Date (Quarterly), shall constitute a Mandatory Collateral Period
if Electroglas shall have failed to maintain a ratio of (a) cumulative
Adjusted EBIT of Electroglas and its Subsidiaries (determined on a
consolidated basis), in the fiscal quarter or quarters of Electroglas
ending after January 1, 1999 and before such period, to (b) cumulative
Fixed Charges of Electroglas and its Subsidiaries (determined on a
consolidated basis) for the same fiscal quarter or quarters, of at
least 2.00 to 1.00.
6 Minimum Fixed Charge Coverage Ratio in Subsequent Fiscal Quarters. The
period commencing on each Post-Fiscal Year 1999 Collateral Test Date
(Quarterly) and ending on the next following Collateral Test Date
(Quarterly), shall constitute a Mandatory Collateral Period if
Electroglas shall have failed to maintain a ratio of (a) cumulative
Adjusted EBIT of Electroglas and its Subsidiaries (determined on a
consolidated basis) for the four latest fiscal quarters ending before
such period, to (b) cumulative Fixed Charges of Electroglas and its
Subsidiaries (determined on a consolidated basis) for the same four
fiscal quarters, of at least 2.00 to 1.00.
Schedule 2 - Page 5
<PAGE> 21
[BNP/Electroglas]
MODIFICATION AGREEMENT
(FIRST AMENDMENT TO PARTICIPATION AGREEMENT)
This MODIFICATION AGREEMENT (FIRST AMENDMENT TO PARTICIPATION
AGREEMENT) (this "AMENDMENT") is made as of July 1, 1998, by and between BNP
LEASING CORPORATION, a Delaware corporation ("BNPLC"), and BANQUE NATIONALE DE
PARIS, SAN FRANCISCO BRANCH ("PARTICIPANT").
R E C I T A L S
A. BNPLC and Electroglas, Inc., a Delaware corporation ("ELECTROGLAS")
executed a Lease Agreement dated as of March 31, 1997 (the " LEASE"). Pursuant
to the Lease, BNPLC has leased to Electroglas the property described therein
(all real and personal property covered from time to time by the Lease is
hereinafter collectively called the "LEASED PROPERTY"). The Lease provides for a
"CONSTRUCTION ALLOWANCE" (as defined in the Lease) to be funded by BNPLC for the
construction of improvements, all as more particularly provided therein.
B. BNPLC and Electroglas have also entered into a Purchase Agreement
dated as of March 31, 1997 (the "PURCHASE AGREEMENT"), pursuant to which
Electroglas has agreed to purchase or arrange for the purchase of the Leased
Property as more particularly provided therein. BNPLC, Electroglas and Banque
Nationale de Paris, San Francisco Branch have also entered into a Pledge
Agreement dated as of March 31, 1997 (the "PLEDGE AGREEMENT"), pursuant to which
Electroglas has agreed to provide cash collateral for its obligations under the
Purchase Agreement as more particularly provided therein. (The Lease Agreement,
the Purchase Agreement and the Pledge Agreement are herein collectively called
the " UNDERLYING DOCUMENTS").
C. BNPLC and Participant have executed a Participation Agreement dated
as of March 31, 1997 ( the "PARTICIPATION AGREEMENT") evidencing Participant's
agreement to participate with BNPLC in certain of the risks and rewards to BNPLC
of the Underlying Documents. Capitalized terms used in this Amendment and not
otherwise defined herein shall have the meanings given to them in the
Participation Agreement.
E. BNPLC and Electroglas wish to enter into a Construction Funding
Agreement (First Amendment to Lease) dated of even date herewith (the "FIRST
LEASE AMENDMENT"), amending the Lease in order to, among other things, increase
the Maximum Construction Allowance to $43,000,000.
NOW, THEREFORE, in consideration of the above recitals and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, BNPLC and Participant, agree as follows:
I. Consent and Agreement of Participant. Participant hereby consents to the
execution and delivery of the First Lease Amendment, and in connection therewith
agrees to the following modifications to the Participation Agreement:
1
<PAGE> 22
A. Replacement of Schedule 1. The SCHEDULE 1 attached hereto
is substituted for and will replace SCHEDULE 1 attached to the
Participation Agreement. By such substitution (A) Participant's
"Percentage" under and as defined in the Participation Agreement is
being increased from 85% to 95%, and (B) the maximum amount of
Participant's participation under the Participation Agreement is being
increased from $10,200,000 to $53,250,000. Consistent with the increase
of Participant's Percentage from 85% to 95%, Participant is delivering
a payment to BNPLC contemporaneously with the execution of this
Amendment equal to 10% of Stipulated Loss Value as of the date of this
Amendment.
B. Funding of Collateral Deposits Required in connection with
Supplemental Carrying Costs. To provide for the funding of deposits for
Electroglas equal to Supplemental Carrying Costs as provided in the
First Lease Amendment, all references in the original Participation
Agreement to "Construction Advance" or "Construction Advances" are
changed to "Construction Related Advance" and "Construction Related
Advances", respectively, and the following new definition is inserted
as a new Section 1.1A into the Participation Agreement:
1.1A "CONSTRUCTION RELATED ADVANCE" MEANS (1) ANY
CONSTRUCTION ADVANCE UNDER AND AS DEFINED IN THE LEASE, AND
(2) ANY DEPOSIT OF FUNDS INTO THE ACCOUNTS (AS DEFINED IN THE
PLEDGE AGREEMENT) BY BNPLC FOR ELECTROGLAS AS PROVIDED IN
SECTION 1.H.(3) OF THE FIRST LEASE AMENDMENT.
B. Replacement of Section 14.1. Section 14.1 of the
Participation Agreement, which concerns assignments by Participants, is
amended and restated in its entirety to read as follows:
14.1 BY THE PARTICIPANTS GENERALLY. EXCEPT AS
EXPRESSLY PROVIDED BELOW, NO PARTICIPANT SHALL ASSIGN OR
ATTEMPT TO ASSIGN ANY INTEREST IN OR RIGHTS UNDER THIS
AGREEMENT WITHOUT THE PRIOR WRITTEN CONSENT OF BNPLC, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD SO LONG AS THE
PARTICIPANT REQUESTING THE APPROVAL IS NOT IN DEFAULT
HEREUNDER; PROVIDED, THIS PROVISION SHALL NOT PREVENT A
PARTICIPANT FROM TRANSFERRING ITS RIGHTS HEREUNDER TO ITS
AFFILIATES OR TO ANY OTHER PARTICIPANTS WHO ARE ALREADY
PARTIES TO THIS AGREEMENT. NOTWITHSTANDING ANY PERMITTED
ASSIGNMENT BY A PARTICIPANT, IF THE ASSIGNMENT IS TO ANY
PERSON THAT DOES NOT QUALIFY AS A "PARTICIPANT" FOR PURPOSES
OF THE LEASE ITSELF (WHICH, AS MORE PARTICULARLY PROVIDED IN
THE DEFINITION OF PARTICIPANT IN THE LEASE, MAY REQUIRE THE
WRITTEN APPROVAL OF SUCH PERSON BY ELECTROGLAS), SUCH
PARTICIPANT'S OBLIGATIONS UNDER THIS AGREEMENT SHALL REMAIN
UNCHANGED, SUCH PARTICIPANT SHALL REMAIN PRIMARILY RESPONSIBLE
FOR THE PERFORMANCE OF ITS OBLIGATIONS HEREUNDER, AND BNPLC
MAY CONTINUE TO DEAL SOLELY AND DIRECTLY WITH SUCH PARTICIPANT
IN CONNECTION WITH ALL RIGHTS AND OBLIGATIONS UNDER THIS
AGREEMENT. IN THE EVENT, HOWEVER, OF A PERMITTED ASSIGNMENT BY
A PARTICIPANT TO A PERSON THAT DOES QUALIFY AS A "PARTICIPANT"
FOR PURPOSES OF THE LEASE ITSELF, ACCOMPLISHED BY THE
EXECUTION OF APPROPRIATE PARTICIPATION AGREEMENT SUPPLEMENTS
AS HEREIN PROVIDED, THE ASSIGNING PARTICIPANT SHALL NOT BE
LIABLE FOR ANY FAILURE BY THE ASSIGNEE TO FULFILL THE
OBLIGATIONS ASSUMED HEREUNDER BY THE ASSIGNEE BY REASON OF
SUCH ASSIGNMENT.
C. Change in Minimum Hold Percentage of BNPLC and its
Affiliates. The reference in the proviso at the end of the second
sentence of Section 14.2 of the Participation Agreement to "twenty-five
percent (25%)" is changed to "three percent (3%)", such that the
proviso will now read as follows:
; PROVIDED, THAT THE ASSIGNMENT OF PARTICIPATIONS BY BNPLC
SHALL NOT REDUCE THE SUM OF THE PERCENTAGES OF BNPLC AND ITS
AFFILIATES TO LESS THAN THREE PERCENT (3%).
II. Ratification. Participant hereby ratifies and confirms in all respects the
Participation Agreement as amended hereby, and agrees that its obligations and
covenants thereunder shall continue in full force and effect with respect to the
Underlying Documents as amended by the First Lease Amendment.
2
<PAGE> 23
III. Fees Excluded From Net Cash Flow. Neither the Administrative Fees nor the
Modification and Extension Fee (both as described in the First Lease Amendment)
will constitute Net Cash Flow for purposes of the Participation Agreement.
IV. Entire Agreement. The Participation Agreement, as amended hereby, and the
documents and agreements referred to therein, set forth the entire agreement
between the parties concerning the subject matter of the Participation
Agreement, and no further amendment of the Participation Agreement or this
Amendment shall be binding or valid unless expressed in a writing executed by
both parties hereto.
V. Successors and Assigns. All of the covenants, agreements, terms and
conditions to be observed and performed by the parties hereto shall be
applicable to and binding upon their respective heirs, personal representatives,
successors and, to the extent assignment is permitted under the Participation
Agreement, their respective assigns.
VI. References to the Participation Agreement. From and after the date of this
Amendment, all references to the "Participation Agreement" in other documents
related to this transaction are intended to mean the Participation Agreement as
amended hereby, unless the context shall otherwise require.
VII. Execution in Counterparts. To facilitate execution, this Amendment may be
executed in as many identical counterparts as may be required. It shall not be
necessary that the signature of, or on behalf of, each party, or that the
signature of all persons required to bind any party, appear on each counterpart.
All counterparts, taken together, shall collectively constitute a single
instrument. It shall not be necessary in making proof of this Amendment to
produce or account for more than a single counterpart containing the respective
signatures of, or on behalf of, each of the parties hereto. Any signature page
to any counterpart may be detached from such counterpart without impairing the
legal effect of the signatures thereon and thereafter attached to another
counterpart identical thereto except having attached to it additional signature
pages.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
3
<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
BNPLC:
BNP LEASING CORPORATION,
a Delaware corporation
By: /s/ Lloyd G. Cox
------------------------------
Lloyd G. Cox, Vice President
<PAGE> 25
[Continuation of signature pages to MODIFICATION AGREEMENT (FIRST AMENDMENT TO
PARTICIPATION AGREEMENT) dated as of July 1, 1998]
PARTICIPANT:
BANQUE NATIONALE DE PARIS,
SAN FRANCISCO BRANCH
By: /s/ Jennifer Cho
------------------------------
Jennifer Cho, Vice President
By: /s/ William J. La Herran
------------------------------
William J. La Herran,
Assistant Vice President
<PAGE> 1
EXHIBIT 10.2
ELECTROGLAS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock Purchase
Plan of Electroglas, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the Company
and its Designated Parents or Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Code. The provisions of the Plan, accordingly,
shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Change in Control" means a change in ownership or control of the
Company effected through the direct or indirect acquisition by any person
or related group of persons (other than an acquisition from or by the
Company or by a Company-sponsored employee benefit plan or by a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company) of beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the common stock of the Company.
(e) "Company" means Electroglas, Inc., a Delaware corporation.
(f) "Compensation" means an Employee's base salary (plus an amount
equal to the total planned sales commission, if any, for the Employee
during the subject Purchase Period) from the Company or one or more
Designated Parents or Subsidiaries, including such amounts of base salary
as are deferred by the Employee (i) under a qualified cash or deferred
arrangement described in Section 401(k) of the Code, or (ii) to a plan
qualified under Section 125 of the Code. The Plan Administrator may specify
that compensation include overtime pay, bonuses, annual awards, and other
incentive payments, but compensation shall not include reimbursements or
other expense allowances, fringe benefits (cash or noncash), moving
expenses, deferred compensation (other than deferred salary described in
the first sentence), contributions (other than contributions described in
the first sentence) made on the Employee's behalf by the Company or one or
more Designated Parents or Subsidiaries under any employee benefit or
welfare plan now or hereafter established, and any other payments not
specifically referenced in the first sentence.
(g) "Corporate Transaction" means any of the following
stockholder-approved transactions to which the Company is a party:
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated;
(2) the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the
Company's subsidiary corporations) in connection with complete
liquidation or dissolution of the Company; or
(3) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger; provided, however that if
such merger is preceded by a Change in Control within six (6) months of
the merger, then a Corporate Transaction will be
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<PAGE> 2
deemed to have occurred if securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities are transferred pursuant to the merger to a person or persons
different from those who held such securities immediately prior to such
Change in Control.
(h) "Designated Parents or Subsidiaries" means the Parents or
Subsidiaries which have been designated by the Plan Administrator from time
to time as eligible to participate in the Plan.
(i) "Effective Date" means July 1, 1998. However, should any
Designated Parent or Subsidiary become a participating company in the Plan
after such date, then such entity shall designate a separate Effective Date
with respect to its employee-participants.
(j) "Employee" means any individual, including an officer or director,
who is an employee of the Company or a Designated Parent or Subsidiary for
purposes of Section 423 of the Code. For purposes of the Plan, the
employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the
individual's employer. Where the period of leave exceeds ninety (90) days
and the individual's right to reemployment is not guaranteed either by
statute or by contract, the employment relationship will be deemed to have
terminated on the ninety-first (91st) day of such leave, for purposes of
determining eligibility to participate in the Plan.
(k) "Enrollment Date" means the first day of each Purchase Period.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Exercise Date" means the last day of each Purchase Period.
(n) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(1) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing price for a share of Common
Stock for the last market trading day prior to the time of the
determination (or, if no closing price was reported on that date, on the
last trading date on which a closing price was reported) on the stock
exchange determined by the Plan Administrator to be the primary market
for the Common Stock or the Nasdaq National Market, whichever is
applicable or (B) if the Common Stock is not traded on any such exchange
or national market system, the average of the closing bid and asked
prices of a share of Common Stock on the Nasdaq Small Cap Market for the
day prior to the time of the determination (or, if no such prices were
reported on that date, on the last date on which such prices were
reported), in each case, as reported in The Wall Street Journal or such
other source as the Plan Administrator deems reliable; or
(2) In the absence of an established market of the type described
in (1), above, for the Common Stock, the Fair Market Value thereof shall
be determined by the Plan Administrator in good faith.
(o) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(p) "Participant" means an Employee of the Company or Designated
Parent or Subsidiary who is actively participating in the Plan.
(q) "Plan" means this Employee Stock Purchase Plan.
(r) "Plan Administrator" means either the Board or a committee of the
Board that is responsible for the administration of the Plan as is
designated from time to time by resolution of the Board.
(s) "Purchase Period" means a purchase period established pursuant to
Section 4 hereof.
(t) "Purchase Price" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
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<PAGE> 3
(u) "Reserves" means the sum of the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and
the number of shares of Common Stock which have been authorized for
issuance under the Plan but not yet placed under option.
(v) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Eligibility.
(a) General. Any individual who is an Employee on a given Enrollment
Date shall be eligible to participate in the Plan for the Purchase Period
commencing with such Enrollment Date.
(b) Limitations on Grant and Accrual. Any provisions of the Plan to
the contrary notwithstanding, no Employee shall be granted an option under
the Plan (i) if, immediately after the grant, such Employee (taking into
account stock owned by any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own stock
and/or hold outstanding options to purchase stock possessing five percent
(5%) or more of the total combined voting power or value of all classes of
stock of the Company or of any Parent or Subsidiary, or (ii) which permits
his/her rights to purchase stock under all employee stock purchase plans of
the Company and its Parents or Subsidiaries to accrue at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined
at the Fair Market Value of the shares at the time such option is granted)
for each calendar year in which such option is outstanding at any time. The
determination of the accrual of the right to purchase stock shall be made
in accordance with Section 423(b)(8) of the Code and the regulations
thereunder.
(c) Other Limits on Eligibility. Notwithstanding Subsection (a),
above, the following Employees shall not be eligible to participate in the
Plan for any relevant Purchase Period: (i) Employees whose customary
employment is 20 or fewer hours or less per week; (ii) Employees whose
customary employment is 5 or fewer months in any calendar year; (iii)
Employees who are subject to rules or laws of a foreign jurisdiction that
prohibit or make impractical the participation of such Employees in the
Plan.
4. Purchase Periods.
(a) The Plan shall be implemented through consecutive Purchase Periods
until such time as (i) the maximum number of shares of Common Stock
available for issuance under the Plan shall have been purchased or (ii) the
Plan shall have been sooner terminated in accordance with Section 19
hereof. The maximum duration of a Purchase Period shall be six (6) months.
Initially, the Plan shall be implemented through consecutive Purchase
Periods of six (6) months' duration commencing each January 1 and July 1
following the Effective Date (The initial Purchase Period shall commence on
the Effective Date and shall end on December 31, 1998). The Plan
Administrator shall have the authority to change the length of any Purchase
Period subsequent to the initial Purchase Period by announcement at least
thirty (30) days prior to the commencement of the Purchase Period.
(b) A Participant shall be granted a separate option for each Purchase
Period in which he/she participates. The option shall be granted on the
Enrollment Date and shall be automatically exercised on the last day of the
Purchase Period.
(c) Except as specifically provided herein, the acquisition of Common
Stock through participation in the Plan for any Purchase Period shall
neither limit nor require the acquisition of Common Stock by a Participant
in any subsequent Purchase Period.
5. Participation.
(a) An eligible Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the designated payroll
office of the Company at least ten (10) business days prior to the
Enrollment Date for the Purchase Period in which such participation will
commence, unless a later time for filing the subscription agreement is set
by the Plan Administrator for all eligible Employees with respect to a
given Purchase Period.
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<PAGE> 4
(b) Payroll deductions for a Participant shall commence with the first
partial or full payroll period beginning on the Enrollment Date and shall
end on the last complete payroll period during the Purchase Period, unless
sooner terminated by the Participant as provided in Section 10.
6. Payroll Deductions.
(a) At the time a Participant files his/her subscription agreement,
he/she shall elect to have payroll deductions made during the Purchase
Period in amounts between one percent (1%) and not exceeding fifteen
percent (15%) of the Compensation which he/she receives during the Purchase
Period.
(b) All payroll deductions made for a Participant shall be credited to
his/her account under the Plan and will be withheld in whole percentages
only. A Participant may not make any additional payments into such account.
(c) A Participant may discontinue his/her participation in the Plan as
provided in Section 10, or may decrease the rate of his/her payroll
deductions during the Purchase Period by completing and filing with the
Company a new subscription agreement authorizing a decrease in the payroll
deduction rate. The decrease in rate shall be effective with the first full
payroll period commencing ten (10) business days after the Company's
receipt of the new subscription agreement unless the Company elects to
process a given change in participation more quickly. A Participant may
increase the rate of his/her payroll deductions for a future Purchase
Period by filing with the Company a new subscription agreement authorizing
an increase in the payroll deduction rate within ten (10) business days
(unless the Company elects to process a given change in participation more
quickly) before the commencement of the upcoming Purchase Period. A
Participant may not increase the rate of his/her payroll deductions for an
existing Purchase Period. A Participant's subscription agreement shall
remain in effect for successive Purchase Periods unless terminated as
provided in Section 10. The Plan Administrator shall be authorized to limit
the number of payroll deduction rate changes during any Purchase Period.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a Participant's
payroll deductions may be decreased to 0% at such time during any Purchase
Period which is scheduled to end during the current calendar year (the
"Current Purchase Period") that the aggregate of all payroll deductions
which were previously used to purchase stock under the Plan in a prior
Purchase Period which ended during that calendar year plus all payroll
deductions accumulated with respect to the Current Purchase Period equal
$21,250. Payroll deductions shall recommence at the rate provided in such
Participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the Participant as provided in Section 10.
7. Grant of Option. On the Enrollment Date, each Participant in such
Purchase Period shall be granted an option to purchase on each Exercise Date of
such Purchase Period (at the applicable Purchase Price) up to a number of shares
of the Common Stock determined by dividing such Participant's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price; provided (i)
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof, and (ii) the maximum number of shares of Common Stock a
Participant shall be permitted to purchase in any Purchase Period shall be 5,000
shares, subject to adjustment as provided in Section 18 hereof. Exercise of the
option shall occur as provided in Section 8, unless the Participant has
withdrawn pursuant to Section 10, and the option, to the extent not exercised,
shall expire on the last day of the Purchase Period.
8. Exercise of Option. Unless a Participant withdraws from the Plan as
provided in Section 10, below, his/her option for the purchase of shares will be
exercised automatically on each Exercise Date, and the maximum number of full
shares subject to the option shall be purchased for such Participant at the
applicable Purchase Price with the accumulated payroll deductions in his/her
account. No fractional shares will be purchased; any payroll deductions
accumulated in a Participant's account which are not sufficient to purchase a
full share shall be carried over to the next Purchase Period or returned to the
Participant, if the Participant withdraws from the Plan. Notwithstanding the
foregoing, any amount remaining in a Participant's account
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<PAGE> 5
following the purchase of shares on the Exercise Date due to the application of
Section 423(b)(8)of the Code or Section 7, above, shall be returned to the
Participant and shall not be carried over to the next Purchase Period. During a
Participant's lifetime, a Participant's option to purchase shares hereunder is
exercisable only by him/her.
9. Delivery. Upon receipt of a request from a Participant after each
Exercise Date on which a purchase of shares occurs, the Company shall arrange
the delivery to such Participant, as promptly as practicable, of a certificate
representing the shares purchased upon exercise of his/her option.
10. Withdrawal; Termination of Employment.
(a) A Participant may withdraw all but not less than all the payroll
deductions credited to his/her account and not yet used to exercise his/her
option under the Plan at any time by giving written notice to the Company
in the form of Exhibit B to this Plan. All of the Participant's payroll
deductions credited to his/her account will be paid to such Participant as
promptly as practicable after receipt of notice of withdrawal, such
Participant's option for the Purchase Period will be automatically
terminated, and no further payroll deductions for the purchase of shares
will be made during the Purchase Period. If a Participant withdraws from a
Purchase Period, payroll deductions will not resume at the beginning of the
succeeding Purchase Period unless the Participant delivers to the Company a
new subscription agreement.
(b) Upon a Participant's ceasing to be an Employee for any reason or
upon termination of a Participant's employment relationship (as described
in Section 2(j)), the payroll deductions credited to such Participant's
account during the Purchase Period but not yet used to exercise the option
will be returned to such Participant or, in the case of his/her death, to
the person or persons entitled thereto under Section 14, and such
Participant's option will be automatically terminated.
11. Interest. No interest shall accrue on the payroll deductions credited
to a Participant's account under the Plan.
12. Stock.
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan shall be 500,000 shares, subject to
adjustment upon changes in capitalization of the Company as provided in
Section 18. If on a given Exercise Date the number of shares with respect
to which options are to be exercised exceeds the number of shares then
available under the Plan, the Plan Administrator shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a
manner as shall be practicable and as it shall determine to be equitable.
(b) A Participant will have no interest or voting right in shares
covered by his/her option until such shares are actually purchased on the
Participant's behalf in accordance with the applicable provisions of the
Plan. No adjustment shall be made for dividends, distributions or other
rights for which the record date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the Participant
and his/her spouse.
13. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all persons.
14. Designation of Beneficiary.
(a) Each Participant will file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the Participant's
account under the Plan in the event of such Participant's death. If a
Participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
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(b) Such designation of beneficiary may be changed by the Participant
(and his/her spouse, if any) at any time by written notice. In the event of
the death of a Participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such Participant's
death, the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or
administrator has been appointed (to the knowledge of the Plan
Administrator), the Plan Administrator, in its discretion, may deliver such
shares and/or cash to the spouse or to any one or more dependents or
relatives of the Participant, or if no spouse, dependent or relative is
known to the Plan Administrator, then to such other person as the Plan
Administrator may designate.
15. Transferability. Neither payroll deductions credited to a Participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in Section 14 hereof) by the Participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Plan Administrator may treat such act as an election to withdraw
funds from a Purchase Period in accordance with Section 10.
16. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each Participant in
the Plan. Statements of account will be given to Participants at least annually,
which statements will set forth the amounts of payroll deductions, the Purchase
Price, the number of shares purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustments Upon Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the Reserves, as well
as the Purchase Price, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other similar event resulting
in an increase or decrease in the number of issued shares of Common Stock.
Such adjustment shall be made by the Plan Administrator, whose
determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an
option. The Plan Administrator may, if it so determines in the exercise of
its sole discretion, make provision for adjusting the Reserves, as well as
the Purchase Price, in the event the Company effects one or more
reorganizations, recapitalizations, rights offerings or other increases or
reductions of shares of its outstanding Common Stock.
(b) Corporate Transactions. In the event of a proposed Corporate
Transaction, each option under the Plan shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation, unless the Plan Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, to shorten the Purchase Period then in progress
by setting a new Exercise Date (the "New Exercise Date"). If the Plan
Administrator shortens the Purchase Period then in progress in lieu of
assumption or substitution in the event of a Corporate Transaction, the
Plan Administrator shall notify each Participant in writing, at least ten
(10) days prior to the New Exercise Date, that the Exercise Date for
his/her option has been changed to the New Exercise Date and that his/her
option will be exercised automatically on the New Exercise Date, unless
prior to such date he/she has withdrawn from the Purchase Period as
provided in Section 10. For purposes of this Subsection, an option granted
under the Plan shall be deemed to be assumed if, following the Corporate
Transaction, the option confers the right to purchase with substantially
equivalent terms as the original option, for each share of Common Stock
subject to the option immediately prior to the Corporate Transaction, the
consideration (whether stock, cash or other securities or property)
received in the Corporate Transaction by holders of Common Stock for each
share of Common Stock held on the effective date of the Corporate
Transaction (and if such holders were
A-6
<PAGE> 7
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares of Common Stock); provided,
however, that if such consideration received in the Corporate Transaction
was not solely common stock of the successor corporation or its Parent, the
Plan Administrator may, with the consent of the successor corporation and
the Participant, provide for the consideration to be received upon exercise
of the option to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received
by holders of Common Stock in the Corporate Transaction.
19. Amendment or Termination.
(a) The Plan Administrator may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 18, no such
termination can affect options previously granted, provided that a Purchase
Period may be terminated by the Plan Administrator on any Exercise Date if
the Plan Administrator determines that the termination of the Purchase
Period is in the best interests of the Company and its stockholders. Except
as provided in Section 18, no amendment may make any change in any option
theretofore granted which adversely affects the rights of any Participant.
To the extent necessary to comply with Section 423 of the Code (or any
successor rule or provision or any other applicable law or regulation), the
Company shall obtain stockholder approval in such a manner and to such a
degree as required.
(b) Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the
Plan Administrator shall be entitled to limit the frequency and/or number
of reductions in the amount withheld during Purchase Periods, establish the
exchange ratio applicable to amounts withheld in a currency other than U.S.
dollars, establish additional terms, conditions, rules or procedures to
accommodate the rules or laws of applicable foreign jurisdictions, permit
payroll withholding in excess of the amount designated by a Participant in
order to adjust for delays or mistakes in the Company's processing of
properly completed withholding elections, establish reasonable waiting and
adjustment periods and/or accounting and crediting procedures to ensure
that amounts applied toward the purchase of Common Stock for each
Participant properly correspond with amounts withheld from the
Participant's Compensation, and establish such other limitations or
procedures as the Plan Administrator determines in its sole discretion
advisable and which are consistent with the Plan.
20. Notices. All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Plan Administrator at the
location, or by the person, designated by the Plan Administrator for the receipt
thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance. As a condition to the
exercise of an option, the Company may require the Participant to represent and
warrant at the time of any such exercise that the shares are being purchased
only for investment and without any present intention to sell or distribute such
shares if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned applicable provisions of law. In addition,
no options shall be exercised or shares issued hereunder before the Plan shall
have been approved by stockholders of the Company as provided in Section 23.
22. Term of Plan. The Plan shall become effective upon the earlier to occur
of its adoption by the Board or its approval by the stockholders of the Company.
It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 19.
23. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. If such stockholder
A-7
<PAGE> 8
approval is obtained at a duly held stockholders' meeting, the Plan must be
approved by a majority of the votes cast at such stockholders' meeting at which
a quorum representing a majority of all outstanding voting stock of the Company
is, either in person or by proxy, present and voting on the Plan. If such
stockholder approval is obtained by written consent, it must be obtained by the
written consent of the holders of a majority of all outstanding voting stock of
the Company. However, approval at a meeting or by written consent may be
obtained by a lesser degree of stockholder approval if the Plan Administrator
determines, after consultation with the Company's legal counsel if the Plan
Administrator deems such consultation advisable, that such a lesser degree of
stockholder approval will comply with all applicable laws and will not adversely
affect the qualification of the Plan under Section 423 of the Code.
24. No Employment Rights. The Plan does not, directly or indirectly, create
any right for the benefit of any employee or class of employees to purchase any
shares under the Plan, or create in any employee or class of employees any right
with respect to continuation of employment by the Company or a Designated Parent
or Subsidiary, and it shall not be deemed to interfere in any way with such
employer's right to terminate, or otherwise modify, an employee's employment at
any time.
25. Effect of Plan. The provisions of the Plan shall, in accordance with
its terms, be binding upon, and inure to the benefit of, all successors of each
Participant, including, without limitation, such Participant's estate and the
executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
26. Applicable Law. The laws of the State of Delaware (excluding that body
of law pertaining to its conflicts of law) will govern all matters relating to
this Plan except to the extent it is superseded by the laws of the United
States.
A-8
<PAGE> 9
EXHIBIT A
ELECTROGLAS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
[ ] Original Application Enrollment Date:
- ------------------
[ ] Change in Payroll Deduction Rate
[ ] Change of Beneficiary(ies)
1. I,
----------------------------------------- , hereby elect to participate in
the Electroglas, Inc. 1998 Employee Stock Purchase Plan (the "Plan") and
subscribe to purchase shares of the Company's Common Stock in accordance with
this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of
- ------------ % of my Compensation on each paycheck during the Purchase Period. I
understand that this amount must not be less than one percent (1%) and not more
than fifteen percent (15%) of my Compensation during the Purchase Period and
that no fractional percentages are permitted. I further understand that:
(a) all payroll deductions made by me shall be credited to my account
under the Plan;
(b) I may not make additional payments into such account;
(c) all payments made by me shall be accumulated for the purchase of
Common Stock at the applicable Purchase Price determined in accordance with
the Plan;
(d) no interest will be credited on funds held in my account at any
time for any reason including, but not limited to, before or after the
purchase of shares under the Plan or in connection with any refund caused
by my withdrawal from the Plan;
(e) I may discontinue my participation in the Plan at any time prior
to an Exercise Date as provided in Section 10 of the Plan, but if I do not
withdraw from the Plan, any accumulated payroll deductions will be used to
automatically purchase Common Stock;
(f) I may decrease the rate of my payroll deductions in whole
percentage increments to not less than one percent (1%) on one occasion
during any Purchase Period by completing and filing a new Subscription
Agreement with such decrease taking effect as of the beginning of the
payroll period following the date of filing of a new Subscription
Agreement, filed at least ten (10) business days prior to the beginning of
such payroll period;
(g) I may not increase the rate of my payroll deductions during any
ongoing Purchase Period:
(h) I may increase or decrease the rate of payroll deductions for
future Purchase Periods by filing a new Subscription Agreement, and that
change will be effective as of the beginning of the next Purchase Period;
and
(i) unless I discontinue my participation in the Plan as provided in
Section 10 of the Plan, my election for payroll deductions will continue to
be effective for each successive Purchase Period.
4. I have received a copy of the complete "Electroglas, Inc. 1998 Employee
Stock Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan. I understand that the grant of the
option by the Company under this Subscription Agreement is subject to obtaining
stockholder approval of the Employee Stock Purchase Plan.
5. Until I request delivery of certificates, Shares purchased for me under
the Plan shall be owned by my beneficially and shall be held in street name of
the nominee of the third party administrator selected by the Plan Administrator
to administer the Plan records or in such other nominee name as shall be
designated from
A2-1
<PAGE> 10
\time to time by the Plan Administrator. Upon delivery, shares should be issued
in the name(s) of (name of employee or employee and employee's spouse only):
- ------------------------------------------------------------
- ------------------------------------------------------------
6. I understand that if I dispose of any shares received by me pursuant to
the Employee Stock Purchase Plan within two (2) years after the Enrollment Date
(the first day of the Purchase Period during which I purchased such shares) or
within one (1) year after the Exercise Date (the date I purchased such shares),
I will be treated for federal income tax purposes as having received ordinary
income at the time of such disposition in an amount equal to the excess of the
fair market value of the shares on the date such shares were purchased for me
over the price which I paid for the shares. I hereby agree to notify the Company
in writing within 30 days after the date of any such disposition and I will make
adequate provision for foreign, federal, state or other tax withholding
obligations, if any which arise upon the disposition of the Common Stock. The
Company may, but will not be obligated to, withhold from my compensation the
amount necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the 2-year and 1-year
holding periods described above, I understand that I will be treated for federal
income tax purposes as having received income only at the time of such
disposition, and that such income will be taxed as ordinary income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares, or (2) 15% of the fair market value of the shares
on the first day of the Purchase Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as long-term capital gain. I also
understand that the foregoing income tax consequences contained herein is only a
summary of some of the basic provisions of the current federal income tax law
and related regulations applicable to the Plan and are subject to change. I
further understand that the Company is not giving tax advice, is not responsible
for advising me of any changes in the applicable tax rules, and that I should
consult a tax advisor concerning the tax consequences of the purchase and sale
of Common Stock under the Plan.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
A2-2
<PAGE> 11
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan.
<TABLE>
<S> <C>
NAME: (Please print) ----------------------------------------------------------------------------
(First) (Middle) (Last)
Relationship:
----------------------------------------------------------------------------
Address:
============================================================================
============================================================================
Employee's Social Security Number:
----------------------------------------------------------------------------
Employee's Home Address:
============================================================================
----------------------------------------------------------------------------
</TABLE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE PURCHASE PERIODS UNLESS TERMINATED BY ME
Employee's Signature:
- --------------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
Signature of spouse
if beneficiary is other
than spouse:
- --------------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
A2-3
<PAGE> 12
EXHIBIT B
ELECTROGLAS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NOTICE OF WITHDRAWAL
The undersigned Participant in the Purchase Period of the Electroglas, Inc.
1998 Employee Stock Purchase Plan which began on , 19 , hereby
notifies the Company that he or she hereby withdraws from the Purchase Period.
He or she hereby directs the Company to pay to the undersigned as promptly as
practicable all the payroll deductions credited to his/her account with respect
to such Purchase Period. The undersigned understands and agrees that his/her
option for such Purchase Period will be automatically terminated. The
undersigned understands further that no further payroll deductions will be made
for the purchase of shares in the current Purchase Period and the undersigned
shall be eligible to participate in succeeding Purchase Periods only by
delivering to the Company a new Subscription Agreement.
<TABLE>
<S> <C>
Name and Address
of Participant:
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Signature:
------------------------------------------------------------
Date:
------------------------------------------------------------
</TABLE>
B-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED BALANCE SHEETS, AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,119
<SECURITIES> 106,583
<RECEIVABLES> 22,873
<ALLOWANCES> 460
<INVENTORY> 19,490
<CURRENT-ASSETS> 190,065
<PP&E> 37,384
<DEPRECIATION> 22,884
<TOTAL-ASSETS> 217,782
<CURRENT-LIABILITIES> 20,276
<BONDS> 0
0
0
<COMMON> 198
<OTHER-SE> 193,541
<TOTAL-LIABILITY-AND-EQUITY> 217,782
<SALES> 64,403
<TOTAL-REVENUES> 64,403
<CGS> 41,830
<TOTAL-COSTS> 41,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (9,272)
<INCOME-TAX> (3,709)
<INCOME-CONTINUING> (5,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,563)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
