Electroglas, Inc 2008 Annual Report

Transcription

Electroglas, Inc
5729 Fontanoso Way
San Jose, California 95138
www.electroglas.com
(408) 528-3000
2008 Annual Report
Notice of 2008 Annual Meeting of Stockholders and Proxy Statement
Report on Form 10-K
September 10, 2008
Dear Electroglas Stockholder,
Despite economic conditions that resulted in a significant contraction of the prober market, fiscal year
2008 was a year of excellent strategic accomplishments for Electroglas.
Our strategy has been based on three key elements:
Position the EG6000 as the technology leading prober with our customers and place units in major
customers to prepare for the market turnaround.
Restructure Electroglas as a virtual company where we put the majority of our resources on
differentiating the performance of the EG6000.
Leverage our precision motion control technology in new markets and applications.
We have made great progress on all three elements. By the end of FY'08 we had recognized EG6000
revenue at 25 customers at 34 sites in 9 countries. We now have 33 active accounts. We have successfully
pursued fabless design companies who have great influence over the foundries and OSATS. We are now a
300mm prober supplier to the two largest fabless suppliers. Our indirect distribution strategy in Taiwan is
paying off. We are now actively engaged with the world’s largest foundry. We are changing the game and
changing it in our favor.
We continue to be the technology leader in the prober market. During this past year both of our
competitors introduced the second generation 300mm probers. Not only did they not leapfrog us, they did not
even catch up. In the meantime we are not resting. Over the course of this year we improved our index speed
by 30%, we improved our disturbance rejection ability, and we improved our probe to pad alignment. We
own over 30 patents, including five granted in fiscal year 2008 and currently have three filed and pending.
These fiscal year 2008 patents include: Active Vibration control (AVC), Dual Loop Controls for improved z
accuracy, and MicroTouch – all key technologies in our EG6000 prober.
Our restructuring efforts have changed the economics of the company. Consider the following
table:
Today
FY'07
Operating Expenses
$7.0M /Q
$4.6M/Q
Manufacturing Overhead
$1.1M/Q
$ 0.7/Q
Inventory
$12M
$5.5M
This restructuring has lowered the breakeven point of Electroglas from $20M per quarter to approximately
$12M per quarter. With this work behind us we have improved our ability to withstand the protracted
slowdown which currently characterized our industry.
During FY'08 we began to pursue a new opportunity to leverage the patented technologies and value
added capabilities of the EG6000. We believe that the EG6000 is the finest precision motion control system
available. As we saw the EG6000 delivering impressive results in evaluation after evaluation it became clear
that our architecture and control systems could move an object, in our case a wafer, in multiple dimensions at
multiple angles and at incredible speeds with unbelievable accuracy. As we analyzed this it became obvious
that we had an exceptional opportunity to leverage our platform into applications beyond wafer probe. We
also knew that we did not have any expertise in these potential applications and had no desire to spend money
on these. Having established a virtual company philosophy over the past year the approach for us was clear.
We would find partners with specific process expertise who require a precision motion control platform for
their solutions. During the past year we have found multiple partners who have bought the EG6000 for use in
a variety of applications including precision assembly, machining, printing and inspection applications.
During the last 6 months of FY'08 this new business resulted in 20% of our bookings. In the coming years we
see this as the means to dramatically increase the volume of standard EG6000s we sell without increasing our
marketing, sales or R&D expenses.
It has been disappointing to see the recent slowdown of the prober market. We estimate that worldwide
sales of probers have dropped over 50% from FY'07 to FY'08. We expect this downturn to last through the
end of calendar year '08. Nevertheless we remain optimistic. We know that the semiconductor capital
equipment markets are cyclical. We know that better times will follow. We are now well structured to
withstand the downturn. We also know that you gain market position during the downturn and you reap the
reward of the downturn activity during the upturn which is sure to follow.
I am optimistic about the position we have achieved during the last 18 months at some of the worlds
biggest and most important accounts.
I am optimistic that as these accounts return to the market for more prober capacity we will be a player in
these deals and we will increase our market share.
I am optimistic about our product and technology and the differentiated advantages it gives us and the
value it brings to our customers.
I am optimistic about the virtual model we have employed which allows us to successfully compete
against much larger companies.
And finally, I am optimistic about out people and the talent they bring to Electroglas every day. They are
skillful, determined, and competitive. They have exhibited the perseverance required to succeed in this
business and I am optimistic that we will succeed.
Thank you.
Very truly yours,
Thomas M. Rohrs
Chairman of the Board
Chief Executive Officer
September 10, 2008
Dear Electroglas Stockholder,
I am pleased to invite you to the Annual Meeting of Stockholders of Electroglas, Inc. to be held on
Wednesday, October 15, 2008 at 10:00 a.m., Pacific Daylight Time, at our corporate headquarters at 5729
Fontanoso Way, San Jose, California 95138 (the “Annual Meeting”).
This year we are seeking (a) the election of two Class III directors, (b) the ratification of the selection of
our independent registered public accounting firm and (c) to transact such other business as may properly
come before the Annual Meeting and any adjournment or postponement thereof.
We encourage you to conserve natural resources, as well as significantly reduce printing and mailing costs,
by signing up for electronic delivery of our stockholder communications. For more information, see
“Electronic Delivery of Our Stockholder Communications” in the proxy statement.
Whether or not you plan to attend the Annual Meeting, please sign and return the enclosed proxy card to
ensure your representation at the Annual Meeting.
On behalf of the Board of Directors, I would like to express our appreciation for your continued interest in
and the support of our Company. We look forward to seeing you at the Annual Meeting.
Very truly yours,
Thomas M. Rohrs
ELECTROGLAS, INC.
________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held October 15, 2008
10:00 a.m Pacific Daylight Time
________________
To the Stockholders of Electroglas, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the “Annual Meeting”) of
Electroglas, Inc., a Delaware corporation (the “Company”), will be held at the Company’s corporate
headquarters at 5729 Fontanoso Way, San Jose, California 95138, on Wednesday, October 15, 2008 at 10:00
a.m., Pacific Daylight Time, for the following purposes:
1. ELECTION OF DIRECTORS. To elect two Class III directors of the Company to serve until the
2011 annual meeting of stockholders or until a successor is duly elected and qualified.
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM. To ratify the appointment of BDO Seidman, LLP as the independent
registered public accounting firm for the Company for the year ending May 31, 2009.
3. To transact such other business as may properly come before the Annual Meeting and any
adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy Statement which is attached hereto
and made a part hereof.
The Board of Directors has fixed the close of business on August 18, 2008, as the record date for
determining the stockholders entitled to notice of and to vote at the Annual Meeting and any adjournment or
postponement thereof.
Whether or not you plan to attend the Annual Meeting, please submit your proxy as soon as possible so
that your shares can be voted at the Annual Meeting in accordance with your instructions. You may
submit your proxy (1) over the Internet at www.proxyvote.com, (2) by telephone (800-690-6903), or (3) by
signing, dating and returning the enclosed proxy card promptly in the accompanying envelope. If you
submit your proxy and then decide to attend the Annual Meeting to vote your shares in person, you may
still do so. Your proxy is revocable in accordance with the procedures set forth in the Proxy Statement.
Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be
held on October 15, 2008.
The proxy statement is available at www.proxyvote.com
By Order of the Board of Directors,
Thomas E. Brunton
Secretary
San Jose, California
September 10, 2008
ELECTROGLAS, INC.
5729 Fontanoso Way
________________
PROXY STATEMENT
________________
General Information
This Proxy Statement is furnished to stockholders of Electroglas, Inc., a Delaware corporation (the
“Company”), in connection with the solicitation by the Board of Directors (the “Board”) of the Company of
proxies in the accompanying form for use in voting at the annual meeting of stockholders of the Company
(the “Annual Meeting”) to be held on Wednesday, October 15, 2008, at 10:00 a.m., Pacific Daylight Time, at
the Company’s headquarters at 5729 Fontanoso Way, San Jose, California 95138, and any adjournment or
postponement thereof. Shares of common stock (“Common Stock”) of the Company represented by the
proxies received, properly marked, dated, executed and not revoked will be voted at the Annual Meeting.
This Proxy Statement and the form of proxy are first being mailed to stockholders on or about September 10,
2008.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it
is exercised by delivering to the Company (to the attention of Thomas E. Brunton, Secretary, 5729 Fontanoso
Way, San Jose California 95138) a written notice of revocation or a duly executed proxy bearing a later date,
or by attending the Annual Meeting and voting in person. Attendance at the Annual Meeting in and of itself
does not revoke a prior proxy.
Record Date, Share Ownership and Quorum
The close of business on August 18, 2008, has been fixed as the record date (the “Record Date”) for
determining the holders of shares of Common Stock of the Company entitled to notice of and to vote at the
Annual Meeting. As of the close of business on the Record Date, the Company had 26,742,520 shares of
Common Stock were issued, outstanding and entitled to vote at the Annual Meeting. The presence at the
Annual Meeting of a majority, or 13,371,261 of these shares of Common Stock of the Company, either
present in person or represented by proxy, will constitute a quorum for the transaction of business at the
Annual Meeting.
Solicitation and Voting Procedures
Each outstanding share of Common Stock on the Record Date is entitled to one vote on all matters. For
Proposal 1, two Class III directors will be elected by a plurality of votes; the nominees receiving the highest
number of affirmative votes of the shares of Common Stock present in person or by proxy at the Annual
Meeting and entitled to vote will be elected. Pursuant to the Company’s Certificate of Incorporation, as
amended, the number of directors is determined from time to time by resolution adopted by affirmative vote
of a majority of the entire Board. Currently there are two vacancies on the Board. Proxies cannot be voted for
a greater number of persons than the nominees named in this proxy statement. Ratification of Proposal 2 will
require the affirmative vote of a majority of the shares present in person or by proxy at the Annual Meeting
and entitled to vote.
If you are not planning on attending the Annual Meeting and voting your shares in person, your shares of
Common Stock cannot be voted until either a signed proxy card is returned to the Company or voting
instructions are submitted by using the Internet website www.proxyvote.com or by calling a specifically
designated telephone number as indicated on the proxy card. Any stockholder may change his or her vote
prior to the Annual Meeting by revoking his or her proxy or by (i) submitting a proxy bearing a later date, (ii)
submitting new voting instructions via the Internet at www.proxyvote.com, or (iii) calling the specifically
designated telephone number on the proxy card. The Internet and telephone voting procedures are designed
to authenticate stockholders’ identities, to allow stockholders to provide voting instructions, and to confirm
that instructions have been recorded properly. The Company believes the procedures which have been put in
place are consistent with the requirements of applicable law. Specific instructions for stockholders of record
who wish to use the Internet or telephone voting procedures are set forth on the enclosed proxy card.
The solicitation of proxies will be conducted by mail, and the Company will bear all attendant costs. These
costs will include the expense of preparing and mailing proxy materials for the Annual Meeting and
reimbursements paid to brokerage firms and others for expenses incurred in forwarding solicitation materials
regarding the Annual Meeting to beneficial owners of the Company’s Common Stock. The Company may
conduct further solicitation personally, by telephone or by facsimile through its officers, directors and regular
employees, none of whom will receive additional compensation for assisting with the solicitation.
An automated system administered by Broadridge Financial Solutions, Inc. (“Broadridge”) will tabulate
votes cast by proxy at the Annual Meeting, and the Inspector of Elections of the Company will tabulate votes
cast in person at the Annual Meeting. The Inspector of Elections will also determine whether or not a quorum
is present. Under the General Corporation Law of the State of Delaware, an abstaining vote and a broker
“non-vote” are counted as present and are, therefore, included for purposes of determining whether a quorum
of shares is present at the Annual Meeting. A broker “non-vote” occurs when a nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does not have the discretionary
voting power with respect to that item and has not received instructions from the beneficial owner. Broker
“non-votes” and shares as to which proxy authority has been withheld with respect to any matter are not
deemed to be entitled to vote for purposes of determining whether stockholder approval of that matter has
been obtained. As a result, broker “non-votes” are not included in the tabulation of the voting results on the
election of directors or issues requiring approval of a majority of the shares of Common Stock entitled to vote
and, therefore, do not have the effect of votes in opposition in such tabulations. With respect to Proposal 2,
broker “non-votes” will have no effect. Because abstentions will be included in tabulations of the shares of
Common Stock entitled to vote for purposes of determining whether a proposal has been approved,
abstentions have the same effect as negative votes on Proposal 2.
Householding of Annual Meeting Materials
Some brokers and other nominee record holders may be participating in the practice of “householding”
proxy statements and annual reports. This means that only one copy of the Proxy Statement and annual report
will be sent to multiple stockholders in a stockholder’s household. The Company believes this
“householding” rule will provide greater convenience for the Company’s stockholders, as well as cost savings
for the Company by reducing the number of duplicate documents that are sent to stockholders’ homes.
The “householding” election appears on the voting instruction form accompanying this Proxy Statement.
If you wish to participate in the “householding” program, please indicate “YES” when voting your proxy.
Your affirmative or implied consent will be perpetual unless you withhold it or revoke it. If you wish to
continue to receive separate proxy statements and annual reports for each account in your household, you
must withhold your consent to the Company’s “householding” program by so indicating when voting your
proxy. Please note that if you do not respond, you will be deemed to have consented, and “householding”
will begin 60 days after the mailing of this Proxy Statement.
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You may revoke your consent at any time by contacting Broadridge, either by calling toll-free (800) 5421061, or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York
11717. If you revoke your consent you will be removed from the “householding” program within 30 days of
receipt of your revocation and each stockholder at your address will receive individual copies of the proxy
statement and annual report.
Electronic Access of Annual Meeting Materials
We strongly encourage our stockholders to conserve natural resources, as well as significantly reduce our
printing and mailing costs, by signing up to receive your stockholder communications electronically via email or the Internet. With electronic delivery, we will notify you as soon as the annual report and the proxy
statement are available on the Internet. Electronic delivery can also help reduce the number of bulky
documents in your personal files and eliminate duplicate mailings. To sign up for electronic delivery:
1. Follow the voting instructions to vote using the Internet at www.proxyvote.com, and when prompted,
indicate that you agree to receive or access stockholders communications electronically in future years.
2. Check the box on the proxy card, indicating your intent to consent to access future annual reports and
proxy statements of the Company electronically over the Internet.
Your electronic delivery enrollment will be effective until you cancel it. If you have questions about
electronic delivery, please contact Broadridge at www.investordelivery.com.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Nominating and Corporate Governance Committee of the Board has recommended, and the Board has
nominated, C. Scott Gibson and John F. Osborne for election as Class III directors at the Annual Meeting, to
serve until the 2011 annual meeting of stockholders, until the director’s successor is elected or appointed and
qualified, or until his earlier resignation or removal. The nominees are currently directors of the Company,
and each nominee named below has consented, if elected as a director of the Company, to serve until his term
expires. In the event that any nominee of the Company is unable or declines to serve as a director at the time
of the Annual Meeting, the proxies will be voted for any nominee who shall be designated by the present
Board to fill the vacancy. In the event that additional persons are nominated for election as Class III director,
the proxy holders intend to vote all proxies received by them in such a manner as will assure the election of
the nominee listed below, and, in such event, the specific nominees to be voted for will be determined by the
proxy holders. The Board has no reason to believe that the persons named below will be unable or unwilling
to serve as a director, if elected.
The nominees for Class III director receiving a plurality of the votes of the shares of Common Stock present
in person or represented by proxy and entitled to vote shall be elected as Class III directors provided a quorum is
present. Votes withheld from any director nominee are counted for purposes of determining the presence or
absence of a quorum. Certain information about C. Scott Gibson and John F. Osborne, the Class III director
nominees, is furnished below.
C. Scott Gibson has been a director of the Company since March 2004. Mr. Gibson is up for re-election as
a Class III director this year. Since his retirement in March 1992, Mr. Gibson has served as a director to
several technology companies. He co-founded Sequent Computer Systems Inc. in 1983 (which was acquired
by International Business Machines Corporation), and served as its President from January 1988 to February
1992. From 1976 to 1983, Mr. Gibson was employed at Intel Corporation as General Manager, Memory
Components Operations. He currently is serving as the Chairman of the Board of RadiSys Corporation, an
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engineering technology company, and is a member of the Board of Directors of TriQuint Semiconductor, Inc.,
a semiconductor company, Pixelworks, Inc., a fabless semiconductor company, Verigy, Inc., semiconductor
equipment company and Northwest Natural Gas Company, a natural gas distribution. Mr. Gibson is also the
Vice Chairman of the Oregon Health and Science University and the Oregon Health and Science Foundation
Board and a member of the Oregon Community Foundation Board. Mr. Gibson received his Bachelors of
Science in electrical engineering from the University of Illinois and his Masters of Business Finance from the
University of Illinois.
John F. Osborne has been a director of the Company since May 2002 and became lead director in June
2005. Mr. Osborne is up for re-election as a Class III director this year. Since January 1998 Mr. Osborne has
been President of Competitive Customer Support, an advisor to companies that manufacture integrated
circuits or supply materials, equipment and services to the microelectronics industry. Prior to forming
Competitive Customer Support, Mr. Osborne was a member of the executive staff of Lam Research (“Lam”),
a semiconductor equipment company. Mr. Osborne joined Lam in 1988 and held the positions of Vice
President of Strategic Development, Vice President of Quality and Vice President of Customer Support. Prior
to joining Lam, Mr. Osborne held management positions at both Motorola, Inc., an embedded
communications computing company, and Royal Philips Electronics, a consumer electronics company, from
1967 to 1985. Mr. Osborne is also a member of the Board of Directors of Amkor Technology, Inc., a supplier
of semiconductor offshore assembly and test services. Mr. Osborne earned his degree in Metallurgical
Engineering from Colorado School of Mines.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE ABOVE NAMED
NOMINEES.
Board of Directors
The Company’s Certificate of Incorporation divides the Company’s Board into three classes designated as
Class I, II, and III with each class serving staggered three-year terms and these classes are up for election in
2009, 2010 and 2008, respectively.
As previously disclosed on Form 8-K filed with the Securities and Exchange Commission on April 30,
2008, at a meeting of the Board on April 25, 2008, upon recommendation of the Nominating and Corporate
Governance Committee, elected Jorge L. Titinger as a Class I director, effective on May 1, 2008. Effective
June 24, 2008, Fusen E. Chen, Ph.D. resigned as a member of the Board.
The following table sets forth certain information with respect to the directors of the Company as of
August 18, 2008:
Name
Thomas M. Rohrs
Age
57
Mel Friedman (2)(3)
C. Scott Gibson (1)(3)
John F. Osborne (1)(2)(3)(4)
Jorge L. Titinger(2)(3)
Jack G. Wilborn (2)(3)
70
56
64
46
61
Class
II
I
III
III
I
II
Position
Chief Executive Officer and Chairman of
the Board
Director
Director
Director
Director
Director
Member Since
December 2004
May 1999
March 2004
May 2002
May 2008
March 2007
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating and Governance Committee
(4) Lead Independent Director
Thomas M. Rohrs was appointed Chairman of the Board and Chief Executive officer in April 2006. Mr.
Rohrs has been a Director of the Company since December 2004 and will continue to serve as a Class II
director until the Annual Meeting in 2010. Mr. Rohrs presently serves on the board of Magna Design
Automation, Inc., an electronic design automation software and design services company, Advanced Energy,
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Inc., a Company that designs and manufactures complex power conversion, control systems, and gas flow
control devises used in plasma-based thin film processing equipment, and several private companies. In
addition, Mr. Rohrs is an adviser and consultant to a number of companies both public and private. Prior to
joining the Company Mr. Rohrs spent five years with Applied Materials, Inc., a semiconductor equipment
company, most recently as Senior Vice President, Global Operations, and was also a member of the
Company's Executive Committee. Immediately prior to that, Mr. Rohrs was Vice President of Worldwide
Operations for Silicon Graphics, a high performance computing company, and previously was with MIPS
Computer Systems, a provider of industry standard processor architectures for the semiconductor industry, as
Senior Vice President of Manufacturing and Customer Service. Mr. Rohrs also served as Group Operations
Manager for Hewlett-Packard Company's Personal Computer Group. Mr. Rohrs received his Bachelors of
Science in mechanical engineering from the University of Notre Dame and a Masters in Business
Administration from the Harvard School of Business.
Mel Friedman has been a director of the Company since May 1999. Mr. Friedman will continue to serve
as a Class I director until the Annual Meeting in 2009. In 2002, Friedman retired from Sun Microsystems,
Inc. (“Sun”), a provider of network computing products and services, where his most recent position was that
of Senior Vice President, Customer Advocacy. Since 2002, Mr. Friedman has acted as a consultant for Sun
and other high technology companies. From March 1998 through July 2000, he was President,
Microelectronics at Sun. Previously, Mr. Friedman was Vice President, Worldwide Operations, Vice
President of Supply Management and Vice President, West Coast Operations. Mr. Friedman joined Sun in
1989. From 1985 through 1989, he was Vice President, Worldwide Operations and Customer Service at
Prime Computer, a mini-computer company. Prior to that, Mr. Friedman held executive positions at Apollo
Computer, a workstation manufacturer, and Polaroid Corporation, a photographic company. Mr. Friedman
also co-founded Tabor Corporation, a micro-floppy disc drive company. Mr. Friedman holds a BSME with
honors from the City College of New York and conducted graduate work in Mechanical Engineering and
Industrial Management at MIT. Mr. Friedman currently serves on the Board of Directors of Volterra
Semiconductor Corporation, which produces power management semiconductors for high technology.
C. Scott Gibson (See background under Proposal No. 1).
John F. Osborne (See background under Proposal No. 1).
Jorge L. Titinger was appointed to the Board in May 2008. Mr. Titinger will continue to serve as a Class I
director until the Annual Meeting in 2009. In June 2008, Mr. Titinger was named the Chief Operating
Officer of Verigy, Ltd.. Prior to Verigy, Mr. Titinger was with FormFactor as senior vice president of the
Product Business Group from November 2007 through June 2008. From January 2003 through October 2007,
Mr. Titinger was with KLA-Tencor, where he held several senior management roles during his five years with
the company. These included: senior vice president and general manager of the global support services and
field operations group; chief administrative officer; and, most recently, chief manufacturing officer and
executive vice president of global operations. Before KLA-Tencor, Titinger spent more than four years at
Applied Materials, where he served in various management positions, including vice president of global
operations for both the Silicon Business Sector (SBS) Products and for the Dielectric Systems and Modules
Product Business Group. Prior to Applied Materials, Titinger was president and chief operating officer of
Insync Systems, a gas delivery systems manufacturer, for four years. He also co-founded and served as vice
president of operations at NeTpower, a high-performance computer workstation and server manufacturer.
Other companies he worked for include MIPS Computer Systems/Silicon Graphics and Hewlett-Packard.
Titinger holds both a bachelor's and a master's degree in electrical engineering, and a master's degree in
engineering management, from Stanford University.
Jack G. Wilborn was appointed to the Board in March 2007 and was appointed Audit Committee
Chairman in April 2007. Mr. Wilborn will continue to serve as a Class II director until the Annual Meeting in
2010. Mr. Wilborn retired from KPMG Portland in October of 2006. In 2004, he was appointed Office
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Managing Partner of KPMG Portland, a global network of professionals providing audit, tax and advisory
services. Mr. Wilborn joined the Portland office of KPMG as a partner in the audit practice in 2002. He
joined KPMG after 31 years with Arthur Andersen where he was office managing partner of Arthur
Andersen's Portland office. Mr. Wilborn received his Bachelors of Arts in political science from the Oregon
State University and a Masters in Business Administration from Oregon State University.
Independence of Directors
A majority of the Board must qualify as “independent” as that term is defined in Rule 4200(a)(15) of the
listing standards of the Marketplace Rules of The NASDAQ Stock Market LLC (“NASDAQ”). The Board
has affirmatively determined that five of the six current members of the Board, Messrs. Friedman, Gibson,
Osborne, Titinger, and Wilborn are “independent” under the applicable NASDAQ listing standards. The
Company’s independent directors meet regularly in executive session without management. The Board of
Directors has also designated a lead director to preside at executive sessions of independent directors. Mr.
Osborne is the Board’s designated lead independent director. The Board adopted and approved Corporate
Governance Guidelines in August of 2005, a copy of which can be viewed at the Company’s website at
www.electroglas.com.
Board Meetings
The Board met seven times during the year ended May 31, 2008. No director attended fewer than 75% of
all the meetings of the Board and its committees on which he served after becoming a member of the Board.
The Board has three committees: the Audit Committee, the Compensation Committee and the Nominating and
Corporate Governance Committee. The Company encourages, but does not require, its Board members to
attend annual stockholders meetings. All members of the board attended the 2007 annual meeting of
stockholders either in person or via conference call.
Committees of the Board of Directors
The Audit Committee held eight meetings in the year ended May 31, 2008. The members of the Audit
Committee are Jack G. Wilborn (Chairman), Mel Friedman, John F. Osborne, and Jorge L. Titinger. The
Board adopted and approved an amended and restated charter for the Audit Committee in March 2006. The
amended and restated charter for the Audit Committee can also be viewed at the Company’s website at
www.electroglas.com. The Audit Committee appoints the Company’s independent registered public
accounting firm and is primarily responsible for approving the services performed by the Company’s
independent registered public accounting firm and for reviewing and evaluating the Company’s accounting
principles and its system of internal accounting controls. The Audit Committee is composed solely of nonemployee directors, as such term is defined in Rule 10A-3(b) under the Securities and Exchange Act of 1934,
as amended (the “Exchange Act”), and the Board has determined that all members of the Audit Committee are
"independent" as that term is defined in Rule 4200(a)(15) of the Marketplace Rules of NASDAQ. The Board
has further determined that Mr. Wilborn is an “audit committee financial expert” as defined by Item
407(d)(5)(ii) of Regulation S-K of the Exchange Act and is independent as required by the applicable
NASDAQ listing standards.
The Compensation Committee held four meetings in the year ended May 31, 2008. The current members
of the Compensation Committee are C. Scott Gibson (Chairman) and John F. Osborne. The Compensation
Committee’s functions are to establish and apply the Company’s compensation policies with respect to the
Board and the Company’s executive officers and to conduct an annual review of the compensation of each
senior executive and make recommendations to the Board regarding the compensation of the Chief Executive
officer as described under “Chief Executive Officer Compensation- Compensation Discussion and Analysis.”
Additionally, the Compensation Committee administers 2002 Employee Stock Purchase Plan, and 2006 Stock
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Incentive Plan. The Compensation Committee has the authority to engage its own independent advisors to
assist in carrying out its responsibilities. The amended charter for the Compensation Committee can also be
viewed at the Company’s website at www.electroglas.com.
Nominating and Corporate Governance Committee met four times in the year ended May 31, 2008. The
current members of the Nominating and Corporate Governance Committee are John F. Osborne (Chairman),
Mel Friedman, C. Scott Gibson, Jorge L. Titinger and Jack G. Wilborn. Our Board of Directors has
determined that each current member of the committee is independent as defined under NASDAQ and
Securities and Exchange Commission rules. Among other matters, our Nominating and Corporate
Governance Committee:
x
x
x
x
x
x
identifies individuals qualified to fill independent director positions and recommends directors for
appointment to committees;
makes recommendations to the Board of Directors as to determinations of director independence;
evaluates the performance of the Board of Directors;
oversees and sets compensation for the directors;
periodically reviews with the Chief Executive Officer the succession plans for the Company’s executive
officers; and
develops, recommends and oversees compliance with the corporate governance guidelines and code of
business conduct and ethics.
The Nominating and Corporate Governance Committee has not adopted a formal process for considering
potential Board candidates proposed by stockholders because it believes that the informal consideration
process has been adequate given the historical absence of stockholder proposals. The Nominating and
Corporate Governance Committee will review periodically whether a more formal policy should be adopted.
Stockholders wishing to recommend candidates for consideration by the Nominating and Corporate
Governance Committee may do so by writing to the Secretary of the Company at 5729 Fontanoso Way, San
Jose, California 95138 providing the candidate’s name, biographical data and qualifications, a document
indicating the candidate’s willingness to act if elected, and evidence of the nominating stockholder’s
ownership of the Company’s Common Stock at least 120 days prior to the next annual meeting to assure time
for meaningful consideration by the Nominating and Corporate Governance Committee. There are no
differences in the manner in which the Nominating and Corporate Governance Committee evaluates nominees
for director based on whether the nominee is recommended by a stockholder or the Nominating and Corporate
Governance Committee. All members of the Nominating and Corporate Governance Committee are
independent directors within the meaning of Rule 4200(a)15 of NASDAQ.
In reviewing potential candidates for the Board, the Nominating and Corporate Governance Committee
considers the individual’s experience in the semiconductor manufacturing equipment industry and related
industries, the general business or other experience of the candidate, the needs of the Company for an
additional or replacement director, the personality of the candidate, the candidate’s interest in the business of
the Company, as well as numerous other subjective criteria. Of greatest importance is the individual’s
integrity, willingness to get involved and ability to bring to the Company experience and knowledge in areas
that are most beneficial to the Company. In April 2008, the Board appointed Jorge L. Titinger to fill a
vacancy on the Company’s Board effective May 1, 2008. The Nominating and Corporate Governance
Committee initiated the review of this candidate, reviewed his qualifications and recommended his
appointment by the full Board.
A copy of the Nominating and Corporate Governance Committee’s charter is available on our website at
www.electroglas.com.
7
Compensation Committee Interlocks and Insider Participation
Messrs. Gibson and Osborne both of whom are “independent” under the applicable NASDAQ listing
standards, served on the Compensation Committee in 2008. No member of the Compensation Committee is or
was formerly an officer or an employee of the Company or its subsidiaries. There were no interlocks or
insider participation between any member of the Board of Directors or the Compensation Committee and any
member of the board of directors or compensation committee of another company.
Compensation of Directors
Board members who are not salaried employees receive compensation for Board service. In the twelve
months ended May 31, 2008, the compensation included:
Annual Retainer
$20,000 per year paid quarterly in January, April, July and October.
Board Meeting Fees
$2,000 per regularly scheduled quarterly Board meetings;
$1,000 for special meetings
Committee Meetings
$1,000 per meeting;
$2,000 per meeting for Audit Committee Chairman
Stock Option Grant
30,000 common stock options upon initial appointment to the Board;
10,000 common stock options granted on the date of each annual
meeting. Each option granted to a director has an exercise price equal to
the closing price of our common stock on the date of grant and have a
seven year term. The options terminate ninety days after the date the
director ceases to be a director or consultant. All initial options granted to
non-employee directors vest 100% upon grant and have a seven year term.
The following table sets forth for each of the Company’s non-employee directors the compensation earned
and awarded in connection with their Board service during the twelve months ended May 31, 2008 and their
stock options outstanding as of May 31, 2008:
Name
Fusen E. Chen (2)
Mel Friedman
C. Scott Gibson
John F. Osborne
Retainers and/or
Meeting Fees
$
37,000
$
41,000
$
37,000
$
44,000
Options Awards
$
10,197
$
10,197
$
10,197
$
10,197
Jorge L. Titinger (3)
Jack G. Wilborn
$
$
$
$
3,350
47,000
$
$
$
$
Total
47,197
51,197
47,197
64,394
Stock Options
Outstanding
50,000
110,000
60,000
60,000
$
$
28,058
57,197
30,000
40,000
(1)
24,708
10,197
(1) These options awards were granted to our Directors under the 2006 Stock Incentive Plan. The amounts reflect the dollar amount
recognized in the fiscal 2008 financial statements. Assumptions used in calculations of these amounts are described in Note 13 –
Stockholders’ Equity in our Annual Report on Form 10-K for the fiscal year ended May 31, 2008.
(2) On May 13, 2008, Dr. Chen provided notice to the Board of his intent to resign effective June 24, 2008.
(3) Mr. Titinger was appointed to the Board on April 25, 2008, effective as of May 1, 2008.
Other: We reimburse all of our directors for travel and other necessary business expenses incurred in the
performance of their services for our company’s Board and Board committee meetings.
Relationships Among Directors or Executive Officers
There are no family relationships among any of the directors or executive officers of the Company.
8
Access to Corporate Governance Policies
Stockholders may access the Company’s committee charters, Code of Conduct, and Corporate
Governance Guidelines at the Company’s Internet website at www.electroglas.com and copies will be
provided to any stockholder upon written request to the Secretary of Electroglas, Inc. at 5729 Fontanoso Way,
San Jose, California 95138.
The code of business conduct and ethics, or code of conduct, was adopted in October 2003. The code of
conduct was designed to qualify as a “code of ethics” within the meaning of Section 406 of the SarbanesOxley Act of 2002 and the rules promulgated thereunder.
Communication between Stockholders and Directors
The Board currently does not have a formal process for stockholders to send communications to the Board.
Nevertheless, every effort has been made to ensure that the views of stockholders are heard by the Board or
individual directors, as applicable, and that appropriate responses are provided to stockholders on a timely
basis. The Board does not recommend that formal communication procedures be adopted at this time because
it believes that informal communications are sufficient to communicate questions, comments and observations
that could be useful to the Board. However, stockholders wishing to formally communicate with the Board
may send communications directly to the Secretary of the Company, to the attention of Thomas E. Brunton, at
5729 Fontanoso Way, San Jose, California 95138. All stockholder communications will be sent to the Board.
Stockholder communications to the presiding independent director can be addressed in writing to John F.
Osborne, Lead Independent Director, c/o Electroglas, Inc., 5729 Fontanoso Way, San Jose, California 95138.
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BDO Seidman, LLP has served as the Company’s independent registered public accounting firm since
July 2005 and the Board has selected BDO Seidman, LLP, an independent registered public accounting firm,
to audit the financial statements of the Company for the fiscal year ending May 31, 2009 and recommends
that the stockholders ratify such selection. Unless otherwise instructed, the proxy holders will vote the
proxies they receive for the ratification of BDO Seidman, LLP as the independent registered public
accounting firm for the fiscal year ending May 31, 2009.
Ratification of this proposal requires the affirmative vote of a majority of the shares of the Company’s
Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting. In the
event that ratification of this selection of auditors is not approved by a majority of the shares of Common Stock
entitled to vote and voting at the Annual Meeting, the Company will review its future selection of independent
registered public accounting firms.
Representatives of BDO Seidman, LLP will be present at the Annual Meeting, will have the opportunity to
make a statement if they so desire and will be available to respond to appropriate questions.
9
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by BDO Seidman, LLP for the years
ended May 31, 2008 and 2007:
2008
(1)
2007
Audit Fees
Audit-Related Fees
$ 445,386 *
$
-
$ 685,264
$
-
Tax Fees (2)
All Other Fees
$
$
$
$
-
-
Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated annual financial
statements and internal controls and the review of the interim consolidated financial statements included in quarterly reports and
services that are normally provided by BDO Seidman, LLP in connection with statutory and regulatory filings or engagements.
(2) Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advisor and tax planning (domestic and
international). There were no tax fees in fiscal 2008 and 2007.
* Amounts reflect fees billed to date for services rendered for fiscal 2008.
(1)
The Audit Committee has considered whether services other than audit and audit-related services provided by
BDO Seidman, LLP are compatible with maintaining the independence of BDO Seidman, LLP.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent
Registered Public Accounting Firm
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent
registered public accounting firm. These services may include audit services, audit-related services, tax services
and other services. The Audit Committee has adopted a policy for the pre-approval of services provided by the
independent registered public accounting firm. Under the policy, pre-approval is generally provided for up to one
year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific
budget. In addition, the Audit Committee may also provide pre-approval for particular services on a case-by-case
basis. For each proposed service, the independent registered public accounting firm is required to provide detailed
back-up documentation at the time of approval.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF BDO SEIDMAN, LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING MAY 31, 2009.
10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with respect to beneficial
ownership of the Company’s Common Stock as of August 18, 2008 by (i) each stockholder known to the
Company to own beneficially more than 5% of the Company’s Common Stock, (ii) each of the Company’s
directors, (iii) the Chief Executive Officer and the four other most highly compensated executive officers of
the Company (collectively, the “Named Executive Officers”) and (iv) all executive officers and directors of
the Company as a group. Unless otherwise noted, the address of each beneficial owner listed in the table is
c/o Electroglas, Inc. 5729 Fontanoso Way, San Jose, California 95138.
(1)
Name and Address of Beneficial Owners
Peninsula Capital Management LP
235 Pine Street Suite 1818
San Francisco, CA 94104-2751 US (3) ......
Shares Beneficially Owned
Amount and Nature of
(2)
Percent of Class
Beneficial Ownership
4,613,889
17.25%
QVT Financial GP LLC
1177 Avenue of the Americas, 9th Floor
New York, NY 10036(4) .............................
2,941,617
11.00%
Westcliff Capital Management
200 Seventh Avenue Suite 105
Santa Cruz, CA 95062-4669 US (5) ...........
2,563,529
9.59%
Royce and Associates, LLC
1414 Avenue of the Americas 9th floor
New York, NY 10019-2578 US (6) ...........
2,213,827
8.28%
State of Wisconsin Investment Board
121 East Wilson Street 2nd floor
Madison, WI 53703-3474 US(7) ................
1,527,890
5.71%
1,475,000
5.52%
1,427,532
5.34%
374,825
274,752
164,162
110,000
90,000
60,000
48,000
30,000
10,045
1.39%
1.02%
*
*
*
*
*
*
*
1,161,784
4.21%
Sidus Investment Partners LP
767 Third Avenue, 15th Floor
New York, NY 10017 US (8) ....................
Dimensional Fund Advisors, LP
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401(9) .........................
(10)
....................................
Thomas M. Rohrs
(11)
.................................
Thomas E. Brunton
Wesley D. Highfill (12) ...................................
(13)
Mel Friedman
........................................
(14)
John F. Osborne
......................................
(15)
C. Scott Gibson
......................................
(16)
Jack G. Wilborn
......................................
(17)
.....................................
Jorge L. Titinger
(18)
...............................
Richard J. Casler, Jr.
All executive officers and directors as a group
(19)
..............................................
(9 persons)
_________
* Less than 1%.
(1)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (“SEC”). In
computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of
Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of August
18, 2008 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the
percentage ownership of each other person. To the Company’s knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the table has sole voting and investment power with
respect to the shares set forth opposite such person’s name.
11
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Applicable percentages beneficially owned are based on 26,742,520 shares of Common Stock outstanding as of August 18,
2008, as adjusted as required by law.
Based on a Schedule 13G/A No.4 filed with the SEC on February 5, 2008. Peninsula Capital Management, LP, a California
limited partnership, does not have sole voting power nor sole dispositive power with respect to 4,613,889 shares of the
Company’s Common Stock. This total includes 2,513,889 shares of Common Stock issuable upon conversion of the
Company’s outstanding 6.25% Convertible Senior Subordinated Notes Due 2027 (“Notes”), based on a conversion price of
$2.295 per share. Peninsula Capital Management, LP is the investment manager of Peninsula Master Fund, Ltd., and the
general partner of Peninsula Technology Fund, LP, which respectively have the right to convert 1,300,000 shares and 800,000
shares of the Common Stock underlying the Notes. Because the Notes contain a conversion limitation prohibiting Peninsula
Capital Management, LP from converting the Notes to the extent that such conversion would result in beneficial ownership by
Peninsula Capital Management, LP and its affiliates of greater than 9.99%, of Common Stock then issued and outstanding, the
Notes are convertible into fewer than 2,513,889 shares of Common Stock.
Based on a Schedule 13G/A No.1 filed with the SEC on February 12, 2008. QVT Financial LP, a Delaware limited
partnership (“QVT”) is the investment manager for QVT Fund LP (the “Fund”) and for Quintessence Fund L.P.
(“Quintessence”), each of which beneficially owns the Company’s Notes. The Notes contain a conversion limitation
prohibiting QVT from converting the Notes to the extent that such conversion would result in beneficial ownership by QVT
and any of its affiliates of greater than 9.99%, of Common Stock then issued and outstanding. Due to the issuance limitation,
the Fund beneficially owns 2,566,018 shares of Common Stock issuable upon conversion of the Notes and Quintessence
beneficially owns 375,599 shares of Common Stock issuable upon conversion of the Notes, based on a conversion price of
$2.295 per share. Accordingly, taking into account the issuance limitation, QVT may be deemed to be the beneficial owner of
an aggregate of 2,941,617 shares of Common Stock, consisting of the shares underlying the Notes owned by the Fund and
Quintessence. The issuance limitation may not be waived. The aggregate number of shares underlying the Notes if the Notes
were fully converted is 3,328,104. The aggregate number of shares of Common Stock of which QVT would be deemed to be
the beneficial owner if the Fund and Quintessence fully converted all of their notes is 3,703,703. QVT has shared voting
power and shared dispositive power with QVT Financial GP LLC, the Fund, QVT Associate GP LLC, and Quintessence.
Based on a Schedule 13G filed with the SEC on February 10, 2006. Westcliff Capital Management, LLC, a California limited
liability company, has sole voting power and sole dispositive power with respect to 2,563,529 shares of the Company’s
Common Stock.
Based on a Schedule 13G/A No.7 filed with the SEC on January 28, 2008. Royce & Associates LLC, a New York limited
liability company, has sole voting power and sole dispositive power with respect to 2,213,827 shares of the Company’s
Common Stock.
Based on a Schedule 13F-HR filed with the SEC on August 14, 2008. State of Wisconsin Investment Board, a Wisconsin
corporation, has sole voting power and sole dispositive power with respect to 1,527,890 shares of the Company’s Common Stock.
Based on a Schedule 13G/A filed with the SEC on February 13, 2008. Together Sidus Investment Partners LP, a Delaware
limited partnership, Sidus Investments, Ltd, a Cayman Islands exempted corporation, Sidus Double Alpha Fund, L.P. a
Delaware limited partnership, Sidus Investment Management, LLC, a Delaware limited liability company, Messrs Alfred V.
Tobia, Jr. and Michael J. Barone, collectively own 1,475,000 shares of the Company’s Common Stock equaling more than
5% of the Company’s Common Stock and share the power to (a) vote, (b) dispose or (c) direct the disposition of the
1,475,000 shares of the Company’s Common Stock.
Based on a Schedule 13G/A No.3 filed with the SEC on February 6, 2008, Dimensional Fund Advisors LP, a Delaware
limited partnership, has sole voting power and sole dispositive power with respect to 1,427,532 shares of the Company’s
Common Stock.
Includes (i) 223,325 options exercisable within 60 days of August 18, 2008 and (ii) 86,666 shares subject to further vesting
restrictions.
restrictions.
restrictions.
Represents 110,000 options exercisable within 60 days of August 18, 2008.
Includes 60,000 options exercisable within 60 days of August 18, 2008.
Includes 40,000 options exercisable within 60 days of August 18, 2008.
Mr. Casler resigned from the Company on May 16, 2008.
restrictions.
12
AUDIT COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the Company’s previous filings under the
Securities Act of 1933 (the “Securities Act”), as amended, or the Exchange Act that might incorporate future
filings, including this Proxy Statement, the following report shall not be deemed to be “soliciting material” or
to be “filed” with the SEC, nor shall such information be deemed to be incorporated by reference into any
previous or future filings under the Securities Act or the Exchange Act.
The Audit Committee oversees the Company’s financial reporting process on behalf of the Board and is
responsible for the appointment, compensation and oversight of the work of the independent registered public
accounting firm. Management has the primary responsibility for the financial statements and the reporting
process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements in the Annual Report on Form 10-K with management, including a
discussion of the quality, not just acceptability, of the accounting principles, the reasonableness of significant
judgments, and the clarity of disclosures in the financial statements.
The Committee reviewed with the independent registered public accounting firm, who are responsible for
expressing an opinion on the conformity of those audited financial statements with U.S. generally accepted
accounting principles, their judgments as to the quality, not just the acceptability, of the Company’s
accounting principles and such other matters as are required to be discussed with the Committee by Statement
on Auditing Standards No. 61 (as amended), other standards of the Public Company Accounting Oversight
Board (United States), rules of the SEC, and other applicable regulations. The Audit Committee has also
received written disclosures and the letter from BDO Seidman, LLP required by Independence Standards
Board Standard No. 1 (which relates to the accountant’s independence from the Company and its related
entities) and has discussed with BDO Seidman, LLP their independence from the Company and Company
management.
The Committee also reviewed management’s report on its assessment of the effectiveness of the
Company’s internal control over financial reporting.
The Committee discussed with the Company’s independent registered public accounting firm the overall
scope and plans for their audit. The Committee met with the independent registered public accounting firm,
with and without management present, to discuss the results of their audit, their evaluations of the Company’s
internal controls, including internal control over financial reporting; and the overall quality of the Company’s
financial reporting. The Committee held eight meetings during the fiscal year 2008.
Based on the reviews and discussions referred to above, the Committee recommended to the Board that the
audited financial statements be included in the Annual Report on Form 10-K for the year ended May 31, 2008
for filing with the SEC.
Submitted by the Audit Committee of the
Board of Directors
Jack G. Wilborn, Chairman
Mel Friedman
John F. Osborne
Jorge L. Titinger
13
COMPENSATION DISCUSSION AND ANALYSIS
Overview of Compensation Program
Pursuant to its charter, the Compensation Committee has responsibility for establishing, implementing and
monitoring adherence to our compensation philosophy. The Compensation Committee seeks to ensure that the
total compensation paid to the executive officers and members of the Board is fair, reasonable and
competitive. Generally, the types of compensation and benefits provided to the Named Executive Officers (as
defined in the Summary Compensation Table) are similar to those provided to all other executive officers.
Compensation Objective and Philosophy
The objective of our compensation program is to provide a total compensation package that will enable us
to:
x
x
x
x
attract, motivate and retain outstanding employees, including Named Executive Officers;
align the financial interests of our employees, including our Named Executive Officers with the interests
of our stockholders
provide incentives for superior company and individual Named Executive Officers performance; and
encourage each Named Executive Officer to have a stake in our long-term performance and success.
To achieve this objective, the Compensation Committee has designed a compensation philosophy that
seeks to combine “fixed” forms of compensation such as base salaries and certain other perquisites and
ancillary benefits with “at-risk” forms of compensation such as performance-based cash bonuses and longterm equity incentive awards. In particular, the Compensation Committee believes that paying “fixed” forms
of compensation that are competitive relative to our Compensation Peer Group (as defined below) helps to
ensure that we maintain our ability to attract, motivate and retain individuals of superior ability and
managerial talent in key positions. Likewise, the Compensation Committee believes that awarding “at-risk”
forms of compensation helps to further align our employees’ interests with those of our stockholders by
providing incentives for superior performance relative to established goals, while also encouraging employees
to value our long-term performance. Thus, our compensation program allows us to reward short-term
achievement of objectives and to foster long-term participation in our success.
We utilize four basic categories of compensation. First, we set base salaries at levels designed to attract
and retain qualified executives based on their levels of experience relevant to our business. Second, we offer
performance-based cash bonuses meant to reward achievement of certain key financial and operational goals.
Third, we grant long-term equity incentive awards, which vest over time, to encourage sustained loyalty and
performance and to foster in each executive a sense of ownership and shared purpose. Finally, we offer
ancillary benefits that the Compensation Committee has determined to be widely offered within our
Compensation Peer Group.
To date, the Compensation Committee has not established any formal policy or target for the relative
balance of “fixed” and “at-risk” compensation. Nevertheless, in light of the importance of uniting the
concepts of personal performance with our corporate performance and success, a significant percentage of the
total compensation for our executive officers is generally allocated to “at-risk” forms of compensation, such
as performance-based cash bonuses which reward achievement of our fiscal year objectives and long-term
equity incentive awards which reward increasing our value in the long term.
Process for Setting Executive Compensation
The Compensation Committee understands that we compete with many companies for top executive-level
talent. Accordingly, the Compensation Committee strives to implement compensation packages for our
executive officers that are competitive with total compensation paid to similarly situated executives of the
14
companies comprising what we refer to as our “Compensation Peer Group”. The members of this
Compensation Peer Group may vary depending on the nature of the executive role being considered, as the
Compensation Committee may deem it appropriate in the case of certain executive roles to refer to the
practices of similarly situated companies within the semiconductor industry and in the case of other executive
roles to refer more generally to the practices of companies similar to ours in terms of size, location,
operations, etc. In addition to comparing compensation levels to the appropriate Compensation Peer Group,
the Compensation Committee also determines the appropriate metrics that will be used to define the various
performance goals underlying certain elements of the “at-risk” compensation we offer.
Ultimately, the Compensation Committee makes all compensation decisions for our executive officers.
Often, these decisions will be based on data obtained by the Compensation Committee from relevant
compensation surveys and other data sources, as well as individual performance, internal comparables and
other related factors as deemed appropriate by the members of the committee. Per its charter, however, the
Compensation Committee has the authority to engage the services of outside advisors, experts and others to
assist it in fulfilling its duties. During fiscal year 2008, the Compensation Committee did not engage an
outside consultant. In addition, from time to time, the Compensation Committee may solicit the input of our
Chief Executive Officer, Mr. Rohrs, with respect to executive compensation matters, other than his own.
Executive Compensation Components
The following discussion further describes the components and mix of compensation we pay to our
executive officers, as well as how we generally determine the amount of each component. It also explains
how each component of compensation fits into our overall compensation objectives and affects decisions
regarding other components of compensation. This discussion and analysis should be read together with the
Summary Compensation Table and the Grants of Plan-Based Awards Table (and the related narrative
disclosure for each such table) that appear directly following this Compensation Discussion and Analysis.
As referenced above, for fiscal year 2008, the principal components of compensation for our executive
officers were:
xbase salary;
xperformance-based cash bonuses;
xlong-term equity incentive awards; and
xancillary benefits.
Each of these components is described in greater detail below.
Base Salary
We provide our executive officers and other employees with base salaries to compensate them for services
rendered during the fiscal year. Base salary ranges for executive officers are determined for each executive
based on his or her position and responsibility, with appropriate reference to market data from the
Compensation Peer Group.
During its review of base salaries for executive officers for fiscal 2008, the Compensation Committee
primarily considered:
x
x
x
market data provided by our Compensation Consultant and data published by independent third-party
sources;
the results of its own internal review and appraisal of the executive’s compensation, both individually
and relative to other executive officers; and
the individual performance and responsibility of the executive.
15
Base salary levels are considered annually as part of our performance review process, as well as upon a
promotion or other material change in job responsibility. Changes in base salary levels may be merit-based or
circumstance-based as determined appropriate by the Compensation Committee. In reviewing market data, the
Compensation Committee considered the surveys that track the executive compensation of other leading
companies in the semiconductor and semiconductor equipment industries, many of which are included in the
RDG Semiconductor Composite Index used in the Stock Performance Graph. In reviewing individual
executive performance, the Compensation Committee considered factors including decision-making skills,
business and financial acumen, ability to drive results, and the executive’s overall performance in his or her
role.
Performance-Based Cash Incentive Compensation
The Compensation Committee met in four times in fiscal 2008 to evaluate performance and set bonuses
payable to its executive officers for the 2008 fiscal year. The bonus incentive program is a Company-wide
program with varying levels of target bonuses for each employee of the Company. The individual bonus is
calculated as a percentage of base salary which percentage is increased for higher positions within the
Company, putting a greater percentage of compensation at risk for more senior positions. The bonus levels are
set relative to other leading companies in the semiconductor equipment industry. The level of operating profit
achieved, and other financial and operating goals, determine the actual bonus payments. Goals are set at the
beginning of the fiscal year and reviewed at the end of the year for level of achievement. Operating goals
involve quality, product development, operation effectiveness and other goals targeted to improve the
Company’s long-term performance. Individual performance by an executive may impact his or her bonus
payment. The Company revised the bonus incentive plan program in fiscal year 2007 to provide for payment
of bonuses based upon certain performance criteria. Accordingly, Messrs. Rohrs Casler, and Highfill
received bonuses based upon performance during the period of June 1, 2007 through May 31, 2008. Mr.
Highfill received sales incentives based on sales during this same period.
Long-Term Equity Incentive Compensation
Our long-term equity incentive compensation program is another key component of our “at-risk”
compensation package. However, whereas other components such as performance-based cash compensation
ultimately tie individual success to predefined corporate performance targets, the value of our long-term
incentive compensation program is even more directly related to the value we create for our stockholders via
appreciating stock prices.
Under the long-term equity incentive compensation program, grants of equity-based awards are made to
Named Executive Officers and other eligible employees upon commencement of employment with us,
promotion to a new role, and/or annually thereafter following our earnings release for the first quarter of each
fiscal year and based upon eligibility and performance criteria upon completion of our annual prior-year
performance review process. When making equity award decisions, the Compensation Committee considers
market data relating to the Compensation Peer Group, the grant size, the forms of long-term equity
compensation available to it under existing plans, the status of awards granted in previous years, our
performance, the value of the specific position to us and individual performance criteria. Existing ownership
levels are not a factor in award determination, as the Compensation Committee wants to encourage executives
to hold our stock in order to achieve alignment between management and stockholders’ interests. All longterm equity incentive compensation awards are currently granted pursuant to our 2006 Stock Incentive Plan.
The amount of long-term equity incentive compensation granted in fiscal year 2008 was based upon our
overall strategic, operational and financial performance, but also took into account the greater-than-normal
length of time since our last annual grants of equity awards. In fiscal year 2008, the Compensation Committee
opted to award stock options following consultation with the Compensation Consultant regarding prevailing
market trends. Each of Messrs. Rohrs, Brunton, and Highfill received a grant of stock options on July 2, 2007
16
and on December 24, 2007, in the aggregate a total of six hundred thousand shares (600,000) and four
hundred twenty thousand shares (420,000), respectively, were granted on such date to Messrs. Rohrs,
Brunton, Casler and Highfill as provided below in the “Outstanding Equity Award at Fiscal Year Ended May
31, 2008” table. One third (1/3) of each recipient’s stock option award vests annually on the first anniversary
of the date of the grant and expires on the sixth (6th) and seventh (7th) anniversary of the date of grant,
respectively.
Other Ancillary Benefits.
We provide the Named Executive Officers and other employees with perquisites and other ancillary
benefits that the Compensation Committee believes are consistent with its objectives and philosophy set forth
above. Description of these perquisites and other ancillary benefits, which the Compensation Committee
periodically reviews and adjusts as deemed necessary, are set forth below.
Life and Long Term Disability Insurance: All of our Named Executive Officers and other executive
officers in the United States are enrolled in our group life and disability insurance plans. All executive
participants are entitled to a benefit under the group life insurance plan equal to two times their annual base
salary and target annual incentive in effect on the date of death, up to a maximum benefit of $550,000 The
long term disability plan provides a monthly benefit to executive officers in the event of disability of 60% of
the participant’s annual base salary to a maximum monthly amount of $10,000.
Tax and Accounting Implications.
As part of its role in developing and overseeing our compensation programs, the Compensation Committee
reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal
Revenue Code, which provides that we may not deduct compensation of more than $1,000,000 that is paid to
certain individuals. To qualify for deductibility under Section 162(m), compensation in excess of $1,000,000
per year paid to the Named Executive Officers at the end of such fiscal year generally must be “performancebased” compensation as determined under Section 162(m). The Compensation Committee generally intends
to comply with the requirements for full deductibility of executive compensation under Section 162(m).
However, the Compensation Committee will balance the costs and burdens involved in such compliance
against the value to us and our stockholders of the tax benefits that we would obtain as a result, and may in
certain instances pay compensation that is not fully deductible if, in its determination, such costs and burdens
outweigh such benefits.
In granting awards pursuant to the long-term equity incentive compensation program, the Compensation
Committee considers the effect of SFAS No. 123R, which requires companies to estimate and record as
expense the fair value of share-based payment awards on the date of grant using an option-pricing model.
When determining the appropriate form of incentive award (e.g., stock options, restricted stock, RSUs, or
stock appreciation rights), the Compensation Committee’s goal is to weigh the cost of these grants with their
potential benefits as a compensation tool. In part due to the adoption of SFAS No. 123R and resulting
compensation expense associated with the granting of stock awards (as discussed above), the Compensation
Committee awarded stock options to the Named Executive Officers in fiscal year 2008.
Chief Executive Officer Compensation
The Company’s Chief Executive Officer is Thomas M. Rohrs. The compensation of the Chief Executive
Officer is reviewed annually. Mr. Rohrs’ base salary for the fiscal year ended May 31, 2008 was $330,000. Mr.
Rohrs’ base salary was established in part by comparing the base salaries of chief executive officers at other
companies of similar size.
17
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The information contained in this report shall not be deemed to be “soliciting material” or “filed” with
the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Electroglas
specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
The Compensation committee reviewed and discussed the “Compensation Discussion and Analysis”
contained in this Proxy Statement with the company’s management. Based on our review and discussions,
the Compensation Committee has recommended to Electroglas’ Board that the “Compensation Discussion
and Analysis” be included in this Proxy Statement.
Submitted
by
the
Compensation
Committee of the Board of Directors
C. Scott Gibson, Chairman
John F. Osborne
18
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Executive Officers
The following table sets forth certain information with respect to the executive officers of the Company as
of August 18, 2008:
Name
Thomas M. Rohrs
Thomas E. Brunton
Warren C. Kocmond, Jr.
Wesley D. Highfill
Age
57
60
47
46
Position
Chief Executive Officer and Chairman of the Board
Chief Financial Officer, Senior Vice President Finance and
Administration, Treasurer and Secretary
Chief Operating Officer
Senior Vice President of Worldwide Sales, Service and
Customer Operations
In addition to Mr. Rohrs, the executive officers of the Company as of August 18, 2008, were as follows:
Thomas E. Brunton is currently the Chief Financial Officer, Senior Vice President of Finance and
Administration, Treasurer and Secretary, a position he has held since July 2008. From February 2003 until
July 2008, he held the position of Chief Financial Officer, Vice President of Finance and Administration,
Treasurer and Secretary. From November 2000 upon joining the Company until February 2003, Mr. Brunton
was the Chief Financial Officer, Vice President, Finance, Treasurer and Secretary of the Company. Prior to
joining the Company, Mr. Brunton was Chief Financial Officer of Centigram Communications
(“Centigram”), a telecommunications equipment company, from March 1998 to July 2000. He joined
Centigram in March 1991 as Controller and also served as Treasurer. Prior to his service at Centigram, he
had financial management responsibilities at 3Com Corporation, a provider of networking solutions, Sun
Microsystems, Inc., a provider of network computing products and services and International Business
Machines Corporation/Rolm, a multinational computer technology and consulting company. Mr. Brunton
received his Bachelor of Business Administration from Loyola University and his Masters of Business
Administration from the University of California Los Angeles.
Warren C. Kocmond, Jr. is currently the Chief Operating Officer, a position he has held since May 12,
2008. Prior to joining the Company, from April 2007 to May 2008 Mr. Kocmond was the Senior Vice
President of Global Operations for Affymetrix, Inc., a manufacturer of DNA microarrays. Prior to joining
Affymetrix, Mr. Kocmond was Chief Executive Office of Earth Renewable Energy from May 2006 to April
2007. Prior to joining Earth Renewable Energy, from April 2004 to May 2006 Mr. Kocmond was the Chief
Operating Officer for Asyst Technologies, a maker of automation and isolation systems for the semiconductor
industry. From March 1999 to April 2004, Mr. Kocmond was at Applied Materials, Inc., a supplier of
manufacturing systems and services in the semiconductor industry in various positions, lastly, the Vice
President of Applied Global Services. Mr. Kocmond has also held manufacturing, operations, and technology
positions at Hewlett-Packard Company, an information technology corporation, and Silicon Graphics, Inc., a
company manufacturing high performance computing systems. Mr. Kocmond holds a Bachelor of Science in
Mechanical Engineering from the University of Nevada, Reno, and a Masters of Science in Systems
Management from the University of Southern California.
Wesley D. Highfill is currently the Senior Vice President of Worldwide Sales, Service and Customer
Operations, a position he has held since July 2008. From July 2007 to July 2008, he held the position of Vice
President of Global Sales, Services and Marketing. From September 1, 2006 to June 2007, Mr. Highfill
served as the Vice President of Global Sales and Marketing. From July 2004 to August 2006, he was named
Vice President, Worldwide Sales and Applications. During that period in March of 2005, Mr. Highfill
because an officer of the Company. Mr. Highfill joined the Company in September of 2003 as Director of
North American Sales a position he held until June of 2004. Prior to joining the Company, Mr. Highfill
served as Director of Asia Pacific Sales for Yield Dynamics, Inc. (“Yield Dynamics”), a process and control
19
solutions company for the semiconductor industry, from 2002 to 2003, and Sales Manager from 2001 to 2002.
Prior to his service at Yield Dynamics, Mr. Highfill was a Global account manager and sales manager for
Tokyo Electron America, a semiconductor equipment company, from 1996 to 2001. From 1988 through 1996
Mr. Highfill held various positions in Engineering and Product Marketing for KLA Instruments, a
semiconductor equipment company.
Summary Compensation Table
The following Summary Compensation Table sets forth certain information on compensation of the
Company’s Named Executive Officers for twelve months periods ended May 31, 2007 and 2008:
Name and Principal Position
Period
Salary
Stock
(2)
Awards
Option
Awards(2)
Non-Equity
Incentive Plan
Compensation(3)
All Other
Compensation(4)
Total
Thomas M. Rohrs
Chief Executive Officer and
2008
2007
$ 330,000
$ 310,000
$ 105,492
$ 38,335
$
$
362,818
342,974
$
$
166,000
-
$
$
-
$ 964,310
$ 691,309
Thomas E. Brunton
Senior Vice President, Finance
and Administration, Chief
Financial Officer, Treasurer
and Secretary
2008
2007
$ 220,000
$ 180,000
$ 32,459
$ 11,795
$
$
73,902
31,215
$
$
44,000
-
$
$
15,158
13,962
$ 385,519
$ 236,972
Richard Casler, Jr.(1)
Chief Technology Officer
Wesley Highfill
Senior Vice President Worldwide
Sales, Service and Customer
Operations
2008
$ 250,000
$ 40,574
$
65,258
$
41,400
2007
$ 210,000
$
14,744
$
33,872
$
5,000
$
$
-
$ 397,232
$ 263,616
2008
2007
$ 220,000
$ 190,000
$ 32,459
$ 11,795
$
$
61,337
21,943
$
$
52,828
21,605
$
$
-
$ 366,624
$ 245,343
_______________
(1) Mr. Casler resigned from the Company in May 2008.
(2) The amounts reflect the dollar amount recognized for fiscal 2008 financial statement reporting purposed in accordance with FAS123(R).
Assumptions used in the calculation of these amounts are described in Note 13 - Stockholders’ Equity in our Annual Report on Form 10-K for the
fiscal year ended May 31, 2008. The company disregarded forfeitures for stock awards and stock options per Item 402(c) (2)(v) and (vi) of
Regulation S-K.
(3) The amounts in this column reflect the cash bonus payouts awarded for specific performance goals achieved and sales commissions.
(4) Represents amounts paid by the Company on behalf of Mr. Brunton as follows: (i) $12,000 in the form of a vehicle allowance and (ii) $3,158 for
Group Term Life Insurance.
20
2008 Grants of Plan-Based Awards
The following tables provide certain information with respect to stock options and stock awards granted to
the Named Executive Officers during the fiscal year ended May 31, 2008. The options were granted under
the 2006 Stock Incentive Plan. The options have an exercise price equal to the closing price of the company’s
Common Stock on the NASDAQ Capital Market on the grant date and have a six and seven year term, as
described in “Compensation Discussion and Analysis-Long Term Equity Incentive Compensation”. The
options vest one third annually with total vesting three years from grant date. There can be no assurance that
the Grant Date Fair Value of Equity Awards will ever be realized.
Name
Grant Date
All Other Option
Awards: Number of
Securities Underlying
(2)
Options
Exercise or Base
Price of Option
(3)
Awards
Grant Date Fair
Value of Stock
and Option
(4)
Awards
Thomas M. Rohrs
7/2/2007
12/24/2007
250,000
175,000
$
$
2.25
1.80
$
$
562,500
315,000
Thomas E. Brunton
7/2/2007
12/24/2007
125,000
87,500
$
$
2.25
1.80
$
$
281,250
157,500
7/2/2007
12/24/2007
100,000
70,000
$
$
2.25
1.80
$
$
225,000
126,000
Wesley D. Highfill
7/2/2007
12/24/2007
125,000
87,500
$
$
2.25
1.80
$
$
281,250
157,500
__________________________
(1) The Company did not grant any non-equity awards where estimated future payouts are tied to performance in fiscal 2008.
(2) The options vest at 33% of the total shares granted on the first anniversary of the grant date and the remaining shares vest ratably thereafter, such
that the option is fully vested three years from the grant date.
(3) The exercise price per share of options granted represented the fair market value of the underlying shares of Common Stock on the date the
options were granted.
(4) The amounts reflect the dollar amount recognized for fiscal 2008 financial statement reporting purposed in accordance with FAS123(R).
Assumptions used in the calculation of these amounts are described in Note 13 – Stockholders’ Equity in our Annual Report on Form 10-K for
the fiscal year ended May 31, 2008.
21
Outstanding Equity Awards at Fiscal Year Ended May 31, 2008
The following table present information regarding outstanding equity awards held by our officers named
in the summary compensation table above at May 31, 2008:
Option Awards
Stock Awards
Exercisable
-
Unexercisable
175,000
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
-
100,000
10,000
30,000
250,000
100,000
-
250,000(4)
-
$
$
$
$
$
2.25
4.86
4.86
3.30
4.45
7/2/2013 (2)
4/12/2013 (3)
4/12/2013 (4)
5/26/2012
12/17/2011
Thomas E. Brunton
14,999
45,000
30,000
35,000
30,000
2,000
87,500
125,000
30,001
-
-
$
$
$
$
$
$
$
$
1.80
2.25
2.89
13.94
1.77
16.00
4.01
12.98
12/24/2014 (1)
7/2/2013 (2)
8/29/2012 (5)
11/27/2010
8/1/2010
5/23/2009
2/1/2009
10/24/2008
16,665
40,000
-
-
$
$
2.89
4.01
8/16/2008 (8)
8/16/2008
Wesley D. Highfill
5,000
50,000
18,000
18,000
87,500
125,000
10,000
-
-
$
$
$
$
$
$
1.80
2.25
2.89
2.83
4.01
2.70
12/24/2014 (1)
7/2/2013 (2)
8/29/2012 (5)
9/17/2010
2/1/2009
7/27/2008
Number of Securities Underlying
Unexercised Options (#)
Name
Thomas M. Rohrs
Option
Exercise
Price
$
1.80
Option Expiration
Date
12/24/2014 (1)
Number of
Shares or Units
of Stock That
Have Not Vested
86,666 (6)
Market Value of
Grant Date
Value of Shares Shares or Units
of Stock That
or Units of
Stock That Have Have Not Vested
(7)
Not Vested
$
210,598
$
162,932
26,666 (6)
$
26,666 (6)
$
64,798
64,798
$
50,132
$
50,132
________________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Commences vesting on July 2, 2008 in equal annual installments over 3 years.
Commences vesting on December 24, 2008 in equal annual installments over 3 years.
Commences vesting on April 12, 2007 in equal annual installments over 4 years.
Commences vesting upon the satisfaction of certain set performance criteria as determined by the Board of Directors. The
unvested shares consist of the following performance-based stock option award: (i) 125,000 of the 250,000 shares granted on
April 12, 2006 that will vest if the Company achieves two (2) consecutive quarters of positive operating income measured on a
GAAP basis, and 125,000 shares that will vest after a determination by a majority of the board that Mr. Rohrs performance as
Chief Executive Officer of Electroglas has improved stockholder value.
Commenced vesting on August 29, 2007 in equal annual installments over 3 years.
Commences vesting on January 18, 2008 in equal annual installments over 3 years.
Market value was determined by multiplying the price for a share of the Company’s Common Stock as of May 31, 2008 by the
number of restricted stock units outstanding.
Mr. Casler resigned from the Company in May 2008. Pursuant to the terms of his option grants, unvested options expired on the
date of his termination and unexercised vested options expired in August 2008.
22
Option Exercises and Stock Vested Table
None of the Company’s Named Executive Officers exercised stock options during Fiscal 2008. The
following table sets forth certain information concerning the vesting of restricted stock for each Named
Executive Officer during the fiscal year ended May 31, 2008:
Name
Thomas M. Rohrs .............................
Thomas E. Brunton...........................
Richard J. Casler, Jr. .........................
Wesley D. Highfill............................
____________________
Restricted Stock Awards
Number of Shares Acquired
Value Realized on
on Vesting (#)
Vesting (1)
43,334
$ 60,234
13,334
$ 18,534
16,667
$ 23,167
13,334
$ 18,534
(1) The value realized equals the closing price of Common Stock on the vesting date, multiplied by the number of shares that vested.
Change of Control, Severance
Change of Control: All of the Company's employees are employees at will. Accordingly, they may be
terminated at any time, with or without cause. Messrs. Rohrs, Brunton, Highfill and Kocmond, all have
change of control agreements with the Company which require certain payments upon termination after a
change in control depending upon the reason their employment is terminated.
The table below sets forth the estimated amount of payments and other benefits each Named Executive
Officer would be entitled to receive upon the occurrence of a change of control, assuming that the event
occurred on May 31, 2008. Amounts potentially payable under plans which are generally available to all
salaried employees, such as life and disability insurance, are excluded from the table. The values related to
vesting of stock options and awards are based upon the fair market value of our Common Stock of $1.88 as
reported on the NASDAQ Capital Market on May 30, 2008, the last trading day of our fiscal year. Actual
payments made at any future date would vary, including based upon the amount the Named Executive Officer
would have accrued under the applicable benefit or compensation plan as well as the price of our Common
Stock:
Salary & Other
Cash Payments
Name
(1)
Thomas M. Rohrs
Thomas E. Brunton
(1)
(2)
Wesley D. Highfill
Warren J. Kocmond, Jr.
(1)
Event
Change in
Control
Change in
Control
Change in
Control
Change in
Control
(3)(4)
Vesting of
Stock
Options(5)
Vesting of
Stock
Awards(6)
Healthcare
Benefits
Total
$
1,652,724
$
14,000
$
162,932
$
13,158
$ 1,842,814
$
994,274
$
10,850
$
50,132
$
7,586
$ 1,062,842
$
499,965
$
7,000
$
50,132
$
6,814
$
$
988,004
$
-
$
-
$
13,158
563,911
$ 1,001,162
(1) Continuation of salary and benefits for 24 months after event. The amounts shown in this table reflect the base salary in effect on
May 31, 2008 including amounts described in footnotes (3) and (4)
(2) Continuation of salary and benefits for 12 months after event. The amounts shown in this table reflect the base salary in effect on
May 31, 2008 including amounts described in footnotes (3) and (4)
(3) Assuming all incentives met in Fiscal Year 2009
(4) Based on commission earnings in Fiscal Year 2008
(5) Net value of 'in-the-money' options as of 5/30/2008
(6) The value equals the closing price of Common Stock at May 31, 2008 multiplied by the number of restricted shares.
23
Severance. All of the executive officers of the Company (each an “Executive Officer”) have entered into
agreements with the Company which provide for severance benefits and acceleration of option vesting in
the event of a change of control of the Company. Pursuant to the terms of the agreements, if an Executive
Officer’s employment is terminated under certain circumstances during the one-year period following a
change in control of the Company, the Company will (i) continue payment of the Executive Officer’s base
salary then in effect for the period specified in the agreement, (ii) pay the Executive Officer a bonus based on
a calculation tied to a prior year’s bonus, (iii) provide for continuation of medical and dental benefits for the
period specified in the agreement, (iv) pay the Executive Officer’s life insurance premiums and car allowance
for the period specified in the agreement, (v) pay accrued but unused vacation as of the date of termination,
(vi) accelerate vesting of stock options and restricted shares; provided that, at least one year has elapsed
between the date of the agreement and the date of termination of employment and (vii) extend the expiration
date of the Executive Officer’s vested stock options as of the date of termination to six months after the date
of termination.
Employment Agreements
Thomas M. Rohrs. On April 7, 2006, the Company entered into an Employment Agreement with Mr.
Thomas M. Rohrs, (the “Employment Agreement”). Pursuant to the Employment Agreement, Mr. Rohrs was
appointed Chief Executive Officer and Chairman of the Board of the Company effective April 7, 2006. Mr.
Rohrs’ initial base salary was $310,000 per year. In addition, Mr. Rohrs is eligible to receive a target
incentive bonus of up to $230,000 during the 2007 fiscal year based on his achievement of performance
targets determined by the Board. Mr. Rohrs was granted an option (the “Initial Option”) to purchase 200,000
shares of the Company’s Common Stock (the “Shares”) pursuant to the 1997 Stock Incentive Plan (the “1997
Plan”) 2 days (“Effective Grant Date”) after the announcement of the change of Chief Executive Officer. The
Initial Option vests over four years such that 25% of the Shares vest one year after the Effective Grant Date
and 25% of the remaining Shares vest on each yearly anniversary of the Effective Grant Date thereafter. In
addition, on the Effective Grant Date, Mr. Rohrs was granted a supplemental option (the “Supplemental
Shares”) to purchase 250,000 Shares pursuant to the 1997 Plan. The Supplemental Shares will vest upon the
achievement of certain performance goals determined by the Board.
Pursuant to the Employment Agreement, Mr. Rohrs is entitled to a Change of Control Agreement, which
includes the current salary plus bonus, for 24 months triggered upon both a successful completion of a board
and stockholder approved acquisition and a subsequent not for cause termination of his services as Chief
Executive Office, within 12 months after the change of control. The terms of the severance agreement will
comply with Code Section 409A.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with our Audit Committee Charter, our Audit Committee is responsible for reviewing all
related party transactions for potential conflicts of interest on an ongoing basis and approving all such
transactions (if such transactions are not approved by another independent body of the Board). A report is
made to our Audit Committee annually disclosing all related parties that are employed by us and related
parties that are employed by other companies that we had a material relationship with during that year. There
were no reportable transactions that occurred during the fiscal year ending May 31, 2008.
The Company has entered into indemnification agreements with its directors and certain of its executive
officers. The indemnity agreements provide, among other things, that the Company will indemnify its
directors and executive officers, under the circumstances and to the extent provided therein, for expenses,
damages, judgments, fines and settlements each may be required to pay in actions or proceedings which either
of them may be made a party by reason of their positions as a director, executive officer or other agent of the
Company, and otherwise to the fullest extent permitted under Delaware law and the Company’s bylaws.
24
STOCKHOLDER PROPOSALS
Requirements for Stockholder Proposals to be Brought Before an Annual Meeting. For stockholder
proposals to be considered properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Company. To be timely for the Company’s
2009 annual meeting of stockholders, a stockholder’s notice must be delivered to or mailed and received by
the Secretary of the Company at the principal executive offices of the Company between June 27, 2009, and
July 27, 2009. A stockholder’s notice to the Secretary must set forth as to each matter the stockholder
proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and
record address of the stockholder proposing such business, (iii) the class and number of shares of the
Company which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in
such business.
Requirements for Stockholder Proposals to be Considered for Inclusion in the Company’s Proxy
Materials. Stockholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act and intended to
be presented at the Company’s 2009 annual meeting of stockholders must be received by the Company no
later than May 13, 2009 in order to be considered for inclusion in the Company’s proxy materials for that
meeting.
OTHER MATTERS
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Exchange Act requires
the Company’s directors, executive officers and persons who own more than 10% of the Company’s Common
Stock (collectively, “Reporting Persons”) to file reports of ownership and changes in ownership of the
Company’s Common Stock with the Securities and Exchange. Reporting Persons are required by SEC
regulations to furnish the Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of such reports received or written representations from certain
Reporting Persons that no other reports were required, the Company believes that during fiscal 2008 all
Reporting Persons complied with all applicable filing requirements applicable to them, except the Company
inadvertently failed to timely file a Form 4 on Mr. Casler’s behalf in connection with the sale of 6,622 shares
of Electroglas’ Common Stock on January 25, 2008.
Other Matters. The Board knows of no other business which will be presented at the Annual Meeting. If
any other business is properly brought before the Annual Meeting, it is intended that proxies in the enclosed
form will be voted in respect thereof in accordance with the judgments of the persons voting the proxies.
Whether or not you expect to attend the Annual Meeting of stockholders in person, you are urged to submit
your proxy as soon as possible so that your shares can be voted at the Annual Meeting in accordance with your
instruction. You may submit your proxy (1) over the Internet at www.proxyvote.com, (2) by telephone (800690-6903), or (3) by signing, dating and returning the enclosed proxy card in the postage-prepaid envelope
provided to ensure your representation and the presence of a quorum at the Annual Meeting. If you send in your
proxy card or submit your proxy over the Internet or by telephone and then decide to attend the Annual Meeting
to vote your shares in person, you may still do so. Your proxy is revocable in accordance with the procedures set
forth in the proxy statement.
25
ANNUAL REPORT ON FORM 10-K
Upon written request to the Corporate Secretary, Electroglas, Inc. at 5729 Fontanoso Way, San Jose,
California 95138, the Company will provide without charge to each person solicited a copy of the Company’s
2008 report on Form 10-K.
By Order of the Board of Directors,
Thomas E. Brunton
Secretary
September 10, 2008
26
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-K
_______________________
(Mark one)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended May 31, 2008
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From ____ To _______
Commission File Number: 0-21626
ELECTROGLAS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
77-0336101
(State of Incorporation)
(I.R.S. Employer Identification No.)
5729 Fontanoso Way,
(408) 528-3000
(Address of Principal Executive Offices) (Zip Code)
(Registrant’s Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended. Yes [
No [ X ]
]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act of 1934, as
amended. Yes [ ] No [ X ]
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X
As of December 1, 2007, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was
approximately $38,000,000 based on the closing sale price as reported on the Nasdaq Global 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 July 28, 2008, the Registrant had 26,718,000 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement in connection with the Annual Meeting of Stockholders, to be held on October 15, 2008, are
incorporated by reference into Part III of this Form 10-K.
ELECTROGLAS, INC.
FORM 10K
For the Year Ended May 31, 2008
INDEX
Pages
FORWARD-LOOKING STATEMENTS.................................................................................................................................... 3
PART I.................................................................................................................................................................................. 5
Item 1. Businesss ............................................................................................................................................................ 5
Item 1A. Risk Factors................................................................................................................................................... 10
Item 1B. Unresolved Staff Comments.......................................................................................................................... 15
Item 2. Properties ......................................................................................................................................................... 15
Item 3. Legal Proceedings............................................................................................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ..................................................................................... 15
PART II .............................................................................................................................................................................. 15
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities...................................................................................................... 15
Item 6. Selected Financial Data................................................................................................................................... 17
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations....................... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ..................................................................... 28
Item 8. Financial Statements and Supplementary Data ............................................................................................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 53
Item 9A(T). Controls and Procedures ......................................................................................................................... 53
Item 9B. Other Information ......................................................................................................................................... 54
PART III............................................................................................................................................................................. 55
Item 10. Directors and Executive Officers of the Registrant and Corporate Governance......................................... 55
Item 11. Executive Compensation................................................................................................................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 55
Item 13. Certain Relationships and Related Transactions and Director Independence ............................................ 55
Item 14. Principal Accountant Fees and Services....................................................................................................... 55
PART IV............................................................................................................................................................................. 56
Item 15. Exhibits and Financial Statement Schedules ............................................................................................... 56
SIGNATURES ...................................................................................................................................................................... 58
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our accompanying Financial Statements and the related
notes thereto. This Annual Report on Form 10-K contains forward-looking statements within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference
in this Annual Report, other than statements that are purely historical are forward-looking statements. Words such as
“anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions also identify
forward-looking statements. The forward-looking statements include, without limitation, statements regarding:
• Our expectation that we will continue to invest in research and development of our wafer prober products and
software to anticipate and address technological advances;
• Our belief that continued, rapid development of new products and enhancements to existing products is necessary
to maintain our competitive position;
• Our belief that alternative sources of components and subassemblies included in our products that are obtained
from a single source exist or can be developed, if required;
• Our belief that our products compete favorably with respect to product performance, reliability, price, service and
technical support, product improvements, established relationships with customers, and product familiarity;
• Our intention to retain any future earnings to fund the development and growth of our business;
• Our statements relating to our efforts to market our existing technologies to other industries;
• Our belief that to stay competitive, grow our business over the long term, improve our gross margins, and generate
operating cash flows, we must continue to invest in new technologies and product enhancements and at the same time, as
necessary, rapidly adjust our expense structure during the hard to predict cyclical semiconductor equipment demand cycles;
• Our expectation that the semiconductor test markets will remain highly cyclical and difficult to forecast;
• Our expectation that international sales will continue to represent a significant percentage of net sales and fluctuate
as a percentage of total sales;
• Our intention not to repatriate earnings from foreign subsidiaries and the effect of any repatriation of foreign
earnings on income taxes;
• Our cash contractual obligations as of May 31, 2008;
• Our anticipation that our future cash from operations, available cash and cash equivalents, and proceeds from our
line of credit at May 31, 2008 should be sufficient to meet our anticipated needs for working capital and capital
expenditures to support planned activities for the next twelve months;
• Our expectation that external financing vehicles will continue to be available to us;
• Our expectation that the holders of the 6.25% Notes will convert the Notes into Common Stock at some time prior to
March 2011 or if not converted prior to that date the note holders will require us to purchase the Notes at that time;
• Our belief that future sales will be impacted by our ability to succeed in new product evaluations;
• Our belief that we have and can maintain certain technological and other advantages over our competitors;
• Our belief that our success depends in significant part on our intellectual property, innovation, technological
expertise, distribution strength, and our ability to manage our suppliers;
• Our belief that our future success partly depends on our ability to hire and retain key personnel and the ability to
attract additional skilled personnel in all areas to grow our business;
• Our current intention not to issue any preferred stock;
• Our belief that our current foreign exchange exposure in all international operations is not material to our
consolidated financial statements because we primarily transact business in United States dollars;
• Our belief that the impact of a 10% change in exchange rates would not be material to our financial condition and
results of operations;
• Our belief that it is improbable that we will be required to pay any amounts for indemnification under our software
license agreements;
• Our statements relating to outstanding restructuring charges and the timing of payment of such charges;
• Our assertion that sales often reflect orders shipped in the same quarter as they are received;
• Our intention to emphasize outsourcing in functional areas where it is cost effective and increases the Company’s
competitive position;
• Our belief that in order to become profitable, our market share for our products must improve;
• Our intention to continue to emphasize reduction of our utilization of cash, improving gross margins on sales, and
maintaining spending controls;
• Our intention to record a full valuation allowance on domestic tax benefits until we can sustain an appropriate
level of profitability; and
• Our belief that we have adequately accrued for any foreseeable outcome related to any foreign and domestic tax
issues on a more likely than not basis.
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The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ
materially from those stated or implied by the forward-looking statements.
These risks and uncertainties include but are not limited to:
• An unanticipated lack of resources to continue to make investments in technological advances necessary to maintain
competitive advantages and fund new development programs;
• Unanticipated product performance failures and the lack of market acceptance of our EG6000 products;
• Unanticipated problems encountered in our manufacturing outsourcing and other outsourcing efforts;
• Unanticipated problems with foreign and domestic tax authorities;
• Continued cyclicality in the semiconductor industry;
• The ability to secure additional funding, if needed;
• The ability to achieve broad market acceptance of existing and future products; and
• The loss of one or more of our customers.
For a detailed description of these and other risks associated with our business that could cause actual results to differ
from those stated or implied in such forward-looking statements, see the disclosure contained under the heading “Risk
Factors” in this Annual Report on Form 10-K. All forward-looking statements included in this document are made as of
the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any
forward-looking statement or statements. The reader should also consult the cautionary statements and risk factors listed
in our other reports filed from time to time with the Securities and Exchange Commission.
4
PART I
Item 1. Business
Overview
We are a supplier of semiconductor manufacturing equipment and software to the global semiconductor industry. We
were incorporated in Delaware in April 1993, to succeed the wafer prober business conducted by the Electroglas division
of General Signal Corporation, our former parent. Immediately prior to the closing of the initial public offering of our
Common Stock in July 1993, we assumed the assets and liabilities of the Electroglas division in an asset transfer. We
have been in the semiconductor equipment business for more than 40 years and our installed base is one of the largest in
the industry, with over 16,500 wafer probers sold.
Our primary product line is automated wafer probing equipment and related network software to manage information
from that equipment. In conjunction with automated test systems from other suppliers, our semiconductor manufacturing
customers use our wafer probers and network software to quality test semiconductor wafers.
In January 2001, we acquired Statware Inc., of Corvallis, Oregon, to further
expand our network software product offerings in the test management area. Today,
the Statware technology is the basis for our web-based applications that allow our
customers to monitor and control probers from any location, as well as collect,
analyze, and report critical test process information and automatically direct
corrective action.
Starting in 2003, we changed our corporate strategy and refocused the Company
back to its core competency of wafer probing and extending wafer probing
technologies throughout the back-end of the semiconductor manufacturing process.
In 2003 we sold our Design for Manufacturing (“DFM”) and Fab Solutions
software product lines and our Optical Inspection product line. In 2004, we
introduced a new extended performance 200mm wafer prober, the 4090μ+, and in
January 2005 a new 300mm prober, the EG6000, that represents a major
advancement in prober design and automation.
Beginning in fiscal 2007, we began to market our existing EG6000
technologies to other equipment manufacturers in other application areas such
as micro assembly and inspection.
These companies, in addition to
semiconductor, sell into the medical and solar fields.
Introduced in 2004, the 4090μ+ addresses
the demands of testing fine pitch devices,
semiconductors with copper interconnects
and low k dielectric processes and other
advanced applications, while simultaneously
reducing test costs by increasing throughput.
Additional information about Electroglas is available on our web site
(www.electroglas.com). Electroglas makes available free of charge on our website Reports filed pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file them with or furnish them to the SEC. The public may read and copy any materials that we file with
the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information by calling the SEC at 1-800-SEC-0330. Our filings also are available at the SEC’s website at
http://www.sec.gov .
Industry Background
Semiconductor devices are fabricated by repeating a series of complex process steps on a substrate, or wafer, which
is usually made of silicon. Wafers are typically sent through a series of 100 to 400 process steps. A finished wafer
consists of many integrated circuits, each referred to as a “device” or “die” or “chip”, the number of which depends on
the area of the circuits and the size of the wafer. These wafers measure from 75mm to 300mm, or 3 to 12 inches, in
diameter. Manufacturers have increasingly utilized larger diameter wafers to achieve more cost-effective production. The
move to 300mm (12-inch) wafers, a significant trend for equipment manufacturers, began in 2000. The manufacture of
semiconductor devices is very capital intensive. A typical state of the art facility, usually called a “wafer fab”, can cost
5
more than $2.0 billion. 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 requires significant
expenditures by semiconductor manufacturers.
Wafer Probing
A wafer prober successively positions each die on the wafer so that the electrical contact points, or pads, on the die
align under and make contact with 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 device being tested, is connected to a test
system, also supplied by other suppliers, which performs the required parametric or functional test. Parametric testing is
typically performed during the wafer fabrication process, referred to as “in-line testing,” to measure electrical parameters
of the device being fabricated. Functional testing is performed after the completion of wafer fabrication to identify
devices that do not conform to particular electrical specifications or performance criteria. This process is commonly
called “wafer sort.” Wafers often go through several wafer probing steps during the manufacturing process.
Wafer probing requires sophisticated machine vision and software capabilities to align each die on a wafer — often to accuracies
as tight as 2.5μm — to pins on a probe card connected to a tester that measures electrical performance.
Automatic wafer probers are primarily used during this “wafer sort” process, which occurs after the fabrication steps
are completed and before the separation and packaging of each individual device. Positioning accuracy is a key
requirement of an automatic wafer prober. As manufacturers continue to shrink their device sizes, the manufacturing
equipment accuracy must continue to keep pace with reduced feature sizes. Throughput is another key prober feature,
because allowing more devices to be tested in a given amount of time reduces the overall cost of test. Similarly, wafer
probers are required to be reliable, easy to use, portable, and very robust at handling the test process without failure or
interruption, since these cause loss of throughput for the entire test cell. Recently, new device manufacturing processes,
such as the use of copper for the metal layers and the use of very soft, delicate dielectric layers, have required a new
level of control over the speed and accuracy with which probes are brought into contact with the pads to prevent damage
and yield loss. Also, many devices must be designed to operate in severe conditions requiring cold testing to -55C and
hot testing to +200C.
Wafer probers are also used during in-line parametric testing. In-line testing requires special equipment features such
as clean room compatibility and low-noise electrical measurement capability, as tests are carried out during the
fabrication process. This testing is done to verify the quality of the manufacturing process while wafers are in an
unfinished state where corrective action can occur. A small number of probers are also used for research and
development, and quality and process control applications. We estimate based upon our experience that wafer sort
applications represent as much as 85%-90% of the market for automatic wafer probers. The remainder is divided
between in-line and laboratory applications.
6
There is a growing trend for semiconductor manufacturers to contract with other companies to perform their wafer
sort operations. These contract test companies, commonly called “test houses”, perform the wafer testing service and
often provide assembly and packaging services as well.
A semiconductor manufacturer typically purchases wafer probers 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 may require
from 20 to over 100 probers to meet testing requirements on a timely basis. A test house may require hundreds of wafer
probe systems to support the testing requirements of the companies that contract with them.
Test Floor Management
Process management software plays an important role in Integrated Circuit (IC) manufacturing. Capital and operating
costs of a fabrication facility are very high so semiconductor manufacturers seek ways to improve overall equipment
efficiency (OEE) and optimize their processes. Test houses and Integrated Device Manufacturers look to reduce the cost
of test and improve quality through software monitoring, analysis, and the automation of their test floors. In wafer sort,
network software is increasingly being used to manage wafer information to speed the identification of yield shortfalls
and to reduce reprobe rates by collecting wafer maps from multiple passes for all systems and storing the files in a
common database for viewing, analyzing and archiving. Other uses include prior step verification to insure that wafers
accurately flow through a pre-defined set of steps and are not tested if they have not completed the previous step in the
process and, product file management capabilities that allow the user to save a master template for product file set-up
that can be accessed by all test systems on the test floor.
Our Strategy
We are a major supplier of wafer probers due to a combination of strengths, including a large installed base,
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 capabilities,
our strategy is comprised of the following key elements:
• Focus on supplying high-speed testing tools that meet our customers’ requirements for accuracy, reliability, and
production-worthiness. We have refocused our efforts on our core technology, wafer probing. We have invested in
research and development to add features and functionality to our 200mm wafer prober products, as well as to
improve and expand our advanced 300mm wafer probing platform. Beginning in 2007, we began to market our
existing EG6000 technologies to other equipment manufacturers in other application areas such as micro assembly
and inspection. We expect to continue to invest in research and development of our wafer prober products and
software to anticipate and address technological advances.
• Maintain customer relationships based on trust and dependability and good service. We have long-standing
relationships with our customers and we seek to strengthen our existing customer relationships by providing high
levels of service and support. Our development of products and product enhancements is market-driven.
Marketing, engineering, sales and management personnel collaborate with our customers to determine their needs
and specifications.
• Emphasize quality products. We believe in providing high-quality products that are dependable tools for our
customer’s manufacturing processes.
• Emphasize outsourcing in functional areas where we believe it is cost effective and increases the Company’s
competitive position. We have outsourced our manufacturing to Flextronics Industrial, Ltd. In China. We also
have engaged with a number of distributors in Asia to sell our products.
Products
Wafer Probers
Horizon 4000 Series: The 4090μ+ (4090 Micro Plus) was introduced in Q4 2004 and is our new extended
performance wafer prober system for 200mm wafers. The 4090μ+ addresses the demands of testing fine pitch devices,
semiconductors with copper interconnects and low k dielectric processes, and other advanced applications. Employing
7
MicroTouch™, a feature that decreases the impact force as the probe pins contact the bond pads, the 4090μ+ reduces
touchdown damage that can occur when testing fragile copper and low k devices or when pads are located over active
circuit geometry. The 4090μ+ increases test cell availability and throughput while simultaneously reducing test cost by
making improvements in how probe-to-pad alignment is maintained in varying temperature environments. In addition,
the 4090μ+ has simplified and fully automated operations for high volume manufacturing applications, such as those that
exist in integrated device manufacturer (IDM) and contract test facilities. Customers who want to use the latest high
productivity 200mm probing solution from Electroglas can also cost-effectively upgrade existing Electroglas 4080, 4090
and 4090μ prober systems with 4090μ+ technology.
The EG6000: Developed in 2004 and introduced in January 2005, the new EG6000 300mm probing system from
Electroglas is the only 300mm prober that employs precision direct-drive technology to enable it to achieve the highest
positioning accuracy currently available. Designed for advanced applications such as copper and low k dielectrics, the
system employs a proprietary stage and control technology enabling highly accurate positioning of the test devices while
moving devices into contact with the probes for test. MicroTouch adds the ability to control the impact forces while
probing on delicate devices. In addition, patented active vibration cancellation technology reduces internally and
externally generated vibrations while maintaining the integrity of the connection between devices under test and the
probe pins, which can improve test yield. It also allows the prober to have higher throughput in typical test applications
with raised test floors that are subject to vibration. The EG6000 features the new Advanced Vision System for better
accuracy, robustness and speed in aligning devices to the probe card for test. It also features a sophisticated system for
automatically measuring and compensating for thermal changes in the system components while testing at hot or cold
temperatures. The EG6000 features a broader range of application capabilities as well as many refinements and
improvements in accuracy, throughput, automation, portability, and reliability. This allows the EG6000 to address
customer’s needs for high volume production wafer test which is the majority of the 300mm prober market. During
2007 and 2008, the Company has successfully completed a number of customer evaluations against its competition,
particularly in the SOC area.
The EG6000t: Introduced in July of 2008, the new EG6000t is the second
generation of our flagship 300mm wafer prober product line that fuses automation
and reliability requirements of high volume manufacturing environments with the
highest caliber of prober technology, producing the world’s most accurate 300mm
production wafer probers. The EG6000t combines improved probe card finding
optics, increased wafer pre-align, cassette loading and mapping speeds together with
increased loader pre-alignment accuracy to produce smooth, fast and precise
operation. The EG6000t also provides a new generation of overall z accuracy with
proprietary grid-based wafer surface mapping and advanced probe-to-pad alignment
optics and algorithms. Along with increased z accuracy, when implemented with
the MicroTouch feature that allows for precise control of z-stage velocities, it
enables the EG6000t to reduce overall damage to aluminum capped copper pads,
low k dielectrics, circuitry under pads, in addition to extending the life of probe
cards used on the tool during production. These advanced features of the EG6000t
are critical elements when probing advanced device technologies.
Parametric Probers: The EG6000e, introduced in December 2005 is targeted at the parametric test (“e-test”)
segment of the wafer probe market. This system incorporates patented technology licensed from, Cascade Microtech,
Inc. This technology allows extremely precise, low-level electrical measurements to be made at the wafer level. This
type of electrical measurement performance is becoming increasingly critical for advanced sub-micron semiconductor
processes.
Test Floor Management Software Products
SORTmanager: Bridging the gap between raw data and genuine process improvement is the difference between data
overload and real productivity gains. Electroglas’ SORTmanager provides that bridge, enabling a secure, web-based
environment for the analysis, reporting and control of sort-floor processes. Data about test results, binning, prober
performance and throughput can be collected from all SORTmanager-connected wafer probers, and this information can
then be delivered via dynamic and interactive web pages that allow users to view the underlying data or perform
8
additional analysis. Powerful web publishing capabilities allow web reports to be created and distributed throughout an
enterprise. SORTmanager’s flexible data-access and information viewing capabilities, combined with a comprehensive
suite of pre-built applications and a scripting language for fine tuning applications to customer needs, makes
SORTmanager a unique and powerful test floor management tool.
Engineering, Research and Development
The market for semiconductor manufacturing equipment is characterized by continuous technological development
and a high rate of product innovation. We believe that continued, rapid development of new products and enhancements
to existing products is necessary to maintain our competitive position. For example, we devote a significant portion of
our personnel and financial resources to engineering, research and development programs to continue development of
our EG6000 300mm platform. We use our close relationships with our key customers to make product improvements
that respond to our customers’ needs. Engineering, research and development expenses were $9.1 million, $11.1 million
and $11.5 million, for the fiscal years ended May 31, 2008, 2007 and 2006, respectively, or 20%, 25% and 26% of net
sales.
Marketing, Sales and Service
We sell our products directly to end-users through a direct sales force and distributors. We generally sell products to
customers on net 30 to 60 day terms from shipment or acceptance. Other, primarily Asian customers are required to
deliver a letter of credit typically payable upon product delivery. We generally warrant our products for a period of 13
months from the date of shipment for material and labor repair. Installation and certain training are customarily included
in the price of the product. Customers may enter into repair and maintenance service contracts covering our products.
Our field engineers provide customers (with products not under warranty or service contracts) with call out repair and
maintenance services. We also train our customers, for a fee, to perform routine service.
We maintain sales and service personnel throughout the United States and Europe in strategic locations to meet our
customers’ needs. In Asia we maintain sales and service offices in the People’s Republic of China, Singapore and
Taiwan.
Customers
We sell our products to leading semiconductor manufacturers and contract test companies throughout the world.
Customers that accounted for more than 10% of our net sales were Texas Instruments and ST Microelectronics for the
fiscal year ended May 31, 2008, NXP Semiconductors for the fiscal year ended May 31, 2007, and ST Microelectronics
for the fiscal year ended May 31, 2006. International sales represented 55%, 56% and 58% of our net sales for the fiscal
years ended May 31, 2008, 2007 and 2006, respectively. These sales represent the combined total of export sales made
by United States operations and all sales made by foreign operations.
Manufacturing and Suppliers
Our manufacturing activities consist primarily of integrating components and subassemblies to create finished probers
and spares and upgrades configured to customer specifications. We schedule production based on firm customer
commitments and anticipated orders during the planning cycle. In December 2002, we completed our move of equipment
manufacturing from San Jose, California to Singapore to reduce production costs. In September 2007, we signed a five year
Manufacturing Services Agreement (“Agreement”) with Flextronics Industrial, Ltd. to outsource our Singapore
manufacturing to Flextronics in China. As part of this Agreement, Flextronics accepts purchase orders and forecasts from
the Company which constitute authorization for Flextronics to procure inventory based on lead times and to procure certain
special inventory such as long lead-time items. This transition from Singapore to China has been completed and our
Singapore factory was closed in April 2008. We believe through outsourcing our manufacturing we can achieve cost
efficiencies and volume flexibility. However, we cannot assure you that we will achieve the expected cost efficiencies and
volume flexibility. In addition to rapid product innovation, the wafer prober market is subject to significant price
competition and product cost reductions are required. Certain of our components and subassemblies included in our
products are obtained from a single source. We believe that alternative sources exist or can be developed, if required.
Quality control is maintained throughout the assembly, test, and final inspection process, with documented instructions and
test procedures.
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Backlog
Our backlog was $13.7 million, $7.6 million and $9.1 million as of May 31, 2008, 2007 and 2006, respectively. Our backlog
consists of product orders for which a customer purchase order has been received and which is scheduled for shipment or is to be
earned within the next twenty-four months. Orders are subject to cancellation or rescheduling by the customer, sometimes with a
cancellation charge. Due to timing of order placement and product lead times, changes in product delivery schedules and
cancellations, and because sales will often reflect orders shipped in the same quarter received, our backlog at any particular date is
not necessarily indicative of sales for any succeeding period. Backlog also includes deferred revenue comprised of products
shipped (but not recognizable as revenue in accordance with our revenue recognition policy), maintenance revenue that is being
amortized over twenty-four months or less, and services earned or to be performed within the next year.
Competition
The semiconductor equipment industry is highly competitive. The principal competitive factors in the industry are
product performance, reliability, price, service and technical support, product improvements, established relationships
with customers, and product familiarity. We believe that our products compete favorably with respect to these factors.
Our major competitors in the prober market are Tokyo Electron Limited (“TEL”) and Tokyo Seimitsu (“TSK”), both of
which are based in Japan. In this market, these competitors have greater financial, engineering and manufacturing
resources than we have, as well as larger service organizations and long-standing customer relationships. We cannot
assure you that levels of competition will not intensify or that our technological advantages will be reduced or lost as a
result of technological advances by competitors or changes in semiconductor processing technology. For a more detailed
discussion of the competition we face, see “Risk Factors.”
Patents, Trademarks, Copyrights and Other Intellectual Property
We believe that the success of our business depends more on the technical competence, creativity and marketing
abilities of our employees, rather than on patents, trademarks and copyrights. Nevertheless, we have a policy of seeking
patents when appropriate on inventions concerning new products and improvements as part of our ongoing research,
development and manufacturing activities. We own over 30 patents, including five granted in fiscal year 2008 and
currently have three filed and pending. These fiscal year 2008 patents include: Active Vibration Control (AVC), Dual
Loop Controls for improved z accuracy, and MicroTouch – all key technologies in our EG6000 prober. We also have
several registered United States and international trademarks. We maintain unregistered copyrights on our software and
typically maintain the source code for our products as a trade secret. We also rely on trade secret protection for our
confidential and proprietary information. We routinely enter into confidentiality agreements with our employees. There
can be no assurance; however, that others will not independently gain information and techniques or otherwise gain
access to our trade secrets or that we can meaningfully protect our trade secrets. For a more detailed discussion regarding
risks related to our intellectual property, see “Risk Factors.”
Employees
As of May 31, 2008, we employed 155 people. Many of our employees are highly skilled, and our success will
depend in part upon our ability to attract and retain such employees, who are in great demand. We have never had a work
stoppage or strike, and there are no employees represented by a labor union or covered by a collective bargaining
agreement. We consider our employee relations to be good.
Item 1A. Risk Factors
Semiconductor industry downturns adversely affect our revenues and operating results. Our business largely depends
on capital expenditures by semiconductor manufacturers and semiconductor test companies, 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. During a down cycle, we must be in a position to adjust our cost and expense
structure to prevailing market conditions. Our ability to reduce expenses may be limited by our need to invest in the
engineering, research and development and marketing required to penetrate targeted markets and maintain customer
service and support. During periods of rapid growth, we must be able to rapidly increase our outsourcing manufacturing
capacity and other personnel to meet customer demand. We cannot assure our investors that these objectives can be met,
which would likely have a material and adverse effect on our business and operating results.
10
Our historical financial results have been, and our future financial results are anticipated to be, subject to
substantial fluctuations. If we do not meet our forecasts and additional capital is unavailable, we may have insufficient
capital available to us to support our business activities and continue to operate our business pursuant to our current
business plan. Total revenues were $45.4 million, $44.6 million, and $44.3 million, respectively, for the years ended
May 31, 2008, 2007 and 2006. We incurred operating losses of $13.1 million, $17.9 million, and $15.7 million for the
same periods, respectively. The demand for our products follows the semiconductor test markets, which remain highly
cyclical and difficult to forecast. Another economic slowdown and/or changes in demand for our products and services
and other factors could continue to adversely affect our business in the near term, and we may experience additional
declines in revenue and increases in operating losses. We cannot assure our investors that we will be able to return to
operating profitability or that, if we do, we will be able to sustain it. Our cash, cash equivalents and short-term
investments totaled $16.5 million at May 31, 2008. Our cash used in operating activities was $5.3 million during the
year ended May 31, 2008. We currently anticipate that our future cash from operations, available cash and cash
equivalents, and our available credit facilities at May 31, 2008 should be sufficient to meet our anticipated needs for
working capital and capital expenditures through the next twelve months. Although we are committed to the successful
execution of our operating plan and will take further action as necessary to align our operations and reduce expenses,
there can be no assurance that our cash utilization will remain at or be reduced below its current level or that we will
have sufficient capital available to us to support our business activities and continue to operate our business pursuant to
our current business plan. We cannot assure you that additional financing, if needed, will be available on terms
favorable to us, or at all. If adequate funds are not available or are not available on terms favorable to us, we may not be
able to continue to operate our business pursuant to our current business plan and our ability to run our business would
be negatively impacted.
Our operating results are subject to variability and uncertainty, which could negatively impact our stock price. We
have experienced and expect to continue to experience significant fluctuations in our results. Our backlog at the
beginning of each period does not necessarily determine actual sales for any succeeding period. Our sales have often
reflected orders shipped in the same period that they were received. Customers may cancel or reschedule shipments, and
production difficulties could delay shipments. For the years ended May 31, 2008, 2007 and 2006 five of our customers
accounted for 51%, 42%, and 51%, respectively, of our net sales. If one or more of our major customers delayed, ceased
or significantly curtailed its purchases, it could cause our quarterly results to fluctuate and would likely have a material
adverse effect on our results of operations. Other factors that may influence our operating results in a particular quarter
include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures, the relative
proportions of domestic and international sales, our ability to design, manufacture and introduce new products on a costeffective 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 our competitors.
Accordingly, our results of operations are subject to significant variability and uncertainty from quarter to quarter, which
could adversely affect our stock price.
If we do not continue to develop and successfully market our existing products and new products, our business will
be negatively affected. We believe that our future success will depend in part upon our ability to continue to enhance
existing products and to develop and manufacture new products. As a result, we expect to continue investing in selective
new development programs. There can be no assurance that we will be successful in the introduction, marketing and cost
effective manufacture of any of our new products; that we will be able to develop and introduce new products in a timely
manner; enhance our existing products and processes to satisfy customer needs or achieve market acceptance; or that the
new markets for which we are developing new products or expect to sell current products will develop sufficiently. To
develop new products successfully, we depend on close relationships with our customers and the willingness of those
customers to share information with us. The failure to develop products and introduce them successfully and in a timely
manner could adversely affect our competitive position and results of operations. Additionally, the customer evaluation
process for our new 300mm prober products can be lengthy and can consume significant Company resources. Our future
sales will be impacted by our ability to successfully complete these new product evaluations. Further, we have begun to
market our existing technologies to other industries. However, there can be no assurance that we will be successful in
these efforts, or that our efforts will result in a significant increase in revenues.
11
If we do not successfully compete in the markets in which we do business, our business and results of operations will
be negatively affected. Our major competitors in the prober market are Tokyo Electron Limited (“TEL”) and Tokyo
Seimitsu (“TSK”), both of which are based in Japan. In the prober market, these competitors have greater financial,
engineering and manufacturing resources than we do as well as larger service organizations and long-standing customer
relationships. Our 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 our operating results. Although we believe we have certain technological and other
advantages over our competitors, maintaining and capitalizing on these advantages will require us to continue a high
level of investment in engineering, research and development, marketing, and customer service. We cannot assure you
that we will have sufficient resources to continue to make these investments or that we will be able to make the
technological advances necessary to maintain such competitive advantages.
We have incurred substantial indebtedness as a result of the sale of convertible Notes. As of May 31, 2007 the
Company had $8.5 million of 5.25% Notes which became due on June 15, 2007. In March 2007, the Company
completed a $25.75 million private placement of 6.25% Notes. The Company used part of the 6.25% Notes proceeds to
repay in June 2007 the $8.5 million of 5.25% Notes which matured. These 6.25% Notes are due in 2027; however, the
holders have the right in March 2011 and on various other dates prior to maturity to demand repayment in full.
Additionally, one of the covenants of our debenture agreement with respect to the 6.25% Notes can be interpreted such
that if we are late with any of our required filings under the Securities Act of 1934, as amended (“1934 Act”), and if we
fail to effect a cure within 60 days, the holders of the 6.25% Notes can put the 6.25% Notes back to the Company,
whereby the 6.25% Notes become immediately due and payable. As a result of our restructuring efforts, the Company
has fewer employees to perform the day-to-day controls, processes and activities which increases the risk that we will be
unable to make timely filings in accordance with the 1934 Act. These 6.25% Notes could materially and adversely affect
our ability to obtain additional debt financing for working capital, acquisitions or other purposes, limit our flexibility in
planning for or reacting to changes in our business, reduce funds available for use in our operations and could make us
more vulnerable to industry downturns and competitive pressures. We expect holders of the 6.25% Notes to convert their
notes or require us to purchase our outstanding 6.25% Notes in March, 2011, the earliest date allowed by the terms of the
6.25% Notes. Our ability to meet our debt service obligations will be dependent upon our future performance, which will
be subject to financial, business and other factors affecting our operations, some of which are beyond our control.
If we do not successfully protect our intellectual property, our business could be negatively impacted. Our success
depends in significant part on our intellectual property. While we attempt to protect our intellectual property through
patents, copyrights and trade secrets, we believe that our success will depend more upon innovation, technological
expertise and distribution strength. There can be no assurance that we will successfully protect our technology or that
competitors will not be able to develop similar technology. No assurance can be given that the claims allowed on any
patents we hold will be sufficiently broad to protect our technology. In addition, we cannot assure you that any patents
issued to us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us
with competitive advantages.
Our dependence on contract manufacturers and sole source suppliers may prevent us from delivering our products
on time, may damage our customer relations, and may harm our business. On September 18, 2007, we signed a five
year Manufacturing Services Agreement (“Agreement”) with Flextronics Industrial Ltd. to outsource our Singapore
manufacturing to China. This agreement requires us to submit rolling unit forecasts, allows us to reschedule and modify
the forecasts within certain period guidelines, and in certain circumstances allows us to share the benefits of cost
reduction projects. We believe through outsourcing our manufacturing we can achieve cost efficiencies, volume
flexibility, and better lead times. We cannot assure you that we will not experience short term manufacturing challenges
such as delays in shipping or that we will achieve the expected cost efficiencies and volume flexibility. Further, reliance
on a single third-party manufacturer exposes us to significant risks, especially inadequate capacity, late delivery,
substandard quality and high costs. We cannot be certain that existing or future contract manufacturers will be able to
manufacture our products on a timely and cost-effective basis, or to our quality and performance specifications. Should
our contract manufacturer be unable to meet our manufacturing requirements in a timely manner, whether as a result of
transitional issues or otherwise, our ability to ship orders and to realize the related revenues when anticipated could be
materially impacted.
12
We also use numerous suppliers to supply components and subassemblies for the manufacture and support of our
products and systems. While we make reasonable efforts to ensure that such components and subassemblies are available
from multiple suppliers, this is not always possible. Although we seek to reduce our dependence on these limited source
suppliers, disruption or termination of certain of these sources could occur and such disruptions could have at least a
temporary adverse effect on our results of operations and damage our customer relationships. Moreover, a prolonged
inability to obtain certain components, or a significant increase in the price of one or more of these components, could
have a material adverse effect on our business, financial condition and results of operations.
As part of our Agreement with Flextronics, Flextronics accepts purchase orders and forecasts from the Company
which constitute authorization for Flextronics to procure inventory based on lead times and to procure certain special
inventory such as long lead-time items. The Company does not take ownership of these Flextronics orders until the
finished products are ready to be shipped on behalf of the Company. Flextronics open commitments and inventory on
hand at May 31, 2008, based on the Company’s forecasts, were valued at $18.6 million. If the Flextronics inventory
goes unused, the Company may be assessed carrying charges or obsolete charges which could have a negative impact on
our results of operations.
If we do not successfully address the challenges inherent in conducting international sales and operations, our
business and results of operations will be negatively impacted. We have experienced fluctuations in our international
sales and operations. International sales accounted for 55%, 56%, and 58% of our net sales for the years ended May 31,
2008, 2007 and 2006, respectively. We expect international sales to continue to represent a significant percentage of net
sales. We are subject to certain risks inherent in doing business in international markets, one or more of which could
adversely affect our international sales and operations, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the imposition of government controls on our business and/or business partners;
fluctuations in the United States dollar, which could increase our foreign sales prices in local currencies;
export license requirements;
restrictions on the export of technology;
changes in tariffs;
legal and cultural differences in the conduct of business;
difficulties in staffing and managing international operations;
strikes;
longer payment cycles;
difficulties in collecting accounts receivable in foreign countries;
withholding taxes that limit the repatriation of earnings;
trade barriers and restrictions;
immigration regulations that limit our ability to deploy employees;
political instability;
war and acts of terrorism;
natural disasters; and
variations in effective income tax rates among countries where we conduct business.
Although these and similar regulatory, geopolitical and global economic factors have not yet had a material adverse
effect on our operations, there can be no assurance that such factors will not adversely impact our operations in the future
or require us to modify our current business practices. In addition, the laws of certain foreign countries where we do
business may not protect our intellectual property rights to the same extent as do the laws of the United States. Further,
we have found it difficult to penetrate the large Japanese market, which represents a significant percentage of the
worldwide wafer prober market. Our past sales in Japan have not been significant.
In addition, an increasing portion of our products and the products we purchase from our suppliers are sourced or
manufactured in foreign locations, including Singapore and China, and a large portion of the devices our products test
are fabricated and tested by foundries and subcontractors in Taiwan, Singapore, China and other parts of Asia. As a
result, we are subject to a number of economic and other risks, particularly during times of political or financial
instability in these regions. Disruption of manufacturing or supply sources in these international locations could have a
material adverse impact on our ability to fill customer orders and potentially result in lost business.
13
Our business will be harmed if we cannot hire and retain key personnel. Our future success partly depends on our
ability to hire and retain key personnel. We also need to attract additional skilled personnel in all areas to grow our
business. While many of our current employees have many years of service with us, there can be no assurance that we
will be able to retain our existing personnel or attract additional qualified employees in the future. We deem stock
options to be an important part of our employees’ compensation. With our Common Stock trading at a price below the
exercise price of most of our outstanding stock options, this may impact our ability to hire and retain key personnel.
Our outsource providers and distributors may fail to perform as we expect. Outsource providers have played and
will play key roles in our manufacturing operations and in many of our transactional and administrative functions, such
as information technology, facilities management, and certain elements of our finance organization. Also, we rely on
distributors in certain geographies to sell our products. Although we aim at selecting reputable providers and secure
their performance on terms documented in written contracts, it is possible that one or more of these providers could fail
to perform as we expect and such failure could have an adverse impact on our business. In addition, the expansive role
of outsource providers has required and will continue to require us to implement changes to our existing operations and
to adopt new procedures to deal with and manage the performance of the outsource providers. Any delay or failure in
the implementation of our operational changes and new procedures could adversely affect our customer relationships
and/or have a negative effect on our operating results.
Material weaknesses or deficiencies in our internal control over financial reporting could harm stockholder and
business confidence in our financial reporting. Maintaining an effective system of internal control over financial
reporting is necessary for us to provide reliable financial reports. Further, Section 404 of the Sarbanes-Oxley Act of
2002 requires our management to report on the effectiveness of our internal control structure and procedures for financial
reporting each year. As described in Item 9A(T) — Controls and Procedures, management, under the supervision of the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of disclosure our controls
and procedures and internal control over financial reporting. Based on those evaluations, the CEO and CFO identified
material weaknesses in internal control over financial reporting related to revenue recognition and inventory reserves.
More specifically, appropriate evidence documenting persuasive evidence of an arrangement was lacking resulting in
year-end audit adjustments to reverse revenue and inventory reserves were incorrectly adjusted in a manner which was
not consistent with the Company’s policies or in accordance with generally accepted accounting principles. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis. As a result of these material weaknesses in revenue recognition procedures and
inventory reserves, our management concluded that our disclosure controls and procedures and internal control over
financial reporting were not effective as of May 31, 2008. We plan to remediate these material weaknesses by:
improving training of our sales force and accounting personnel on our revenue and inventory reserve policies and
procedures, ensuring that appropriate evidence of an arrangement exists for revenue transactions, reviewing shipping
terms to ensure proper revenue recognition under current arrangements, and adding controls around changes in shipping
terms from other than EXWorks which is the standard commercial shipping terms used by the Company. We cannot
assure you however that the measures we have taken will remediate these material weaknesses identified or that any
additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal
controls over financial reporting. In addition, even if we are successful in strengthening our controls and procedures,
those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of
our financial statements included in our periodic reports filed with the Commission.
Our business may be harmed if we cannot maintain our listing on the NASDAQ Capital Market. To maintain our
listing on the NASDAQ Capital Market we must satisfy certain minimum financial and other continued listing standards,
including, among other requirements, (i) a $1.00 minimum bid price requirement and (ii) a $2.5 million minimum
stockholder’s equity requirement, $500,000 minimum net income requirement or $35 million minimum market value of
listed securities requirement. As of July 24 2008, the bid price of our common stock was $1.30 per share and our
approximate market value for listed securities was $34.5 million. Further, as of May 31, 2008 our stockholders' equity
was $3.9 million and our net loss was $15.9 million for fiscal year ended May 31, 2008. There can be no assurance we
will continue to meet the continued listing requirements for the NASDAQ Capital Market, or that we will not be delisted
from the NASDAQ Capital Market in the future. The delisting of our Common Stock could have a material adverse
effect on the trading price, liquidity, value and marketability of our Common Stock.
14
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In February 2005, we entered into an agreement with 5729 Fontanoso Way, LLC to lease 78,000 square feet for our
corporate headquarters. This facility includes most of the Company’s engineering, marketing, and general and
administrative functions. The term of this lease is five years with an option to renew for an additional five years.
Item 3. Legal Proceedings
We are not currently involved in any legal actions that we believe are material. From time to time, however, we may
be subject to various claims and lawsuits by customers, suppliers, competitors, and employees 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 could be trebled.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth quarter ended May 31, 2008.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Prices for Common Stock
Our common stock is traded on the Nasdaq Capital Market under the symbol “EGLS”. The following table sets forth
for the periods indicated the closing high and low sales prices per share.
Quarter
st
1
Year 2008
Year 2007
High
Low
High
Low
$2.75
$1.95
$3.81
$2.29
nd
2
$2.70
$1.27
$3.22
$2.39
3rd
$1.94
$1.23
$2.99
$2.29
4th
$2.06
$1.12
$2.55
$1.92
On July 24, 2008, the closing price of our common stock was $1.30. We have never declared or paid cash dividends
and we do not anticipate paying cash dividends in the foreseeable future. Also, the terms of the Company’s 6.25% Notes
restrict the Company from paying dividends. We currently intend to retain any future earnings to fund the development
and growth of our business. As of July 24, 2008, we had approximately 2,600 stockholders of record.
15
The following graph compares the cumulative 53-month total return of holders of Electroglas, Inc.'s common stock
relative to the cumulative total returns of the NASDAQ Composite index and the RDG Semiconductor Composite
index. The graph tracks the performance of a $100 investment in our Common Stock and in each of the indexes (with
the reinvestment of all dividends) from December 31, 2003 to May 31, 2008.
COMPARISON OF 53 MONTH CUMULATIVE TOTAL RETURN
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/03
12/04
Electroglas, Inc.
Electroglas, Inc.
NASDAQ Composite
RDG Semiconductor
Composite
5/05
5/06
5/07
NASDAQ Composite
5/08
RDG Semiconductor Composite
12/03
12/04
5/05
5/06
5/07
5/08
100.00
100.00
129.04
110.06
95.62
104.45
95.34
112.16
59.45
135.12
51.51
130.67
100.00
79.75
83.34
82.92
91.63
89.54
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
16
Item 6. Selected Financial Data
In thousands, except per share data
2008
Years ended May 31,
2007
2006
Net sales
Gross profit (1)
Engineering, research and development
Sales, general and administrative
Restructuring charges
Impairment charges
Indemnification release
Gains on sales of product lines
Operating loss
Interest expense, net
Gain on sale of long term investment
Gain on settlement of long term liability
Debt conversion expense
Gain (loss) on mark to market of financial
instrument related to convertible debt
Other income (expense), net
Net loss before income taxes
Provision (benefit) for income taxes
Net loss
$
45,421 $ 44,624 $
12,414
9,483
9,102
11,073
14,475
16,593
1,580
129
359
(459)
(13,102)
(17,853)
(1,410)
(487)
-
44,317
12,303
11,510
16,153
239
89
(15,688)
(982)
(17,603)
85
(154)
(855)
(280)
(15,282)
(18,774)
651
9
$ (15,933) $ (18,783) $
(385)
(34,658)
(628)
(34,030)
Basic and diluted net loss per share
Shares used in basic and diluted calculations
$
Working capital
Total assets
Convertible notes
Total stockholders' equity
$ 22,498
$ 43,361
$ 23,610
$ 3,918
(0.60) $
(0.71) $
26,395
26,285
$
$
$
$
33,814
65,834
31,337
15,503
$
$
$
$
Five months ended
May 31, 2005
Years ended December 31,
2004
2003
$
11,223
1,109
5,524
7,038
86
(11,539)
(499)
-
$ 63,004
22,810
16,194
17,182
979
4,251
(15,796)
(2,077)
3,545
8,273
-
(350)
(12,388)
5
(12,393)
(260)
(6,315)
57
$ (6,372)
$
$
$
44,967
220
21,785
33,559
3,909
6,254
(7,872)
(57,415)
(2,822)
112
(60,125)
(1,153)
(58,972)
(1.53)
22,178
$
(0.57)
21,762
$
(0.30)
21,534
$
(2.76)
21,343
32,524
62,672
8,330
33,182
$
$
$
$
54,433
83,990
32,413
32,432
$
$
$
$
69,865
95,619
34,123
44,662
$
$
$
$
43,463
110,155
33,630
50,265
(1) Gross profit for 2007 includes a $2.8 million inventory provision due to a reduced forecast for the strip handler product line, net of $0.6 million
of that reserved inventory which was subsequently sold. The Company also recorded, during 2007, a $0.7 million provision for excess
inventory related to its 2001 product line and $0.4 million for other inventory provisions. Gross profit for 2003 includes $3.2 million
for inventory provisions, $3.7 million in write-offs of unreserved inventories, and $2.7 million in warranty charges.
17
Quarterly Consolidated Financial Data (Unaudited)
In thousands, expect per share data
Net Sales
Gross profit
Net loss
In thousands, expect per share data
Net Sales
Gross profit (1)
Net loss
$
$
$
$
May 31, 2008
11,996
2,802
(5,554)
(0.21)
Quarters ended
March 1, 2008
December 1, 2007
$
11,553 $
11,381
$
2,918 $
3,098
$
(3,748) $
(3,333)
$
(0.14) $
(0.13)
September 1, 2007
$
10,491
$
3,596
$
(3,298)
$
(0.13)
$
$
$
$
May 31, 2007
8,701
529
(6,609)
(0.25)
Quarters ended
March 3, 2007
December 2, 2006
$
9,809 $
12,581
$
3,080 $
3,891
$
(3,123) $
(3,226)
$
(0.12) $
(0.12)
September 2, 2006
$
13,533
$
1,983
$
(5,825)
$
(0.22)
(1) Gross profit for 2007 includes: in the first quarter – a $3.4 million inventory provision due to a reduced forecast for the strip
handler product line; in the second quarter - $0.6 million of a reversal of inventory reserves from the sale of strip handler products.
During Q4 2007, the Company recorded a $0.7 million provision for excess inventory related to its 2001 product line and $0.4
million for other inventory provisions.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a supplier of semiconductor manufacturing equipment and software to the global semiconductor industry. Our
primary product line is automated wafer probing equipment. In conjunction with automated test systems from other
suppliers, our semiconductor manufacturing customers use our wafer probers to quality test semiconductor wafers.
Electroglas has sold over 16,500 wafer probers and its installed base is one of the largest in the industry. Beginning in
2007, we began to market our existing EG6000 technologies to other equipment manufacturers in other application areas
such as micro assembly and inspection. These companies, in addition to semiconductor, sell into the medical and solar
fields.
Our customers consist primarily of chip manufacturers and contract test companies. The demand for our products
follows the semiconductor test markets, which remain highly cyclical and difficult to forecast. The EG6000, which
represents a major advancement in prober design and automation and is focused on providing better performance than
currently available from competitors’ products, was developed to serve this much larger production test market.
To stay competitive, grow our business over the long term, improve our gross margins, and generate operating cash
flows, we must continue to invest in new technologies and product enhancements and at the same time, as necessary,
rapidly adjust our expense structure during the hard to predict cyclical semiconductor equipment demand cycles. Due to
the cyclicality of the semiconductor equipment industry and the resulting market pressures, we are focusing our efforts in
the following areas:
• Controlling and aligning our costs, through outsourcing and streamlining to move to break-even and then
profitable levels of operation, including positive operating cash flows;
• Developing successful products and services to meet market windows in our target markets, and marketing our
existing technologies to other industries;
• Working with our manufacturing outsourcing vendor, Flextronics, to achieve a more variable cost model and to
cost reduce our products;
• Completing new customer evaluations of our 300mm products; and
• Preparing ourselves for increases in customer demand while at the same time maintaining expense control and
limiting increases in our cost structure.
18
There can be no assurances that these efforts will be successful. In order to become profitable, our market share for
our products must improve.
Additional information about Electroglas is available on our website (www.electroglas.com). Electroglas makes
available free of charge on our website our Reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, as soon as reasonably practicable after we electronically file them with the Securities
Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room (1-800-SEC-0330) at 100 F Street, NE, Washington, D.C. 20549. Our filings are also available
at the SEC’s website at http://www.sec.gov.
Critical Accounting Policies and Estimates
General: Our discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted
in the United States.
Use of Estimates: The preparation of our financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, inventory
valuation, warranties, allowance for doubtful accounts, tax allowances and reserves, stock based compensation, valuation
of long-lived assets, and accruals for such items as restructuring reserves. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis for our judgments about the carrying values of assets and liabilities. Actual results may differ
materially from these estimates under different assumptions or conditions.
We believe the following critical accounting policies involve more significant judgments or estimates used in the
preparation of our consolidated financial statements. Senior management has discussed the development and selection of
these critical accounting policies and estimates with the Company’s audit committee.
Revenue recognition: Revenue is recognized on the sale of the Company’s equipment when a customer purchase
order or contract has been received, when the products or services have been delivered, when the total purchase price can
be assured without making significant concessions, and when the Company’s ability to collect from its customer has
been assured. In recognizing revenue the Company makes certain assumptions and estimates, namely: (i) the Company
considers a new system routinely accepted in the marketplace when three to five successful installations, based on our
acceptance criteria, have been put into customer production; (ii) the Company considers systems, delivered separately
from options, to have value to our customers on a stand alone basis if we have fair value of the options and the options
are not significant to the total amount of the order and the options are not essential to the functionality of the system; (iii)
the Company considers systems, delivered separately from installation, to have value to its customers on a stand-alone
basis because the equipment can readily be sold by the customer, customers are capable of installing the systems without
the support of our installers, installation is routine and inconsequential to the total value of the transaction, we have fair
value and routinely sold on a stand-alone basis; and (iv) for most customers the Company assumes that, based on past
history, it will continue to collect its receivables from them without payment or product concessions, despite the fact that
they have larger financial size relative to the Company and despite its dependence on them in a heavily concentrated
industry. In an arrangement with multiple deliverables, such as installation and services, the delivered items are
considered a separate unit of accounting if all of the following criteria are met: (i) the delivered items have value to the
customer on a stand-alone basis, (ii) vendor specific objective evidence (VSOE) of fair value exists, which is based on
the average price charged when each element is sold separately, for the undelivered elements, and (iii) if the arrangement
does not include a general right of return relative to a delivered item, or if performance of the undelivered item is
considered probable and substantially in the control of the Company. If the Company cannot objectively determine the
fair value of any undelivered element included in a multiple element arrangement, the Company defers revenue until all
elements are delivered and the service has been performed, or until fair value can be objectively determined for any
remaining undelivered elements. Where the Company sells to distributors, revenue is deferred until resale to the endcustomers. Sales to distributors do not represent a material amount of the Company's sales. Revenue related to
maintenance and service contracts is recognized ratably over the duration of the contracts.
19
Inventory valuation: Inventories are stated at lower of cost or market (estimated net realizable value) using the FIFO
method. We periodically review the carrying value of inventories and non-cancelable purchase commitments, including
inventories at Flextronics, by reviewing sales forecasts, material usage requirements, and by reviewing the impact of
changes in technology on our products (including engineering design changes). These forecasts of changes in
technology, future sales and pricing are estimates. We may record charges to write down inventories based on these
reviews and forecasts. If there is weak demand in the semiconductor equipment markets and orders fall below our
forecasts, additional write downs of inventories may be required which will negatively impact gross margins. Inventory
impairment charges are considered to permanently establish a new cost basis for inventory and are not subsequently
reversed to income even if circumstances later suggest that increased carrying amounts are recoverable, except when the
associated inventory is disposed of or sold. Inventory purchase commitments considered excess or losses on purchase
commitments above market prices are accrued in the period in which such determinations are made.
Warranty: We generally warrant our products for a period of thirteen months from the date of shipment and we
accrue a liability for the estimated cost of warranty. For our established products, this accrual is based on historical
experience; and for our newer products, this accrual is based on estimates from similar products. In addition, from time
to time, specific warranty accruals are made for specific technical problems. If we experience unforeseen technical
problems with our products in future periods to meet our product warranty requirements, revisions to our estimated cost
of warranty may be required, and our gross margins will be negatively impacted. Estimates have historically
approximated actual results.
Allowance for doubtful accounts: We closely monitor the collection of our accounts receivable and record a general
allowance based on the age of the receivables and a specific reserve for identified amounts that we believe are not
recoverable. We sell primarily to large, well-established semiconductor manufacturers and semiconductor test companies
and we have not experienced significant accounts receivable losses in the past. We have, however, from time to time
experienced slowdowns in receivable collections, especially during semiconductor equipment down cycles, as customers
extend their payment schedules to conserve their cash balances. If our customers continue to experience down cycles or
if their financial conditions deteriorate, we may be required to increase our allowance for doubtful accounts. If a
customer demonstrates a pattern of renegotiating terms or requesting concessions prior to payment, we would defer
revenue until the price was considered fixed and determinable. Estimates have historically approximated actual results.
Accounting for Income Taxes: The Company adopted FIN 48 “Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement No. 109” on June 1, 2007, the first day of the first quarter of fiscal 2008. FIN 48
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return that results in a tax benefit. Additionally, FIN 48 provides
guidance on de-recognition of deferred tax assets and liabilities, statement of operations classification of interest and
penalties, accounting in interim periods, disclosure, and transition. In connection with our implementation of FIN 48, we
reevaluated all of our significant tax positions and based upon this evaluation we concluded that our deferred tax assets
and liabilities did not differ significantly from our recorded deferred tax assets and liabilities prior to adoption.
Therefore, we did not record any adjustments as of the adoption date. At the adoption date of June 1, 2007, we had
approximately $7.7 million of total gross unrecognized tax benefits, all of which would impact our effective tax rate if
recognized. We continue to recognize interest and penalties related to uncertain tax positions in income tax expense.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income
taxes. This process involves estimating our actual current tax liability together with assessing temporary differences that
may result in deferred tax assets. Management judgment is required in determining any valuation allowance recorded
against our net deferred tax assets. We establish estimates for these allowances and reserves based on historical
experience and other assumptions. It is our policy to accrue for tax exposures or to release tax reserves in the period in
which the facts and circumstances arise that suggest that the valuation allowances or reserves should be modified. We
will continue to record a full valuation allowance on domestic tax benefits until we can sustain an appropriate level of
profitability. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities
which might result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is
judgmental in nature. However, we believe we have adequately provided for any reasonable foreseeable outcome related
to those matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in
the period the assessments are made or resolved or when statutes of limitation on potential assessments expire.
20
Long-lived assets: We evaluate the carrying value of long-lived assets, consisting primarily of equipment and
leasehold improvements, whenever certain events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. Charges related to asset impairments are recorded in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
Restructuring charges: We recognize a liability for restructuring costs at fair value only when the liability is
incurred. The three main components of our restructuring charges are workforce reductions, consolidating facilities and
asset impairments. Workforce-related charges are accrued when it is determined that a liability has been incurred, which
is generally when individuals have been notified of their termination dates and expected severance payments. Plans to
eliminate excess facilities result in charges for lease termination fees and future commitments to pay lease charges, net of
estimated future sublease income. We recognize charges for elimination of excess facilities when we have vacated the
premises. Asset impairments primarily consist of property, plant and equipment associated with excess facilities being
eliminated, and are based on an estimate of the amounts and timing of future cash flows related to the expected future
remaining use and ultimate sale or disposal of the property, plant and equipment. These estimates were derived using the
guidance of Statement of Financial Accounting Standards ("SFAS") No. 146 "Accounting for Exit or Disposal
Activities" ("SFAS No. 146") which was effective for exit and disposal activities initiated after December 31, 2002. If
the amounts and timing of cash flows from restructuring activities are significantly different from what we have
estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or
lower, than those we have recorded.
Stock based compensation expense: We estimate the value of employee stock based awards on the date of grant
using the Black-Sholes model and amortize these costs on a straight-line basis over the requisite service periods of the
awards. Under SFAS 123(R) “Share-Based Payment”, the determination of fair value of share-based payment awards on
the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number
of highly complex and subjective variables, such as:
Expected volatility – historical volatility of the Company’s stock price.
Expected term – historical data on employee exercises and post-vesting employment termination behavior.
Risk free interest rate – an implied yield currently based on United States Treasury rates.
Estimated forfeitures – historical option forfeitures over a given period.
Dividend yield – historical rate of dividend payments
21
Results of Operations
Percentage of net sales
Years
2007
2008
Net sales
Cost of sales
Gross profit
Operating expenses:
Impairment charges
Total operating expenses
Operating loss
Interest income
Interest expense
Gain (loss) on mark to market of financial instrument
related to convertible debt
Other expense, net
Loss before income taxes
Net loss
2006
100.0 %
72.7
27.3
100.0 %
78.7
21.3
100.0 %
72.2
27.8
20.0
31.9
3.5
0.8
56.2
(28.9)
2.3
(5.4)
-
24.8
37.2
0.3
(1.0)
61.3
(40.0)
1.4
(2.5)
-
26.0
36.5
0.5
0.2
63.2
(35.4)
2.7
(4.9)
(39.7)
0.2
(1.9)
(33.7)
1.4
(35.1) %
(0.4)
(0.6)
(42.1)
(42.1) %
(0.9)
(78.2)
(1.4)
(76.8) %
Net Sales
Net sales are comprised of systems and aftermarket products and services sales, consisting primarily of services,
spare parts, upgrades, and refurbished systems. Service revenue, included in aftermarket prober products and service was
10%, 11% and 10% of net sales for the years ended May 31, 2008, 2007, and 2006, respectively. Net sales of our
products are as follows:
In thousands
Systems
Aftermarket products and service
Years
2007
2008
$
$
27,595
17,826
45,421
$
$
26,084
18,540
44,624
2006
$
$
27,074
17,243
44,317
Net sales increased 2% in 2008 as compared to 2007 because of increased EG6000 and 4090 system sales ($2.9
million), and software royalties ($0.3 million), offset by lower sales of aftermarket products ($1.7 million) and
Sidewinder, strip test handler ($0.6 million). Net sales were up slightly in 2007 as compared to 2006. The demand for
our products follows the semiconductor test markets, which remain highly cyclical and difficult to forecast. As a result
of uncertainties in this market environment, any rescheduling or cancellation of planned capital purchases by our
customers will cause our sales to fluctuate.
22
Net sales amounts and as a percentage of sales were as follows:
In thousands
Asia
Europe
International
North America
Years
2007
2008
$
$
16,056
8,885
24,941
20,480
45,421
35 %
20
55 %
45
100 %
$
2006
13,704
11,355
25,059
19,565
44,624
$
31 %
25
56 %
44
100 %
$
15,924
9,804
25,728
18,589
44,317
$
36 %
22
58 %
42
100 %
We expect international sales to continue to represent a significant percentage of net sales and fluctuate as individual
manufacturers and semiconductor test companies address their capacity needs at differing stages of the semiconductor
demand cycle. During 2006 through 2008, we experienced weakness in sales across all of our major geographic regions
due to industry conditions and slow customer acceptance of our 300mm products.
Gross Profit
In thousands
Years
2007
2008
$
Gross Profit
Gross profit as a % of net sales
12,414
27.3%
$
2006
9,483
21.3%
$
12,303
27.8%
The increase in gross profit in 2008 compared to 2007 was primarily due to higher systems sales with higher average
ASP’s ($0.9 million), and lower net inventory provisions in 2007 related to the strip handler product compared to the
prior year ($2.8 million), offset by higher period costs due to duplicate factories, Singapore and Flextronics in China
($1.6 million). The decline in gross profit in 2007 compared to 2006 was primarily due to higher inventory provisions of
$2.8 million due to a reduced forecast for the strip test handler product line in 2007.
We periodically review the carrying value of our inventories and non-cancelable inventory purchase commitments by
evaluating material usage and manufacturing requirements to determine inventory obsolescence and excess quantities,
and we reduce the carrying value of these inventories when appropriate.
We believe that our gross profit will continue to be affected by a number of factors, including changes in demand for
semiconductors, competitive pressures on average selling prices and product mix. Continued weak demand and changes
in market conditions may cause orders to be below forecasts, which may result in additional excess inventory, which
would cause additional write-downs of inventories and would negatively impact our gross profit margins.
Engineering, Research and Development Expenses (ER&D)
In thousands
ER&D
Years
2007
2008
$
9,102
20.0%
ER&D as a % of net sales
$
11,073
24.8%
2006
$
11,510
26.0%
In 2008 versus 2007, the decrease in ER&D was mainly due to a reduction in headcount and related personnel expenses of
$0.9 million and reduced development and evaluation costs of $1.1 million as part of our cost containment measures. In 2007
versus 2006, the decrease in ER&D was mainly due to reduced payroll and related personnel charges of $0.6 million as well as
lower infrastructure and facility costs of $0.3 million, partially offset by higher development and evaluation costs for the
EG6000 product line of $0.6 million. Engineering, research and development expenses consist primarily of salaries, project
materials, consultant fees, and other costs associated with our ongoing efforts in product development and enhancement.
23
Selling, General and Administrative Expenses (SG&A)
In thousands
Years
2007
2008
$
SG&A
14,475
$
31.9%
SG&A as a % of net sales
2006
16,593
$
37.2%
16,153
36.5%
In 2008 versus 2007, the decrease was primarily due to a decrease in headcount and related personnel costs of $1.1
million and reduced product evaluation costs, audit fees, and discretionary costs of $0.4 million, $0.2 million, and $0.3
million, respectively. In 2007 versus 2006, the increase in absolute dollars was primarily due to increased new product
evaluation costs of $0.9 million and audit fees of $0.4 million, offset by lower payroll and related personnel charges of
$0.6 million and decreased infrastructure and facility costs of $0.2 million. SG&A expenses consist primarily of
employee salaries and benefits, travel expenses, advertising and other promotion expenses, facilities expenses, legal
expenses and other infrastructure costs.
Restructuring Charges
During 2008 we recorded a restructuring charge of $1.6 million related to reductions in the workforce in our foreign
offices and the closing of our manufacturing facility in Singapore. During 2007 the net restructuring amount was $0.1
million. We recorded a restructuring charge of $0.3 million related to a reduction in workforce. This was offset by a
favorable $0.2 million benefit related to the early termination of a facility lease previously restructured in 2004. During
2006, we recorded a $0.2 million restructuring charge related to workforce reductions.
Impairment Charges
We performed impairment tests as of December 31, 2007 and 2006, which compared currently utilized property and
equipment and non-current assets net book values with the expected undiscounted cash flows from these assets. The
estimated undiscounted cash flows of the assets were sufficient to recover the net book value of these assets. In 2008, we
recorded a $0.4 million impairment charge on the carrying value of the company’s MRP system due to the closure of our
manufacturing facility in Singapore as well an impairment of furniture and fixtures in under utilized facilities. In 2006,
we recorded a $0.1 million impairment charge on fixed assets no longer in use.
The semiconductor industry is highly cyclical and the severity of these cycles is difficult to predict. During a down
cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions, which could
affect our net sales and the sufficiency of estimated future cash flows. If the estimated cash flows are not sufficient to
recover the net book value of our assets we would be required to record additional impairment charges.
In January 2005, the Company sold its San Jose campus facility. The agreement covering this sale included a
provision that allowed for a two year period for the buyer to make indemnification claims up to a maximum amount of
$3.5 million for breaches of the agreement’s representations and warranties. At that time, the Company recorded a $0.5
million reserve for the net present value of the Company’s guarantee obligations under these indemnification provisions.
In January 2007, after the expiration of the two year period specified in the agreement, the Company reversed this
reserve as no claims had been made.
Interest Income
In thousands
Interest income
Years
2007
2008
$
1,037
24
$
2006
604
$
1,195
The increase in interest income in 2008 over 2007 was related to increased cash due to the issuance of $25.75 million
in 6.25% Notes offset by the repayment of $8.5 million of our 5.25% bonds and cash used to fund operations. The
decrease in interest income in 2007 over 2006 was primarily due to the use of cash for operations as well as the $7.5
million in cash used as partial consideration in the repurchase of $25.0 million of our 5.25% Notes.
Interest Expense
In thousands
Interest expense
Years
2007
2008
$
2,447
$
2006
1,091
$
2,177
Interest expense is comprised primarily of interest on our Notes. The increase in 2008 over 2007 is primarily due to
increased convertible debt and discount amortization of our 6.25% Notes. The decrease in 2007 over 2006 is primarily
due to the repurchase of $25.0 million of the Notes in 2006. (see Notes 8 and 9).
Debt Conversion Expense
During May 2006, we exchanged $25.0 million of our 5.25% Notes for 4,268,000 shares of common stock and $7.5
million in cash in privately negotiated transactions with Note holders. At the conversion price of $10.2465 per share, the
$25.0 million of Notes exchanged would have been convertible into 2,440,000 shares of common stock. For accounting
purposes, the additional 1,828,000 shares of common stock, valued at $8.6 million, and the $7.5 million cash paid was
considered an inducement for the holders to convert their Notes, which combined with unamortized bond costs of $1.1
million and transaction costs of $0.4 million, required us to record a non-operating debt conversion expense of $17.6
million during the year ended May 31, 2006.
Provision (Benefit) for Income Taxes
In thousands
Years
2007
2008
$
651
$
2006
9
$
(628)
The 2008 provision reflects the amount of the tax settlement totaling $0.4 million reached with the Singapore
government to end our tax holiday (see Note 16) and a reduction in our deferred tax assets due to changes in estimates of
$0.2 million. The 2007 provision resulted from taxes accrued on the income of various foreign branches and
subsidiaries. The 2006 income tax benefit resulted primarily from a $0.6 million release of tax reserves related to
transfer pricing issues. Realization of our deferred tax assets depends on us generating sufficient taxable income in future
years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from net operating
loss and credit carryforwards. Due to the uncertainty of the timing and amount of such realization, management
concluded that a valuation allowance of $122.0 million was required at May 31, 2008.
In October of 2004, the American Jobs Protection Act was signed into law. Certain provisions of this Act allow
multinational companies to repatriate cash related foreign earnings at a favorable rate if used to create or maintain jobs in
the United States. At May 31, 2008, there are no plans to repatriate earnings from foreign subsidiaries as the only cash
maintained in these entities is for working capital purposes. Any repatriation of foreign earnings would have an
immaterial effect on income taxes.
25
Liquidity and Capital Resources
In thousands
Cash used in operating activities
Cash (used in) provided by investing activities
Cash (used in) provided by financing activities
Years
2007
2008
$
$
$
(5,333)
(505)
(8,444)
$
$
$
2006
(11,251)
1,191
23,547
$
$
$
(20,525)
13,377
(7,051)
Operating activities: Cash used in operating activities was $5.3 million for the period ended May 31, 2008. The
primary uses of cash were to fund operational losses offset by cash received from Flextronics for transfer of inventories
of $6.7 million in connection with its outsourcing agreement.
Cash used in operating activities was $11.3 million for the period ended May 31, 2007. The primary uses of cash
were to fund operational losses and a reduction in accounts payable and accrued liabilities offset by reduced accounts
receivable due to improved collection efforts.
Cash used in operating activities was $20.5 million for the period ended May 31, 2006. The primary uses of cash
was to fund operational losses and fund increases in working capital levels, including accounts receivable and
inventories, due to increased sales in the last half of 2006.
Investing activities: Cash used in investing activities in 2008 was $0.5 million due to purchases of fixed assets. Cash
provided by investing activities in 2007 was $1.2 million due to the maturity of investments offset by purchases of fixed
assets. Cash provided by investing activities in 2006 was $13.4 million, an increase of $5.3 million over the prior fiscal
year largely due to liquidation of investments due to our increased use of cash in operations as a result of larger accounts
receivables and inventory balances.
Financing activities: Cash used in financing activities in 2008 was $8.4 million, primarily due to the repayment of
$8.5 million of our 5.25% Notes. Cash provided by financing activities in 2007 was $23.5 million, largely from the
proceeds received from the issuance of our 6.25% Notes in March 2007. Cash used in financing activities in 2006 was
$7.1 million, largely from $7.5 million paid in the exchange of $25.0 million of our 5.25% Notes in May 2006 for
4,268,000 shares of our common stock and cash in privately negotiated transactions with Note holders.
Cash contractual obligations are as follows as of May 31, 2008:
In thousands
Operating leases
Inventory purchase commitments
Interest payments on convertible subordinated notes
Principal payment on convertible subordinated notes
Total
Payments Due by Fiscal Year
2009
2010
2011
Total
$
3,345
20,069
5,279
25,750
$ 54,443
$
1,712
20,069
1,609
$ 23,390
$
$
1,545
1,609
3,154
$
88
2,061
25,750
$ 27,899
Purchase commitments include $1.0 million of purchase orders that are cancelable.
On September 18, 2007, the Company signed a five year Manufacturing Services Agreement (“Agreement”) with
Flextronics Industrial Ltd. to outsource its Singapore manufacturing to Flextronics in China. As part of this Agreement,
Flextronics accepts purchase orders and forecasts from the Company which constitute authorization for Flextronics to
procure inventory based on lead times and to procure certain special inventory such as long lead-time items. The
Company does not take ownership of these Flextronics orders until the finished products are ready to be shipped to our
customers. Flextronics open commitments and inventory on hand at May 31, 2008, based on the Company’s forecasts,
were valued at $18.6 million and are included in the above table as inventory purchase commitments.
26
In February 2005, we entered into a five-year operating lease for a 78,000 square foot corporate headquarters
building in San Jose, California. Payments due under this new lease are $2.7 million for fiscal years 2009 through 2010.
Line of credit: In June 2008, we renewed and amended our revolving line of credit with Comerica Bank. Under this
amended agreement, we may borrow up to $7.5 million based upon eligible accounts receivable balances. This amended
line of credit, which has a maturity date of August 31, 2010, is secured by substantially all of our assets and requires that
we maintain certain financial covenants. We currently maintain cash deposits of $3.0 million that will be considered
restricted as compensating balances to the extent we borrow against this credit line. There were no borrowings from the
credit line as of May 31, 2008 and 2007, respectively.
Liquidity: Our principal source of liquidity as of May 31, 2008 consisted of $16.5 million of cash and cash
equivalents. As of May 31, 2008, we had net working capital of $22.5 million. During 2009, we will continue to
emphasize reduction of our utilization of cash, including improving gross margins on sales, maintaining spending
controls and additional headcount reductions. In March 2007, the Company completed a $25.75 million private
placement of 6.25% fixed rate convertible subordinated secured notes (the “6.25% Notes Offering”). We currently
anticipate that our available cash and amounts available under our line of credit at May 31, 2008 should be sufficient to
meet our anticipated needs for working capital and capital expenditures to support planned activities for the next 12
months.
Impact of Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This Statement applies to other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. This Statement is required to be adopted by us in the first
quarter of our fiscal year 2009. On February 12, 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, “Effective
date of FASB Statement No. 157”. FSP 157-2 delays the effective date for nonfinancial assets and liabilities to fiscal years
beginning after November 15, 2008. Management is currently assessing the impact of the adoption of this Statement.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB statement No. 115”. SFAS No. 159 permits companies to choose to
measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses
are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The fair value option under SFAS No 159 becomes available to us in the first
quarter of our fiscal year 2009. Management is currently assessing the impact of the adoption of this Statement.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”. SFAS 141R establishes principles
and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets
acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in the business
combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. This Statement is required to be
adopted by us in the first quarter of our fiscal year 2010. This statement will have no impact on the Company unless
management enters into a business combination after May 31, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements
— an Amendment of Accounting Research Bulletin, or ARB No. 51”. SFAS 160 establishes and expands accounting
and reporting standards for the noncontrolling interest in a subsidiary. SFAS 160 is effective for business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This Statement is required to be adopted by us in the first quarter of our fiscal year 2010. This
statement will have no impact on the Company unless management enters into a business combination after May 31,
2009.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”.
SFAS 161 requires additional disclosures about the objectives of using derivative instruments, the method by which the
derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related
27
interpretations, and the effect of derivative instruments and related hedged items on financial position, financial
performance, and cash flows. SFAS 161 also requires the disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged. This Statement is required to be adopted
by us in the first quarter of our fiscal year 2010. This statement will have no impact on the Company unless management
enters into derivative instruments or hedging activities after May 31, 2009.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
At May 31, 2008, our cash equivalents consisted primarily of fixed income securities. We maintain an investment
policy, which ensures the safety and the preservation of our invested funds by limiting default risk, market risk and
reinvestment risk. The portfolio includes only cash equivalents with active secondary or resale markets. These securities
are subject to interest rate risk and may decline in value when interest rates change. If a 100 basis point change occurred
in the value of our portfolio, the impact on our financial statements would be less than $0.1 million. The table below
presents notional amounts and related weighted-average interest rates by year of maturity for our investment portfolios:
Within One
Year
In thousands, except percentages
Interest bearing cash accounts and cash equivalents
Average rate
$
14,042
2.6%
Fair Value at
May 31, 2008
$
14,042
2.6%
Foreign Currency Exchange Rate Risk
We believe that our current foreign exchange exposure in all international operations is not material to our
consolidated financial statements because we primarily transact business in United States dollars. Accordingly, we do
not use derivative financial instruments to hedge our current foreign exchange exposure. We believe the impact of a
10% change in exchange rates would not be material to our financial condition and results of operations. (see Note 2 –
Business and Summary of Significant Accounting Policies) There have been no significant changes in our market risk
from the prior year.
28
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Electroglas, Inc.
San Jose, CA
We have audited the accompanying consolidated balance sheets of Electroglas, Inc. as of May 31, 2008 and 2007 and
the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each
of the three years in the period ended May 31, 2008. 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Electroglas, Inc. at May 31, 2008 and 2007, and the results of its operations and its cash flows for
each of the three years in the period ended May 31, 2008, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 13, effective June 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R) “Share-Based Payment”.
As discussed in Note 14, effective May 31, 2007, the Company adopted Statement of Financial Accounting
Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment
of FASB Statements No. 87, 88, 106, and 132(R)”.
As discussed in Note 16, effective June 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109”.
/s/ BDO Seidman, LLP
August 12, 2008
29
ELECTROGLAS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales
Cost of sales
Gross profit
Operating expenses:
Impairment charges
Total operating expenses
Operating loss
Interest income
Interest expense
Loss on mark to market of financial instruments
related to convertible debt
Other expense, net
Loss before income taxes
Net loss
2008
$
45,421
33,007
12,414
Years ended May 31,
2007
$
44,624
35,141
9,483
2006
$
44,317
32,014
12,303
9,102
14,475
1,580
359
25,516
(13,102)
1,037
(2,447)
-
11,073
16,593
129
(459)
27,336
(17,853)
604
(1,091)
-
11,510
16,153
239
89
27,991
(15,688)
1,195
(2,177)
(17,603)
$
85
(855)
(15,282)
651
(15,933)
$
(154)
(280)
(18,774)
9
(18,783)
$
(385)
(34,658)
(628)
(34,030)
$
(0.60)
$
(0.71)
$
(1.53)
Shares used in basic and diluted calculations
26,395
26,285
See accompanying notes to consolidated financial statements.
30
22,178
ELECTROGLAS, INC
CONSOLIDATED BALANCE SHEETS
May 31,
In thousands, except share data
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $329 and $392
Inventories
Restricted cash
Receivable from Flextronics Industrial Ltd.
Prepaid expenses and other current assets
Total current assets
Equipment and leasehold improvements, net
Goodwill
Other assets
Total assets
2008
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue - current
Accrued losses on inventory purchase commitments
Convertible subordinated notes - short term
Total current liabilities
Convertible subordinated notes - long term
Financial instrument related to convertible debt
Non-current liabilities
Total liabilities
Commitments and contingencies (see Note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none outstanding
Common stock, $0.01 par value; 60,000,000 shares authorized; 26,681,000 and 26,466,000
shares issued; 26,526,000 and 26,311,000 outstanding
Additional paid-in capital
Accumulated deficit
Cost of common stock in treasury; 155,000 shares
Total stockholders’ equity
Total liabilities and stockholders’ equity
31
$
2007
16,541
9,419
5,533
1,644
2,752
35,889
2,724
1,942
2,806
43,361
6,848
5,717
826
13,391
23,610
2,442
39,443
-
$
267
199,932
(193,985)
(2,296)
3,918
43,361
$
$
$
30,788
9,855
11,883
500
2,355
55,381
4,779
1,942
3,732
65,834
5,953
5,456
1,036
636
8,486
21,567
22,851
3,192
2,721
50,331
265
195,586
(178,052)
(2,296)
15,503
$
65,834
ELECTROGLAS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
Accumulated
Common Stock
In thousands
Shares
Balance at June 1, 2005
21,957
Net loss
Net unrealized loss on investments
Total comprehensive loss
Issuance of common stock under
employee stock plans
177
Issuance of common stock through
conversion of notes
4,268
Stock-based compensation expense
Balance at May 31, 2006
26,402
Net loss
64
26,466
Net loss
Reclassification of financial instrument related
to convertible debt
215
26,681
Amount
$
Retained
Other
Paid-in
Earnings
Comprehensive
Total
Capital
(Deficit)
$ (125,239)
(34,030)
-
2
447
43
264
-
33,533
794
194,508
-
(159,269)
(18,783)
-
(25)
25
(155)
-
(2,296)
-
33,576
794
33,182
(18,783)
25
(18,758)
1
265
-
143
935
195,586
-
(178,052)
(15,933)
-
-
(155)
-
(2,296)
-
144
935
15,503
(15,933)
(15,933)
-
3,107
2
267
106
1,133
$ 199,932
$
-
14
(39)
-
-
-
$
-
32
(155)
-
-
-
$ (193,985)
Shares
Stockholders’
$ 159,734
-
3,107
Income/(Loss)
Treasury Stock
219
-
-
$
Additional
(155)
Amount
$ (2,296)
-
Equity
$
-
$ (2,296)
32,432
(34,030)
(39)
(34,069)
449
$
108
1,133
3,918
ELECTROGLAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Cash flow s used in operating activities
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation
Am ortization
Provision for inventory reserves and amortization
of loaner equipment
Stock based compensation charges
Interest expense on convertible notes
Loss on m ark to market of financial instrum ent related to
convertible debt
Indem nification release
Impairm ent charges
(Gain) loss on translation of foreign currency
Loss (gain) on disposal of fixed assets
Change in estimate on tax reserves
Changes in current assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current and long-term assets
Accounts payable
Accrued and other current and long-term liabilities
Years ended M ay 31,
2007
2008
$
(18,783)
(34,030)
1,908
632
1,952
294
2,220
589
1,859
1,133
773
6,872
935
295
988
794
424
89
(65)
17,603
(15)
(865)
(285)
3,870
606
(220)
(202)
(5,333)
2,761
422
(49)
(3,781)
(1,915)
(11,251)
(6,939)
(4,033)
1,438
2,565
(1,288)
(20,525)
(505)
(505)
(808)
1,999
1,191
(624)
16
(10,000)
23,985
13,377
$
25,750
(2,347)
144
23,547
8
13,495
17,293
30,788
(7,500)
-
$
(8,500)
(52)
108
(8,444)
35
(14,247)
30,788
16,541
$
449
(7,051)
7
(14,192)
31,485
17,293
$
$
(1,381)
(676)
$
$
(446)
(31)
$
$
(2,271)
170
$
-
$
-
$
33,532
$
3,107
$
-
$
-
33
$
154
(459)
37
14
-
Cash flow s (used in) provided by financing activities
Purchase of convertible notes
Proceeds from issuance of convertible notes
Debt issuance cost related to the issuance of convertible notes
Sales of common stock to employees
Supplem ental cash flow disclosures:
Interest paid on convertible subordinated notes
Cash (paid) received during the period for income taxes
Supplem ental non-cash investing and financing activities:
Conversion of subordinated debt
Reclassification of financial instrument related to
convertible debt
$
(85)
359
(152)
404
-
Cash flow s (used in) provided by investing activities
Capital expenditures
Proceeds from disposal of property, plant and equipment
Purchases of investments, available-for-sale
M aturities of investments, available-for-sale
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(15,933)
2006
-
ELECTROGLAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Change in Fiscal Year
Effective July 2005, Electroglas, Inc. (“the Company”) changed its fiscal year-end from December 31 to May 31
retroactive to May 31, 2005. The Company’s fiscal quarters are every 13 weeks and end on a Saturday.
Note 2. Business and Summary of Significant Accounting Policies
Business: Electroglas Inc. is a supplier of semiconductor manufacturing equipment and software to the global
semiconductor industry. The Company was incorporated in Delaware in April 1993, to succeed the wafer prober
business conducted by the Electroglas division of General Signal Corporation, our former parent. Immediately prior to
the closing of the initial public offering of our Common Stock in July 1993, the Company assumed the assets and
liabilities of the Electroglas division in an asset transfer. The Company has been in the semiconductor equipment
business for more than 40 years. The Company’s primary product line is automated wafer probing equipment and related
network software to manage information from that equipment. In conjunction with automated test systems from other
suppliers, the Company’s semiconductor manufacturing customers use its wafer probers and network software to quality
test semiconductor wafers.
Principles of consolidation and basis of presentation: The consolidated financial statements include the accounts of
the domestic and foreign business operations of the Company for all periods. Intercompany balances and transactions
have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions for such items as revenue recognition,
inventory valuation, warranty reserves, allowances for doubtful accounts, guarantee obligations, tax valuation allowances,
stock based compensation, valuation of long-lived assets, and accruals such as restructuring reserves. These estimates and
assumptions affect the amounts reported in the financial statements. Actual results could differ materially from these
estimates.
Cash and cash equivalents: The Company considers all highly liquid investments with minimum yield risks and
maturities of 90 days or less from the date of purchase to be cash equivalents.
Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation.
These reclassifications have no effect on previously reported net loss or accumulated deficit.
Investments: The Company invests its excess cash in investment grade debt and equity instruments. Management
determines the appropriate classification of the debt securities at the time of the 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.
Amortization of premiums and accretion of discounts, as well as any interest on the securities, is included in interest
income. At May 31, 2008 and 2007, the Company did not have any marketable securities.
Inventories: Inventories are stated at the lower of cost or market (estimated net realizable value) using the first-in,
first-out (FIFO) method. The Company may record charges to inventory reserves due to excess, obsolete and slow
moving inventories, including those held by Flextronics. The Company’s reserve analysis is based on the estimated
impact of changes in technology on the Company’s products (including engineering design changes) and the timing of
these changes. The Company also considers future sales forecasts, product order history, and backlog to assess its
inventory requirements as well as outstanding purchase commitments. Inventory on loan to customers is included in
finished goods inventory. Loaner inventory is reserved beginning in the ninth month after shipment through the twentieth
month to a 10% residual value and is charged to the organization responsible for the inventory, either Engineering or
Sales. If there is weak demand in the semiconductor equipment markets and orders fall below forecasts, additional
reserves of inventories may be required which will negatively impact gross margins. Inventory reserves are considered to
permanently establish a new basis for inventory and are not subsequently reversed to income even if circumstances later
34
suggest that increased carrying amounts are recoverable, except when the associated inventory balances decline due to
disposition or sale. As a result of these analyses, the Company recorded inventory provisions and amortization of loaned
inventory of $1.9 million, $6.9 million and $1.0 million, for the years ended May 31, 2008, 2007 and 2006, respectively.
The following is a summary of the major categories of inventory as of:
May 31,
2008
2007
$
2,578
$
7,807
143
2,327
2,812
1,749
$
5,533
$
11,883
In thousands
Raw materials
Work-in process
Finished goods
Equipment and leasehold improvements: Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization using the straight-line method over the estimated useful lives of the assets or the life of the
lease, whichever is shorter. The following is a summary by major category as of:
Estimated
Useful Lives
3-5
Term of lease
3-10
Dollars in thousands
Equipment
Leasehold improvements
Office furniture and equipment
Accumulated depreciation and amortization
May 31,
2008
2007
$
5,220
$
5,999
1,737
3,657
5,463
7,377
12,420
17,033
(9,696)
(12,254)
$
2,724
$
4,779
Accounting for long-lived assets: In accordance with Statement of Financial Accounting Standards No. No.144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company reviews long-lived assets
held and used by the Company for impairment whenever events or changes in circumstances indicate that assets may be
impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of
those assets. Measurement of impairment charges for long-lived assets to be held and used are based on the excess of the
carrying amount of those assets over the fair value. The fair value of the assets then becomes the assets’ new carrying
value, which is depreciated over the remaining estimated useful lives of the assets.
Goodwill: The Company accounts for goodwill in accordance with Statement of Financial Accounting Standard No.
142, “Goodwill and Intangible Assets” (SFAS 142). The Company performed its annual impairment test of goodwill as
of December 31, 2007 and 2006 and has concluded that no impairment exists. The Company performs impairment tests
on an annual basis and between annual tests if an event occurs or circumstances change that would indicate that a
potential impairment in the value of the asset has occurred.
Revenue recognition: Revenue is recognized on the sale of the Company’s equipment when a customer purchase
order or fully executed contract has been received, when the products or services have been delivered, when the total
purchase price can be assured without making significant concessions, and when the Company’s ability to collect from
its customer has been assured. In recognizing revenue the Company makes certain assumptions and estimates, namely:
(i) the Company considers a new system routinely accepted in the marketplace when three to five successful
installations, based on our acceptance criteria, have been put into customer production; (ii) the Company considers
systems delivered separately from options to have value to our customers on a stand alone basis if we have fair value of
the options and the options are not significant to the total amount of the order and the options are not essential to the
functionality of the system; (iii) the Company considers systems delivered separately from installation to have value to
its customers on a stand-alone basis because the equipment can readily be sold by the customer, customers are capable
of installing the systems without the support of our installers, installation is routine and inconsequential to the total value
of the transaction, we have fair value, and these services are routinely sold on a stand-alone basis; and (iv) for most
customers the Company assumes that, based on past history, it will continue to collect its receivables from them without
payment or product concessions, despite the fact that they have larger financial size relative to the Company and despite
35
its dependence on them in a heavily concentrated industry. In an arrangement with multiple deliverables, such as
installation and services, the delivered items are considered a separate unit of accounting if all of the following criteria
are met: (i) the delivered items have value to the customer on a stand-alone basis, (ii) vendor specific objective evidence
(VSOE) of fair value exists, which is based on the average price charged when each element is sold separately, for the
undelivered elements, and (iii) if the arrangement does not include a general right of return relative to a delivered item,
or if performance of the undelivered item is considered probable and substantially in the control of the Company. If the
Company cannot objectively determine the fair value of any undelivered element include in a multiple element
arrangement, the Company defers revenue until all elements are delivered and service have been performed, or until fair
value can objectively be determined for any remaining undelivered elements. Where the Company sells to distributors,
revenue is deferred until resale to the end-customers. Sales to distributors do not represent a material amount of the
Company's sales. Revenue related to maintenance and service contracts is recognized ratably over the duration of the
contracts.
Deferred revenue consisted of the following as of:
May 31,
In thousands
Systems products
Prober maintenance revenue
Prober services recognized upon future delivery
Software licenses
Deferred revenue - current
Prober maintenance revenue - non current
2008
$
2007
$
$
70
612
72
72
826
$
96
617
276
47
1,036
$
191
$
194
Warranty: The Company generally warrants its products for a period of thirteen months from the date of shipment
and accrues a current liability for the estimated cost of warranty upon shipment. For established products, this accrual is
based on historical experience; and for the Company’s newer products, this accrual is based on estimates from similar
products. In addition, from time to time, specific warranty accruals are made for specific technical problems.
Allowance for doubtful accounts: The Company closely monitors the collection of its accounts receivables and
records a reserve for doubtful accounts against aged accounts and for specifically identified amounts that it believes are
not recoverable. When receivable balances are determined to be uncollectible, these balances are written off. The
Company sells primarily to large, well-established semiconductor manufacturers and semiconductor test companies and
has not experienced significant accounts receivable losses in the past.
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, ongoing product and process
improvement, and engineering, and support programs relating to existing products are conducted. Engineering, research
and development costs are expensed to operations as incurred.
Foreign currency accounting: The United States dollar is the functional currency for all foreign operations. The
effect on the consolidated statements of operations of transaction and translation gains and losses is insignificant for all
periods presented.
Stock based compensation expense: We estimate the value of employee stock options on the date of grant using the
Black-Sholes model and amortize these costs on a straight-line basis over the requisite service periods of the awards.
Under SFAS 123(R) “Share-Based Payment”, the determination of fair value of share-based payment awards on the date
of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables.
36
Expected volatility – historical volatility of the Company’s stock price
Expected term – historical data on employee exercises and post-vesting employment termination behavior
Risk free interest rate – an implied yield currently based on United States Treasury rates
Estimated forfeitures – historical option forfeitures over a given period
Dividend yield – historical rate of dividend payments
Shipping and handling: The cost of shipping the Company’s products to customers is included in SG&A expenses.
The cost of shipping related to material purchases is included in cost of sales. Shipping costs are not material. The
Company recognizes billings to customers related to shipping costs as Sales. Shipping revenues are not material.
Comprehensive loss: This includes net loss as well as additional other comprehensive items such as unrealized losses
on investments. The Consolidated Statement of Stockholders’ Equity and Comprehensive Loss summarizes the activity
in comprehensive loss. As of May 31, 2008 and 2007, there was no items of accumulated other comprehensive income
or loss.
Income taxes: The Company recognizes income taxes in accordance with SFAS 109, using an asset and liability
approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax
assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s
consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of
the enacted tax law. SFAS 109 provides for recognition of deferred tax assets if the realization of such assets is more
likely than not to occur. Otherwise, a valuation allowance is established for the deferred tax assets which may not be
realized.
The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it
operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of
complex and sometimes uncertain tax laws and regulations. The recognition and measurement of current taxes payable
or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments.
Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a
future period.
Effective June 1, 2007, the Company adopted FIN 48, which requires a more-likely-than-not threshold for financial
statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company
records a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax
position taken or expected to be taken on its tax return. To the extent that the Company’s assessment of such tax
positions changes, the change in estimate is recorded in the period in which the determination is made. With the adoption
of FIN 48, the Company also began reporting tax-related interest and penalties as a component of income tax expense.
Impact of recently issued accounting pronouncements: In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in
those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. This Statement is required to be adopted by us in the first quarter of our fiscal year 2009. On February 12, 2008,
the FASB issued FASB Staff Position (FSP) No. 157-2, “Effective date of FASB Statement No. 157”. FSP 157-2 delays
to effective date of for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008.
Management is currently assessing the impact of the adoption of this Statement.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB statement No. 115”. SFAS No. 159 permits companies to choose to
measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses
are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. This Statement is required to be adopted by us in the first quarter of our fiscal year
2009. Management is currently assessing the impact of the adoption of this Statement.
37
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”. SFAS 141R establishes principles
and requirements for how the acquirer shall recognize and measure in its financial statements the identifiable assets
acquired, liabilities assumed, any noncontrolling interest in the acquiree and goodwill acquired in the business
combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. This Statement is required to be
adopted by us in the first quarter of our fiscal year 2010. This statement will have no impact on The Company unless
management enters into a business combination after May 31, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements
— an Amendment of Accounting Research Bulletin, or ARB No. 51”. SFAS 160 establishes and expands accounting
and reporting standards for the noncontrolling interest in a subsidiary. SFAS 160 is effective for business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This Statement is required to be adopted by us in the first quarter of our fiscal year 2010. This
statement will have no impact on The Company unless management enters into a business combination after May 31,
2009.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities”.
SFAS 161 requires additional disclosures about the objectives of using derivative instruments, the method by which the
derivative instruments and related hedged items are accounted for under FASB Statement No.133 and its related
interpretations, and the effect of derivative instruments and related hedged items on financial position, financial
performance, and cash flows. SFAS 161 also requires the disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged. This Statement is required to be adopted
by us in the first quarter of our fiscal year 2010. This statement will have no impact on the Company unless management
enters into derivative instruments or hedging activities after May 31, 2009.
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 United States and state government
entities. The Company has established guidelines relative to credit ratings, diversification and maturities that seek to
maintain safety and liquidity. With respect to accounts receivable, the Company sells its systems to semiconductor
manufacturers and contract test companies 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 writeoff of uncollectible amounts historically has been within management’s expectations. Accounts receivable from
customers in Asia were $3.3 million and $3.4 million at May 31, 2008 and 2007, respectively (see Note 15 – Segment
Information). For the years ended May 31, 2008, 2007 and 2006 five of our customers accounted for 51%, 42%, and
51%, respectively, of our net sales.
Fair value of financial instruments: The Company estimated the fair value of financial instruments and concluded
the amounts reported for cash equivalents approximate fair value due to their short maturities. Convertible subordinated
notes are stated at cost which approximates fair value due to the recent March 2007 issue of the 6.25% Notes and the
expectation that they will convert by March 2011.
38
Note 4. Non-Current Liabilities and Other Assets
The following is a summary of non-current liabilities by major category as of:
In thous ands
$
Deferred revenue
Deferred rent liability - long term
Projected benefit obligation - German pension
Post-retirement medical plan
Other
$
M ay 31,
2008
2007
191
$
194
570
1,148
929
908
548
255
204
216
2,442
$
2,721
The following is a summary of other assets by major category as of:
In thousands
Cash surrender value of Company owned life insurance
Cash surrender value of Company owned reinsurance policies
Foreign income tax receivable
Deferred financing costs on convertible subordinated notes,
net of current portion
Other
$
$
May 31,
2008
2007
414
$
395
1,200
1,009
523
1,100
92
2,806
$
1,663
142
3,732
Note 5. Accrued Liabilities
The following is a summary of accrued liabilities by major category as of:
In thousands
Accrued compensation and related liabilities
Warranty reserves
Accrued audit and compliance fees
Deferred rent liability - current
Taxes other than on income
Interest payable on convertible subordinated notes
Other
May 31,
2008
2007
$
1,755
$
1,550
1,110
1,242
459
523
147
321
578
532
483
319
738
491
447
478
$
5,717
$
5,456
Note 6. Warranty Reserves and Guarantees
The Company’s warranty liability is included in accrued liabilities and changes during the reporting periods are as
follow:
In thousands
Year 2008
Year 2007
Balance at
Beginning of
Period
$
1,242
$
1,518
Additions Charged
to Costs of Sales
$
1,400
$
2,106
Warranty Reserve
Utilized
$
(1,532)
$
(2,382)
Balance at End of
Period
$
1,110
$
1,242
The Company’s software license agreements generally include certain provisions for indemnifying customers against
liabilities if the Company’s software products infringe a third party’s intellectual property rights. Further, the Company
39
also provides guarantee instruments to certain third parties as required for certain transactions. To date, the Company has
not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such
obligations. The Company does not believe, based on historical experience and information currently available, that it is
probable that any amounts will be required to be paid under these arrangements.
In January 2005, the Company sold its corporate campus to Integrated Device Technology (“IDT”). In the sales
agreement the Company had indemnified IDT for two years with respect to representations and warranties made by the
Company related to the sale. The limit of the Company’s liability for breach of the representations and warranties was
$3.5 million in the sale agreement, and a $0.5 million reserve was recorded for the net present value of the Company’s
guarantee obligations under the indemnification provisions. In January 2007, after the expiration of the two year period
specified in the agreement, the Company reversed this reserve as no claims had been made nor have any been made to
date.
Note 7. Restructuring Charges
For the year ended May 31, 2008, the Company recorded restructuring charges of $1.6 million consisting of $0.6
million related to retention incentives during the shut down of our Singapore factory, $0.8 million related to our
Singapore factory closure and $0.2 million for headcount reductions in our European offices. During 2007, the
Company recorded a $0.1 million net restructuring charge. A $0.3 million charge related to a reduction of workforce in
foreign offices, offset by a $0.2 million reversal for the early termination of a facility lease previously restructured in
2004. In 2006, the Company recorded $0.2 million in restructuring charges for workforce reductions of three employees
in the United States and Europe. Restructuring accruals are included in accrued liabilities.
Details of the 2008 Plan were as follows and are expected to be fully paid by the end of fiscal 2009:
In thousands
Beginning balance
Cash payments
Ending balance
Severance
$
-
$
-
Year 2008
Other Costs
$
1,371
(1,224)
$
147
Total
$
$
1,371
(1,224)
147
Details of the 2007 Plan were as follows:
In thousands
Beginning balance
Asset write offs
Cash payments
Ending balance
Severance
$
227
197
(424)
$
-
Year 2008
Other Costs
$
94
12
(80)
(26)
$
-
Total
$
321
209
(80)
(450)
$
-
Severance
$
227
$
227
Year 2007
Other Costs
$
94
$
94
Severance
$
$
-
Year 2007
Other Costs
$
365
(167)
(198)
$
-
Total
$
$
321
321
Details of the 2004 Plan were as follows:
In thousands
Beginning balance
Cash payments
Ending balance
40
Total
365
(167)
(198)
$
$
Details of the 2003 and 2002 Plan were as follows:
In thousands
Beginning balance
Cash payments
Ending balance
Severance
17
(15)
(2)
$
$
Year 2007
Other Costs
$
20
(10)
(10)
$
-
Total
$
$
37
(25)
(12)
-
Note 8. Convertible Subordinated Notes (“5.25% Notes”), Debt Conversion Expense and Warrants
In June 2002, the Company completed a $35.5 million private placement of 5.25% fixed rate convertible
subordinated notes (the “5.25% Notes”) due in June 2007. Interest on the 5.25% Notes was payable each year on the
fifteenth of June and December and was charged to interest expense. In the transition period ended May 31, 2005, the
Company repurchased a total of $2.0 million of the 5.25% Notes. During May 2006, the Company exchanged $25.0
million of 5.25% Notes for 4,268,000 shares of Common Stock and $7.5 million in cash in privately negotiated
transactions incurring debt conversion expense of $17.6 million. The Company repaid the $8.5 million balance of the
5.25% Notes plus accrued interest on the June 15, 2007 maturity date.
Note 9. Subordinated Secured Notes (“6.25% Notes”)
In March 2007, the Company completed a $25.75 million private placement of 6.25% (payable semi-annually in June
and December) fixed rate subordinated secured notes (the “6.25% Notes”). The Company incurred debt issuance costs
totaling $2.4 million and these costs are being amortized to other expense using a method that approximates the effective
interest method over the estimated four year life of the 6.25% Notes, which coincides with the earliest date upon which
the note holders can require the Company to repurchase the Notes. For the years ended May 31, 2008 and 2007, the
Company recognized other expense related to the amortization of the debt issuance costs of $0.6 million and $0.1
million, respectively. The 6.25% Notes are due in March 2027; however, the holders may require the Company to
repurchase for cash on March 26, 2011 and various future dates at a price equal to 100% of the principal amount plus
accrued interest, if any, to the applicable repurchase date. The 6.25% Note terms restrict the Company from transferring
capital to certain of its subsidiaries, restrict the payment of dividends, and contain certain other restrictions. Additionally,
one of the covenants of our debenture agreement can be interpreted such that if we are late with any of our required
filings under the Securities Act of 1934, as amended, and if we fail to effect a cure within 60 days, the holders of the
6.25% Notes can put the 6.25% Notes back to the Company, whereby the 6.25% Notes become immediately due and
payable.
The 6.25% Notes are convertible at any time prior to maturity at the election of the bond holders into shares of
Common Stock at a conversion price of $2.295, which represented a 12.5% premium over the Company’s stock price on
the date of the private placement’s closing. If fully converted, the 6.25% Notes would convert into approximately 11.22
million shares of Common Stock. At any time prior to maturity, subject to certain limitations, the Company may elect to
automatically convert (“Auto Convert”) the 6.25% Notes into Common Stock if the closing price of the Common Stock
has exceeded 150% (above $3.44 per share) of the conversion price for at least 20 trading days during any 30-day period
prior to the Company giving notice to the bond holders. If the Company elects to Auto Convert within the first three
years, the Company will be required to pay the bond holders interest for the three year period (make-whole), less any
interest paid to that date. The Company considers this interest make-whole provision to be an embedded derivative and
determined the value of it to be negligible. The Company can also after three years redeem the 6.25% Notes for cash at
100% of the principal amount plus accrued interest. The 6.25% Notes are ranked junior to the Company’s Comerica
bank line borrowings and are collateralized by a second priority lien on substantially all of the Company’s assets.
Prior to October 17, 2007, the 6.25% Notes were deemed to contain an additional embedded derivative (described
below) requiring bifurcation and valuation in accordance with the guidance in SFAS 133 “Accounting for Derivative
Instruments and Hedging Activities”. Furthermore, in analyzing the terms of the 6.25% Notes, the Company determined
41
that the notes represent non-conventional convertible debt as defined in EITF Issue 05-2, “The Meaning of
‘Conventional Convertible Debt Instrument’ in Issue No. 00-19” due to the fact that the 6.25% Notes contain provisions
that provide for adjustment to the number of shares into which the notes are convertible and, therefore, the number of
shares issuable upon conversion is not fixed. Under the provisions of EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” this conversion feature would be classified
as a liability if it were a freestanding financial instrument, due to the fact that at issuance and through the remainder of
the year ended May 31, 2007, the Company did not have enough authorized and unissued shares available to fully settle
the maximum potential number of shares that could be required to be delivered under the terms of all of the Company’s
existing financial instruments. As a result, to the extent that a shortfall existed between the maximum potential shares
issuable under the conversion feature of approximately 13,365,000 shares and the minimum number of shares the
Company has available for issuance of approximately 10,091,000 (resulting in a shortfall of approximately 3,274,000
shares), the Company had calculated the relative portion of the fair value of the conversion feature that pertains to this
shortfall to be $3.0 million (see discussion of valuation methodology and assumptions below) and had recognized this
amount as a separate derivative liability with an offsetting discount to the carrying value of the 6.25% Notes. The
resultant discount is being amortized to interest expense over the estimated four year life of the 6.25% Notes. Discount
amortization recorded to interest expense during the years ended May 31, 2008 and 2007 was $0.8 million and $0.1
million, respectively.
On October 17, 2007, at the annual meeting of stockholders, the stockholders approved an amendment to the
Company’s certificate of incorporation to increase the number of authorized shares of the Company’s Common Stock
from 40,000,000 to 60,000,000. This increase in authorized common shares eliminated the shortfall that existed between
the maximum potential shares issuable under the conversion feature and the number of authorized shares, and thereby
eliminated the embedded derivative liability established in accordance with SFAS 133 when the 6.25% Notes were
issued. On October 17, 2007 the conversion feature derivative liability was remeasured at its estimated fair value and the
increase in value of $0.1 million was recognized as a gain on mark to market financial instrument in the statement of
operations and the financial instrument liability of $3.1 million was reclassified to additional paid-in capital.
The following table outlines the assumptions the Company used in the Black-Scholes model to value the conversion
feature at the dates presented:
Conversion Feature
October 17, 2007
May 31, 2007
3.4
3.8
59.9%
66.8%
4.7%
4.9%
0%
0%
Contractual term in years
Volatility
Risk-free interest rate
Dividend yield
The following is a summary of the 6.25% Notes value, as of:
May 31,
In thousands
Face value of Notes
Notes discount
2008
$
$
2007
25,750
(2,140)
23,610
$
$
25,750
(2,899)
22,851
Note 10. Long Term Liability – Deferred Rent
The Company leases facilities for its corporate headquarters under a five year agreement that includes tenant
concessions such as tenant improvement allowances of $1.0 million and eighteen months of "free rent”. The Company
records rent expense using the effective average net rent over the lease term after taking into consideration the value of
these tenant rent concessions. This accounting resulted in long term deferred rent liabilities of $0.6 million and $1.1
million as of May 31, 2008 and 2007, respectively.
42
Note 11. Line of Credit
In June 2008, the Company renewed and amended its revolving line of credit with Comerica Bank. Under this
amended agreement, the Company may borrow up to $7.5 million at a rate of prime plus 0.25% based upon eligible
accounts receivable balances. This bank line, which has a maturity date of August 31, 2010, is secured by substantially
all of the Company’s assets and requires that the Company maintain certain financial covenants. At May 31, 2008, the
Company met all financial covenants and currently maintains cash deposits of $3.0 million that will be considered
restricted as compensating balances to the extent the Company borrows against this bank line. There were no
borrowings outstanding as of May 31, 2008 and May 31, 2007, respectively.
Note 12. Commitments and Contingencies
The Company’s lease agreement with 5729 Fontanoso Way, LLC for its new corporate headquarters commenced on
May 1, 2005 for sixty months. The Company has an option to extend this lease agreement for an additional five year
period. The Company’s rent expense was $1.6 million, $1.6 million, and $1.7 million for the years ended May 31, 2008,
2007, and 2006, respectively.
The following table summarizes our contractual obligations and estimated commercial commitments as of May 31,
2008 and the effect such obligations are expected to have on liquidity in future periods:
Payments Due by Fiscal Period
In thousands
Operating leases
Inventory purchase commitments
Interest payments on convertible notes
Principal payment on convertible notes
Total cash obligations
2009
2010
$ 1,712
20,069
1,609
$ 23,390
$ 1,545
1,609
$ 3,154
2011
$
88
2,061
25,750
$ 27,899
Total
$ 3,345
20,069
5,279
25,750
$ 54,443
On September 18, 2007, the Company signed a five year Manufacturing Services Agreement (“Agreement”) with
Flextronics Industrial Ltd. to outsource its Singapore manufacturing to Flextronics in China. As part of this Agreement,
Flextronics accepts purchase orders and forecasts from the Company which constitute authorization for Flextronics to
procure inventory based on lead times and to procure certain special inventory such as long lead-time items. The
Company does not take ownership of these Flextronics orders until the finished products are ready to be shipped to our
customers. Flextronics open commitments and inventory on hand at May 31, 2008, based on the Company’s forecasts,
were valued at $18.6 million and are included in the above table as inventory purchase commitments. If the Flextronics
inventory goes unused, the Company may be assessed carrying charges or obsolete charges. During the fiscal year ended
May 31, 2008, the Company billed Flextronics $8.3 million for inventory purchases of which $6.7 million was paid
leaving a $1.6 million “Receivable from Flextronics Industrial Ltd”.
The Company is not currently involved in any legal actions that management believes are material. From time-totime, however, the Company may be subject to various claims and lawsuits by customers, suppliers, competitors, and
employees 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 could be trebled.
Note 13. 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 therefrom, 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.
43
Stock option plans: The Company has a stock-based compensation program that provides its Board of Directors with
broad discretion in creating employee equity incentives. In October 2006, the Company’s stockholders approved a new
stock incentive plan (the “2006 Plan”) to replace the Company’s 1997 Stock Incentive Plan (the “1997 Plan”) and the
Company’s 2001 Non-Officer Employee Stock Incentive Plan (the “2001 Plan”). The stockholders approved a total of
4.0 million shares of Common Stock (2.0 million of which may be restricted shares) reserved for issuance under the
2006 Plan, plus the number of shares of Common Stock that remained available for grants of awards under the 1997 and
2001 Plans (1.4 million shares), plus any shares of Common Stock that would otherwise return to these plans as a result
of forfeiture, termination or expiration of awards previously granted under these plans. Stock options are generally timebased, vesting on each annual anniversary of the grant date over three to four years and expire no more than seven years
from the grant date. At May 31, 2008, there were 7.5 million shares reserved of which 3.9 million shares were available
for grant.
The following table summarizes stock option activity and related information for the years ended May 31:
2008
Shares in
thousands
Beginning
Granted
Exercised
Forfeited
Ending
Weighted
Average
Options
Exercise
Outstanding
Price
3,077 $
6.53
1,909 $
2.06
(14) $
1.66
(1,393) $
6.43
3,579 $
4.21
Years
2007
Weighted
Average
Options
Exercise
Outstanding
Price
3,480 $
6.88
375 $
2.83
(3) $
2.44
(775) $
6.33
3,077 $
6.53
2006
Weighted
Average
Options
Exercise
Outstanding
Price
3,582 $
6.63
1,614 $
3.75
(118) $
2.20
(1,598) $
3.49
3,480 $
6.88
Additional disclosures for options outstanding as of May 31, 2008 at various ranges of exercise prices are as follows
(shares in thousands):
Options outstanding
Range of exercise prices
$
1.59 to $
1.99
$
2.00 to $
2.39
$
2.40 to $
4.45
$
4.46 to $ 32.94
Shares
952
883
896
848
3,579
Weighted
average exercise
price
$
1.83
$
2.26
$
3.37
$
9.81
$
4.21
Options exercisable
Weighted average
contractual life
6.2
5.1
2.3
3.2
4.3
Shares
122
80
766
497
1,465
Weighted
average exercise
price
$
1.72
$
2.20
$
3.44
$
13.31
$
6.58
Aggregate intrinsic value represents the excess of the Company’s closing stock price on the last trading day of the fiscal
period, which was $1.88 as of May 31, 2008, over the option exercise price of the shares multiplied by the number of
options outstanding. Additional information on the status of options as of May 31, 2008 is as follows:
Shares and aggregate intrinsic value, in
thousands
Outstanding
Vested and expected to vest
Exercisable
Shares
3,579
3,409
1,465
Aggregate intrinsic
value
$
70
$
66
$
19
44
Weighted average
exercise price
$
4.21
$
4.27
$
6.58
Weighted average
remaining
contractual life
(years)
4.3
4.2
2.3
The following table summarizes stock option exercises for:
In thousands
Net cash proceeds
Intrinsic value of options exercised
Income tax benefits
Years
2007
2008
$
$
$
22
9
-
$
$
$
2006
8
2
-
$
$
$
260
225
-
In accordance with FAS 123(R), the Company presents excess tax benefits from the exercise of stock options, if any,
as financing cash flows rather than operating cash flows.
Restricted Stock Units: Restricted stock units are converted into shares of Common Stock upon vesting on a one-forone basis. Vesting of restricted stock units is subject to the employee’s continuing service with the Company. The
compensation expense related to these awards was determined using the fair value of Common Stock on the date of the
grant, and compensation is recognized over the service period. Restricted stock units generally vest over three years.
The following table summarizes restricted stock unit activity and related information for the period indicated:
Year 2008
Outstanding restricted stock units
Restriced stock units
Weighted average grant
outsanding
date fair value
521
$
2.43
$
(156)
$
2.43
(108)
$
2.43
257
$
2.43
Shares in thousands
Unvested awards beginning of period
Awards
Vested
Forfeitures
Unvested awards end of period
Employee Stock Purchase Plan: In May 2002, the Company’s stockholders approved the 2002 Employee Stock
Purchase Plan (the “2002 Plan”) and reserved 2,000,000 shares for issuance under the Plan. The Company’s 2002 Plan
provides that eligible employees may purchase stock at 85% of its fair value on specified dates through payroll
deductions. At May 31, 2008, the Company had 1.5 million shares reserved for future issuance.
Shares issued
Average purchase price
Net cash proceeds
Intrinsic value
Income tax benefits
Years
2007
2008
46
1.81
84
15
-
$
$
$
$
$
$
$
$
2006
60
2.24
135
24
-
$
$
$
$
59
3.20
189
53
-
Adoption of Statement of Financial Accounting Standard No. 123(revised) “Share-Based Payment”: On June 1,
2006, the Company adopted the provisions of FAS 123(R), and started recognizing compensation expense related to the
fair value of its employee stock-based compensation awards. The Company elected to use the modified prospective
transition method as permitted by FAS 123(R) and therefore financial results for prior periods were not restated. Under
this transition method, stock-based compensation expense for the year ended May 31, 2007 includes compensation
expense for all employee stock-based compensation awards granted prior to, but not yet vested as of June 1, 2006 based
on the grant date fair value estimated in accordance with the original provisions of FAS 123, adjusted for awards not
expected to vest. Stock-based compensation expense for all stock-based compensation awards granted subsequent to
June 1, 2006 was based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R), adjusted
for awards not expected to vest. Upon adoption of SFAS 123(R), the Company recognizes compensation expense for
stock option awards granted subsequent to June 1, 2006 on a straight-line basis over the requisite service period of the
award while prior grants continue to be recognized on an accelerated basis.
45
The Company estimates the fair value of stock options using a Black-Scholes valuation model. The fair value
assumptions and weighted average grant date fair values for the plans are as follows:
Stock Option Plans
Expected dividend yield
Expected stock price volatility
Expected life (years)
Weighted average grant date fair values
2008
Employee stock purchase plans
Expected dividend yield
Expected stock price volatility
Weighted average purchase date fair values
2008
Years
2007
60.7%
4.2%
3.8
$1.00
2006
66.8%
4.9%
3.1
$1.36
Years
2007
49.4%
3.8%
1.3
$0.05
67.4%
4.9%
2.9
$2.42
2006
55.9%
5.1%
1.3
$1.05
71.8%
3.6%
1.2
$1.85
The Company’s computation of expected volatility for all periods presented was based on historical volatility and the
computation of expected life was based on historical exercise patterns. The interest rate for periods within the contractual
life of the award was based on the U.S. Treasury yield curve in effect at the time of grant. The Company pays no
dividends and does not expect to pay any for the foreseeable future. FAS 123(R) requires forfeitures to be estimated at
the time of grant and these estimates are revised if necessary in subsequent periods if actual forfeitures differ.
FAS 123(R) requires the Company to calculate the pool of excess tax benefits that are available as of June 1, 2006 to
absorb tax deficiencies recognized in subsequent periods, assuming the Company had applied the provisions of the
standard in prior periods. The Company has elected to use the regular or long method of determining tax effects of sharebased compensation. The choice of approach will have no impact on the tax benefit pool or tax expense to be recognized
for the current period, due to the Company’s net operating loss position.
The total stock-based compensation expense for stock options, restricted stock units, and ESPP was as follows:
Years
In thousands
Cost of sales
Research and development
Selling, general and administrative
2008
$
$
2007
70
306
757
1,133
$
$
79
177
679
935
As of May 31, 2008, the unamortized stock-based compensation balance related to stock options, restricted stock
units, and the ESPP was $1.9 million and will be recognized over an estimated weighted average amortization period of
three years.
Prior to the adoption of FAS 123(R): Prior to the adoption of FAS 123(R), the Company applied FAS 123, amended
by FAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (SFAS 148), which allowed
companies to apply the existing accounting rules under Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees” and related interpretations. In general, as the exercise price of options granted under these
plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee
compensation cost was recognized in the Company’s net loss. As required by FAS 148 prior to the adoption of FAS
123(R), the Company provided pro forma net loss and pro forma net loss per common share disclosures for stock-based
awards, as if the fair-value-based method defined in FAS 123 had been applied.
46
The following table illustrates the pro forma net loss after tax and net loss per common share as if the Company had
applied the fair value recognition provisions of FAS 123 to stock-based compensation:
Year ended
May 31, 2006
In thousands, except per share data (unaudited)
Net loss - as reported
$
(34,030)
Add: Stock-based employee compensation expense
included in reported net loss
794
Deduct: stock-based employee compensation
expense net of related tax effects
Pro forma net loss
$
(1,565)
(34,801)
Net loss per share:
Basic and Diluted - as reported
$
(1.53)
Basic and Diluted - pro forma
$
(1.57)
Warrants: In connection with the issuance of the 5.25% Notes, the Company also issued warrants for the purchase of
715,000 shares. (see Note 8 – Convertible Subordinated Notes (“5.25% Notes”) Conversion Expense and Warrants)
These warrants expired June 15, 2007.
Note 14. Employee Benefit Plans
Incentive plans: The Company has adopted an Employee Incentive Plan and a Savings Plan covering substantially
all of its employees who reside in the United States. The Board of Directors determines annually a formula to set aside
amounts into a profit sharing pool based upon performance targets to pay bonuses to employees. There were no charges
to operations for these plans during 2008, 2007 and 2006.
Post-retirement medical plan: Effective July 23, 1996 the Board of Directors approved a plan for medical and dental
coverage for certain executive retirees meeting certain age and service eligibility requirements. At May 31, 2008, three
retirees and their spouses were in the plan. The retirees and their spouses pay their share of the coverage costs at the
same percentage rate as an active Company employee. The Company’s future obligation under this plan, which is
accrued and included in accrued liabilities, is estimated to be $0.5 million using the following medical assumptions:
Year
2008
Post-retirement medical plan
Premium inflation factor
Present value rate
7.6%
7.0%
17.8
Pension plans: The majority of employees in the United States are covered by 401K type defined contribution plans.
In Germany, employees are covered by a defined benefit pension plan (“The Plan”) in accordance with local legal
requirements.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans (“SFAS No. 158”). SFAS No. 158 amends SFAS No. 87, Employers’ Accounting for
Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits, SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions,
SFAS No. 132R, Employers’ Disclosures about Pensions and Other Postretirement Benefits, and other related
accounting literature. SFAS No. 158 requires employers to recognize the funded status of a benefit plan, measured as the
difference between plan assets at fair value and the benefit obligation, in their balance sheet. The recognition of the
funded status on the balance sheet requires employers to recognize actuarial items (such as actuarial gains and losses,
prior service costs, and transition obligations) as a component of other comprehensive income, net of tax. The adoption
47
of SFAS No. 158 on May 31, 2007 had no impact on our Consolidated Statement of Operations, Consolidated Balance
Sheets or Consolidated Statement of Stockholder’s Equity and Comprehensive Loss. The Company has purchased
insurance policies to cover the payment risk of The Plan. These insurance policies have not been segregated and
restricted to provide for pension benefits and are therefore not considered plan assets The cash surrender value of these
insurance policies as of May 31, 2008 and 2007 was $1.2 million and $1.0 million, respectively, and have been included
in non-current assets.
The projected benefit obligations of the Plan are as follows and are classified as non-current liabilities:
Years
In thousands
Projected benefit obligation at beginning of year
Interest costs
Actuarial loss
Service costs
Benefits paid
Effect of foreign currency
Projected benefit obligation at the end of the year
2008
$
2007
908
48
(150)
8
(28)
143
929
$
$
826
40
(20)
8
(25)
79
908
$
The net periodic pension costs are as follows for the periods presented:
In thousands
Interest on projected benefit obligation
Service cost
Net periodic pension cost
Years
2007
2008
$
48
8
56
$
$
2006
40
8
48
$
$
37
7
44
$
The weighted-average assumptions used in computing the projected benefit obligation and net periodic pension costs
are as follows:
Years
2007
2008
Assumed discount rate
Rate of compensation increase
5.8%
1.5%
2006
4.9%
1.5%
4.6%
1.5%
The Plan benefit payments, which reflect expected future service, are expected to be paid as follows:
In thousands
2009
2010
2011
2012
2013-2017
Total
$
30
31
31
32
185
309
Note 15. Segment Information
FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information”, establishes
standards for reporting information about operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated regularly by the chief operating
48
decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The
Company’s chief operating decision maker is the Chief Executive Officer. The Company operates as a single operating
unit and has one reportable unit and is a United States, Delaware Corporation.
The Company’s net sales by geography are as follows:
Asia
Europe
International
North America
Years
2007
2008
In thousands
$
$
16,056
8,885
24,941
20,480
45,421
35 %
20
55
45
100 %
$
2006
13,704
11,355
25,059
19,565
44,624
$
31 %
25
56
44
100 %
$
15,924
9,804
25,728
18,589
44,317
$
36 %
22
58
42
100 %
Sales between geographic areas are at prices that the Company believes are at arm’s length and are eliminated in the
consolidated financial statements. International sales represent the combined total of export sales made by United States
operations and all sales made by foreign operations.
Sales to customers in the United States represented 45% of the Company’s sales in 2008. Sales to customers in the
United States represented 44% of the Company’s sales in 2007. Sales to customers in the United States, Singapore and
France represented 41%, 11% and 10% of the Company’s sales in 2006, respectively.
Service revenue, included in aftermarket prober products and services was 10%, 11% and 10% of net sales for the
year ended May 31, 2008, 2007 and 2006, respectively. Revenues from after-sale services have traditionally totaled less
than 10% of the Company’s total revenues and are not shown separately. The following is a summary of the Company’s
net sales by product category, although the Company manages its business as a single operating unit:
In thousands
Prober systems and software
Aftermarket prober products and services
2008
$
27,595
17,826
45,421
$
$
$
Years
2007
26,084
18,540
44,624
$
$
2006
27,074
17,243
44,317
The following table presents summary customer concentration information as a percentage of sales:
Customers
Customer A
Customer B
Customer C
Years
2 007
2008
2 4%
1 1%
7%
2006
9%
8%
11%
5%
28%
8%
The following table presents summary customer concentration information as a percentage of accounts receivable:
Years ended
Customers
Customer C
Customer D
2008
2 007
11%
10%
49
8%
9%
Identifiable long-lived assets by geography are as follows:
Years ended
In thousands
Europe
Asia
International
United States
2008
$
2007
13
405
418
2,306
2,724
$
$
111
690
801
3,978
4,779
$
The majority of the Company’s long-lived assets in Asia consist of fixed assets located at the Company’s Singapore
and Taiwan offices.
Note 16. Income Taxes
Significant components of the provision (benefit) for income taxes are as follows for:
In thousands
Federal:
Current
Deferred
Years
2007
2008
$
State:
Current
Deferred
-
$
-
Foreign:
Current
Deferred
$
463
188
651
651
2006
-
$
-
$
297
(288)
9
9
-
$
(628)
(628)
(628)
No tax benefits were realized from exercises of nonqualified stock options or disqualifying dispositions of stock acquired
through incentive stock option or the employee stock purchase plan during the years ended May 31, 2008, 2007 and 2006,
respectively. Pre-tax income (loss) from foreign operations was $1.3 million, $0.6 million and $2.1 million, for the same
periods.
The Company uses estimates based on historical experience and various other assumptions in the area of income tax
accounting that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of tax assets and liabilities. It is the Company’s policy to accrue for income tax
exposures or to release such tax reserves in the period in which facts and circumstances arise that suggest that the
valuation allowances or reserves should be adjusted. As of May 31, 2008 and 2007, income tax related reserves totaled
approximately $1.2 million and $1.0 million, respectively.
When establishing the manufacturing facility in Singapore, the Company received a five-year exemption from
Singapore income taxes beginning March 1, 2003 under the condition that certain capital investment and expenditure
milestones would be reached by March 1, 2008. As a result of the Company’s strategic initiative of moving the
Company’s manufacturing function from Singapore to China, the Company was exposed to a liability for the taxes that
otherwise would have been due during the tax exemption period. During 2007, the Company initiated negotiations with
the Singapore government, which were concluded in September 2007 to end the tax exemption period retroactively, and
eliminate the remaining investment milestones, in exchange for a three-year tax exemption ending February 28, 2006.
50
The Singapore government agreed to shorten the exemption period and waive the remaining investment milestones.
During 2008, the Company accrued $0.4 million to reflect the tax amounts owed as part of this negotiated settlement.
The reconciliation of income tax computed at the United States federal statutory rates to income tax expense is as
follows for the periods ended:
In thousands,
except percentages
Tax computed
at U.S. statutory rate
Research and development
credits
Foreign taxes
Debt conversion expenses
Unbenefitted losses
Changes in valuation
allowance
Reversal of tax reserves
956 inclusion
Other, net
Years
2007
Amount
Percent
2008
Amount
$
$
(5,349)
Percent
(35.0) %
(45)
234
217
2,488
(0.3)
1.5
1.4
16.3
63
2,544
499
651
0.4
16.7
3.3
4.3 %
$
(6,571)
(35.0) %
(296)
(16)
6,496
$
2006
Amount
$ (12,131)
(1.6)
(0.1)
34.6
296
100
9
(554)
13
6,023
5,857
1.6
0.5
(0.0) %
$
554
(647)
257
(628)
Percent
(35.0) %
(1.6)
17.4
16.9
1.6
(1.9)
0.8
(1.8) %
Deferred income taxes reflect the net tax effects of temporary timing 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 for:
Years
2008
In thousands
Deferred tax assets:
Intangible assets
Warranty reserves
Inventories
Depreciable assets
Deferred revenue
Net operating losses
Tax credit carryforwards
Other
Total deferred tax assets
Less: valuation allowance
Net deferred tax assets
$
$
65
430
1,777
(136)
328
106,540
9,378
3,873
122,255
(122,155)
100
2007
$
$
2,099
470
2,090
(222)
361
104,562
13,893
3,346
126,599
(126,311)
288
Realization of the deferred tax assets is dependent on the Company generating sufficient taxable income in future
years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences and from net operating
losses and tax credit carryforwards. The Company has provided a valuation allowance against deferred tax assets of
$122.0 million to reflect management’s estimation that, as of May 31, 2008, it is more likely than not that only $ 0.1
million of deferred tax assets will be utilized. The valuation allowance decreased by $4.2 million and increased by $9.7
million in 2008 and 2007, respectively.
51
The Company’s tax attributes were as follows as of May 31, 2008:
In thousands
Acquistion related net operating losses
Acquisition related tax credits
Non-acquisition related net operating losses
Non-acquisition related tax credits
Federal
Amount
Expiration
$
230
2018-2020
$
139
2010-2019
$ 302,066
2021-2028
$
6,838
2018-2028
Amount
$
$
$ 128,389
$
6,588
State
Expiration
2013-2017
2009-2014
As of May 31, 2008, the Company had federal and state net operating losses and tax credits that will expire in
varying amounts if unutilized as indicated above. Due to change of ownership rules, net operating losses and tax credits
attributable to the Company’s acquisitions are significantly limited and will expire if not utilized. The California
research and development credit of $6.3 million does not expire under the current law, whereas the manufacturer’s
investment credit of $0.3 million will expire if not used in 2014.
The Company may have had an ownership change as defined in Section 382 of the Internal Revenue Code and
similar state law. The Company’s ability to utilize the net operating losses and tax credit carryforwards in the future may
be subject to substantial restriction in the event of past or future ownership changes. No determination has been made at
this point. A formal Section 382 study will be performed in order to make a determination.
Effective June 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation
No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes,” which provisions included a two-step approach
to recognizing, de-recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109
(“SFAS No. 109”), “Accounting for Income Taxes.” As a result of the implementation of FIN No. 48, the Company
recognized no increase in the liability for unrecognized tax benefits.
The Company adopted a policy to classify accrued interest and penalties as part of the accrued FIN No. 48 liability in
the provision for income taxes. For the year beginning June 1, 2007, the Company has recognized interest or penalties of
approximately $9,000 related to unrecognized tax benefits. As of May 31, 2008, the Company had approximately
$12,000 of accrued interest and penalties related to uncertain tax matters.
The Company’s unrecognized tax benefits:
In thousands
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions based on tax positions related to the current year
Amount
$
7,688
23
(276)
6
$
7,441
All of these unrecognized tax benefits would affect the effective tax rate if recognized.
During the next fiscal year, the Company has no material uncertain tax positions that would be reduced as a result of
a lapse of the applicable statute of limitations. We do not anticipate the adjustments would result in a material change to
our financial position.
We file income tax returns in the U.S. federal jurisdictions, and various states jurisdictions. The 1997 through 2008
tax years are open and may be subject to potential examination in one or more jurisdictions. The Company is not
currently under federal or state income tax examination.
52
Note 17. Allowances for Doubtful Accounts and Sales Returns
In thousands
Allowance for doubtful accounts
Allowance for sales returns
Total at May 31, 2008
Balance at
Beginning of
Period
$
331
61
$
392
Charged to costs
and expenses
$
(1)
$
(1)
Deductions
$
(62)
$
(62)
Balance at End of
Period
$
268
61
$
329
$
$
$
$
$
$
$
418
61
479
513
81
594
$
$
$
29
29
(79)
(20)
(99)
$
$
$
(116)
(116)
(16)
(16)
$
$
$
331
61
392
418
61
479
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A(T). Controls and Procedures
Controls and Procedures
Evaluation of disclosure controls and procedures: We conducted an evaluation of the effectiveness of the design
and operation of our “disclosure controls and procedures” (Disclosure Controls) as of May 31, 2008, the end of the
period covered by this Form 10K. The controls evaluation was conducted under the supervision and with the
participation of management, including our CEO and CFO. Disclosure Controls are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this
Form 10K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and
Exchange Commission’s (SEC) rules and forms. Disclosure Controls are also designed to reasonably assure that such
information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of
some components of our internal control over financial reporting, and internal control over financial reporting is also
separately evaluated on an annual basis for purposes of providing the management report which is set forth below.
The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the Company’s
implementation of the controls and the effect of the controls on the information generated for use in this Form 10K. In
the course of the controls evaluation, we sought to identify any past instances of data errors, control problems or acts of
fraud and sought to confirm that appropriate corrective actions, including process improvements, had been undertaken.
This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO
and CFO, concerning the effectiveness of the Disclosure Controls can be reported in our periodic reports on Form 10Q
and Form 10K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by our
finance organization. The goals of these various evaluation activities are to monitor our Disclosure Controls, and to
modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as
conditions warrant.
53
Based upon the controls evaluation, our CEO and CFO have identified material weaknesses related to controls
surrounding revenue recognition and inventory reserves. More specifically, appropriate evidence documenting
persuasive evidence of an arrangement was lacking resulting in year-end audit adjustments to reverse revenue. Also,
inventory reserves were incorrectly adjusted in a manner which was not consistent with the Company’s policies or in
accordance with generally accepted accounting principles. Based on the results of this controls evaluation, our
management has concluded as a result of the material weaknesses in our controls surrounding revenue recognition and
inventory reserves that the Company’s disclosure controls and procedures were not effective as of May 31, 2008, the end
of the period covered by this Form 10K. We plan to remediate these material weaknesses by: improving training of our
sales force and accounting personnel on our revenue and inventory reserve policies and procedures, ensuring that
appropriate evidence of an arrangement exists for revenue transactions, reviewing shipping terms to ensure proper
revenue recognition under current arrangements, and adding controls around changes in shipping terms from other than
EXWorks which is the standard commercial shipping terms used by the Company.
Changes Internal Control over Financial Reporting: There were no changes in our internal controls over financial
reporting during the quarter ended May 31, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a15(f) and 15d15(f). Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of
the effectiveness of our internal control over financial reporting as of May 31, 2008 based on the guidelines established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on the results of this controls evaluation, our management has concluded solely as a result
of the material weaknesses in controls surrounding revenue recognition and inventory reserves that our internal control
over financial reporting was not effective as of as of May 31, 2008, the end of the period covered by this Form 10K.
This annual report does not include an attestation report of the company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s
registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the
company to provide only management’s report in this annual report.
Item 9B. Other Information
Not applicable.
54
PART III
Item 10. Directors and Executive Officers of the Registrant and Corporate Governance
The information required by this item, including the independence of the audit committee and the audit committee’s
financial expert, is included under the heading “Election of Director” and “Other Matters” in the Company’s Proxy
Statement to be filed in connection with the Annual Meeting of Stockholders to be held on October 15, 2008 and is
incorporated herein by reference.
We adopted a code of business conduct and ethics, or code of conduct, in 2003. The code of conduct has been
designed to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the
rules promulgated thereunder. The code is available on our website (www.electroglas.com). To the extent required by
law, any amendments to, or waivers from, any provision of the code will be promptly disclosed publicly. To the extent
permitted by such requirements, we intend to make such public disclosure by posting the relevant material on our
website in accordance with SEC rules.
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 the Annual Meeting of Stockholders to be
held on October 15, 2008, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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 the Annual Meeting of
Stockholders to be held on October 15, 2008, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions and Director Independence
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 the Annual Meeting of Stockholders to
be held on October 15, 2008, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required by this item is included under the heading “Principal Accountant Fees and Services” in the
Company’s Proxy Statement to be filed in connection with the Annual Meeting of Stockholders to be held on October
15, 2008, and is incorporated herein by reference.
55
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this Report:
(1) Index to Financial Consolidated Statements
Report of Independent Registered Public Accounting Firm, BDO Seidman LLP................................
Consolidated statements of operations - years ended May 31, 2008, 2007 and 2006...........................
Consolidated balance sheets - May 31, 2008 and 2007 ........................................................................
Consolidated statements of stockholders’ equity and comprehensive loss years ended May 31, 2008, 2007 and 2006....................................................................................
Consolidated statements of cash flows - years ended May 31, 2008, 2007 and 2006 ..........................
Notes to consolidated financial statements ...........................................................................................
29
30
31
32
33
34
(2) Index to Financial Statement Schedules – All schedules have been omitted because the required information is
included in the consolidated financial statements or the notes thereto, or are not applicable or required.
(3) Exhibit Index
Exhibit
Number
Filed
Incorporated by Reference
Exhibit Description
Form
File No.
S-1
33-61528
Exhibit
Filing Date
3.1
Certificate of Incorporation of Electroglas, Inc., as amended.
6/23/1993
3.2
By-laws of Electroglas, Inc., as amended.
10-K
3.2
3/12/1999
3.3
Certificate of Designation for Electroglas, Inc.
10-K
3.3
3/30/1998
4.1
Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2
Specimen Common Stock Certificate of Electroglas, Inc., a
Delaware Corporation.
S-1
33-61528
10.1*
Electroglas, Inc. 1993 Long-Term Incentive Plan.
S-1
33-74860
10.2*
Change in Control Agreement between Electroglas, Inc. and
Armand J. Stegall dated as of June 9, 1995.
6/23/1993
10.1
2/23/1994
10-K
10.2
3/31/1996
Electroglas, Inc. Restricted Stock Bonus Agreement Between
Electroglas, Inc. and Curtis S. Wozniak.
10-Q
10.10
6/30/1996
Change of Control Agreement between Electroglas, Inc. and
Curtis S. Wozniak dated as of April 4, 1996.
10-Q
10.11
6/30/1997
Electroglas Officers' Retirement Medical and Dental Coverage
Policy.
10-Q
10.12
9/31/1996
Rights Agreement between Electroglas, Inc., and BankBoston,
N.A., as rights agent dated as of November 18, 1997
8A12G
1
11/19/1997
10.8*
Electroglas, Inc. 1997 Stock Incentive Plan.
10-K
10.18
3/30/1998
10.9*
Form of change of Control Agreement between the company
and each of Timothy J. Boyle, Wayne E. Woodward, Thomas
E. Brunton, and Richard J. Casler as of June 9, 1995, April 5,
1999, December 22, 2000, and March 14, 2004, respectively.
10-K
10.18
3/30/1998
10.11*
Electroglas, Inc. 1998 Employee Stock Purchase Plan.
10-Q
10.2
6/30/1998
10.12*
Electroglas, Inc. 2001 Non-Officer Employee Stock Incentive
Plan.
10-K
10.12
3/13/2002
Executive Employment Agreement between Electroglas, Inc.
and Keith Barnes dated October 22, 2003.
10-K
10.13
9/30/2003
10.3*
10.4*
10.5*
10.7
10.13*
56
0-21626
Herewith
10.14*
10.15*
10.16
10.17*
10.18*
10.19*
10.20*
10.19
10.20*
10.21*
10.22*
Electroglas, Inc. Stock Option Agreement between
Electroglas, Inc. and Keith Barnes dated October 28, 2003.
10-K
10.14
9/30/2003
Resignation letter from Curt Wozniak to Electroglas, Inc.
dated October 28, 2003.
10-K
10.15
9/30/2003
Lease agreement between 5729 fontanoso Way, LLC and
Electroglas, Inc. dated February 7, 2005.
10-K
10.16
3/14/2005
Form of Board of Directors consulting and Indemnity
Agreement, dated December 19, 2005, by ad between
Electrogals, Inc. and each of Robert J. Frankenberg, Mel
Friedman, C. Scott Gibson, John F. Osborne, Thomas M.
Rohrs, and Edward M. Saliba.
8-K
10.1
12/23/2005
Board of Directors Consulting and Indemnity Agreement,
dated February 2, 2006 by and between Electroglas, Inc. and
Fusen E. Chen.
8-K
10.1
2/8/2006
Board of Directors consulting and Indemnity Agreement,
dated April 12.2006, by and between Electrogals, Inc. and
Keith L. Barnes.
8-K
10.1
4/14/2006
Offer letter, effective April 7, 2006 by and between the
Company and Thomas M. Rohrs
10-Q
10.2
3/4/2006
Exchange Agreement with Certain holder of the Company's
5.25% convertible Subordinated Notes Due 2007.
8-K
10.1
5/3/2006
Clarification of Consulting Agreement by and Between
Electroglas, Inc., and Keith L. Barnes dated July 6, 2006.
8-K
Amended and Restated Change of Control Agreement, dated
March 31, 2006, by and between Electrogals, Inc. and
Thomas E. Brunton.
8-K
10.1
5/3/2006
Board of Directors consulting and Indemnity Agreement,
dated March 30, 2007, by and between Electroglas, Inc. and
Jack G. Wilborn.
8-K
10.1
3/31/2007
7/10/2006
Statement of Computation of Ratios
X
21.1
List of subsidiaries of registrant.
X
23.1
Consent of BDO Seidman LLP, Independent Registered
Public Accounting Firm.
X
Certification of Thomas M. Rohrs, Chief Executive Officer,
pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act, as amended.
X
Certification of Thomas E. Brunton, Chief Financial Officer,
pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities
Exchange Act, as amended.
X
Certification of Thomas M. Rohrs, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
Certification of Thomas E. Brunton, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
12.1
31.1
31.2
32.1
32.2
*
Management contracts, or Company compensatory planos or arrangements.
57
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.
By:
/s/
THOMAS M. ROHRS
Thomas M. Rohrs
Chairman and Chief Executive Officer
Date: August 12, 2008
POWER OF A TTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Thomas M. Rohrs and Thomas E. Brunton, and each of them, his attorneys-in-fact, each with power of
substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file
the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
Chairman and Chief Executive Officer
(Principal Executive Officer)
August 12, 2008
Senior Vice President, Finance, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
August 12, 2008
/s/
THOMAS M. ROHRS
Thomas M. Rohrs
/s/
THOMAS E. BRUNTON
Thomas E. Brunton
/s/
MEL FRIEDMAN
Mel Friedman
Director
August 12, 2008
/s/
C. SCOTT GIBSON
C. Scott Gibson
Director
August 12, 2008
/s/
JOHN OSBORNE
John Osborne
Director
August 12, 2008
/s/
JORGE TITINGER
Jorge Titinger
Director
August 12, 2008
/s/
JACK G. WILBORN
Director
August 12, 2008
Jack G. Wilborn
58
EXHIBIT 12.1
STATEMENT OF COMPUTATION OF RATIOS
The ratio of earnings to fixed charges represents the number of times “fixed charges” are covered by “earnings.”
“Fixed charges” consist of interest expense, including discounts on notes payable, and 30% of rental expense deemed to
represent the interest portion. “Earnings” consist of income from continuing operations before income taxes plus fixed
charges. The following table sets forth the ratio of earnings to fixed charges of the Company for periods presented:
2008
Fixed Charges
Interest expense excluding beneficial
conversion feature
Portion of rental expense
deemed to represent interest
Total fixed charges
Earnings before fixed charges
Earnings from continuing
operations before income tax
Fixed charges
Total earnings before fixed charges
Additional earnings to achieve a 1:1 ratio of
earnings plus fixed charges
Years ended May 31,
2007
2006
Five months ended Years ended December 31,
May 31, 2005
2004
2003
$
2,447
$
952
$
2,177
$
1,024
$
2,370
$
2,346
$
474
2,921
$
489
1,441
$
521
2,698
$
328
1,352
$
338
2,708
$
637
2,983
$
$
$
(15,282)
2,921
(12,361)
$
$
(18,774)
1,441
(17,333)
$
15,282
$
18,774
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF REGISTRANT
Electroglas International, Inc. (Delaware)
EGsoft, Inc. (Delaware)
EGsoft Holdings Corporation (Delaware)
Electroglas GmbH (Germany)
Electroglas Private Limited (Singapore)
Electroglas Far East Holding Company (Cayman Islands)
Electroglas Far East Technical Services (Shanghai) Ltd.
59
$
$
(34,658)
2,698
(31,960)
$
$
(12,388)
1,352
(11,036)
$
(6,315)
2,708
(3,607)
$
34,658
$
12,388
$
6,315
$ (60,125)
2,983
$ (57,142)
$
60,125
EXHIBIT 23.1
CONSENT OF BDO SEIDMAN LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference of our report dated August 12, 2008, relating to the
consolidated financial statements of Electroglas, Inc. which appear in this Form 10-K in the following registration
statements:
1. Form S-8 No. 33-69668 pertaining to the 1993 Employee Stock Purchase Plan and 1993 Long-Term Stock
Incentive Plan,
2. Form S-8 No. 33-95052 pertaining to the 1993 Long-Term Stock Incentive Plan of Electroglas, Inc.,
3. Form S-8 No. 333-35023 pertaining to the 1997 Stock Incentive Plan and Stock Options Granted Pursuant
to Agreement between Electroglas, Inc. and Certain Employees of Knights Technology, Inc.,
4. Form S-8 No. 333-28327 pertaining to the Knights Technology Inc., 1987 Stock Option Plan and
Employment Agreements with each of Tom Sherby, Ken Huang, Mary Korn and Ankush Oberai,
5. Form S-8 No. 333-49303 pertaining to Options Granted Pursuant to Agreements made between Electroglas,
Inc. and Certain Employees of Techne Systems, Inc.,
6. Form S-8 No. 333-62139 pertaining to the 1997 Stock Incentive Plan and the 1998 Employee Stock
Purchase Plan,
7. Form S-8 No. 333-82209 pertaining to the 1997 Stock Incentive Plan,
8. Form S-8 No. 333-38842 pertaining to the 1997 Stock Incentive Plan,
9. Form S-8 No. 333-67708 pertaining to the Amended and Restated 1997 Stock Incentive Plan,
10. Form S-8 No. 333-67712 pertaining to the 2001 Non-Officer Employee Stock Incentive Plan,
11. Form S-8 No. 333-96827 pertaining to the 2002 Employee Stock Purchase Plan,
12. Form S-8 No. 333-103160 pertaining to the 2001 Non-Officer Employee Stock Incentive Plan, as amended,
and
13. Form S-3 No. 333-134587 pertaining to the “shelf” registration of securities for sale;
/s/ BDO Seidman, LLP
August 12, 2008
60
EXHIBIT 31.1
ELECTROGLAS, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Thomas M. Rohrs, certify that:
1.
I have reviewed this annual report on Form 10-K of Electroglas, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
/s/ Thomas M. Rohrs
Thomas M. Rohrs
61
EXHIBIT 31.2
ELECTROGLAS, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Thomas E. Brunton, certify that:
1.
I have reviewed this annual report on Form 10-K of Electroglas, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
/s/ Thomas E. Brunton
Thomas E. Brunton
Chief Financial Officer
62
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the periodic report of Electroglas, Inc. (the "Company") on Form 10-K for the period ended
May 31, 2008 as filed with the Securities and Exchange Commission (the "Report"), I, Thomas M. Rohrs, Chief
Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63,
Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
/s/Thomas M. Rohrs
Thomas M. Rohrs
63
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the periodic report of Electroglas, Inc. (the "Company") on Form 10-K for the period ended
May 31, 2008 as filed with the Securities and Exchange Commission (the "Report"), I, Thomas E. Brunton, Chief
Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63,
Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
/s/ Thomas E. Brunton
Thomas E. Brunton
Chief Financial Officer
64

Electroglas, Inc 2008 Annual Report

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