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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER:
DECEMBER 31, 1997 0-21626
ELECTROGLAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 77-0336101
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2901 Coronado Drive, Santa Clara, California 95054 (408) 727-6500
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (REGISTRANT'S
TELEPHONE NUMBER,
INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 28, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $363,334,950, based
on the closing sale price as reported on the Nasdaq National Market on such
date. This calculation does not reflect a determination that certain persons are
affiliates of the Registrant for any other purposes.
As of February 28, 1998, the Registrant had outstanding 19,639,727 of
Common Stock.
The Index to Exhibits is located beginning on Page 16.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of this Report on Form 10-K incorporates information by reference from
Registrant's 1997 Annual Report to Stockholders. Part III of this Report on Form
10-K incorporates information by reference from Registrant's Proxy Statement for
its 1997 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Electroglas, Inc. ("Electroglas" or "the Company") is a world-leading
supplier of hardware- and software-based data collection, management, and
analysis tools to the global semiconductor industry. Semiconductor producers
depend on the Company's products to improve their productivity and process
control by optimizing manufacturing efficiency. Historically, the Company's
primary product has been automatic wafer probing equipment. Electroglas believes
it is one of the largest suppliers of wafer probers worldwide. The Company has
sold over 9,700 wafer probers from among its current product offerings and
believes it supplies more than half of the probers used in the United States and
European market segments. The Company's primary prober product offerings are its
Horizon 4000 Series wafer probers and its 2000 Series wafer probers. All of the
Company's wafer probers feature the Company's linear motor technology and offer
advanced vision processing, sophisticated system software and high throughput.
Today, the Company is also involved in the development, manufacture,
marketing, and servicing of inspection products and yield management software as
part of its strategy to move from a supplier of wafer probers to a process
management solutions provider. The move began with two acquisitions completed in
1997. In May, Electroglas acquired Sunnyvale, California-based Knights
Technology, Inc. ("Knights"). Knights is a supplier of yield management software
products to the semiconductor industry. In December, Electroglas acquired
Albany, Oregon-based Techne Systems, Inc. (renamed "Electroglas Inspection
Products"). Techne is a supplier of back-end wafer inspection systems.
Electroglas was formed on April 1, 1993 to succeed to the wafer prober
business conducted by the Electroglas division of General Signal Corporation
(former "Parent"). Immediately prior to the closing of the initial public
offering of its Common Stock ("the IPO") on July 1, 1993, the Company assumed
the assets and liabilities of the Electroglas division in the asset transfer
and, following the IPO, the Company commenced operations as an independent
corporation. The Company, through its predecessors, has been in the wafer prober
business for more than 30 years.
INDUSTRY BACKGROUND
Semiconductor devices are fabricated by repeating a complex series of
process steps on a wafer substrate, which is usually made of silicon and
measures three to eight inches in diameter. Wafers are typically sent through a
series of 100 to 300 process steps. A finished wafer consists of many integrated
circuits (each referred to as a "device" or "die"), the number depending on the
area of the circuits and the size of the wafer. Manufacturers have increasingly
utilized larger diameter wafers to achieve more cost effective production. The
move to 300 mm (12 inch) wafers is currently underway throughout the industry.
The management of these fabrication steps has become Electroglas' new
focus. The Company's wafer probers and inspection products will be designated
to collect data that is managed by their networking software and analyzed by
their yield management products - providing a way to manage the fabrication
process.
Wafer Probing
A wafer prober successively positions each integrated circuit on a
wafer so that the electrical contact points (or "pads") on the die align under
and make contact with the probe pins, which are located on a probe card mounted
on the wafer prober. The probe card, which is generally custom made by other
suppliers for the specific integrated circuit being tested, is connected to a
test system, also supplied by other suppliers, which performs the required
parametric or functional test. Parametric testing is performed during the wafer
fabrication process ("in-line testing") and at the completion of the wafer
fabrication process ("end-of-line testing") to measure electrical parameters
which verify the reliability of the wafer fabrication process, while functional
testing is performed after the completion of wafer fabrication ("wafer sort") to
identify devices which do not conform to particular electrical specifications.
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Inspection
Wafer inspection tools are used to automate a range of semiconductor
defect identification, defect classification, CD measurement and feedback
control processes. The tools analyze each individual die on each wafer for
defects and process excursions, identify the type of defect or pattern anomaly,
measure the defect or anomaly, and pass the quantitative results to both
upstream and downstream production machines.
Yield Management Software
Yield management software tools access and extract inspection and
measurement results for the purpose of yield enhancement analysis in the wafer
fab.
CAD Navigation Software
CAD Navigation software provides computerized interfaces and navigation
capabilities for IC design, failure analysis, defect review and debugging.
Wafer Prober Market
The automatic wafer probing market can be divided into the United
States, European and Asian market segment, into which the Company sells
substantially all of its products, and the Japanese market segment. The Japanese
market segment is comprised of semiconductor fabrication facilities located in
Japan and those located outside Japan which are controlled by Japanese
companies. Semiconductor manufacturers use automatic wafer probers primarily
during wafer sort, which occurs before the separation and packaging of each
individual device. Wafer probers have been increasingly used during in-line and
end-of-line testing and are also used for research and development, and quality
and process control applications. In-line testing requires special equipment
features such as cleanroom compatibility, as tests are carried out during the
manufacturing process. This testing is done to verify the manufacturing process
while wafers are in an unfinished state where corrective action can occur. The
Company estimates, based upon its experience, that wafer sort applications
represent approximately 80% of the market for automatic wafer probers. The
remaining 20% is approximately equally divided between in-line and end-of-line
testing and laboratory applications.
Wafer probers are typically purchased by a semiconductor manufacturer
when outfitting a new wafer fabrication facility or expanding an existing
facility. Wafer probers are also purchased to replace equipment in response to
major changes in technology, such as larger wafer sizes and greater device
complexity. A semiconductor fabrication facility typically requires 20 to 80
probers to meet testing requirements on a timely basis. The purchase of
semiconductor manufacturing equipment and spare parts, the integration of such
equipment into production lines and the training of employees on a particular
supplier's equipment require significant expenditures by semiconductor
manufacturers. To maximize the benefits of their investment in machinery, parts,
production line integration and training, semiconductor manufacturers generally
are reluctant to replace existing equipment with equipment from another
supplier.
COMPANY STRATEGY
Electroglas has become a leader in the wafer probing market through a
combination of strengths, including advanced technical capabilities, close
relationships with the leading manufacturers of integrated circuits, a broad
line of high quality products and a well established, highly qualified
distribution organization. Building on these strengths, Electroglas' strategy is
comprised of the following key elements:
o Focus on Technological Innovation. The Company has invested heavily in
engineering, research and development to add features and functionality to
its products. The Company was the first to introduce automatic wafer probers
using a linear motor positioning system for precise motion control and
digital pattern recognition processors for automatic alignment and was the
first to introduce automatic wafer probers for use with eight-inch wafers.
The Company expects to continue its emphasis on engineering, research and
development in an effort to anticipate and address technological advances in
semiconductor processing.
o Maintain Strong Customer Relationships. The Company has long-standing
relationships with its customers. The Company's development of products and
product enhancements is market driven. Engineering, sales and management
personnel collaborate with customer counterparts to determine customers'
needs and specifications. The Company expects to continue to strengthen its
existing customer relationships by continuing to provide high levels of
service and support.
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o Emphasize Quality Products. The Company believes it has developed a
reputation as a leader in providing high quality products. The Company was
chosen in the most recent customer survey conducted by VLSI Research, Inc.
as one of the "Ten-Best" test and measurement equipment manufacturers.
Knights' YieldManager(R) product was awarded the 1997 Editors' Choice Best
Product Award by Semiconductor International magazine. The Company has
received quality awards from its customers and the SEMATECH Partnering for
Total Quality award. The Company has a company-wide quality program and
recently received its ISO 9002 Certification. The Company's quality training
program emphasizes continuous improvement, data driven decisions and close
collaboration among the Company's employees, customers and suppliers. The
Company trains all of its employees in basic quality skills. The Company
also regularly participates in quality sharing meetings with other equipment
manufacturers and customer quality audits of procedures and personnel.
o Expand Product Lines and Applications. The Company intends to capitalize on
its market position and technical skills to further broaden existing product
lines through internally developed products and from time to time through
strategic alliances and acquisitions, such as the Knights and Techne
acquisitions of 1997.
PRODUCTS
Probers
Horizon 4000 Series: The Horizon 4090, and the Horizon 4090u (micro),
which is targeted to ship in the first half of 1998 are the Company's primary
offering in the Horizon 4000 Series of wafer probers. This product line is
positioned to satisfy high volume semiconductor manufacturing applications. The
Horizon 4000 Series provides many advanced automation capabilities including
automatic probe-to-pad-alignment, in-process inspection and optical character
recognition (OCR). Optional for Horizon Series probers is a temperature
controlled chuck top, providing the ability to maintain precisely a
customer-selected wafer temperature during testing. The Horizon 4090, and
Horizon 4090u micro utilize the Company's EGCommander system software. This
software was developed by the Company and allows significant application and
customer driven customization of the wafer prober and compatibility with the
standard MS-DOS operating system. The user interface features color graphics,
touchscreen programming, probing recipes, control maps and real-time maps.
Accuracy of the Horizon 4000 Series has been enhanced and the Horizon 4000
Series probers feature a distributed multiple processor architecture to
maximize productivity and expandability.
In May 1997, the Company opened the Electroglas Prober Integration
Center (EPICenter) on its campus in Santa Clara, California. The EPICenter helps
provide the Company and key semiconductor manufacturing and test equipment
partners the resources to integrate and test probing solutions before product
introduction.
In 1997, the Company increased engineering development work for the
next-generation, 300mm wafer prober. The Company anticipates selective
introduction of the product to key customers in late 1998.
Network Products
The Electroglas Station Controller and SORTnet products are a
system of software and hardware components that allows the integration of the
Company's prober products into standard local area networks found in
semiconductor manufacturing operations. The network products allow manufacturers
to monitor the entire probing operation, collect test data on a real-time basis,
control centrally prober setup and facilitate key manufacturing advancements,
including offline inking and inkless probing, which in turn improve overall
productivity.
Yield Management
YieldManager, introduced in 1994, is an integrated enterprise, client
server yield enhancement system for sub-micron semiconductor fabrication
facilities. YieldManager takes the output from testers, probers and inspection
equipment used at various points in the semiconductor fabrication process,
correlates it and manages it in a manner that enables the operator of the fab to
maximize its manufacturing yield. YieldManager provides an encompassing and
integrated approach to yield management and automates processes previously
managed separately and often manually.
YieldManager links to Knights' MegaLab(R) and Merlin's FrameworkTM
software for defect review; SpaR (Spatial Pattern recognition) to group defects
into signatures that can be classified into process events; and Q-YIELD(TM) for
data-mining.
CAD Navigation
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Merlin's Framework is Knights' principal CAD navigation product that
uses the CAD semiconductor design data to locate physical attributes of the
semiconductor itself. Merlin's Framework has been used in the semiconductor
industry for failure analysis and process diagnostics and is a leading CAD
navigation product.
Inspection Products
The QuickSilver series of products feature key technologies, such as
Time Delay Integration (TDI) for high speed acquisition of complex images. In
the series, there are four products distinguished by their software packages,
not necessarily their platform. The QuickSilver 100 is primarily for
microstructure inspection applications, the QuickSilver 200 focuses on defect
inspection and the QuickSilver 300 and 330 inspect bump applications,
two-dimensional and three-dimensional, respectively.
ENGINEERING, RESEARCH AND DEVELOPMENT
The market for wafer probing equipment is characterized by continuous
technological development and product innovation. The Company believes that
continued and timely development of new products and enhancements to existing
products is necessary to maintain its competitive position. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to engineering, research and development programs. The Company uses its close
relationships with key customers to make improvements on its products which
respond to such customers' needs. For example, the Horizon 4085X responds to the
Company's major customers' need for cleanroom compatible probers. In addition,
the Company develops new products to respond to general market requirements. For
example, the EGCommander was developed to address the market's demand for
increased system software flexibility.
The Company's ongoing engineering, research and development efforts
generally can be classified into three categories: feature enhancements, such as
features to improve accuracy, speed or automation; new products; and customer
driven product enhancements. Engineering, research and development expenses were
$21,897,000, $18,672,000 and $13,560,000 in 1997, 1996 and 1995, respectively,
or 14.6%, 12.3% and 8.0% of net sales, respectively. Engineering, research and
development expenses consist primarily of salaries, project materials and other
costs associated with the Company's ongoing efforts.
MARKETING, SALES AND SERVICE
The Company primarily sells its products directly to end-users. The
Company believes that using a direct sales force provides it with a significant
competitive advantage in communicating with customers and responding to market
demands.
The Company generally sells product on net 30-day terms to most
customers. Other, primarily foreign, customers are required to deliver a letter
of credit typically payable upon product delivery. The Company generally
warrants its products for a period of up to 12 months from shipment for material
and labor to repair the product. Installation is customarily included in the
price of the product. The Company's field engineers provide customers with call
out repair and maintenance services for a fee. Customers may enter into repair
and maintenance service contracts covering the Company's products. The Company
trains customer employees to perform routine service for a fee and provides
telephone consultation services generally free of charge.
In the United States, Electroglas maintains sales and service offices
in Arizona, California, Massachusetts, Oregon and Texas. In Europe, the Company
maintains sales and service locations in France, Germany and the United
Kingdom. In Asia, the Company maintains direct sales and service locations in
Japan, Hong Kong, Korea, People's Republic of China, Singapore and Taiwan. As
of December 31, 1997, the Company employed approximately 232 people worldwide
in sales, service, applications, logistics, technical support and customer
service.
CUSTOMERS
Electroglas sells its products to leading semiconductor manufacturers
throughout the world. In 1997 and 1995, no single customer accounted for more
than 10% of net sales. In 1996, sales to Intel represented 13% of net sales. No
other customer exceeded 10% of net sales in 1996.
International sales represented 43%, 45% and 45% of the Company's net
sales in 1997, 1996 and 1995, respectively. These sales represent the combined
total of export sales made by United States operations and all sales made by
foreign operations.
Export sales made by United States operations were 23% of net sales in 1997 (21%
to Asia, 2% to other), 19% of net sales in 1996 (18% to Asia, 1% to other) and
22% of net sales in 1995 (21% to Asia, 1% to other).
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The following is a summary of the Company's geographic operations:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Adjustment
United and
(in thousands) States Asia Europe Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Sales to unaffiliated $ 119,567 $ 1,557 $28,911 $ -- $ 150,035
customers
Transfer between geographic
locations 23,829 517 93 (24,439) --
- ------------------------------------------------------------------------------------------------------
Total net sales $ 143,396 $ 2,074 $29,004 $(24,439) $ 150,035
Operating income (loss) $ (12,970) $(6,571) $ 2,531 $ (822) $ (17,832)
Identifiable assets $ 211,898 $ 2,311 $16,140 $ (1,430) $ 228,919
1996
Sales to unaffiliated $ 112,216 $ 7,844 $31,890 $ -- $ 151,950
customers
Transfer between geographic
locations 27,057 87 -- (27,144) --
- ------------------------------------------------------------------------------------------------------
Total net sales $ 139,273 $ 7,931 $31,890 $(27,144) $ 151,950
Operating income (loss) $ 28,402 $(4,582) $ 4,827 $ 207 $ 28,854
Identifiable assets $ 187,135 $ 2,741 $ 8,597 $ (607) $ 197,866
1995
Sales to unaffiliated $ 131,351 $ 9,509 $28,380 $ -- $ 169,240
customers
Transfer between geographic
locations 25,287 95 -- (25,382) --
- ------------------------------------------------------------------------------------------------------
Total net sales $ 156,638 $ 9,604 $28,380 $(25,382) $ 169,240
Operating income (loss) $ 52,205 $(2,877) $ 4,185 $ (210) $ 53,303
Identifiable assets $ 175,967 $ 3,969 $12,619 $ (814) $ 191,741
</TABLE>
Sales between geographic areas are accounted for at prices that the Company
believes are at arm's length prices.
MANUFACTURING AND SUPPLIERS
The Company's principal manufacturing activities take place in Santa
Clara, California and consist primarily of assembling and testing complete
probing systems that meet specific customer requirements. Most of the
subassemblies used in the probing systems are manufactured by the Company;
however, some are standard products purchased from third parties. While the
Company uses standard components wherever possible, most mechanical parts, metal
fabrications and castings are made to Company specifications. The Company
schedules production based upon firm customer commitments and anticipated orders
during the planning cycle. The Company generally expects to be able to accept a
customer order, build the required machinery and ship to the customer within 10
weeks.
Electroglas maintains manufacturing capability for certain components.
This capacity has proven useful for certain short-run and small lot size
components where economic third party supply is not available. This capacity has
also been used for product development and prototypes. The Company maintains
in-house control of the critical manufacturing processes for its linear motor
positioning system.
Quality control is maintained through incoming inspection of components,
in-process inspection during equipment assembly and final inspection and
operation of all manufactured equipment prior to shipment. Electroglas has a
company-wide quality training program emphasizing continuous improvement, data
driven decisions and close collaboration among the Company's employees and its
customers and suppliers. The Company trains all of its employees in basic
quality skills and regularly participates in quality sharing meetings with other
equipment manufacturers and customer quality audits of procedures and personnel.
Certain of the components and subassemblies included in the Company's
products are obtained from a single source. However, the Company believes that
alternative sources exist or can be developed, if necessary.
BACKLOG
At December 31, 1997, the Company's backlog was approximately $36.6
million as compared to approximately $24.3 million at December 31, 1996. The
Company generally ships orders within four months after receipt of a customer's
purchase order. Due to possible changes in product delivery schedules and
cancellation of product orders and because the Company's sales will often
reflect orders shipped in the same quarter received, the Company's backlog at
any particular date is not necessarily indicative of actual sales for any
succeeding period.
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COMPETITION
The semiconductor equipment industry is highly competitive. The
principal competitive factors in the industry are product performance,
reliability, service and technical support, product improvements, price,
established relationships with customers and product familiarity. The Company
believes that its products compete favorably with respect to each of these
factors in the non-Japanese market segment. The Company's major competitors are
Tokyo Electron Labs ("TEL") and Tokyo Seimitsu ("TSK"). Some of the Company's
competitors have greater financial, engineering and manufacturing resources than
the Company and larger service organizations and long-standing customer
relationships. There can be no assurance that levels of competition in the
Company's particular product market will not intensify or that the Company's
technological advantages may not be reduced or lost as a result of technological
advances by competitors or changes in semiconductor processing technology. See
"Factors that May Affect Results and Financial Condition - Highly Competitive
Industry, - Japanese Market Segment and - Japanese Competition."
PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY
The Company believes that the success of its business depends more on
the technical competence, creativity and marketing abilities of its employees,
rather than on patents, trademarks and copyrights. Nevertheless, the Company has
a policy of seeking patents when appropriate on inventions concerning new
products and improvements as part of its ongoing research, development and
manufacturing activities. The Company owns various patents and has applied for
additional patent protection in the United States and abroad for the technology
in its products. The Company also has several registered United States and
international trademarks. The Company maintains unregistered copyrights on its
software and typically maintains the source code for its products as trade
secrets.
The Company also relies upon trade secret protection for its
confidential and proprietary information. The Company routinely enters into
confidentiality agreements with its employees. There can be no assurance,
however, that others will not independently gain information and techniques or
otherwise gain access to the Company's trade secrets or that the Company can
meaningfully protect its trade secrets. See "Factors that May Affect Results and
Financial Condition - Patent and Other Intellectual Property."
EMPLOYEES
As of December 31, 1997, the Company employed approximately 765 persons.
Many of the Company's employees are highly skilled, and the Company's success
will depend in part upon its ability to attract and retain such employees, who
are in great demand. The Company has never had a work stoppage or strike and no
employees are represented by a labor union or covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
FACTORS THAT MAY AFFECT RESULTS AND FINANCIAL CONDITION
The statements contained in this Form 10-K which are not purely
historical are forward looking statements, including statements regarding the
Company's beliefs, expectations, hopes, plans or intentions regarding the
future. Forward-looking statements in this document include statements under the
heading "Company Strategy" with respect to the Company's expectations regarding
continued emphasis on research and development and strengthening of customer
relationships, intentions regarding broadening existing product lines and the
complementary nature of its SORTnet(TM) products to its core product lines,
among others. All forward-looking statements included in this document are made
as of the date hereof, based on information available to the Company as of the
date hereof, and Electroglas assumes no obligation to update any forward
looking-statement or statements. It is important to note that the Company's
actual results could differ materially from those in such forward-looking
statements. The following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual operating results
and could cause the Company's actual consolidated operating results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
Semiconductor Industry Downturns Adversely Affect Electroglas Revenues and
Operating Results. The Company's business largely depends on capital
expenditures by semiconductor manufacturers, which in turn depend on the current
and anticipated market demand for integrated circuits and products that use
integrated circuits. The semiconductor industry is highly cyclical and has
historically experienced periods of oversupply resulting in significantly
reduced demand for capital equipment. The semiconductor industry is currently
experiencing a downturn which has led many semiconductor manufacturers to delay
or cancel capital expenditures. These delays and cancellations have adversely
affected the Company's revenues, gross profit, gross margin and operating
results. Furthermore, there can be no assurance that the semiconductor industry
will not experience further downturns or slowdowns in the future, which may
materially and adversely affect the Company's business and operating results. In
addition, the need to invest in the engineering, research and development and
marketing required to penetrate targeted foreign markets and maintain extensive
customer service and support capabilities limits the Company's ability to reduce
expenses during such downturns.
Variability and Uncertainty of Quarterly Operating Results. The Company has
experienced and expects to continue to experience significant fluctuations in
its quarterly results. The Company's backlog at the beginning of each quarter
does not
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necessarily determine actual sales for any succeeding period. The Company's
sales will often reflect orders shipped in the same quarter that they are
received. Moreover, customers may cancel or reschedule shipments, and production
difficulties could delay shipments. Other factors which may influence the
Company's operating results in a particular quarter include the timing of the
receipt of orders from major customers, product mix, competitive pricing
pressures, continue or worsened financial markets or economic instability in
Asia, the relative proportions of domestic and international sales, the
Company's ability to design, manufacture and introduce new products on a
cost-effective and timely basis, the delay between expenses to further develop
marketing and service capabilities and the realization of benefits from those
improved capabilities, and the introduction of new products by the Company's
competitors. Accordingly, the Company's results of operations are subject to
significant variability and uncertainty from quarter to quarter.
Dependence on New Products and Processes. Electroglas believes that its
future success will depend in part upon its ability to continue to enhance its
existing products and to develop and manufacture new products. As a result, the
Company expects to continue to make a significant investment in engineering,
research and development. There can be no assurance that the Company will be
successful in the introduction, marketing and cost effective manufacture of any
of its new products, or that the Company will be able to timely develop and
introduce new products, or to enhance its existing products and processes to
satisfy customer needs or achieve market acceptance. To develop new products
successfully, the Company depends on close relationships with its customers and
the willingness of those customers to share information with the Company. The
failure to develop products and introduce them successfully and in a timely
manner could adversely affect the Company's competitive position and results of
operations.
Dependence on Principal Customers. For the years ended December 31, 1997 and
1996, five of the Company's customers accounted for 33% and 37%, respectively,
of its net sales. No single customer accounted for more than 10% of net sales in
1997 and 1995. Intel Corporation accounted for 13% of net sales in the year
ended December 31, 1996. If one or more of the Company's major customers ceased
or significantly curtailed its purchases, a material adverse effect on the
Company's results of operations could result.
Highly Competitive Industry. The semiconductor equipment industry is highly
competitive. Electroglas faces substantial competition from established
competitors, some of which are part of larger companies that have greater
financial, engineering and manufacturing resources than the Company and have
larger service organizations and long-standing customer relationships. The
Company's competitors can be expected to continue to improve the design and
performance of their products and to introduce new products with competitive
price/performance characteristics. Competitive pressures may force price
reductions that could adversely affect the Company results of operations.
Although the Company believes it has certain technological and other advantages
over its competitors, maintaining and capitalizing on these advantages will
require the Company to continue a high level of investment in engineering,
research and development, marketing and customer service and support. There can
be no assurance that the Company will have sufficient resources to continue to
make these investments or that the Company will be able to make the
technological advances necessary to maintain such competitive advantages. See
"Business - Competition."
Japanese Market Segment and Japanese Competition. Electroglas believes that
competing Japanese companies have a competitive advantage because they dominate
the Japanese market segment (comprised of semiconductor fabrication facilities
located in Japan and those located outside Japan which are controlled by
Japanese companies). Foreign companies find it difficult to penetrate the large
and technically advanced Japanese market, which represents a substantial
percentage of the worldwide wafer prober market. In particular, Tokyo Electron
Limited ("TEL"), a large supplier of wafer probers and other semiconductor
capital equipment in Japan, dominates the Japanese market segment for wafer
probers. TEL dominance of the Japanese market segment and its position as a
large supplier of wafer probers worldwide provide it with a sales and technology
base that enables it to compete throughout the rest of the world. Another
Japanese company, Tokyo Seimitsu Co., Ltd. ("TSK"), also a large supplier of
wafer probers in the Japanese market segment, has recently increased its share
of that market. See "Business - Competition."
Although Electroglas believes it is the largest supplier of wafer probers in
the non-Japanese market segment, Electroglas has not yet established itself as a
significant participant in the Japanese market segment. While Japanese
semiconductor manufacturers in recent years have begun to build semiconductor
fabrication facilities outside Japan, Electroglas has not yet had significant
sales into such facilities. Further, Japanese semiconductor manufacturers have
extended their influence outside Japan by licensing products and process
technologies to non-Japanese semiconductor manufacturers; these licenses
typically include a recommendation to use wafer probers and other semiconductor
equipment manufactured by Japanese companies. In particular, Electroglas may be
at competitive disadvantage with respect to the Japanese semiconductor capital
equipment suppliers who have been engaged for some time in collaborative efforts
with Japanese semiconductor manufacturers. There can be no assurance that
Electroglas will be able to establish a significant presence in or ever compete
successfully in the Japanese market segment. In addition, to the extent that the
slowdown in the Japanese market segment, recently exacerbated by the recent
economic and currency turmoil in Japan and Asia generally, has left the
Company's Japanese competitors with excess inventory or excess capacity, they
may offer substantial discounts on their products, increasing pricing pressure
in both the Japanese market segment and elsewhere. Furthermore, the current
weakness and any greater weakness of the yen compared to the dollar may
exacerbate this situation.
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Patents and Other Intellectual Property. The Company's success depends in
significant part on its intellectual property. While the Company attempts to
protect its intellectual property through patents, copyrights and trade secrets,
it believes that its success will depend more upon innovation, technological
expertise and distribution strength. There can be no assurance that the Company
will successfully protect its technology or that competitors will not be able to
develop similar technology independently. No assurance can be given that the
claims allowed on any patents held by the Company will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.
Some customers using certain products of Electroglas have received a notice
of infringement from Technivison Corporation and Jerome H. Lemelson alleging
that the manufacture of semiconductor products infringes certain patents issued
to Mr. Lemelson. Certain of these customers have notified Electroglas that, in
the event it is subsequently determined that the customer infringes certain of
the Lemelson patents, they may seek reimbursement from Electroglas for some
damages or expenses resulting from this matter. Electroglas believes that its
products do not infringe the Lemelson patents. Certain of the Company's
customers are currently engaged in litigation with Mr. Lemelson involving 17 of
his patents and the validity of those patents has been placed in issue. In the
future, it is possible that the Company's participation in the litigation may be
required. Electroglas may incur costs with respect to such participation and
cannot predict the outcome of this or similar litigation or the effect of such
litigation upon Electroglas. To the best of the Company's knowledge, neither it
nor any of its products has been identified by Mr. Lemelson as infringing his
patents.
Dependence on Certain Suppliers. Electroglas obtains certain of the
components and subassemblies for its systems from a single source or a limited
group of suppliers, most notably all of the vision processor systems used in the
Company's products are supplied by Cognex Corporation ("Cognex"). Although
Electroglas seeks to reduce dependence on its sole and limited source suppliers,
the partial or complete loss of Cognex as a supplier of vision processor
systems, and the loss of certain other limited source suppliers could at least
temporarily adversely affect the Company's results of operations and damage
customer relationships. Further, a significant increase in the price of one or
more of these components could adversely affect the Company's results of
operations.
International Operations. International sales accounted for 43%, 45% and
45% of the Company's net sales for 1997, 1996 and 1995, respectively. The
Company expects international sales to continue to represent a significant
percentage of net sales. A number of factors may adversely affect the Company's
international sales and operations, including the imposition of governmental
controls, fluctuations in the U.S. dollar, which could increase the foreign
sales prices of the Company's products in local currencies, export license
requirements, restrictions on the export of technology, political instability,
trade restrictions, changes in tariffs and difficulties in staffing and managing
international operations. Currently, many Asian countries are experiencing
banking and currency difficulties that could lead to economic recession in those
countries. Among other things, the decline in value of the Korean currency,
together with difficulties obtaining credit, could result in a decline in the
purchasing power of the Company's Korean customers. This in turn could result in
the cancellation or delay of orders for the Company's products from Korean
customers, thus materially adversely affecting the Company's business, financial
condition or results of operations. Although these and similar regulatory,
geopolitical and global economic factors have not yet had a material adverse
effect on the Company's operations, there can be no assurance that such factors
will not adversely impact the Company's operations in the future or require the
Company to modify its current business practices. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.
Dependence on Key Employees. The future success of Electroglas partly
depends on its ability to retain key personnel. The Company also needs to
attract additional skilled personnel in all areas of its business to grow. While
many of the Company's current employees have years of service with Electroglas,
there can be no assurance that the Company will be able to retain its existing
personnel or attract additional qualified employees in the future.
Acquisitions. The Company may pursue acquisitions of complementary product
lines, technologies or businesses, such as the acquisitions of Knights and
Techne in May and December 1997, respectively. Acquisitions by the Company may
result in potentially dilutive issuances of equity securities, the incurrrence
of debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, which could materially adversely affect the
Company's profitability. To the extent future events result in the impairment of
any capitalized intangible assets, amortization expenses may occur sooner that
the Company expects. In addition, current or future or acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. There can be no
assurances as to the effect thereof of these, or future, acquisitions on the
Company's business or operating results.
Possible Volatility of Common Stock Price. The market price of Electroglas
Common Stock could fluctuate significantly in response to variations in
quarterly operating results and other factors, such as announcements of
technological innovations or new products by the Company or by the Company's
competitors, government regulations, developments in patent or other property
rights, and developments in the Company's relationships with its customers. In
addition, the stock market has in
9
<PAGE> 10
recent years experienced significant price fluctuations. These fluctuations
often have been unrelated to the operating performance of the specific companies
whose stock is traded. Broad market fluctuations, general economic conditions
and specific conditions in the semiconductor industry may adversely affect the
market price of the Company's Common Stock.
Antitakeover Provisions. The recently adopted Shareholders Rights Plan,
certain provisions of the Company's Certificate of Incorporation and Delaware
law could discourage potential acquisition proposals and could delay or prevent
a change in control of Electroglas. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of Electroglas
Common Stock. Such provisions may also inhibit fluctuations in the market price
of Electroglas Common Stock that could result from takeover attempts. In
addition, the Board of Directors, without further stockholder approval, may
issue additional series of preferred stock that could have the effect of
delaying, deterring or preventing a change in control of Electroglas. The
issuance of additional series of preferred stock could also adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any Preferred
Stock.
ITEM 2. PROPERTIES
The Company's executive office and manufacturing, engineering, research
and development operations are located primarily in four buildings in Santa
Clara, California totaling approximately 150,000 square feet, occupied under
leases expiring in March 2000. The Company owns substantially all of the
machinery and equipment used in its facilities. The Knights subsidiary is
headquartered in a 21,410 square foot leased facility in Sunnyvale, California
and also leases office space in Mumbai, India were it maintains an engineering
and quality assurance operation. The Techne subsidiary's manufacturing,
engineering and administrative operations are housed in a leased 15,500 square
foot facility in Albany, Oregon.
The Company also leases sales and service offices in Arizona,
California, Massachusetts, Oregon, Texas, the United Kingdom, France, Germany,
Japan, Hong Kong, Taiwan, Singapore, Korea and People's Republic of China.
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
monthly payments will vary based on LIBOR. At current interest rates, the annual
lease payments represent approximately $710,000. At the end of the lease, the
Company has the option to acquire the property at its original cost of
approximately $12,000,000 and any current rent due and payable. The guaranteed
residual payment on the lease is approximately $12,000,000. The lease contains
certain restrictive covenants. The Company was in compliance with these
covenants at December 31, 1997. The Company anticipates that this land will be
used for a new corporate headquarters.
The Company voluntarily 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 some environmental
remediation activities on the property's soil. In 1997, the Company accrued
$1,600,000, which is the Company's best estimate of its obligation. Although
the Company has undertaken an extensive investigation related to the
aforementioned environmental remediation activities, there can be no assurance
that adverse developments related to its investigation and such remediation
activities will not result in the need for the Company to expend additional
resources to remedy environmental problems in order to comply with current or
future environmental regulations. The Company, like all manufacturing companies,
is subject to various federal, state and local environmental statutory
requirements. Except for the aforementioned remediation activities, the Company
believes that it is in material compliance with existing applicable
environmental laws and regulations.
Management considers the above facilities suitable and adequate to meet
the Company's requirements for the next twelve months and that suitable
additional or substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal actions.
From time to time, however, the Company may be subject to various claims and
lawsuits by customers and competitors arising in the normal course of business,
including suits charging infringement or violations of antitrust laws. Such
suits may seek substantial damages and, in certain instances, any damages
awarded would be trebled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter ended December 31, 1997.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is included under the heading
"Corporate Information" in the Company's 1997 Annual Report to Stockholders, and
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under the heading
"Selected Consolidated Financial Data" in the Company's 1997 Annual Report to
Stockholders, and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is included under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1997 Annual Report to Stockholders, and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in the Company's 1997
Annual Report to Stockholders under the headings listed under Item 14(a)1. of
Part IV of this Report on Form 10-K and under the heading "Unaudited Quarterly
Consolidated Financial Data" in the Company's 1997 Annual Report to
Stockholders, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
11
<PAGE> 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the heading
"Election of Directors" and "Other Matters" in the Company's Proxy Statement to
be filed in connection with its 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the heading
"Executive Compensation and Other Information" in the Company's Proxy Statement
to be filed in connection with its 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement to be filed in connection with its 1997 Annual Meeting
of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the heading
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement to be filed in connection with its 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
12
<PAGE> 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS. The following consolidated financial statements of the
Registrant and Report of Ernst & Young LLP, Independent Auditors, are
contained in the Company's 1997 Annual Report to Stockholders and are
incorporated by reference in Item 8 of Part II of this Report on Form
10-K:
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule is filed as part of this Report on Form 10-K on page 15:
Schedule II--Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
3. EXHIBITS. The exhibits listed in the accompanying Index to Exhibits are
filed or incorporated by reference as part of this Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter ending
December 31, 1997.
(c) See Index to Exhibits
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELECTROGLAS, INC.
Date: March 20, 1998
By /s/ Curtis S. Wozniak
---------------------------
Curtis S. Wozniak
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Curtis S. Wozniak Chairman and Chief Executive Officer March 20, 1998
---------------------------- (Principal Executive Officer)
Curtis S. Wozniak
/s/ Armand J. Stegall Vice President, Finance March 20, 1998
--------------------------- Chief Financial Officer,
Armand J. Stegall Treasurer and Secretary
(Principal Financial
and Accounting Officer)
/s/ Neil R. Bonke Director March 20, 1998
----------------------------
Neil R. Bonke
/s/ Joseph F. Dox Director March 20, 1998
----------------------------
Joseph F. Dox
/s/ Roger D. Emerick Director March 20, 1998
----------------------------
Roger D.Emerick
/s/ Robert J. Frankenberg Director March 20, 1998
----------------------------
Robert J.Frankenberg
</TABLE>
14
<PAGE> 15
SCHEDULE II
ELECTROGLAS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES(b) DEDUCTIONS(a) OF PERIOD
----------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
(deducted from accounts receivable):
Year Ended December 31, 1997 $205 $292 $ 32 $465
Year Ended December 31, 1996 243 0 38 205
Year Ended December 31, 1995 248 0 5 243
</TABLE>
(a) Includes write-offs and reversals.
(b) Additions in 1997 related to allowances acquired
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------
<S> <C>
3(i) Certificate of Incorporation of Electroglas, Inc., as amended.(1)
3(ii) Bylaws of Electroglas, Inc.(1)
3.3 Certificate of Designation for Electroglas, Inc.
4.1 Reference is made to Exhibits 3(i) and 3(ii).
4.2 Specimen Common Stock Certificate of Electroglas, Inc., a Delaware
corporation.(1)
10.1 Asset Transfer Agreement by and among General Signal Corporation,
General Signal Technology Corporation and Electroglas, Inc., dated
June 23, 1993, with schedules and exhibits thereto.(2)
10.2 Foreign Units Management Service Agreement by and among General Signal
Corporation, General Signal Technology Corporation and Electroglas,
Inc., dated June 23, 1993.(2)
10.3 Registration Rights Agreement by and between General Signal
Corporation and Electroglas, Inc., dated June 23, 1993.(2)
10.4* Electroglas, Inc. 1993 Long-Term Incentive Plan.(2)
10.5* Electroglas, Inc. Amended and Restated 1993 Employee Stock Purchase
Plan.(3)
10.6 Lease between RREEF USA FUND-III, a California Group Trust, and
Electroglas, Inc. dated as of December 20, 1993.(4)
10.7* Change of Control Agreement between Electroglas, Inc. and Neil R.
Bonke dated as of June 9, 1995.(5)
10.8* Change of Control Agreement between Electroglas, Inc. and William J.
Cornwell dated as of June 9, 1995.(5)
10.9* Change of Control Agreement between Electroglas, Inc. and Armand J.
Stegall dated as of June 9, 1995.(5)
10.10* Electroglas, Inc. Restricted Stock Bonus Agreement Between
Electroglas, Inc. and Curtis S. Wozniak.(6)
10.11* Change of Control Agreement between Electroglas, Inc. and Curtis S.
Wozniak dated as of April 4, 1996.(6)
10.12* Employment and Consulting Agreement Between Electroglas, Inc. and Neil
R. Bonke.(7)
10.13* Electroglas Officers' Retirement Medical and Dental Coverage
Policy.(8)
10.14* Severance Agreement between Electroglas, Inc. and William J. Cornwell
dated as of April 1, 1996.(9)
10.15 Lease Agreement between BNP Leasing Corporation and Electroglas, Inc.
dated March 31, 1997.(10)
10.16 Agreement and Plan of Reorganization among Knights Technology, Inc.,
certain shareholders of Knights Technology, Inc., and Electroglas,
Inc. dated March 12, 1997.(11)
10.17 Rights Agreement between Electroglas, Inc., and BankBoston, N.A., as
rights agent dated as of November 18, 1997.(12)
10.18* Electroglas, Inc. 1997 Stock Incentive Plan.
10.19* Form of Change of Control Agreement between the Company and each of
Timothy J. Boyle, Phillip M. Truckle, Conor P. O'Mahoney, Joseph A.
Savarese, Daniel D. Welton, William J. Haydamack and John P.
Livingston as of June 9, 1995, June 9, 1995, June 9, 1995, June 9,
1995, June 9, 1995, December 12, 1997 and December 8, 1997.
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
13.1 Electroglas, Inc. 1997 Annual Report to Stockholders. This Annual
Report shall not be deemed to be filed except to the extent that the
information is specifically incorporated by reference.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 1997 Financial Data Schedule.
27.1 Restated 1996 and 1995 Financial Data Schedules.
</TABLE>
- --------
(1) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-1 (Commission File No.
33-61528), which became effective on June 23, 1993.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-1 (Commission File No.
33-74860), which became effective on February 23, 1994.
(3) Incorporated by reference to Exhibit 10.5 of the Company's Annual Report
on Form 10-K, filed with the Securities and Exchange Commission on March
31, 1995.
(4) Incorporated by reference to Exhibit 10.9 of the Company's Annual Report
on Form 10-K, filed with the Securities and Exchange Commission on March
31, 1994.
(5) Incorporated by reference to the identically numbered exhibit of the
Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1996.
(6) Incorporated by reference to the identically numbered exhibit of the
Company's Quarterly Report on Form 10-Q, for the quarter ended June 30,
1996.
(7) Incorporated by reference to Exhibit 10.11 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended September 31, 1996.
(8) Incorporated by reference to Exhibit 10.12 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended September 31, 1996.
(9) Incorporated by reference to the identically numbered exhibit of the
Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 26, 1997.
(10) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended March 31, 1997.
(11) Incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q, for the quarter ended March 31, 1997.
(12) Incorporated by reference to Exhibit 1 of the Company's Registration
Statement on Form 8-A12G (Commission File No. 0-21626), filed with the
Securities and Exchange Commission on November 19, 1997.
* Management contracts, or Company compensatory plans or arrangements.
17
<PAGE> 1
Exhibit 3.3
ELECTROGLAS, INC.
CERTIFICATE OF DESIGNATION
OF THE VOTING POWERS, DESIGNATION,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF THE
SERIES A PREFERRED STOCK
-------------------------------------
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
-------------------------------------
The undersigned officers of Electroglas, Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation"), in accordance with the provisions of Section 103 thereof, DO
HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of Directors
of the Corporation by its Restated Certificate of Incorporation (the
"Certificate"), the said Board of Directors, at a duly called meeting held on
October 23, 1997, at which a quorum was present and acted throughout, adopted
the following resolution, which resolution remains in full force and effect on
the date hereof creating a series of 500,000 shares of Preferred Stock having a
par value of $.01 per share, designated as Series A Preferred Stock (the "Series
A Preferred Stock") out of the class of 1,000,000 shares of preferred stock of
the par value of $.01 per share (the "Preferred Stock"):
RESOLVED, that pursuant to the authority vested in the Board of
Directors in accordance with the provisions of its Certificate, the Board of
Directors does hereby create, authorize and provide for 500,000 shares of its
authorized Preferred Stock to be designated and issued as the Series A Preferred
Stock, having the voting powers, designation, relative, participating, optional
and other special rights, preferences and qualifications, limitations and
restrictions that are set forth as follows:
1. Dividends and Distributions. (A) Subject to the prior and superior
rights of the holders of any shares of any other series of Preferred Stock or
any other shares of stock of the Corporation ranking prior and superior to the
shares of Series A Preferred Stock with respect to dividends, each holder of one
one-hundredth (1/100) of a share (a "Unit") of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for that purpose, (i) quarterly dividends payable in
cash on the last day of February, May, August and November in each year (each
such date being a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of such Unit of Series
A Preferred Stock, in an amount per Unit (rounded to the nearest cent) equal to
the greater of (a) $.01 or (b) subject to the provision for adjustment
hereinafter set forth, the aggregate per share amount of all cash dividends
declared on shares of the Common Stock since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of a Unit of Series A Preferred
<PAGE> 2
Stock, and (ii) subject to the provision for adjustment hereinafter set forth,
quarterly distributions (payable in kind) on each Quarterly Dividend Payment
Date in an amount per Unit equal to the aggregate per share amount of all
non-cash dividends or other distributions (other than a dividend payable in
shares of Common Stock or a subdivision of the outstanding shares of Common
Stock, by reclassification or otherwise) declared on shares of Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or with respect
to the first Quarterly Dividend Payment Date, since the first issuance of a Unit
of Series A Preferred Stock. In the event that the Corporation shall at any time
after December 5, 1997 (the "Rights Declaration Date") (i) declare any dividend
on outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock or (iii) combine outstanding shares
of Common Stock into a smaller number of shares, then in each such case the
amount to which the holder of a Unit of Series A Preferred Stock was entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the numerator of which
shall be the number of shares of Common Stock that are outstanding immediately
after such event and the denominator of which shall be the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on Units
of Series A Preferred Stock as provided in paragraph (A) above immediately after
it declares a dividend or distribution on the shares of Common Stock (other than
a dividend payable in shares of Common Stock); provided, however, that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series A Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issuance of such Unit of Series A Preferred
Stock, unless the date of issuance of such Unit is prior to the record date for
the first Quarterly Dividend Payment Date, in which case, dividends on such Unit
shall begin to accrue from the date of issuance of such Unit, or unless the date
of issuance is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of Units of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series A Preferred
Stock in an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a
unit-by-unit basis among all Units of Series A Preferred Stock at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of Units of Series A Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
2. Voting Rights. The holders of Units of Series A Preferred Stock
shall have the following voting rights:
2
<PAGE> 3
(A) Subject to the provision for adjustment hereinafter set forth, each
Unit of Series A Preferred Stock shall entitle the holder thereof to one vote on
all matters submitted to a vote of the stockholders of the Corporation. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on outstanding shares of Common Stock payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, then in
each such case the number of votes per Unit to which holders of Units of Series
A Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction the numerator of which shall
be the number of shares of Common Stock outstanding immediately after such event
and the denominator of which shall be the number of shares of Common Stock that
were outstanding immediately prior to such event; and
(B) Except as otherwise provided herein, in the Certificate or the
Bylaws of the Corporation or as required by law, the holders of Units of Series
A Preferred Stock and the holders of shares of Common Stock shall vote together
as one class on all matters submitted to a vote of stockholders of the
Corporation, and such holders shall have no special voting rights and their
consents shall not be required for taking any corporate action.
3. Certain Restrictions. (A) Whenever quarterly dividends or other
dividends or distributions payable on Units of Series A Preferred Stock as
provided herein are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on outstanding Units of
Series A Preferred Stock shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or redeem or
purchase or otherwise acquire for consideration any shares of junior stock; (ii)
declare or pay dividends on or make any other distributions on any shares of
parity stock, except dividends paid ratably on Units of Series A Preferred Stock
and shares of all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of such Units and all
such shares are then entitled; (iii) redeem or purchase or otherwise acquire for
consideration shares of any parity stock, provided, however, that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any junior stock; (iv) purchase or
otherwise acquire for consideration any Units of Series A Preferred Stock,
except in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such Units.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 3,
purchase or otherwise acquire such shares at such time and in such manner.
4. Reacquired Shares. Any Units of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such Units
shall, upon their cancellation, become authorized but unissued shares (or
fractions of shares) of Preferred Stock and may be reissued as part of a new
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors, subject to the conditions and restrictions on issuance set
forth herein.
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5. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (i) to the holders of shares of junior stock unless
the holders of Units of Series A Preferred Stock shall have received, subject to
adjustment as hereinafter provided in paragraph (B), the greater of either (a)
$.01 per Unit plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not earned or declared, to the date of such
payment, or (b) the amount equal to the aggregate per share amount to be
distributed to holders of shares of Common Stock, or (ii) to the holders of
shares of parity stock, unless simultaneously therewith distributions are made
ratably on Units of Series A Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of Units of Series
A Preferred Stock are entitled under clause (i)(a) of this sentence and to which
the holders of shares of such parity stock are entitled, in each case upon such
liquidation, dissolution or winding up.
(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock, or (iii) combine outstanding shares of Common Stock into a smaller number
of shares, then in each such case the aggregate amount to which holders of Units
of Series A Preferred Stock were entitled immediately prior to such event
pursuant to clause (i)(b) of paragraph (A) of this Section 5 shall be adjusted
by multiplying such amount by a fraction the numerator of which shall be the
number of shares of Common Stock that are outstanding immediately after such
event and the denominator of which shall be the number of shares of Common Stock
that were outstanding immediately prior to such event.
6. Consolidation, Merger, etc. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or converted into other stock or securities,
cash and/or any other property, then in any such case Units of Series A
Preferred Stock shall at the same time be similarly exchanged for or converted
into an amount per Unit (subject to the provision for adjustment hereinafter set
forth) equal to the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is converted or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock, or (iii) combine outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the immediately preceding sentence with respect to the exchange or
conversion of Units of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which shall be the number of shares
of Common Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. Redemption. The Units of Series A Preferred Stock and shares of
Series A Preferred Stock shall not be redeemable.
8. Ranking. The Units of Series A Preferred Stock and shares of Series
A Preferred Stock shall rank junior to all other series of the Preferred Stock
and to any other class of Preferred
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Stock that hereafter may be issued by the Corporation as to the payment of
dividends and the distribution of assets, unless the terms of any such series or
class shall provide otherwise.
9. Fractional Shares. The Series A Preferred Stock may be issued in
Units or other fractions of a share, which Units or fractions shall entitle the
holder, in proportion to such holder's units or fractional shares, to exercise
voting rights, receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Series A Preferred Stock.
10. Certain Definitions. As used in this resolution with respect to the
Series A Preferred Stock, the following terms shall have the following meanings:
(A) The term "Common Stock" shall mean the class of stock designated as
the common stock, par value $.01 per share, of the Corporation at the date
hereof or any other class of stock resulting from successive changes or
reclassification of the common stock.
(B) The term "junior stock" (i) as used in Section 3 shall mean the
Common Stock and any other class or series of capital stock of the Corporation
hereafter authorized or issued over which the Series A Preferred Stock has
preference or priority as to the payment of dividends and (ii) as used in
Section 5, shall mean the Common Stock and any other class or series of capital
stock of the Corporation over which the Series A Preferred Stock has preference
or priority in the distribution of assets on any liquidation, dissolution or
winding up of the Corporation.
(C) The term "parity stock" (i) as used in Section 3 shall mean any
class or series of stock of the Corporation hereafter authorized or issued
ranking pari passu with the Series A Preferred Stock as to dividends and (ii) as
used in Section 5, shall mean any class or series of capital stock ranking pari
passu with the Series A Preferred Stock in the distribution of assets on any
liquidation, dissolution or winding up.
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IN WITNESS WHEREOF, Electroglas, Inc. has caused this Certificate to be
signed by its Chairman and Chief Executive Officer and its Secretary this ____
day of ____________, 1997.
ELECTROGLAS, INC.
By:____________________________
Curtis S. Wozniak
President
By:____________________________
Armand Stegall
Secretary
<PAGE> 1
EXHIBIT 10.18
ELECTROGLAS, INC.
1997 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees
appointed to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(d) "Award" means the grant of an Option, SAR, Dividend Equivalent
Right, Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the
grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "Board" means the Board of Directors of the Company.
(g) "Change in Control" means a change in ownership or control of
the Company effected through either of the following transactions:
(i) 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 pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing
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Directors who are not Affiliates or Associates of the offeror do not recommend
such stockholders accept, or
(ii) a change in the composition of the Board over a period
of thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(h) "Code" means the Internal Revenue Code of 1986, as amended.
(i) "Committee" means any committee appointed by the Board to
administer the Plan.
(j) "Common Stock" means the common stock of the Company.
(k) "Company" means Electroglas, Inc., a Delaware corporation.
(l) "Consultant" means any person who is engaged by the Company or
any Related Entity to render consulting or advisory services as an independent
contractor and is compensated for such services.
(m) "Continuing Directors" means members of the Board who either
(i) have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36) months
and were elected or nominated for election as Board members by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board.
(n) "Continuous Status as an Employee, Director or Consultant"
means that the provision of services to the Company or a Related Entity in any
capacity of Employee, Director or Consultant, is not interrupted or terminated.
Continuous Status as an Employee, Director or Consultant shall not be considered
interrupted in the case of (i) any approved leave of absence or (ii) transfers
between locations of the Company or among the Company, any Related Entity, or
any successor in any capacity of Employee, Director or Consultant. An approved
leave of absence shall include sick leave, military leave, or any other
authorized personal leave. For purposes of Incentive Stock Options, no such
leave may exceed ninety (90) days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract.
(o) "Corporate Transaction" means any of the following
stockholder-approved transactions to which the Company is a party:
(i) 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;
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(ii) 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 the complete
liquidation or dissolution of the Company; or
(iii) 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.
(p) "Covered Employee" means an Employee who is a "covered
employee" under Section 162(m)(3) of the Code.
(q) "Director" means a member of the Board.
(r) "Dividend Equivalent Right" means a right entitling the
Grantee to compensation measured by dividends paid with respect to Common Stock.
(s) "Employee" means any person, including an Officer or Director,
who is an employee of the Company or any Related Entity. The payment of a
director's fee by the Company shall not be sufficient to constitute "employment"
by the Company.
(t) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(u) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) Where there exists a public market for the Common Stock,
the Fair Market Value shall be (A) the closing price for a Share 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 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 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 Administrator deems reliable; or
(ii) In the absence of an established market of the type
described in (i), above, for the Common Stock, the Fair Market Value thereof
shall be determined by the Administrator in good faith.
(v) "Grantee" means an Employee, Director or Consultant who
receives an Award under the Plan.
(w) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
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(x) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(y) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(z) "Option" means a stock option granted pursuant to the Plan.
(aa) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(bb) "Performance - Based Compensation" means compensation
qualifying as "performance-based compensation" under Section 162(m) of the Code.
(cc) "Performance Shares" means Shares or an award denominated in
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(dd) "Performance Units" means an award which may be earned in
whole or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or a
combination of cash, Shares or other securities as established by the
Administrator.
(ee) "Plan" means this 1997 Stock Incentive Plan.
(ff) "Related Entity" means any Parent, Subsidiary and any
business, corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds an ownership interest,
directly or indirectly.
(gg) "Restricted Stock" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(hh) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act or any successor thereto.
(ii) "SAR" means a stock appreciation right entitling the Grantee
to Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(jj) "Share" means a share of the Common Stock.
(kk) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
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(ll) "Subsidiary Disposition" means the disposition by the Company
of its equity holdings in any subsidiary corporation effected by a merger or
consolidation involving that subsidiary corporation, the sale of all or
substantially all of the assets of that subsidiary corporation or the Company's
sale or distribution of substantially all of the outstanding capital stock of
such subsidiary corporation.
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to Awards shall be
750,000 Shares. The Shares to be issued pursuant to Awards may be authorized,
but unissued, or reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an Award exchange program,
or if any unissued Shares are retained by the Company upon exercise of an Award
in order to satisfy the exercise price for such Award or any withholding taxes
due with respect to such Award, such unissued or retained Shares shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that actually have been issued under the Plan pursuant to an
Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Plan Administrator.
(i) Administration with Respect to Directors and Officers.
With respect to grants of Awards to Directors or Employees who are also Officers
or Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.
(ii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority as the Board
determines from time to time.
(iii) Administration With Respect to Covered Employees.
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee
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making Awards qualifying as Performance-Based Compensation. In the case of such
Awards granted to Covered Employees, references to the "Administrator" or to a
"Committee" shall be deemed to be references to such Committee or subcommittee.
(iv) Administration Errors. In the event an Award is granted
in a manner inconsistent with the provisions of this subsection (a), such Award
shall be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and
the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to
whom Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are
granted hereunder;
(iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreement for use under the
Plan;
(v) to determine the terms and conditions of any Award
granted hereunder;
(vi) to amend the terms of any outstanding Award granted
under the Plan, provided that any amendment that would adversely affect the
Grantee's rights under an outstanding Award shall not be made without the
Grantee's written consent;
(vii) to construe and interpret the terms of the Plan and
Awards granted pursuant to the Plan;
(viii) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan; and
(ix) to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
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5. Eligibility. Awards other than Incentive Stock Options may be
granted to Employees, Directors and Consultants. Incentive Stock Options may be
granted only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.
6. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the Plan
to award any type of arrangement to an Employee, Director or Consultant that is
not inconsistent with the provisions of the Plan and that by its terms involves
or might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar
right with an exercise or conversion privilege at a fixed or variable price
related to the Common Stock and/or the passage of time, the occurrence of one or
more events, or the satisfaction of performance criteria or other conditions, or
(iii) any other security with the value derived from the value of the Common
Stock or other securities issued by a Related Entity. Such awards include,
without limitation, Options, SARs, sales or bonuses of Restricted Stock,
Dividend Equivalent Rights, Performance Units or Performance Shares, and an
Award may consist of one such security or benefit, or two or more of them in any
combination or alternative.
(b) Designation of Award. Each Award shall be designated in the
Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
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(d) Deferral of Award Payment. The Administrator may establish one
or more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts, Shares or other consideration so deferred, and
such other terms, conditions, rules and procedures that the Administrator deems
advisable for the administration of any such deferral program.
(e) Award Exchange Programs. The Administrator may establish one
or more programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as determined by the Administrator from time to time.
(f) Separate Programs. The Administrator may establish one or more
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(g) Individual Option and SAR Limit. The maximum number of Shares
with respect to which Options and SARs may be granted to any Employee in any
fiscal year of the Company shall be Five Hundred Thousand (500,000) Shares. The
foregoing limitation shall be adjusted proportionately in connection with any
change in the Company's capitalization pursuant to Section 10, below. To the
extent required by Section 162(m) of the Code or the regulations thereunder, in
applying the foregoing limitation with respect to an Employee, if any Option or
SAR is canceled, the canceled Option or SAR shall continue to count against the
maximum number of Shares with respect to which Options and SARs may be granted
to the Employee. For this purpose, the repricing of an Option (or in the case of
a SAR, the base amount on which the stock appreciation is calculated is reduced
to reflect a reduction in the Fair Market Value of the Common Stock) shall be
treated as the cancellation of the existing Option or SAR and the grant of a new
Option or SAR.
(h) Early Exercise. The Award may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee, Director
or Consultant to exercise any part or all of the Award prior to full vesting of
the Award. Any unvested Shares received pursuant to such exercise may be subject
to a repurchase right in favor of the Company or to any other restriction the
Administrator determines to be appropriate.
(i) Term of Award. The term of each Award shall be the term stated
in the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who, at
the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Incentive Stock Option shall be five (5)
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years from the date of grant thereof or such shorter term as may be provided in
the Award Agreement.
(j) Transferability of Awards. Incentive Stock Options may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee; provided,
however, that the Grantee may designate a beneficiary of the Grantee's Incentive
Stock Option in the event of the Grantee's death on a beneficiary designation
form provided by the Administrator. Other Awards shall be transferable to the
extent provided in the Award Agreement.
(k) Time of Granting Awards. The date of grant of an Award shall
for all purposes be the date on which the Administrator makes the determination
to grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(a) Exercise or Purchase Price. The exercise or purchase price, if
any, for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be not less than one
hundred ten percent (110%) of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(ii) In the case of a Non-Qualified Stock Option, the per
Share exercise price shall be not less than one hundred percent (100%) of the
Fair Market Value per Share on the date of grant.
(iii) In the case of Awards intended to qualify as
Performance-Based Compensation, the exercise or purchase price, if any, shall
be not less than one hundred percent (100%) of the Fair Market Value per Share
on the date of grant.
(iv) In the case of other Awards, such price as is determined
by the Administrator.
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(b) Consideration. Subject to Applicable Laws, the consideration
to be paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator (and,
in the case of an Incentive Stock Option, shall be determined at the time of
grant). In addition to any other types of consideration the Administrator may
determine, the Administrator is authorized to accept as consideration for Shares
issued under the Plan the following:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such
recourse, interest, security, and redemption provisions as the Administrator
determines as appropriate;
(iv) surrender of Shares or delivery of a properly executed
form of attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or attestation
equal to the aggregate exercise price of the Shares as to which said Award shall
be exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(vi) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
(d) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
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8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and full payment
for the Shares with respect to which the Award is exercised has been received by
the Company. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to
Shares subject to an Award, notwithstanding the exercise of an Option or other
Award. The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Award. No adjustment will be made for a dividend
or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in the Award Agreement or Section 10,
below.
(b) Exercise of Award Following Termination of Employment,
Director or Consulting Relationship.
(i) An Award may not be exercised after the termination date
of such Award set forth in the Award Agreement and may be exercised following
the termination of a Grantee's Continuous Status as an Employee, Director or
Consultant only to the extent provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise
an Award following the termination of the Grantee's Continuous Status as an
Employee, Director or Consultant for a specified period, the Award shall
terminate to the extent not exercised on the last day of the specified period or
the last day of the original term of the Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to the
extent not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Status as an Employee, Director or Consultant shall convert automatically to a
Non-Qualified Stock Option and thereafter shall be exercisable as such to the
extent exercisable by its terms for the period specified in the Award Agreement.
(c) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Award previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Grantee at the time that such offer is made.
11
<PAGE> 12
9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may
require the person exercising such Award 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
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, 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. Except
as expressly provided herein, no issuance 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 hereof shall be made with respect to, the
number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Subsidiary Dispositions.
Except as may be provided in an Award Agreement:
(a) In the event of a Corporate Transaction, each Award which is
at the time outstanding under the Plan automatically shall become fully vested
and exercisable and be released from any restrictions on transfer and repurchase
or forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction, for all of the Shares at the time represented by such
Award. Effective upon the consummation of the Corporate Transaction, all
outstanding Awards under the Plan shall terminate unless assumed by the
successor company or its Parent.
(b) In the event of a Change in Control (other than a Change in
Control which also is a Corporate Transaction), each Award which is at the time
outstanding under the Plan automatically shall become fully vested and
exercisable and be released from any restrictions on transfer and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Change in Control, for all of the Shares at the time represented by such Award.
Each such Award shall remain so exercisable until the expiration or sooner
termination of the applicable Award term.
(c) In the event of a Subsidiary Disposition, each Award with
respect to those Grantees who are at the time engaged primarily in Continuous
Status as an Employee or
12
<PAGE> 13
Consultant with the subsidiary corporation involved in such Subsidiary
Disposition which is at the time outstanding under the Plan automatically shall
become fully vested and exercisable and be released from any restrictions on
transfer and repurchase or forfeiture rights, immediately prior to the specified
effective date of such Subsidiary Disposition, for all of the Shares at the time
represented by such Award Each such Award shall remain so exercisable until the
expiration or sooner termination of the Award term.
(d) The portion of any Incentive Stock Option accelerated under
this Section 11 in connection with a Corporate Transaction, Change in Control or
Subsidiary Disposition shall remain exercisable as an Incentive Stock Option
under the Code only to the extent the $100,000 dollar limitation of Section
422(d) of the Code is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated excess portion of such Option shall be exercisable as
a Non-Qualified Stock Option.
12. 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.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) No Award may be granted during any suspension of the Plan or
after termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall not
affect Awards already granted, and such Awards shall remain in full force and
effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon any
Grantee any right with respect to continuation of employment or consulting
relationship with the
13
<PAGE> 14
Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
16. Stockholder Approval. The grant of Incentive Stock Options under 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. Such
stockholder approval shall be obtained in the degree and manner required under
Applicable Laws. The Administrator may grant Incentive Stock Options under the
Plan prior to approval by the stockholders, but until such approval is obtained,
no such Incentive Stock Option shall be exercisable. In the event that
stockholder approval is not obtained within the twelve (12) month period
provided above, all Incentive Stock Options previously granted under the Plan
shall terminate.
14
<PAGE> 1
EXHIBIT 10.19
CHANGE OF CONTROL AGREEMENT
This Agreement is made this __ day of ___________________, 199__ between (
the "Executive") and Electroglas, Inc., a Delaware corporation (the "Company").
WHEREAS, the Executive is employed by the Company; and
WHEREAS, the Company desires to retain the services of Executive in the
event of a change of control (as hereinafter defined) of the Company.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
1. Definitions.
(a) Change of Control. For purposes of this Agreement only, a
"Change of Control" shall be defined as:
(i) a merger or consolidation in which the Company is not
the surviving entity, except for (1) a transaction in which the principal
purpose is to change the state of the Company's incorporation, or (2) a
transaction in which the Company's stockholders immediately prior to such merger
or consolidation hold (by virtue of securities received in exchange for their
shares in the Company) securities of the surviving entity representing more than
fifty percent (50%) of the total voting power of such entity immediately after
such transaction;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company, unless the Company's
stockholders immediately prior to such sale, transfer or other disposition hold
(by virtue of securities received in exchange for their shares in the Company)
securities of the purchaser or other transferee representing more than fifty
percent (50%) of the total voting power of such entity immediately after such
transaction; or
(iii) any reverse merger in which the Company is the surviving
entity but in which the Company's stockholders immediately prior to such merger
do not hold (by virtue of their shares in the Company held immediately prior to
such transaction) securities of the Company representing more than fifty percent
(50%) of the total voting power of the Company immediately after such
transaction.
1
<PAGE> 2
(b) Cause. For purposes of this Agreement only, the Company shall
have "Cause" to terminate the Executive's employment hereunder only on the basis
of (i) fraud, (ii) misappropriation, (iii) embezzlement or (iv) willful
engagement by the Executive in misconduct, which misconduct is demonstrably and
materially injurious to the Company and its subsidiaries, taken as a whole. No
act, or failure to act, on the part of the Executive shall be considered
"willful" unless done, or omitted to be done, by the Executive without a
reasonable and actual belief that the action or omission was in the best
interests of the Company and its subsidiaries.
(c) Good Reason. "Good Reason" shall exist if: (i) there is an
assignment to the Executive of any duties materially inconsistent with or which
constitutes a material change in the Executive's position, duties,
responsibilities or status with the Company, or a material change in the
Executive's reporting responsibilities, titles or offices; or removal of the
Executive from or failure to reelect the Executive to any of such positions,
except in connection with the termination of employment for Cause, or due to
disability, retirement, death or termination of employment by the Executive
other than for Good Reason; (ii) there is a reduction by the Company in the
Executive's annual salary then in effect, other than a reduction similar in
percentage to a reduction generally applicable to similarly situated employees
of the Company; (iii) the Company acts in any way that would adversely affect
the Executive's participation in or materially reduce the Executive's benefits
under any benefit plan of the Company in which the Executive is participating or
deprive the Executive of any material fringe benefit enjoyed by the Executive,
except those changes generally affecting similarly situated employees of the
Company; or (iv) the Company reduces the number of paid vacation days to which
the Executive is then entitled.
(d) Closing Date. "Closing Date" shall mean the date of the first
closing of any transactions constituting a Change of Control.
(e) Termination Date. "Termination Date" shall mean the date the
Executive's employment is terminated by the Company other than for Cause or is
terminated by the Executive for Good Reason.
(f) Company. "Company" shall mean Electroglas, Inc. and its
successors or assigns (including without limitation, any entity, entities or
persons acquiring control of the Company through a Change of Control).
2. Continuation of Salary and Benefits; Vesting of Equity Incentives.
If, during the twelve (12) month period following the Closing Date of a Change
of Control, the Company shall terminate the Executive's employment other than
for Cause or the Executive shall terminate his employment for Good Reason, then
in such event:
(a) Continuation of Salary. The Company shall continue to pay the
Executive's base salary in effect as of the Termination Date for a period of
twelve (12) months after the Termination Date. Such salary shall be paid to the
Executive in accordance with the Company's regular payroll practices then
currently in effect;
2
<PAGE> 3
(b) Bonus. In addition to the salary continuation set forth in
Section 2(a) above, the Company shall pay the Executive a bonus according to the
following formula:
(i) If the Termination Date occurs after the Executive's
bonus for the last completed fiscal year has been determined by the Compensation
Committee of the Board of Directors (the "Compensation Committee") and paid to
the Executive, then the Executive shall receive a bonus in the amount of no less
than:
X1 + X1(Y/365)
(ii) If the Termination Date occurs before the Executive's
bonus for the last completed fiscal year has been determined by the Compensation
Committee and paid to the Executive, then the Executive shall receive a bonus in
the amount of no less than:
2(X2) + X2(Y/365)
where:
"X1" = the bonus amount paid to the Executive for the
last completed fiscal year;
"X2" = the bonus amount paid to the Executive for the
fiscal year prior to the last completed fiscal year; and
"Y" = the number of days in the current fiscal year
prior to and including the Termination date.
The bonus shall be paid in equal monthly payments over a period of
twelve (12) months after the Termination Date. Such amount shall be payable to
the Executive regardless of the Company's financial performance, and shall not
be conditioned on the Company's continued satisfaction of any goals or criteria
required by any compensation plan;
(c) Medical and Dental Benefits. For the period that salary
continuation payments are being made, the Company shall either: (i) continue the
Executive's medical and dental benefits as such benefits are generally offered
to the Company's employees as of the Termination Date, or (ii) reimburse the
Executive for COBRA payments made by the Executive to maintain his medical and
dental benefits, as applicable under the Company's insurance policies;
3
<PAGE> 4
(d) Life Insurance and Car Allowance. For the period that salary
continuation payments are being made, the Company shall continue payment of the
Executive's life insurance premiums and car allowance, if applicable.
(e) Vacation Pay. The Company shall pay the Executive any accrued
but unused vacation time as of the Termination Date;
(f) Stock Options, Performances Shares or Units and Restricted
Shares or Units. Any stock option, performance share or unit, or restricted
share or unit shall vest in its entirety and become exercisable or, with respect
to such performance share or unit or restricted share or unit, be released from
restrictions on transfer and repurchase rights, immediately prior to the
Termination Date; provided that, at least one (1) year has elapsed between the
date of this Agreement and the Termination Date; and
(g) Extension of Stock Option Exercise Term. All vested stock
options held by the Executive as of the Termination Date shall expire six (6)
months after the Termination Date.
3. No Employment Agreement, Employment at Will. Executive and the
Company each acknowledge and agree that: (i) this Agreement does not provide for
the terms and conditions of Executive's employment with the Company prior to any
Change of Control and does not require or obligate Executive to provide services
to the Company or the Company to continue to employ Executive; and (ii)
Executive's employment with the Company is and remains an employment
relationship terminable at will and without advance notice by either Executive
or the Company.
4. Release of the Company and Its Affiliates. Upon a termination of
Executive's employment with the Company following a Change of Control for which
Executive is entitled to payments or other benefits pursuant to Section 2 above
and subject to full performance by the Company of its obligations hereunder,
Executive hereby forever and completely releases and discharges the following
(and each of them): (i) the Company and (ii) any past, present or future agents,
attorneys, directors, officers, stockholders, employees, affiliates,
predecessors and successors of the Company, of and from any and all claims and
demands of every kind and nature, in law, equity or otherwise, known or unknown,
suspected or unsuspected, disclosed or undisclosed, including but not limited to
all claims and demands of every kind and nature, known or unknown, suspected or
unsuspected, disclosed or undisclosed, for damages actual, consequential or
exemplary, past, present and future, arising out of or in any way related to the
severance payment or vesting of the Executive's salary, bonus, benefits, stock
options, or any other compensation pursuant to Section 2 above.
5. Notices. All notices or other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand, by facsimile or mailed, postage prepaid, by certified or
registered mail, return receipt requested, and addressed to the Company at:
4
<PAGE> 5
Electroglas, Inc.
3045 Stender Way
Santa Clara, CA 95054
Attention: Chief Executive Officer
or to the Executive at:
-----------------------------
-----------------------------
-----------------------------
Notice of change of address shall be effective only when done in
accordance with this Section.
6. Successors. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
7. Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of California.
8. Entire Agreement. This Agreement represents the entire Agreement and
understanding between the Company and the Executive concerning the Executive's
termination of employment with the Company after a Change in Control. This
Agreement supersedes any prior agreement or understanding of the parties with
respect to the subject matter hereof.
9. No Oral Modification. This Agreement may only be amended in a
writing signed by the Executive and the Company.
10. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as the original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
11. Attorneys' Fees. If any legal action, arbitration or other
proceeding is brought to interpret or enforce the terms of this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and any
other costs incurred in that proceeding, in addition to any other relief to
which it is entitled.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
ELECTROGLAS, INC., EXECUTIVE:
a Delaware corporation
By:_________________________________ ________________________________________
[Signature]
Title:______________________________ ________________________________________
[Print Name]
6
<PAGE> 1
EXHIBIT 13.1
selected consolidated financial data
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 150,035 $ 151,950 $ 169,240 $ 112,319 $ 79,411
--------------------------------------------------------------
Gross profit 63,626 72,284 92,634 61,921 40,331
Engineering, research and development 21,897 18,672 13,560 10,149 8,763
Selling, general and administrative 32,532 24,758 25,771 19,272 14,956
In-process research and development 27,029 -- -- -- --
--------------------------------------------------------------
Operating income (loss) (17,832) 28,854 53,303 32,500 16,612
Interest and other income, net 4,844 4,847 4,211 2,876 453
--------------------------------------------------------------
Income (loss) before income taxes (12,988) 33,701 57,514 35,376 17,065
Provision for income taxes(1) 2,949 9,242 20,417 13,042 2,405
Net income (loss)(1) $ (15,937) $ 24,459 $ 37,097 $ 22,334 $ 14,660
--------------------------------------------------------------
Basic net income (loss) per share(1) $ (0.86) $ 1.38 $ 2.09 $ 1.34
Diluted net income (loss) per share(1) $ (0.86) $ 1.36 $ 2.05 $ 1.31
--------------------------------------------------------------
Pro forma basic net income per share (1)(2) $ 1.08
Pro forma diluted net income per share(1)(2) $ 1.07
--------------------------------------------------------------
Working capital $ 172,423 $ 159,376 $ 146,849 $ 96,482 $ 28,991
Total assets 230,133 197,866 191,741 131,901 52,987
Short-term borrowings 1,160 1,790 1,952 -- --
Total equity 199,734 173,651 157,394 110,755 39,499
--------------------------------------------------------------
</TABLE>
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
=================================================================================================
<S> <C> <C> <C> <C>
1997:
Net sales $ 25,551 $ 36,075 $ 44,263 $ 44,146
Gross profit 9,884 15,864 19,707 18,171
Net income (loss)(4) 26 (20,715) 5,687 (935)
Basic income (loss) per share 0.00 (1.14) 0.30 (0.05)
Diluted income (loss) per share 0.00 (1.14) 0.29 (0.05)
1996:
Net sales $ 51,835 $ 48,869 $ 31,467 $ 19,779
Gross profit 27,990 24,966 14,453 4,875
Net income(3) 11,224 8,953 4,223 59
Basic income per share 0.62 0.50 0.24 0.00
Diluted income per share 0.62 0.50 0.24 0.00
</TABLE>
(1) Net income for the year ended December 31, 1994 includes a $941,000 credit
for the favorable impact of new California tax legislation. Net income and
diluted net income per share for the year ended December 31, 1994 without
the $941,000 credit were $21,393,000 and $1.26, respectively. Net income for
the year ended December 31, 1993 includes a $4,364,000 credit for
elimination of the valuation allowance on deferred taxes. Net income and pro
forma diluted net income per share for the year ended December 31, 1993
without the $4,364,000 credit were $10,296,000 and $0.75, respectively.
(2) Pro forma basic and diluted net income per share assumes 13,600,000 shares
outstanding through July 1, 1993 (the date of the closing of the Initial
Public Offering ("IPO")).
(3) Net income for the fourth quarter of 1996 includes a pretax adjustment made
by management to reduce employee incentive compensation by $2,300,000 in
light of the decreased operating results for 1996.
(4) Net income for the second and fourth quarters of 1997 include pretax
in-process research and development charges of $23,500,000 and $3,529,000
resulting from the acquisitions of Knights Technology, Inc. and Techne
Systems, Inc., respectively. In addition, the Company incurred a $1,600,000
pretax charge in the fourth quarter of 1997 for environmental remediation
costs.
<PAGE> 2
management's discussion and analysis of
financial condition and results of operations
The statements contained in this annual report which are not purely historical
are forward-looking statements under the heading "Management's Discussion and
Analysis of Financial Condition and Result of Operations," 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, the Company's environmental remediation efforts, estimated
investment in research and development to complete in-process research and
development, the impact of Year 2000 issues, current levels of taxable income,
liquidity, anticipated cash needs and availability. All forward-looking
statements included in this document are made as of the date hereof, based on
information available to the Company as of the date hereof, and Electroglas
assumes no obligation to update any forward-looking statement. It is important
to note that the Company's actual results could differ materially from those in
such forward-looking statements. You should consult the risk factors listed from
time to time in the Company's reports on SEC forms 10-K, 10-Q, as well as those
disclosed on the financial highlights page of this annual report and in this
discussion and analysis under "Factors That May Affect Results and Financial
Condition."
The components of the Company's statements of operations, expressed as a
percentage of net sales, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
=======================================================================================
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 57.6% 52.4% 45.3%
-------------------------------------
Gross profit 42.4% 47.6% 54.7%
Operating expenses:
Engineering, research and development 14.6% 12.3% 8.0%
Selling, general and administrative 21.7% 16.3% 15.2%
In-process research and development 18.0% -- --
-------------------------------------
Total operating expenses 54.3% 28.6% 23.2%
-------------------------------------
Operating income (loss) (11.9)% 19.0% 31.5%
Interest income 3.5% 3.1% 2.3%
Other income (expense), net (0.3)% 0.1% 0.2%
-------------------------------------
Income (loss) before income taxes (8.7)% 22.2% 34.0%
Provision for income taxes 1.9% 6.1% 12.1%
-------------------------------------
Net income (loss) (10.6)% 16.1% 21.9%
-------------------------------------
</TABLE>
RESULTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
Net Sales. Net sales were $150.0 million in 1997, as compared to $152.0 million
in 1996. Excluding Knights software sales, prober sales decreased 3.9% in 1997
due to lower system unit sales resulting from the downturn of the capital
equipment industry, which negatively impacted the Company's sales from the third
quarter of 1996 through the second quarter of 1997.
Net sales decreased to $152.0 million in 1996, as compared to $169.2 million
in 1995 principally due to lower system unit sales. The decrease reflected the
slowdown in the capital equipment industry during the latter half of 1996.
Net sales were comprised of the Horizon 4000 series (71.4%, 58.0% and 59.5%,
for 1997, 1996, and 1995, respectively), the 2000 series
(10.7%, 26.5%, and 27.3%, for 1997, 1996 and 1995, respectively) and aftermarket
sales, consisting primarily of service, spare parts and upgrades (15.2%, 15.5%
and 13.2% for 1997, 1996 and 1995, respectively). Knights software sales added
2.7% to 1997 net sales since the acquisition in May 1997.
International sales represented 43%, 45% and 45% of net sales for the years
1997, 1996 and 1995, respectively. The Company's international sales will
continue to account for a significant portion of net sales in 1998. However,
current Asian economic conditions may have a significant adverse impact on
international revenues in 1998.
<PAGE> 3
Gross Profit. Gross profit was 42.4%, 47.6% and 54.7% in 1997, 1996 and 1995,
respectively. The absolute dollar decrease in gross profit in 1997 as compared
to 1996, was primarily attributable to a change in sales mix from higher margin,
more mature products to the Horizon 4090, which has lower margins due to higher
material costs. Lower warranty costs in 1997 partially offset the negative
impact of the change in sales mix.
The absolute dollar decrease in gross profit in 1996 as compared to 1995 was
primarily attributable to the decline in system unit sales. The associated
decline in production volume resulted in underutilization of manufacturing
capacity causing a decrease in gross profit as a percentage of net sales. In
addition, higher material costs as a percentage of sales, and increased warranty
costs contributed to the decrease in gross profit.
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 $21.9 million, $18.7 million and $13.6 million in 1997, 1996 and
1995, respectively. 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. The increase in engineering, research and development in 1997 was
due primarily to the addition of Knights expenses of $2.5 million that included
expenditures associated with the development of yield management software. The
increase in engineering, research and development expenses in 1996 compared to
1995 reflected the Company's investment in additional personnel to strengthen
its technology position in the industry by developing new products, and
improving existing products.
Selling, General and Administrative. Selling, general and administrative
expenses were $32.5 million, $24.8 million and $25.8 million in 1997, 1996 and
1995, respectively. The addition of Knights operations and intangible
amortization related to the Knights acquisition contributed $3.1 million of
selling, general and administration expenses in 1997. In addition, the Company
accrued $1.6 million for environmental remediation costs in 1997. The Company is
voluntarily performing clean up activities on its leased property in Santa
Clara, California in cooperation with the California Regional Water Quality
Board. The accrual is the Company's best estimate of its obligation. It is
possible that the Company's recorded estimate may change in the near term. The
remaining increase in 1997 was due to additional marketing support and higher
worldwide sales expenses.
In 1996, the Company increased its sales, marketing and administrative
workforce from 1995 levels to strengthen its global customer support operations.
The increase in expenses compared to 1995 was more than offset by a decrease in
employee incentive compensation due to lower operating results for 1996 and by
management's decision to further reduce this amount by $2.3 million in the
fourth quarter of 1996 in light of the decreased operating results.
Interest Income. Interest income was $5.2 million, $4.8 million and $3.9 million
in 1997, 1996 and 1995, respectively. The increase in interest income in each
year was principally the result of increasing average cash balances.
In-Process Research and Development. The charge for in-process research and
development of $27.0 million in 1997 was attributable to the Company's
acquisitions of Knights Technology, Inc., and Techne Systems, Inc. See Note 2
under "Notes to Consolidated Financial Statements." The Company estimates that a
total investment of $3.8 million in research and development over the next year
will be required to complete in-process research and development.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Income Taxes. Income taxes as a percentage of income before taxes exclusive of
the 1997 non-deductible in-process research and development expenses were 21.0%,
27.4% and 35.5% in 1997, 1996 and 1995, respectively. The decrease in the
effective tax rate in 1997 and 1996 compared to 1995 was primarily due to the
impact of tax exempt investment income and increased tax benefits received from
research and development expenditures on lower pretax income. In 1997,
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 the 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.
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 has begun 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 internal Year 2000
concerns, there is no guarantee that the systems of other companies, including
suppliers and customers on which the Company's systems, operations and sales
rely, 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 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.
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and short-term investments were $125.0
million at December 31, 1997, a decrease of $4.1 million from December 31, 1996.
Cash generated from operations was $6.4 million, which resulted from the net
loss of $15.9 million adjusted for non-cash items of $37.1 million, primarily
the write-off of in-process research and development related to the Knights and
Techne acquisitions and an increase in net current assets of $14.7 million.
Accounts receivable increased by $18.0 million as a result of higher sales
volume in the latter half of 1997 compared to the same period in 1996. The
changes in accounts receivable, inventories, other current assets, accrued
liabilities, and accounts payable exclude the impact of the Knights and Techne
acquisitions.
Cash provided by investing activities was $1.0 million due primarily to net
sales and maturities of investments of $12.4 million, offset partially by
capital expenditures of $10.7 million for engineering design and test equipment,
manufacturing leasehold improvements, and enhancement of the Company's
information technology infrastructure. In addition, the Company used $0.5
million of cash, net of cash acquired in the Knights and Techne acquisitions.
Cash provided by financing activities was $1.6 million. This was attributed
to the sale of common stock of $6.3 million under employee stock plans partially
offset by the repayment of $1.3 million and $0.7 million for bank loans assumed
by the Company from the Knights and Techne acquisitions, the repurchase of
126,000 shares of the Company's common stock at a cost of $2.0 million and the
payment of short-term borrowings of $0.6 million by the Company's Japanese
subsidiary.
At December 31, 1997, the Company's Japanese subsidiary had lines of credit
with Japanese banks with a total borrowing capacity of approximately $4.6
million (denominated in Yen). Amounts outstanding under these facilities at
December 31, 1997 were $1.2 million. These facilities enable the Company's
Japanese subsidiary to finance its working capital requirements locally.
In March 1997, the Company entered into an agreement to lease land for a
five-year term with an investment value of $12.0 million. Based on current
interest rates, the annual lease payments are approximately $0.7 million.
In January 1998, the Company repurchased 200,000 shares of its common stock
at a cost of $3.3 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.
<PAGE> 6
consolidated statements of operations
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997 1996 1995
===========================================================================================
<S> <C> <C> <C>
Net sales $ 150,035 $ 151,950 $ 169,240
Cost of sales 86,409 79,666 76,606
--------------------------------------------
Gross profit 63,626 72,284 92,634
--------------------------------------------
Operating expenses:
Engineering, research and development 21,897 18,672 13,560
Selling, general and administrative 32,532 24,758 25,771
In-process research and development 27,029 -- --
--------------------------------------------
Total operating expenses 81,458 43,430 39,331
--------------------------------------------
Operating income (loss) (17,832) 28,854 53,303
Interest income 5,207 4,771 3,858
Other income (expense), net (363) 76 353
--------------------------------------------
Income (loss) before income taxes (12,988) 33,701 57,514
Provision for income taxes 2,949 9,242 20,417
--------------------------------------------
Net income (loss) $ (15,937) $ 24,459 $ 37,097
--------------------------------------------
Basic net income (loss) per share $ (0.86) $ 1.38 $ 2.09
--------------------------------------------
Diluted net income (loss) per share $ (0.86) $ 1.36 $ 2.05
--------------------------------------------
Shares used in basic calculations 18,460 17,779 17,776
--------------------------------------------
Shares used in diluted calculations 18,460 17,967 18,075
--------------------------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
<PAGE> 7
consolidated balance sheets
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 1996
===========================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,259 $ 11,141
Short-term investments 104,719 117,961
Accounts receivable, net of allowance for doubtful
accounts of $465 in 1997 and $205 in 1996 35,852 16,663
Inventories 26,032 22,578
Prepaid expenses and other assets 4,577 8,231
Deferred income taxes 7,613 7,017
---------------------------
Total current assets 199,052 183,591
Deferred income taxes 1,214 2,669
Equipment and leasehold improvements, net 16,392 10,184
Intangible assets, net of accumulated amortization
of $1,639 in 1997 and $230 in 1996 12,525 208
Other assets 950 1,214
---------------------------
Total assets $ 230,133 $ 197,866
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,160 $ 1,790
Accounts payable 7,424 4,754
Accrued liabilities 18,045 17,061
Income taxes payable -- 610
---------------------------
Total current liabilities 26,629 24,215
Deferred income taxes 3,770 --
Commitments (Note II)
Stockholders' equity:
Preferred stock, $0.01 par value;
authorized 1,000,000; none outstanding -- --
Common stock, $0.01 par value;
authorized 40,000,000; 20,543,000 issued
and outstanding at December 31, 1997, and
18,203,000 at December 31, 1996 205 182
Additional paid-in capital 133,600 89,923
Deferred stock compensation (983) (1,278)
Retained earnings 78,736 94,673
Net unrealized gains on investments 69 138
Net translation adjustments (101) (236)
---------------------------
211,526 183,402
Less cost of common stock in treasury;
800,000 at December 31, 1997 and 674,000
at December 31, 1996 11,792 9,751
---------------------------
Total stockholders' equity 199,734 173,651
---------------------------
Total liabilities and stockholders' equity $ 230,133 $ 197,866
===========================
</TABLE>
See the accompanying notes to consolidated financial statements.
<PAGE> 8
consolidated statements of stockholders' equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED NET UNREALIZED
PAID-IN STOCK RETAINED GAINS (LOSSES)
(IN THOUSANDS) SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ON INVESTMENTS
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 17,441 $ 174 $ 77,464 $ -- $ 33,117 $ --
Net income -- -- -- -- 37,097 --
Net unrealized gains on investments -- -- -- -- -- 96
Net translation adjustments -- -- -- -- -- --
Issuance of common stock under
employee stock plans 570 6 5,749 -- -- --
Tax benefit of stock option exercises -- -- 3,889 -- -- --
--------------------------------------------------------------------------------------
Balance at December 31, 1995 18,011 180 87,102 -- 70,214 96
Net income -- -- -- -- 24,459 --
Deferred compensation related to grant
of restricted stock 100 1 1,424 (1,425) -- --
Amortization of deferred compensation -- -- -- 147 -- --
Net unrealized gains on investments -- -- -- -- -- 42
Net translation adjustments -- -- -- -- -- --
Issuance of common stock under
employee stock plans 92 1 1,314 -- -- --
Purchase of treasury stock -- -- -- -- -- --
Tax benefit of stock option exercises -- -- 83 -- -- --
--------------------------------------------------------------------------------------
Balance at December 31, 1996 18,203 182 89,923 (1,278) 94,673 138
Net loss -- -- -- -- (15,937) --
Amortization of deferred compensation -- -- -- 295 -- --
Net unrealized losses on investments -- -- -- -- -- (69)
Net translation adjustments -- -- -- -- -- --
Issuance of common stock under
employee stock plans 588 6 6,286 -- -- --
Purchase of treasury stock -- -- -- -- -- --
Tax benefit of stock option exercises -- -- 3,337 -- -- --
Common stock issued for businesses acquired 1,752 17 34,054 -- -- --
--------------------------------------------------------------------------------------
Balance at December 31, 1997 20,543 $ 205 $ 133,600 $ (983) $ 78,736 $ 69
--------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NET TREASURY STOCK TOTAL
TRANSLATION STOCKHOLDERS'
(IN THOUSANDS) ADJUSTMENTS SHARES AMOUNT EQUITY
========================================================================================================
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- -- $ -- $ 110,755
Net income -- -- -- 37,097
Net unrealized gains on investments -- -- -- 96
Net translation adjustments (198) -- -- (198)
Issuance of common stock under
employee stock plans -- -- -- 5,755
Tax benefit of stock option exercises -- -- -- 3,889
----------------------------------------------------------
Balance at December 31, 1995 (198) -- -- 157,394
Net income -- -- -- 24,459
Deferred compensation related to grant
of restricted stock -- -- -- --
Amortization of deferred compensation -- -- -- 147
Net unrealized gains on investments -- -- -- 42
Net translation adjustments (38) -- -- (38)
Issuance of common stock under
employee stock plans -- -- -- 1,315
Purchase of treasury stock -- (674) (9,751) (9,751)
Tax benefit of stock option exercises -- -- -- 83
----------------------------------------------------------
Balance at December 31, 1996 (236) (674) (9,751) 173,651
Net loss -- -- -- (15,937)
Amortization of deferred compensation -- -- -- 295
Net unrealized losses on investments -- -- -- (69)
Net translation adjustments 135 -- -- 135
Issuance of common stock under
employee stock plans -- -- -- 6,292
Purchase of treasury stock -- (126) (2,041) (2,041)
Tax benefit of stock option exercises -- -- -- 3,337
Common stock issued for businesses acquired -- -- -- 34,071
----------------------------------------------------------
Balance at December 31, 1997 $ (101) (800) $ (11,792) $ 199,734
----------------------------------------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
<PAGE> 9
consolidated statements of cash flows
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1996 1995
========================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (15,937) $ 24,459 $ 37,097
-----------------------------------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 5,211 2,887 1,521
Amortization 2,813 1,208 704
Write-off of in-process research and development 27,029 -- --
Deferred income taxes 1,997 2,518 (1,797)
Changes in current assets and liabilities
net of effects from acquisitions:
Accounts receivable (17,953) 15,418 (9,902)
Inventories (973) (144) (10,343)
Prepaid expenses and other current assets 3,758 (7,177) (268)
Accounts payable 2,092 (2,959) 2,622
Accrued liabilities (4,212) (1,602) 4,938
Income taxes payable 2,559 (5,326) 7,578
-----------------------------------------
Cash provided by operating activities 6,384 29,282 32,150
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (10,697) (8,010) (3,494)
Purchases of investments, held-to-maturity -- -- (69,202)
Purchases of investments, available-for-sale (193,692) (233,171) (149,945)
Maturities of investments, held-to-maturity -- -- 54,077
Maturities of investments, available-for-sale 206,126 225,932 128,790
Acquisitions, net of cash acquired (516) -- --
Other assets (257) (1,057) (427)
-----------------------------------------
Cash provided by (used in) investing activities 964 (16,306) (40,201)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings -- -- 1,952
Payments on short-term borrowings (2,624) (162) --
Sales of common stock 6,292 1,315 5,755
Purchase of treasury stock (2,041) (9,751) --
-----------------------------------------
Cash provided by (used in) financing activities 1,627 (8,598) 7,707
-----------------------------------------
Effect of exchange rate changes 143 (33) (207)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 9,118 4,345 (551)
Cash and cash equivalents at beginning of year 11,141 6,796 7,347
-----------------------------------------
Cash and cash equivalents at end of year $ 20,259 $ 11,141 $ 6,796
-----------------------------------------
Supplemental cash flow disclosure:
Cash paid (received) during the year for income taxes $ (5,062) $ 18,916 $ 15,145
Other noncash changes:
Income tax benefits from employee stock plans $ 3,337 $ 83 $ 3,889
</TABLE>
See the accompanying notes to consolidated financial statements.
<PAGE> 10
notes to consolidated financial statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include the
accounts of the domestic and foreign business operations of the Company for all
periods. Intercompany transactions have been eliminated.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Cash and cash equivalents. The Company considers all highly liquid investments
with minimum yield risks and maturities of less than 90 days from the date of
purchase to be cash equivalents.
Investments. The Company invests its excess cash in high quality debt and equity
instruments. Management determines the appropriate classification of the debt
securities at the time of purchase as either held-to-maturity or
available-for-sale and re-evaluates such designation as of each balance sheet
date.
Available-for-sale securities are stated at fair market value, with
unrealized gains and losses reported in a separate component of stockholders'
equity. Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization, as well as any interest on the securities, is included in interest
income.
On November 15, 1995, the FASB staff issued a Special Report, A Guide to
Implementation of Statement No.115 on Accounting for Certain Investments in Debt
and Equity Securities. In accordance with the provisions in that Special Report,
the Company chose to reclassify its debt securities from held-to-maturity to
available-for-sale. At the date of transfer, the amortized cost of those
securities was $111,352,000 and the unrealized gain on those securities was
$96,000 which is included in stockholders' equity.
Inventories. Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Equipment and leasehold improvements. Equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives (three to ten years) of assets. Leasehold improvements are
amortized over the life of the related assets or the life of the lease whichever
is shorter.
Revenue recognition. Revenue related to the majority of the Company's products
is recognized as products are shipped and services rendered, except for newly
introduced products and for initial customer installments, which are recognized
upon the successful completion of an evaluation period. For software sales, if
significant obligations remain or significant uncertainties exist about customer
acceptance of the software, revenue is deferred until the obligations are
satisfied or the uncertainties are resolved. When collectibility of the
receivable is in doubt, revenue is recognized under the installment method.
Revenue from post-contract customer support (PCS) is recognized ratably over the
period of the PCS agreement.
Warranty. The Company generally warrants its products for a period of up to 12
months from shipment for material and labor to repair the product; accordingly,
a provision for the estimated cost of the warranty is recorded upon shipment.
Engineering, research and development expenses. The Company is actively engaged
in basic technology and applied research programs designed to develop new
products and product applications. In addition, substantial ongoing product and
process improvement engineering and support programs relating to existing
products are conducted within engineering departments. Engineering, research and
development costs are charged to operations as incurred.
Foreign currency accounting. The U.S. dollar is the functional currency for all
foreign operations, excluding Japan. Losses that resulted from the process of
remeasuring foreign currency financial statements into U.S. dollars were
$562,000, $250,000 and $278,000 in 1997, 1996 and 1995, respectively, and are
included in operations.
The Japanese Yen is the functional currency for the Company's Japanese
subsidiary. Translation gains or losses related to the Japanese subsidiary are
included as a component of stockholders' equity.
<PAGE> 11
notes to consolidated financial statements
Net income (loss) per share. In 1997, the Financial Accounting Standards Board
(FASB) issued Statement No. 128, Earnings Per Share. Statement No.128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement No. 128 requirement.
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997 1996 1995
========================================================================================================
<S> <C> <C> <C>
Numerator:
Net income (loss) $(15,937) $ 24,459 $ 37,097
Denominator:
Denominator for basic income (loss)
per share-weighted average shares 18,460 17,779 17,776
Effect of dilutive securities:
Employee stock options -- 138 299
Restricted stock -- 50 --
-------------------------------------
Dilutive potential common shares -- 188 299
Denominator for diluted income (loss) per share -
adjusted weighted average shares and assumed conversions 18,460 17,967 18,075
-------------------------------------
Basic income (loss) per share $ (0.86) $ 1.38 $ 2.09
Diluted income (loss) per share $ (0.86) $ 1.36 $ 2.05
-------------------------------------
</TABLE>
Options to purchase 2,302,000 shares of common stock and 100,000 shares of
restricted common stock were outstanding at December 31, 1997, but were not
included in the computation of diluted loss per share as the effect would be
antidilutive. In connection with the acquisition of Knights Technology, Inc.
(Knights) and Techne Systems, Inc. (Techne), 135,191 and 120,000 shares of
common stock have been placed in escrow through May 1998 and December 1999,
respectively, subject to certain representations and warranties (see Note 2).
These shares were not included in the computation of diluted loss per share as
the effect would be antidilutive.
Effect of new accounting pronouncements: In June 1997, the FASB issued Statement
130, Reporting Comprehensive Income, and SFAS 131, Disclosures about Segments of
an Enterprise and Related Information, both of which will be adopted by the
Company in 1998. Statement No. 130 requires companies to disclose certain
information regarding the nature and amounts of comprehensive income included in
the financial statements. Statement No. 131 requires companies to disclose
certain information about operating segments within their business. The Company
does not anticipate that Statement No. 130, or Statement No. 131, will have a
material impact on its consolidated financial statement disclosures.
NOTE 2. ACQUISITIONS
On May 19, 1997, the Company acquired Knights of Sunnyvale, California, a
developer of yield management software for the semiconductor industry, for the
following amounts:
(IN THOUSANDS)
======================================================
Common stock issued, 1,352,205 shares $27,720
Assumption of Knights stock options 2,295
Acquisition costs 1,785
-------
$31,800
-------
<PAGE> 12
On December 19, 1997, the Company acquired all of the outstanding shares of
common stock of Techne of Albany, Oregon, a manufacturer of back-end wafer
inspection equipment for the following amounts:
(IN THOUSANDS)
===================================================
Cash $1,500
Common stock issued, 400,000 shares 4,340
Acquisition costs 400
------
$6,240
------
The Knights and Techne acquisitions were recorded under the purchase method
of accounting and accordingly, results of operations of Knights and Techne are
included in the accompanying consolidated financial statements subsequent to
acquisitions. The purchase prices have been allocated, based on independent
appraisals obtained by the Company, to the tangible and intangible assets
acquired and liabilities assumed based on their respective fair values on the
date of acquisition as follows:
(IN THOUSANDS) KNIGHTS TECHNE
==============================================================
Cash $ 973 $ 11
Other current assets 1,220 3,685
Non-current assets 712 49
Intangibles 7,720 3,697
Liabilities (2,325) (4,731)
In-process research and development 23,500 3,529
-----------------------
$ 31,800 $ 6,240
-----------------------
To determine the value of in-process research and development of the
acquired businesses, the Company considered, among other factors, the stage of
development of each project, expected income, target markets, and associated
risks. Associated risks included inherent difficulties and uncertainties in
completing the project and, thereby, achieving technical feasibility and risks
related to the viability of and potential changes in future target markets. This
analysis resulted in a valuation for in-process research and development that
had not reached technical feasibility and did not have alternative future uses.
Therefore, in accordance with generally accepted accounting principles,
$23,500,000 and $3,529,000 was expensed related to the Knights and Techne
acquisitions, respectively.
Intangible assets on the Knights acquisition relate primarily to developed
technology and goodwill. Intangible assets on the Techne acquisition relate
principally to developed technology. To determine the value of developed
technology, the expected future cash flows of each product was discounted,
taking into account risks related to the characteristics and applications of
each product, existing and future markets, and assessment of the life cycle
stage of each product. This analysis resulted in a valuation for completed
products that had reached technological feasibility and, therefore, was
capitalizable. Intangible assets will be amortized on a straight-line basis over
estimated useful lives ranging from three to five years.
As part of the Agreement and Plan of Reorganization of the Knights and
Techne acquisitions, 135,191 and 120,000, respectively, of the common stock
included as consideration was deposited into an escrow account. The escrow
shares are to be distributed to Knights stockholders on May 19, 1998 and to
Techne shareholders on December 19, 1999 and are for the full satisfaction of
losses to the Company resulting from misrepresentations or omissions in the
agreement.
The Company entered into an agreement to lease Techne's current
manufacturing facilities from Techne's President. The one year operating lease
provides for annual lease payments of approximately $166,000, plus payment of
executory costs such as property taxes, maintenance and insurance. No payments
were made under the lease during 1997.
<PAGE> 13
notes to consolidated financial statements
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding the charge for in-process research and
development, as if the acquisitions of Knights and Techne had occurred at the
beginning of 1996 and does not purport to be indicative of what would have
occurred had the acquisition been made as of the beginning of 1996 or of results
which may occur in the future:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997 1996
----------- -----------
Net sales $ 152,438 $ 159,175
Net income $ 8,959 $ 24,143
Basic net income per share $ 0.49 $ 1.36
Diluted net income per share $ 0.47 $ 1.34
----------- -----------
NOTE 3. FINANCIAL INSTRUMENTS
Concentration of credit risk. Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash equivalents,
investments and trade receivables.
The Company places its cash equivalents and investments with high
credit-quality financial institutions. The Company invests its excess cash in
commercial paper, readily marketable debt and equity instruments and
collateralized funds of U.S. and state government entities. The Company has
established guidelines relative to credit ratings, diversification and
maturities that seek to maintain safety and liquidity.
The Company sells its systems to semiconductor manufacturers throughout the
world. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit, whenever
deemed necessary. The write-off of uncollectible amounts has been insignificant.
At December 31, 1997, accounts receivable from customers in Asia was $7,119,000
which are mainly secured by letters of credit.
Fair value of financial instruments. The Company has evaluated the estimated
fair value of financial instruments. The amounts reported for cash and cash
equivalents, accounts receivable, short-term borrowings, accounts payable and
accrued expenses approximate the fair value due to their short maturities.
Investment securities are reported at their estimated fair value based on quoted
market prices.
Investments. The following is a summary of the Company's investments:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
AT DECEMBER 31, 1997: AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
===========================================================================================================
<S> <C> <C> <C> <C>
Municipal bonds $ 87,768 $ 110 $ (35) $ 87,843
Floating rate notes 16,882 -- (6) 16,876
--------------------------------------------------------------
$ 104,650 $ 110 $ (41) $ 104,719
--------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
AT DECEMBER 31, 1996: AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
===========================================================================================================
<S> <C> <C> <C> <C>
Municipal bonds $ 78,309 $ 125 $ (10) $ 78,424
Preferred stock 14,600 -- -- 14,600
Floating rate notes 24,914 23 -- 24,937
--------------------------------------------------------------
$ 117,823 $ 148 $ (10) $ 117,961
--------------------------------------------------------------
</TABLE>
<PAGE> 14
The following is a summary of amortized costs and estimated fair values of debt
securities by contractual maturity:
<TABLE>
<CAPTION>
(IN THOUSANDS) AMORTIZED ESTIMATED
AT DECEMBER 31, 1997: AVAILABLE-FOR-SALE COST FAIR VALUE
======================================================================================
<S> <C> <C>
Amounts maturing within one year $ 28,171 $ 28,171
Amounts maturing after one year, within five years 76,479 76,548
-------------------------
$104,650 $104,719
-------------------------
</TABLE>
NOTE 4. INVENTORIES
The following is a summary of inventories by major category at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
====================================================
<S> <C> <C>
Raw materials $11,571 $ 7,671
Work in process 8,499 8,766
Finished goods 5,962 6,141
----------------------
$26,032 $22,578
----------------------
</TABLE>
NOTE 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following is a summary of equipment and leasehold improvements by major
categories at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
========================================================================
<S> <C> <C>
Equipment $ 18,302 $ 15,989
Leasehold improvements 8,425 6,091
Office furniture and equipment 9,415 3,871
-------------------------
36,142 25,951
Accumulated depreciation and amortization (19,750) (15,767)
-------------------------
$ 16,392 $ 10,184
-------------------------
</TABLE>
NOTE 6. ACCRUED LIABILITIES
The following is a summary of accrued liabilities at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
=====================================================================
<S> <C> <C>
Salaries and benefits $ 5,704 $ 5,546
Warranty reserves 3,325 6,078
Customer advance payments 2,249 388
Deferred revenue 1,858 2,363
Environmental remediation costs (note 11) 1,468 --
Other 3,441 2,686
----------------------
$18,045 $17,061
----------------------
</TABLE>
<PAGE> 15
notes to consolidated financial statements
NOTE 7. SHORT-TERM BORROWINGS
The Company's Japanese subsidiary has credit facilities with a total borrowing
capacity of approximately $4,600,000 (denominated in Yen) with Japanese banks.
One of the facilities is guaranteed by a $1,000,000 standby letter of credit
issued by the Company. As of December 31, 1997, the amount outstanding was
$1,160,000 (denominated in Yen), renewable quarterly at the current bank
interest rate plus .25% per annum (1.625% at December 31, 1997).
NOTE 8. STOCKHOLDERS' EQUITY
Preferred stock. The Board of Directors has the authority, without any further
vote or action by the stockholders, to provide for the issuance of 1,000,000
shares of preferred stock from time to time in one or more series with such
designation, rights preferences and limitations as the Board of Directors may
determine, including the consideration received therefore, the number of shares
comprising each series, dividend rates, redemption provisions, liquidation
preferences, redemption fund provisions, conversion rights and voting rights,
all without the approval of the holders of common stock.
Rights agreement. On November 19, 1997, the Company adopted a Shareholder Rights
Plan (Rights Agreement). Pursuant to the Rights Agreement, rights were
distributed at the rate of one right for each share of Common Stock owned by the
Company's stockholders of record on December 5, 1997. The rights expire on
December 4, 2007 unless extended or earlier redeemed or exchanged by the
Company.
Under the Rights Agreement, each right entitles the registered holder to
purchase one-hundredth of a Series A Preferred share of the Company at a price
of $140. The rights will become exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's common stock or commences a
tender offer or exchange offer upon consummation of which such person or group
would beneficially own 15% or more or the Company's common stock.
Stock repurchase program. On March 14, 1996, the Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's common stock on the
open market. During 1997 and 1996, the Company repurchased 126,000 shares of its
common stock at a cost of $2,041,000, and 674,000 shares at a cost of
$9,751,000, respectively.
In January 1998, the Company repurchased 200,000 shares of its common stock
at a cost of $3,271,000.
Stock option plans. On August 27, 1997, the Company's stockholders approved the
1997 Stock Incentive Plan (1997 Plan). The 1997 Plan replaces the Company's 1993
Long Term Stock Incentive plan (1993 Plan), and as a result, no additional
shares will be issued from the 1993 Plan after 1998. Under the 1997 and 1993
Plans, 750,000 and 3,000,000 shares, respectively, have been reserved for
issuance to eligible employees and to provide for certain automatic grants of
stock options to non-employee directors. Options under these plans are granted
at fair market value, expire ten years from the date of grant, and generally
vest in quarterly installments, commencing one year from the date of grant.
The following table summarizes option activity and related information:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
(SHARE AMOUNTS IN THOUSANDS) EXERCISE EXERCISE EXERCISE
YEARS ENDED DECEMBER 31, OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 1,710 $ 13.69 1,210 $ 19.53 1,099 $ 11.15
Granted 1,149 16.49 1,548 13.99 623 26.18
Exercised (482) 10.17 (38) 11.09 (502) 9.56
Canceled (75) 17.60 (1,010) 22.60 (10) 14.23
-------------------------------------------------------------------------------------
Outstanding-end of year 2,302 $ 15.70 1,710 $ 13.69 1,210 $ 19.53
-------------------------------------------------------------------------------------
</TABLE>
<PAGE> 16
The following table summarizes information about outstanding options at December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
(IN THOUSANDS EXCEPT PER SHARE DATA) CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
==============================================================================================================
<S> <C> <C> <C> <C> <C>
$ 1.03 -- $ 13.50 263 7.53 $ 9.61 154 $ 8.77
$ 13.51 -- $ 14.25 963 7.80 $ 14.25 434 $ 14.25
$ 14.26 -- $ 34.25 1,076 6.93 $ 18.48 120 $ 21.92
--------------------------------------------------------------------
2,302 708
--------------------------------------------------------------------
</TABLE>
In addition, the Company issued 100,000 shares of restricted stock under the
1993 Long Term Stock Incentive Plan. The Company has recorded a deferred
compensation charge equal to the fair value of the restricted stock at the time
of issuance of $1,425,000. The deferred compensation charge is being amortized
over the five-year vesting period.
On July 1, 1996, the Company repriced 932,370 employee stock options to
$14.25, the closing value at June 28, 1996.
Employee Stock Purchase Plan. The 1993 Employee Stock Purchase Plan (ESPP),
provides that eligible employees may purchase stock at 85% of its fair value on
specified dates through payroll deductions. Under the Plan, as amended, 500,000
shares were reserved for issuance. The Company sold 106,007 shares, 55,102
shares and 67,706 shares to employees in 1997, 1996 and 1995, respectively.
Stock based compensation. As permitted under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS No.
123), the Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), in accounting for
stock-based awards to employees. Under APB 25, the Company generally recognizes
no compensation expense with respect to such awards.
Pro forma information regarding net income and income per share is required
by FAS No. 123 for awards granted after December 31, 1995 as if the Company had
accounted for its stock-based awards to employees under the fair value method of
FAS No. 123. The fair value of the Company's stock-based awards to employees was
estimated using a Black-Scholes option pricing model. The Black-Scholes option
pricing model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's stock-based awards to employees have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated using the
following assumptions:
<TABLE>
<CAPTION>
OPTIONS ESPP
1997 1996 1997 1996
=============================================================================================
<S> <C> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
Expected stock price volatility 51.0% 49.0% 51.0% 49.0%
Risk-free interest rate 5.6% 5.8% 5.5% 5.6%
Expected life (years) 4.0 4.0 0.5 0.5
</TABLE>
<PAGE> 17
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the six-month purchase period (for stock purchases under the
ESPP). The Company's pro forma information follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
======================================================================================
<S> <C> <C>
Net income (loss) - as reported $ (15,937) $ 24,459
Net income (loss) - pro forma (20,308) 20,655
---------- ----------
Basic net income (loss) per share - as reported (0.86) 1.38
Basic net income (loss) per share - pro forma (1.10) 1.16
---------- ----------
Diluted net income (loss) per share - as reported (0.86) 1.36
Diluted net income (loss) per share - pro forma (1.10) 1.15
</TABLE>
For pro forma purposes in accordance with FAS No. 123, the repricing of
employee stock options during 1996 is treated as a modification of the
stock-based award, with the original options being repurchased and new options
granted. Any additional compensation arising from the modification is recognized
over the remaining vesting period of the new grant. FAS No. 123 is effective for
stock-based awards granted by the Company commencing January 1, 1995. All
stock-based awards granted before January 1, 1995, have not been valued and no
pro forma compensation expense has been recognized. However, any option granted
before January 1, 1995, that was repriced in 1996 is treated as a new grant
within 1996 and valued accordingly. In addition, because compensation expense is
recognized over the vesting period of the option, which is typically four years,
and pro forma disclosure is only required commencing with 1995, the initial
impact on pro forma income may not be representative of pro forma compensation
expense in future years.
The weighted average fair value of options and stock purchase rights granted
during 1997 was $10.91 and $5.33, respectively.
Incentive plans. The Company has adopted an Employee Incentive Plan and a
Savings Plan covering substantially all of its United States-resident employees.
The Board of Directors determines annually a formula for setting aside amounts
into a profit sharing pool based upon performance targets. The amounts set aside
are used to pay bonuses to employees. The charge to income for these plans
during 1997, 1996 and 1995 was $1,254,000, $1,249,000 and $5,930,000,
respectively.
NOTE 9. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1996 1995
===============================================================================
<S> <C> <C> <C>
Federal:
Current $ 631 $ 5,012 $ 18,000
Deferred 1,053 1,602 (2,678)
-----------------------------------------
1,684 6,614 15,322
State:
Current (92) 227 3,064
Deferred 609 916 881
-----------------------------------------
517 1,143 3,945
Foreign:
Current 748 1,485 1,150
-----------------------------------------
Total provision for income taxes $ 2,949 $ 9,242 $ 20,417
-----------------------------------------
</TABLE>
<PAGE> 18
The tax benefits associated with exercises of nonqualified stock options and
disqualifying dispositions of stock acquired through incentive stock options and
the employee stock purchase plan reduce taxes currently payable for 1997, 1996
and 1995, as shown above by $3,337,000, $83,000 and $3,889,000, respectively.
Such benefits are credited to additional paid in capital when realized.
The reconciliation of income tax computed at the U.S. federal statutory
rates to provision for income taxes is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PERCENTAGES) 1997 1996 1995
YEARS ENDED DECEMBER 31, AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Tax computed at U.S. statutory rate $ (4,545) (35.0%) $ 11,795 35.0% $ 20,130 35.0%
State income taxes (net of federal benefit) 335 2.6 743 2.2 2,565 4.5
Tax exempt investment income (1,312) (10.1) (1,532) (4.6) (1,250) (2.2)
In-process research and development 9,460 72.8 -- -- -- --
R&D credit (1,646) (12.6) (1,564) (4.6) (55) (0.1)
Foreign tax credits not benefited 266 2.0 -- -- -- --
Tax exempt foreign sales corporation (212) (1.6) (622) (1.9) (1,095) (1.9)
Other, net 603 4.6 422 1.3 122 0.2
---------------------------------------------------------------------------
Provision for income taxes $ 2,949 22.7% $ 9,242 27.4% $ 20,417 35.5%
---------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax accounts are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1996
========================================================================
<S> <C> <C>
Deferred tax liabilities:
Intangible assets $ (3,770) $ --
-------------------------
Deferred tax assets:
Warranty reserves $ 1,229 $ 2,244
Inventories 2,238 1,809
Intangible assets -- 1,864
Depreciable assets 1,214 797
Deferred revenue 1,942 1,116
Acquired net operating losses 700 --
Tax credit carryforwards 590 --
Other, including nondeductible accruals 2,204 1,856
-------------------------
Total deferred tax assets $ 10,117 $ 9,686
Less: Valuation allowance (1,290) --
-------------------------
Net deferred tax assets $ 5,057 $ 9,686
-------------------------
</TABLE>
In 1997, management concluded that a valuation allowance of approximately
$1,290,000 is required for acquired net operating losses that are significantly
limited due to change of ownership rules and foreign tax credit carryforwards.
Approximately $700,000 of this valuation allowance relates to the acquisition of
Knights. The reversal of this allowance will be credited to goodwill when
realized. The foreign tax credit carryforwards of $590,000 and net operating
loss carryforwards of $1,800,000 will expire in 2002 and 2011, respectively.
Pre-tax income (loss) from foreign operations was ($753,000), $2,647,000 and
$3,466,000 for 1997, 1996, and 1995, respectively. Upon repatriation of foreign
earnings, residual U.S. taxes would be immaterial.
<PAGE> 19
NOTE 10. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company operates principally in one industry segment; the manufacture, sale
and servicing of wafer probers for use in the manufacture of semiconductor
devices. The Company's principal markets are the North American, European and
Asian based semiconductor manufacturing companies.
No single customer accounted for more than 10% of net sales in 1997 and
1995. In 1996, one customer comprised 13% of net sales. No other customer
exceeded 10% of net sales in 1996.
International sales represented 43%, 45% and 45% of the Company's net sales
in 1997, 1996 and 1995, respectively. These sales represent the combined total
of export sales made by United States operations and all sales made by foreign
operations.
Export sales made by United States operations were 23% of net sales in 1997
(21% to Asia, 2% to other), 19% of net sales in 1996 (18% to Asia, 1% to other)
and 22% of net sales in 1995 (21% to Asia, 1% to other).
The following is a summary of the Company's geographic operations:
<TABLE>
<CAPTION>
ADJUSTMENT
UNITED AND
(IN THOUSANDS) STATES ASIA EUROPE ELIMINATIONS CONSOLIDATED
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
1997
Sales to unaffiliated customers $ 119,567 $ 1,557 $ 28,911 $ -- $ 150,035
Transfer between geographic locations 23,829 517 93 (24,439) --
---------------------------------------------------------------------------------
Total net sales $ 143,396 $ 2,074 $ 29,004 $ (24,439) $ 150,035
Operating income (loss) $ (12,970) $ (6,571) $ 2,531 $ (822) $ (17,832)
Identifiable assets $ 211,898 $ 2,311 $ 16,140 $ (1,430) $ 228,919
1996
Sales to unaffiliated customers $ 112,216 $ 7,844 $ 31,890 $ -- $ 151,950
Transfer between geographic locations 27,057 87 -- (27,144) --
---------------------------------------------------------------------------------
Total net sales $ 139,273 $ 7,931 $ 31,890 $ (27,144) $ 151,950
Operating income (loss) $ 28,402 $ (4,582) $ 4,827 $ 207 $ 28,854
Identifiable assets $ 187,135 $ 2,741 $ 8,597 $ (607) $ 197,866
1995
Sales to unaffiliated customers $ 131,351 $ 9,509 $ 28,380 $ -- $ 169,240
Transfer between geographic locations 25,287 95 -- (25,382) --
---------------------------------------------------------------------------------
Total net sales $ 156,638 $ 9,604 $ 28,380 $ (25,382) $ 169,240
Operating income (loss) $ 52,205 $ (2,877) $ 4,185 $ (210) $ 53,303
Identifiable assets $ 175,967 $ 3,969 $ 12,619 $ (814) $ 191,741
</TABLE>
Sales between geographic areas are accounted for at prices that the Company
believes are at arm's length prices.
<PAGE> 20
NOTE 11. COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating leases. As of December 31, 1997, the minimum annual rental commitments
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
=========================================
<S> <C>
1998 $ 3,912
1999 3,450
2000 2,260
2001 1,640
2002 884
Thereafter 332
-------
$12,478
-------
</TABLE>
Rent expense was approximately $3,594,000, $2,616,000 and $2,021,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
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 monthly payments are based on the London Interbank Offering Rate (LIBOR). At
current interest rates, the annual lease payments represent approximately
$710,000. At the end of the lease, the Company has the option to acquire the
property at its original cost of approximately $12,000,000 and any current rent
due and payable.
The guaranteed residual payment on the lease is approximately $12,000,000.
The lease contains certain restrictive covenants. The Company was in compliance
with these covenants at December 31, 1997. 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 December 31, 1997, the Company had cash
pledged of approximately $12,000,000, which is included in cash and cash
equivalents, since the Company can withdraw the cash with ten days notice.
Environmental remediation. 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 some
environmental remediation activities on the property's soil. In 1997, the
Company accrued $1,600,000, which is the Company's best estimate of its
obligation. It is possible that the Company's recorded estimate of its
obligations may change in the near term.
NOTE 12. SUBSEQUENT EVENTS
In February 1998, the Board of Directors approved the retirement of the
1,000,000 shares of the Company's common stock held in treasury.
<PAGE> 21
report of Ernst & Young LLP, independent auditors
The Board of Directors and Stockholders
Electroglas, Inc.
We have audited the accompanying consolidated balance sheets of Electroglas,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Electroglas,
Inc. at December 31, 1997 and 1996, and the consolidated results of operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
January 27, 1998, except for
Note 12 as to which the date
is February 13, 1998.
<PAGE> 22
corporate information
BOARD OF DIRECTORS
CLASS III
Curtis S. Wozniak
Chairman and CEO
Electroglas, Inc.
CLASS III
Neil R. Bonke
Chairman (retired)
Electroglas, Inc.
CLASS II
Robert J. Frankenberg
President and CEO
Encanto Networks
CLASS II
Roger D. Emerick
Chairman and CEO
Lam Research Corp.
CLASS I
Joseph F. Dox
President and COO (retired)
Novellus Systems, Inc.
CORPORATE MANAGEMENT
Curtis S. Wozniak
Chairman and CEO
Armand J. Stegall
VP of Finance and CFO
Timothy J. Boyle
VP of Engineering
William J. Haydamack
VP, General Manager of Knights
Technology, Inc.
Joseph G. LaChapelle
VP, General Manager of
Electroglas Inspection Products
John P. Livingston
VP of Operations
Conor P. O'Mahony
VP of Global Customer Operations
Joseph A. Savarese
VP of Business Development
Phillip M. Truckle
VP of Marketing
Daniel D. Welton
VP of Manufacturing
Joe M. Reid, Jr.
Director of Quality
CORPORATE OFFICE
Electroglas, Inc.
2901 Coronado Drive
Santa Clara, California 95054
(408) 727-6500
UNITED STATES OFFICES
Arizona
California
Massachusetts
Oregon
Texas
INTERNATIONAL SALES OFFICES
France
Germany
Japan
Korea
People's Republic of China
Singapore
Taiwan
United Kingdom
GENERAL LEGAL COUNSEL
Morrison & Foerster LLP
Palo Alto, California
INDEPENDENT AUDITORS
Ernst & Young LLP
San Jose, California
As of December 31, 1997, the Company had approximately 13,000 stockholders of
record and holders in streetname.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "EGLS."
REGISTRAR AND TRANSFER AGENT
Boston EquiServe LP
Boston, Massachusetts
<TABLE>
<CAPTION>
HIGH LOW
- -------------------------------------------
Fiscal Year 1997
<S> <C> <C>
1st Quarter 22 3/8 15 7/8
2nd Quarter 27 3/4 15 1/4
3rd Quarter 35 7/8 23 1/2
4th Quarter 34 14 3/8
Fiscal Year 1996
1st Quarter 25 3/4 14 3/8
2nd Quarter 22 1/2 13 3/4
3rd Quarter 15 1/4 12
4th Quarter 19 5/8 12 5/8
</TABLE>
The preceding table sets forth the high and low closing sale prices as reported
on the Nasdaq National Market during the last two years.
The Company has never declared or paid cash dividends on its Common Stock. The
Company currently intends to retain all future income for use in the operation
of its business, and, therefore, does not anticipate paying any cash dividends
in the foreseeable future. Additional copies of this report, as well as of SEC
Form 10-k, for the year ended December 31, 1997, may be obtained from the
Company without charge by writing to:
Electroglas, Inc.
Attn: Investor Relations
3045 Stender Way
Santa Clara, California 95054
The Electroglas logo and SORTnet are registered trademarks and Horizon 4090 is a
trademark of Electroglas, Inc. Windows NT is a registered trademark of Microsoft
Corporation. Yield Manager is a registered trademark and Merlin's Framework and
SPaR are trademarks of Knights Technology, Inc.
from left to right - Joe M. Reid Jr., Timothy J. Boyle, Conor P. O'Mahony, John
P. Livingston, Curtis S. Wozniak, Armand J. Stegall, Joseph G. LaChapelle,
Phillip M. Truckle, Joseph A. Savarese, Daniel D. Welton, (not pictured -
William J. Haydamack)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Electroglas, Inc. of our report dated January 27, 1998 (except for Note 12,
as to which the date is February 13, 1998), included in the 1997 Annual Report
to Stockholders of Electroglas, Inc.
Our audits also included the financial statement schedule of Electroglas, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-69668) pertaining to the 1993 Employee Stock
Purchase Plan and 1993 Long-Term Stock Incentive Plan, the Registration
Statement (Form S-8 No. 33-95052) pertaining to the 1993 Long-Term Stock
Incentive Plan of Electroglas, Inc., the Registration Statement (Form S-8 No.
333-35023) pertaining to the 1997 Stock Incentive Plan and Stock Options
Granted Pursuant to Agreements made between Electroglas, Inc. and Certain
Employees of Knights Technology, Inc., the Registration Statement (Form S-8 No.
333-28327) pertaining to the Knights Technology, Inc. 1987 Stock Option Plan
and Employment Agreement with each of Tom Sherby, Ken Huang, Mary Korn and
Ankush Oberai, and the Registration Statement (Form S-4 No. 333-24587) of
Electroglas, Inc. and in the related Prospectus of our report dated January 27,
1998 (except for Note 12, as to which the date is February 13, 1998), with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
Electroglas, Inc.
/s/ Ernst & Young LLP
San Jose, California
March 30, 1997
18
<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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,259
<SECURITIES> 104,719
<RECEIVABLES> 36,317
<ALLOWANCES> 465
<INVENTORY> 26,032
<CURRENT-ASSETS> 199,052
<PP&E> 36,142
<DEPRECIATION> 19,750
<TOTAL-ASSETS> 230,133
<CURRENT-LIABILITIES> 26,629
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 199,529
<TOTAL-LIABILITY-AND-EQUITY> 230,133
<SALES> 150,035
<TOTAL-REVENUES> 150,035
<CGS> 86,409
<TOTAL-COSTS> 86,409
<OTHER-EXPENSES> 27,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> (12,988)
<INCOME-TAX> 2,949
<INCOME-CONTINUING> (15,937)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,937)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
<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> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 11,141 6,796
<SECURITIES> 117,961 111,448
<RECEIVABLES> 16,868 32,324
<ALLOWANCES> 205 243
<INVENTORY> 22,578 22,434
<CURRENT-ASSETS> 183,591 181,196
<PP&E> 25,951 18,167
<DEPRECIATION> 15,767 13,101
<TOTAL-ASSETS> 197,866 191,741
<CURRENT-LIABILITIES> 24,215 34,347
<BONDS> 0 0
0 0
0 0
<COMMON> 182 180
<OTHER-SE> 173,469 157,214
<TOTAL-LIABILITY-AND-EQUITY> 197,866 191,741
<SALES> 151,950 169,240
<TOTAL-REVENUES> 151,950 169,240
<CGS> 79,666 76,606
<TOTAL-COSTS> 79,666 76,606
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 38 44
<INCOME-PRETAX> 33,701 57,614
<INCOME-TAX> 9,242 20,417
<INCOME-CONTINUING> 24,459 37,097
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 24,459 37,097
<EPS-PRIMARY> 1.38 2.09
<EPS-DILUTED> 1.36 2.05
</TABLE>
