<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
(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, 1997 or
( ) 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: 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0370304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13900 NW Science Park Drive
Portland, Oregon 97229
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 641-4141
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of Common Stock held by nonaffiliates of the
Registrant at July 15, 1997: $471,712,000.
The number of shares of Common Stock outstanding at July 15, 1997: 9,853,000.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document which is incorporated
- - -------- ----------------------
1997 Annual Report to Shareholders Part II
Proxy Statement for 1997 Annual Meeting Part III
of Shareholders
<PAGE>
TABLE OF CONTENTS
Item of Form 10-K Page
- - ----------------- ----
PART I
Item 1 - Business................................................ 3
Item 2 - Properties.............................................. 13
Item 3 - Legal Proceedings....................................... 13
Item 4 - Submission of Matters to a Vote of Security Holders..... 13
Item 4(a) - Executive Officers of the Registrant.................... 14
PART II
Item 5 - Market for the Registrant's Common Equity and
Related Shareholder Matters............................. 17
Item 6 - Selected Financial Data................................. 17
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 18
Item 8 - Financial Statements and Supplementary Data............. 22
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 40
PART III
Item 10 - Directors and Executive Officers of the Registrant...... 40
Item 11 - Executive Compensation.................................. 40
Item 12 - Security Ownership of Certain Beneficial
Owners and Management................................... 40
Item 13 - Certain Relationships and Related Transactions.......... 40
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 41
SIGNATURES.......................................................... 43
<PAGE>
PART I
ITEM 1. BUSINESS
ESI provides electronics manufacturers with equipment necessary to produce
key components used in wireless telecommunications, computers, automotive
electronics, and many other electronic products. ESI believes it is the
leading supplier of advanced laser systems used to adjust (trim) electronic
circuitry and to improve the yield of semiconductor memory devices. ESI
believes it is the leading producer of high-speed test and termination
equipment used in the high-volume production of miniature capacitors. ESI
produces a family of mechanical and laser drilling systems for production of
printed circuit boards and advanced electronic packaging. Additionally, ESI
designs and manufactures machine vision products for manufacturers of
semiconductors, electronics and other products. ESI's products enable these
manufacturers to reduce production costs, increase yields and improve the
quality of their products. ESI's customers include manufacturers of: wireless
telecommunication products (Ericsson, Motorola and Siemens); automotive
electronics (Delco, Ford, Nippon-Denso and Siemens); miniature capacitors
(Kemet, Kyocera/AVX, Murata, Philips, Samsung and TDK) and semiconductor
memory devices (Fujitsu, Hitachi, Hyundai, IBM, Samsung and Texas
Instruments).
ELECTRONICS INDUSTRY OVERVIEW
The electronic content of telecommunications products, automobiles and
personal computers continues to increase. For example, automobile
manufacturers now routinely include electronic ignition, anti-lock brakes,
electronic fuel injection and other electronic systems in place of components
that in the past were predominantly mechanical. In addition, markets for
consumer-oriented electronic products such as cellular telephones, facsimile
machines, pagers, camcorders and personal computers have developed rapidly as
increasingly affordable products have been introduced.
Demand for electronics manufacturing equipment is driven by the demand for
electronic devices and circuits. Electronic components are used in virtually
all electronic products, from inexpensive consumer electronics to the most
sophisticated computers. These components are produced in very large unit
volumes.
The demands upon manufacturers to supply increasing quantities of electronic
components have been accompanied by demands for increased complexity, reduced
size and improved quality. As electronic products become more powerful and
portable, the devices and circuits in these products must be faster, smaller
and more reliable. To achieve these attributes of higher performance, the
electronic device manufacturers increase densities and tune the devices to
precise electrical values. Manufacturers of cellular telephones, for example,
must use miniaturized circuits to accommodate the size limitations of the
finished product. These circuits must also operate within precise frequency
specifications, typically requiring component values with less than 0.5
percent tolerance, in order for the existing cellular frequency bands to
accommodate the expanding number of cellular users without interchannel
interference.
As electronic device densities and performance demands have increased, the
manufacturers of capacitors and resistors, which are basic components of
assembled electronic devices, have been compelled to reduce size and to
improve performance of these individual components. The increasing
miniaturization of these components makes production, testing and termination
difficult.
3
<PAGE>
In addition to quantity, size and performance demands, a trend throughout the
electronics industry is cost reduction. The highly competitive markets for
electronic products create cost limitations at the consumer level, and result
in cost pressure on component manufacturers. The manufacturers continuously
seek to reduce device costs by improving throughput, yield and quality in
device production.
OVERVIEW OF MARKETS, PRODUCTS AND STRATEGY
Pagers, cellular telephones, personal computers and automotive electronics
represent the largest end-market applications for electronic devices and
circuits that are produced using ESI's systems. ESI's customers also serve a
wide range of other electronic applications.
ESI believes it is critical that each of its products provide the customer
with measurable production benefits, such as improved yield, increased
throughput, greater reliability, or increased flexibility, resulting in a
high return on investment. ESI also designs its production systems with a
migration path for system upgrade, thereby providing its customers
flexibility to add capacity or improve product performance at a reasonable
incremental cost.
ESI believes it is the leading merchant equipment supplier to three
specialized markets: laser trimming, miniature capacitor testing and
production and semiconductor memory yield improvement. ESI also serves the
machine vision and electronic packaging markets.
LASER TRIMMING SYSTEMS. ESI's laser trimming systems are used to tune the
precise frequency of electronic circuits that receive and transmit signals in
pagers, cellular telephones and other wireless devices. ESI's laser trimming
systems are also used to tune automotive electronic assemblies such as engine
control circuits.
ESI's laser systems are used by manufacturers supplying the
telecommunications, automotive, and consumer markets. Customers include
Delco, Ericsson, Ford, IBM, Motorola, Nippon-Denso, Siemens, and Kyocera.
The laser adjusts the electrical performance of an electrical product or
assembly containing many circuits. The laser removes a precise amount of
material from one or more components in the circuit to achieve the desired
electrical specification for the entire product. This process is called
"functional trimming," and is performed while the product or assembly is
under power. For example, in pagers, laser trimming of a few selected
components in the product is used to tune the electrical performance of the
entire product to the desired frequency specification.
ESI's systems also adjust the electrical performance of individual devices
such as film resistors, resistor networks, capacitors and hybrid circuits.
Laser trimming is required because the screening process used to manufacture
resistors cannot cost effectively deposit material precisely enough to
provide consistent electrical values. The trimming system can also be rapidly
reprogrammed to trim devices of different values.
4
<PAGE>
The following chart summarizes the models, typical applications and key
features of ESI's current laser trimming products:
ESI LASER TRIMMING PRODUCTS
<TABLE>
<CAPTION>
BEAM
POSITIONING THROUGHPUT WORK
RESOLUTION (TRIMS PER AREA
PRODUCT TYPICAL APPLICATION (MICRONS) SECOND) (INCHES)
- - ------- ------------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Model 4300 Surface mount capacitor and resistor trimming 2.50 50 4 x 4
Model 977 Test intensive, thick film, functional trimming 1.55 50 3 x 3
Model 4990 Thick film functional trimming 1.27 50 3 x 3
Model 907V Chip resistor trimming 1.27 100 3 x 3
Model 4410 Thick/thin film functional trimming 1.01 15 3 x 3
</TABLE>
TEST AND PRODUCTION SYSTEMS FOR SURFACE MOUNT CERAMIC CAPACITORS. ESI's
product offering consists of automated test, production and handling
equipment for manufacture of miniature multi-layer ceramic capacitors (MLCCs)
which are used in very large numbers in nearly all types of electronic
circuits. Large numbers of MLCCs are used in circuits that process analog
signals or operate at high frequencies such as in video products (VCRs and
camcorders), voice communication products, wireless telecommunication
products and computers. Principal customers for ESI's MLCC test and
production equipment are Kemet, Kyocera/AVX, Murata, Philips, Samsung and TDK.
The worldwide miniature surface mount capacitor market is estimated to be
approximately $4.5 billion (240 billion units) in 1996. Most of the leading
producers are in Japan, led by Kyocera, Murata and TDK. ESI believes it is
the leading merchant supplier of equipment to the MLCC industry for test and
termination of miniature capacitors. Production demands imposed by
miniaturization are leading capacitor manufacturers to increasingly consider
merchant equipment suppliers as an alternative to internal development of
manufacturing equipment.
As circuit sizes have shrunk, the size of commonly used miniature capacitors
has also shrunk to as small as .04" x .02" x .01". These minute sizes and the
high unit volumes place extraordinary demands on manufacturers. ESI's
products combine high-speed, small parts handling technology with
microprocessor-based systems to provide highly automated solutions for MLCC
manufacturers. ESI's test and termination equipment and specialty handling
tools perform a broad range of functions in the manufacturing process.
TEST. Virtually all capacitors are tested and sorted by capacitance
(electrical energy storage) and dissipation (electrical energy leakage).
ESI's equipment employs high-speed handling and positioning techniques to
precisely load, test and sort capacitors based upon these electrical values.
5
<PAGE>
TERMINATION. MLCCs are manufactured in a lamination process, layering
conductive and insulation materials. ESI's microprocessor-based termination
systems apply conductive material to the ends of surface mountable MLCCs,
permitting connection of the device in a circuit. Chip Star, Inc., a
subsidiary purchased on June 26, 1997, produces a fully automated product
line for termination of MLCCs and capacitor arrays. These products, the
CS 325A and CS 750, are capable of processing the smallest sized (.04 x .02)
parts available on the commercial market.
HANDLING TOOLING. ESI offers a wide range of specialized production fixtures
and tools for various stages of the manufacturing process, including a series
of patented carrier plates capable of handling up to 8,000 devices per plate
for termination application. The decreasing size and growing volumes of MLCCs
produced cause manufacturers to continuously seek new tools and fixtures to
improve throughput and handling efficiency.
6
<PAGE>
The following chart summarizes the models, typical applications and key
features of ESI's current miniature capacitor test and production products:
ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS
<TABLE>
<CAPTION>
PRODUCT APPLICATION KEY FEATURES
------- ----------- ------------
<S> <C> <C>
TEST SYSTEMS
Models 16A and 18 Tests capacitance, dissipation factor and High speed rotary tester with
voltage capability for small (Model 18) throughput of up to 50,000 parts/hour.
and medium (Model 16A) size MLCCs
Models 3002 and 3001 IR Tests insulation resistance (IR) High speed parallel tester with
of MLCCs throughput of up to 50,000 parts/hour.
Model 3001 IR includes automatic bulk loading.
Model 3300 Tests capacitance dissipation factor and High speed rotary tester with
voltage capability for small and medium throughput of up to 180,000 parts/hour.
size MLCCs; tests insulation resistance
TERMINATION SYSTEMS
Models 2001 and 2020 Electrical contact attachment Microprocessor controlled surface
on MLCCs mount termination system with
throughput up to 130,000 parts/hour.
Model 2020 includes an integrated kiln.
Model 2007 Electrical contact attachment High productivity microprocessor
on MLCCs controlled surface mount termination
system with throughput up to 470,000
parts/hour.
CS 325A Electrical contact attachment Automated termination of smallest size
on MLCCs capacitors with throughput up to 100,000 parts/hour.
CS 750 Electrical contact attachment Automated termination of smallest size
on MLCC arrays capacitor arrays with throughput up to 50,000 parts/hour.
HANDLING TOOLING
Carrier Plates Plates to batch handle MLCCs for Patented composite carriers to handle
test and termination the full range of MLCC sizes and up to
8,000 pieces per batch.
Test Tooling Test fixtures for use with Permits precise location and positioning
ESI systems of MLCCs during the test operation.
</TABLE>
7
<PAGE>
MEMORY YIELD IMPROVEMENT SYSTEMS. Memory yield improvement systems are used
by nearly all manufacturers of dynamic random access memories (DRAMs) to
increase production yields. Personal computers and high performance
workstations are the largest market for semiconductor memory, although
photocopiers, facsimile machines and telecommunications equipment represent
products requiring increasing amounts of memory. Customers of ESI's memory
systems include Fujitsu, LG Semiconductor, Hitachi, Hyundai, IBM, NEC,
Samsung, Siemens, and Texas Instruments.
Memory device manufacturers use a laser process that removes defective
circuit elements while programming spare elements to be replacements and
thereby salvaging a memory device. Cost reductions and demand for higher
capacity memory devices have lead manufacturers to reduce the size of circuit
elements while increasing the number of circuit elements per device. This
increased density in memory devices has required leading edge semiconductor
processes, resulting in lower initial manufacturing yields.
The yield enhancement process begins with circuit designers adding extra or
spare elements to the memory array. During the manufacturing process each
device is tested to determine yield. When a defective element is identified,
its location or address is recorded and given to ESI's laser system to effect
a replacement or repair. The laser system positions a laser beam over
connecting links to the defective element and cuts or breaks the electrical
path. Replacements are added by programming the failed address into a new or
spare element. Redundancy is used by every significant manufacturer of DRAMs
and is increasingly being used by manufacturers of other semiconductor memory
applications, such as SRAMs, DSPs, and other logic devices.
ESI began shipments of the Model 9300 Laser Repair system in August 1996.
This system features a patented laser system technology operating at a 1.3
micron wavelength that enables manufacturers to use metal links which are
required for advanced memory devices. This system is recognized as the new
industry standard for future laser repair systems.
ESI also offers the Model 1225ci and Model 9250 series systems. The Model
1225ci uses patented stage plus galvanometer beam positioning to provide
throughput benefits, a small footprint, and a high cost performance ratio.
It is used by manufacturers requiring increased capacity of four and sixteen
megabit devices. The ESI Model 9250 series provides high throughput and high
reliability for those manufacturers using poly-link materials, even for
advanced memory devices.
VISION SYSTEMS. ESI's vision systems combine advanced computer technology,
proprietary software and optical equipment to reduce application development
time and provide machine vision inspection that facilitates quality products
and fast throughput. ESI's vision systems are integrated in ESI's laser
systems and are also marketed independently to electronic and semiconductor
industry customers for general purpose inspection, part position verification
for manufacturing processes, wafer identification using OCR, measurement,
alignment, machine guidance and assembly verification. Customers for ESI's
vision products include Hewlett Packard and IBM.
8
<PAGE>
ELECTRONIC PACKAGING SYSTEMS. ESI provides a cost effective method for
forming vias, which are the basis for creating electrical connections in a
multiple layer printed circuit board and electronic packages. Applications
in this market include new generations of integrated circuit packages, multi
chip modules, and high density circuit boards. The primary advantage of the
technology is the ability to process very small vias in a wide variety of
materials. Electronic industry materials include ceramic, traditional glass
reinforced circuit boards, copper, and new organic compounds. Customers
include Automata, Erricson, IBM, Johnson-Matthey/ACI, Sheldahl, Siemens and
W.L. Gore.
DRILLING PRODUCTS. The Model 5100, introduced in June 1996, is the current
laser-based product offering, and features the capability to drill up to
10,000 micro-vias per minute. The Model 5100 includes a proprietary laser,
operating in the ultraviolet region of the light spectrum, which can cleanly
cut copper and glass-reinforcement without damaging or burning organic
materials. The system can form blind or through holes in all of the common
circuit board materials and uses a unique real-time inner layer alignment to
deliver high placement accuracy. In this way, the user can achieve the
smallest pad dimensions enabling the production of today's emerging high
density packages.
Dynamotion, a subsidiary purchased on June 9, 1997, produces
computer-controlled mechanical drilling equipment which is sold to
manufacturers of printed circuit boards (PCBs) and semiconductor packages.
The drilling machines are used to produce thousands of very small holes,
sometimes as small as .004" in diameter, which is the diameter of a human hair.
Four product lines of computer-controlled drilling equipment are produced by
Dynamotion: (1) DM 9400/9500 with a patented vacuum pre-load air bearing
guiding design for the high-dynamic stability necessary for micro-drilling;
(2) Six-PAK-TM- with its new innovative design is economical, accurate, compact
and extremely productive for the commercial, high-volume PCB market; (3)
Modular Systems offer the same characteristics as the DM 9400/9500 to the
prototype and quick-turn market; and (4) Smart DrillTM with its patented
vision optimization capability offers a fast, highly accurate method of
optimizing and drilling for the most sophisticated multilayer board
manufacturers.
ROUTING PRODUCTS. Dynamotion produces computer-controlled routers which are
sold to computer manufacturers and manufacturers of PCBs. Routers are used
to cut and shape individual PCBs out of panels. Currently, the two primary
machining processes required to produce a PCB are routing and drilling. In
contrast to a drill, which makes thousands of tiny holes on a PCB, the router
cuts the shape of the PCB, as well as the larger holes and special cavities
for mounting of semiconductor die. The computer-controlled cuts made by the
router can be very complex since the position of the cuts are pre-programmed
in three axes.
A newly emerging PCB chip carrier technology creates unusual demands on the
routing process. Perfect registration of routed edges with respect to the
circuitry features and the internal layers are required to successfully
produce chip carriers. Very accurate depth control is necessary for cavity
routing. Dynamotion produces two product lines of computer controlled
routers: the SMART-TM- Driller/Router and the Six-PAK-TM- Router Drill.
9
<PAGE>
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service offices
located in or near: Boston, Massachusetts, Dallas, Texas, Portland, Oregon,
San Diego and Santa Ana, California in the United States; Tokyo and Nagoya,
Japan, Seoul, Korea, and Taipei, China in Asia; and Munich, Germany, London,
England and Leiderdorp, Netherlands in Europe. ESI serves customers in
approximately 30 additional countries through manufacturers representatives.
ESI has a substantial base of installed products in use by leading worldwide
electronics manufacturers. ESI emphasizes strong working relationships with
these leading manufacturers in order to meet their needs for additional
systems and to facilitate the successful development and sale of new products
to these customers.
ESI maintains service personnel wherever it has a significant installed base
and provides service anywhere its equipment is installed. New systems are
tested to ensure they meet requirements and acceptance criteria as specified
in customer orders. ESI also offers a variety of maintenance contracts and
parts replacement programs.
ESI has an OEM contract with Advantest Ltd. to supply memory yield improvement
systems in Japan. Sales to Advantest amounted to 10.5%, 6.8% and 7.2% of net
sales for the fiscal years 1997, 1996, and 1995. ESI maintains a presence in
Korea through a wholly-owned subsidiary.
Sales outside the U.S. accounted for 71.0%, 66.8% and 70.9% of ESI's net sales
for fiscal years 1997, 1996 and 1995.
One customer accounted for 10.5% of sales in fiscal 1997. In fiscal year 1996,
no one customer exceeded 10% of sales. One customer accounted for 12.4% of
ESI's sales in fiscal 1995.
BACKLOG
Backlog consists of written purchase orders for products for which ESI has
assigned shipment dates within the following twelve months. Backlog also
includes written purchase orders for spare parts and service to be delivered
or performed within the next twelve months. Backlog was $25 million at May
31, 1997 versus $35 million at May 31, 1996 and $26 million at May 31, 1995.
ESI expects all of its existing backlog to ship within the next twelve months.
10
<PAGE>
RESEARCH, DEVELOPMENT AND TECHNOLOGY
ESI believes that its ability to compete effectively depends, in part, on
whether it can maintain and expand its expertise in core technologies and
product applications. The primary emphasis of ESI's research and development
is to advance ESI's capabilities in:
- Lasers and laser/material interaction
- High speed, sub-micron motion control systems
- Precision optics
- High speed, small parts handling
- Image processing and optical character recognition
- Real-time production line electronic measurement
- Real-time software
- Systems integration
ESI's research and development expenditures for fiscal years 1997, 1996, and
1995 were $16.5 million (11.0% of net sales), $16.3 million (10.2% of net
sales), and $13.7 million (12.7% of net sales), respectively. The foregoing
figures do not include the effect of research and development expenditures
funded by the Advanced Research Projects Agency (ARPA) of the U.S. Government.
In addition, research and development expenditures for the year ended May 31,
1996 do not include the acquired in-process research and development expense
of $6.0 million incurred in connection with the purchase price allocation of
XRL, Inc.
COMPETITION
ESI's markets are competitive. The principal competitive factors in the
industry are product performance, reliability, service and technical support,
product improvements, price, established relationships with customers and
product familiarity. ESI believes that its products compete favorably with
respect to these factors. Some of ESI's competitors have greater financial,
engineering and manufacturing resources than ESI and larger service
organizations. In addition, certain of ESI's customers develop, or have the
ability to develop, similar manufacturing equipment. There can be no
assurance that competition in ESI's markets will not intensify or that ESI's
technological advantages may not be reduced or lost as a result of
technological advances by competitors or customers or changes in electronic
device processing technology.
11
<PAGE>
For laser trimming systems, major competitors are NEC and General Scanning.
In miniature capacitor test and production equipment, ESI's competition comes
mainly from manufacturers that develop systems for internal use, and in
Japan, from test equipment manufactured by Tokyo Weld and Humo, among others.
ESI's major competitors for memory repair systems are Nikon and General
Scanning. ESI also competes with stand alone vision suppliers such as Cognex
and Robotic Vision Systems, and with robotics and factory automation
companies, such as Allen Bradley. There are also numerous other vision
companies and captive vendors in Japan, North America and Europe. ESI's
electronic packaging systems compete with mechanical drilling manufacturers
such as Hitachi-Seiko, Excellon and laser system provider, Lumonics.
MANUFACTURING AND SUPPLY
ESI's laser system manufacturing operations consist of electronic
subassembly, laser production and final system assembly. Principal production
facilities are headquartered in Portland, Oregon. Miniature capacitor test
and production systems are manufactured by ESI's Palomar and Chip Star
subsidiaries near San Diego, California. Dynamotion drilling and routing
products are produced in Santa Ana, California. ESI also uses qualified
manufacturers to supply many components of its products.
ESI's laser systems use high performance computers, peripherals, lasers and
other components from various vendors. Some components used by ESI are
obtained from a single source or a limited group of suppliers. An
interruption in the supply of a particular component could require
substitutions which would have a temporary adverse impact on ESI. ESI
believes it has good relationships with its suppliers.
EMPLOYEES
As of May 31, 1997, ESI employed 649 persons, including 195 in engineering,
research and development, 251 in manufacturing and 203 in marketing, sales,
customer service and administration. Many of ESI's employees are highly
skilled, and ESI's success will depend in part upon its ability to attract
and retain such employees, who are in great demand. ESI has never had a work
stoppage or strike and no employees are represented by a labor union or
covered by a collective bargaining agreement. ESI considers its employee
relations to be good.
PATENTS AND OTHER INTELLECTUAL PROPERTY
ESI has a policy of seeking patents, when appropriate, on inventions relating
to new products and improvements which are discovered or developed as part of
ESI's on-going research, development and manufacturing activities. ESI owns
40 United States patents and has applied for 16 patents in the United States.
In addition, ESI has 35 foreign patents and has applied for 40 additional
foreign patents. Although ESI's patents are important, ESI believes that the
success of its business depends to a greater degree on the technical
competence and innovation of its employees.
12
<PAGE>
ESI relies on copyright protection for its proprietary software. ESI also
relies upon trade secret protection for its confidential and proprietary
information. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques, or
that ESI can meaningfully protect its trade secrets.
Some customers using certain products of ESI have received a notice of
infringement from Jerome H. Lemelson, alleging that equipment used in the
manufacture of semiconductor products infringes patents issued to Mr.
Lemelson relating to "machine vision" or "barcode reader" technologies.
Certain of these customers have notified ESI that they may be seeking
indemnification from ESI for any damages and expenses resulting from this
matter. One of ESI's customers has settled litigation with Mr. Lemelson, and
several other customers are currently engaged in litigation involving Mr.
Lemelson's patents. While ESI cannot predict the outcome of this or similar
litigation or its effect upon ESI, ESI believes that it will not have a
material adverse effect on its financial condition or results of operations.
ITEM 2. PROPERTIES
The Company's executive and administrative offices, and principal laser
system manufacturing facilities are located in a two-building complex located
on 16 acres in Sunset Science Park, in Portland, Oregon. The buildings are
owned by ESI, and contain approximately 134,000 square feet of floor space.
Palomar is located in a 64,000 square foot plant on ten acres of land, all
owned by ESI, in Escondido, California.
In addition, approximately 15,000 square feet of industrial space is leased
in Canton, Massachusetts. The Company also leases 7,000 square feet of
office space in Portland, Oregon for its Vision Products Division, 8,000
square feet of office and industrial space in San Marcos, California for its
Chip Star subsidiary, 30,000 square feet of office and industrial space in
Santa Ana, California for its Dynamotion subsidiary, and office and service
space in several additional locations in the United States, and in seven
foreign countries.
ITEM 3. LEGAL PROCEEDINGS
On December 26, 1996, ESI filed a lawsuit against General Scanning, Inc. in
the United States District Court for the Northern District of California for
patent infringement. The complaint alleges that General Scanning is
infringing two of ESI's patents used in the Model 9300 laser repair systems
(patent numbers 5,265,114 "System and Method for Selectively Laser Processing
a Target Structure of One of More Materials of a Multimaterial, Multilayer
Device" and 5,473,624 "Laser System and Method for Selectively Severing
Links"). ESI is seeking damages and an injunction against further
infringement. General Scanning has filed counterclaims alleging that certain
ESI patents are invalid and unenforceable and that ESI has interfered with
General Scanning's business reputation. General Scanning is seeking damages
and declaratory judgments that the ESI patents are not infringed, are invalid
and are unenforceable. While ESI cannot predict the outcome of this or
similar litigation or its effect upon ESI, ESI believes that it will not have
a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter ended May 31, 1997.
13
<PAGE>
ITEM 4(A): EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, and their ages and positions as of
June 30, 1997, are as follows:
NAME AGE POSITION
---- --- --------
Donald R. VanLuvanee 53 Chief Executive Officer, President and
Director
Robert E. Belter 56 Vice President
Robert C. Cimino 52 Director of Human Resources
Barry L. Harmon 43 Chief Financial Officer and
Senior Vice President
Jon R. Hopper 37 Vice President
Jonathan C. Howell 43 Vice President
Mark W. Klug 58 Vice President
John R. Kurdock 52 Vice President
Larry T. Rapp 57 Corporate Secretary and Vice President
Joseph L. Reinhart 38 Vice President
Joseph Z. Rivlin 62 Vice President
Vernon R. Swearingen 57 Vice President
Edward J. Swenson 58 Senior Vice President
Mr. VanLuvanee joined the Company in 1992 as Chief Executive Officer,
President and a Director. From July 1991 to July 1992, Mr. VanLuvanee was
President, Chief Executive Officer and a Director at Mechanical Technology
Inc., a supplier of contract research and development services and a
manufacturer of technologically advanced equipment. From 1990 to 1991, he was
President and Chief Executive Officer of BCT Spectrum, Inc., a supplier of
vacuum deposition systems. From 1984 to 1990, he was President, Chief
Operating Officer and a Director of Kulicke and Soffa Industries, Inc., a
supplier of capital equipment and consumables to the microelectronics
industry. Mr. VanLuvanee is also a Director of Micro Component Technology,
Inc., a leading manufacturer of automated test handling equipment, and FEI
Company, which designs, manufactures and markets focused ion beam
workstations and both ion and electron emitter and focusing column components.
Mr. Belter joined ESI in May, 1997 and was elected President and General
Manager of the Palomar subsidiary and a Corporate Vice President. Mr. Belter
is responsible for the ceramic capacitor production equipment business unit,
including the Palomar and Chip Star subsidiaries. Prior to joining ESI, Mr.
Belter served as a consultant to the Company in marketing and product
development for one year. Mr. Belter has extensive prior experience in the
electronic component industry, including four years as President and General
Manager of Johanson Dielectrics, and ten years as President and General
Manager of Kyocera Northwest, North American Electronic Components.
Mr. Cimino joined ESI in 1993 as Director of Human Resources. Mr. Cimino was
employed by Eastman Kodak prior to joining ESI. He held management positions
at Kodak in human resources, customer service, sales, and real estate asset
management.
14
<PAGE>
Mr. Harmon joined the Company in 1992 and has served the Company in various
financial management positions. In January 1995, he was elected Chief
Financial Officer and Senior Vice President. Mr. Harmon held various financial
management positions with the Global Private Banking Group of Citibank from
1985 to 1991. He was employed by Arthur Andersen LLP from 1976 until 1983.
Mr. Harmon is a licensed CPA.
Mr. Hopper joined ESI as a Group Vice President in the Electronic Packaging
Business Unit upon Dynamotion's merger with the Company on June 9, 1997.
Previously, he was Chairman, President and Chief Executive Officer of
Dynamotion from April 1995. Mr. Hopper's experience includes several
management positions in high technology businesses during the period from
1990 to 1994.
Mr. Howell joined ESI in April 1993 as Director of MIS. In June 1995, he was
appointed Managing Director of the Vision Products Division. In September
1995, Mr. Howell was elected Vice President. Since July 1996, Mr. Howell is
responsible for the Company's technical staff and resources. Mr. Howell has
extensive management experience from Citibank, Gulf and Western and Arthur
Young & Co.
Mr. Klug joined Palomar Systems, Inc. in August 1992 and in April 1993 was
elected a Corporate Vice President. Mr. Klug is responsible for the test
segment of the capacitor equipment business unit. From 1988 to 1992, Mr. Klug
was Vice President of Engineering for Symtek Systems, Inc., and between 1983
and 1988 he held senior management positions with Kulicke and Soffa
Industries, Inc., including Senior Vice President of U.S. Operations and Vice
President of Engineering.
Mr. Kurdock joined ESI in February 1997 as Group Vice President and General
Manager of Portland Operations. Prior to joining ESI, Mr. Kurdock served as
Vice President of the Surface Mount Division for Universal Instruments. He
has also held senior operating positions with the Silicon Valley Group and
Perkin Elmer.
Mr. Rapp joined the Company in 1966 and has served in various capacities in
engineering. In 1982 he became the Government Relations and Patent Manager.
He served as Assistant Secretary from 1988 to 1991, and in January 1992 was
elected Corporate Secretary and Legal Manager. In September 1995, Mr. Rapp
was elected Vice President.
Mr. Reinhart joined ESI in 1993 as Communications and Contracts Manager and
was promoted to Director of Business Development in April 1995. He was
elected a Vice President in September 1996. His experience includes finance,
venture funding, mergers and acquisitions and administration in
high-technology businesses.
Mr. Rivlin, who joined the Company in 1994, was elected Vice President of
Sales in February 1995. Prior to joining ESI, Mr. Rivlin was Vice President
of Sales and Service for Solbourne Computer, and President and CEO of XRL,
Inc. He has held other management positions at GenRad, Fairchild Camera and
Instrument Corp., and Veeco Instruments, Inc.
15
<PAGE>
Mr. Swearingen joined the Company in November 1992 as Director of Laser
Systems Business Unit and was elected Vice President in April 1993. From
1990 to 1991, Mr. Swearingen was President of Quantum Engineering, Inc., a
project engineering firm, and from 1988 to 1990 he held a management position
with Kulicke and Soffa Industries, Inc.
Mr. Swenson joined the Company in 1961 as a project and applications
engineer. In 1970, he initiated the manufacture of computer-controlled laser
systems for trimming and scribing microcircuits. He became Manager of the
Systems Business Unit in 1978, Vice President, Advanced Development in 1979,
Vice President, Advanced Technology Division in 1985 and Senior Vice
President, Advanced Technology Group in 1987.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK PRICES/DIVIDENDS
The Company's Common Stock trades on the NASDAQ National Market under the
symbol ESIO. The following table sets forth, for the fiscal quarters
indicated, the high, low and closing sales prices for the Common Stock as
reported on the NASDAQ National Market.
FISCAL QUARTER 1997 1996
- - -------------- ---- ----
HIGH LOW CLOSING HIGH LOW CLOSING
---- --- ------- ---- --- -------
1st Quarter. . . . . $27-1/4 $15-1/2 $18-1/4 $39-3/4 $24-5/8 $33-3/4
2nd Quarter. . . . . 26 17-1/4 24-1/4 41-1/2 24-1/2 28-1/2
3rd Quarter. . . . . 31-3/4 22-1/2 27 30-1/2 18-3/4 21-1/2
4th Quarter. . . . . 39-1/4 23-3/4 38 28-3/4 16-3/4 26-1/2
The Company has not paid any cash dividends on its Common Stock during the last
five fiscal years. The Company currently intends to retain its earnings for its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
The approximate number of shareholders of record at May 31, 1997 was 336.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
--------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE) 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $150,159 $159,705 $108,215 $72,550 $67,851
Laser systems and service 104,535 108,577 66,045 41,985 36,742
Capacitor manufacturing equipment 40,457 47,531 39,115 23,961 20,393
Vision systems 5,167 3,597 3,055 2,562 2,736
Divested product lines(1) -- -- -- 4,042 7,980
Net income(2) 18,952 19,894 11,517 7,874 2,244
Net income per share(2) 2.19 2.31 1.53 1.23 0.37
Working capital 113,201 92,901 74,419 36,247 28,883
Net property, plant and equipment 16,185 16,662 15,616 14,592 16,696
Total assets 148,886 132,525 110,598 62,366 61,161
Long-term debt -- -- -- -- 4,809
Shareholders' equity 135,212 114,916 94,444 53,547 43,950
</TABLE>
(1) See Management's Discussion and Analysis.
(2) Fiscal 1996 excludes the $6.0 million In-Process Research and Development
write off associated with the acquisition of XRL.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
Revenue for fiscal 1997 was $150.2 million, which was 6.0% or $9.5 million
lower than for fiscal 1996. The decline was due to lower shipments of
capacitor production equipment during the first half of fiscal 1997, as
customers absorbed capacity added in the prior year, and lower sales of
circuit fine tuning systems throughout the year. These declines were
partially offset by an increase from $4.8 million to $10.8 million in
laser-based electronics packaging systems and smaller increases in the sales
of semiconductor memory yield improvement and vision systems.
Gross margin of 53.6% for the year ended May 31, 1997 was slightly below the
54.4% gross margin for fiscal 1996. The sales decline in capacitor production
equipment increased manufacturing overhead cost per unit sold was the most
significant factor causing the decrease in margin. Increased sales of higher
margin semiconductor yield improvement systems, electronic packaging
equipment and machine vision systems positively affected gross margin.
Selling, service and administrative expenses were $3.3 million lower for the
year ended May 31, 1997. The decrease is a result of lower selling
commissions associated with decreased sales volumes and lower incentive
compensation. Selling, service and administrative expenses decreased as a
percentage of sales, to 24.4% from 25.0% from year to year.
Research, development and engineering expenses for the year ended May 31,
1997 were $0.3 million higher than the prior year. Research, development and
engineering expenses increased, as a percentage of sales, to 11.0% for 1997
from 10.2% for the prior year. The comparison between spending of the
current year and the prior year does not include the acquired in-process
research and development charge of $6.0 million incurred in connection with
the purchase price allocation of XRL, Inc in fiscal 1996.
The effective tax rate of 34.1% for the year ended May 31, 1997 decreased
from 36.5% as a result of an increased benefit recognized on foreign sales.
Net income for the year ended May 31, 1997 was $19.0 million or $2.19 per
share compared to $16.1. million or $1.87 per share for the same period of
the prior year.
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO FISCAL YEAR ENDED MAY 31, 1995
Net sales increased 47.6% or $51.5 million. The increasing electronics
content, complexity and decreasing size of consumer communication devices,
automotive components and computers is directly related to the increased
demand for ESI's products. Sales of semiconductor yield improvement systems
more than doubled. The acquisition of XRL, Inc. in July 1995 contributed
$18.9 million toward the increase in semiconductor yield improvement sales.
Increased volume and more favorable product mix of capacitor manufacturing
products and circuit fine tuning systems also contributed significantly to
the revenue growth. ESI's emerging electronic packaging business reported
modest growth.
18
<PAGE>
Gross margin increased from 52.5% for fiscal 1995 to 54.4% as a result of
increased volume of semiconductor yield improvement equipment sold, increased
sales of higher margin circuit fine tuning systems, and productivity
improvements in the capacitor carrier plate manufacturing process.
Selling, service and administrative expenses decreased, as a percentage of
sales, to 25.0% from 25.5% for fiscal 1996 compared to the same period of the
prior year. Selling, service and administrative expenses increased $12.2
million compared to the prior year as a result of higher selling commissions
and travel associated with increased sales levels, salaries and incentive
compensation.
Research, development and engineering expenses increased $3.1 million for the
year ended May 31, 1996 compared to the prior year. Increased product
development efforts resulted in additional project material costs and
compensation related to new hires. Engineering costs associated with XRL
also contributed to the increase. Research, development and engineering
expenses declined, as a percentage of sales, to 10.2% for fiscal 1996 from
12.1% for the prior year as sales grew faster than spending increases.
The acquired in-process research and development expense of $6.0 million
occurred in connection with the purchase price allocation of XRL, Inc. ESI
obtained an appraisal of the intangible assets which indicated that
substantially all of the acquired intangible assets consisted of research and
development in process. In accordance with generally accepted accounting
principles, the acquired in-process research and development was expensed
during the first quarter ended August 31, 1995.
The effective tax rate of 36.5% for the year ended May 31, 1996 increased
from 30.0% for the prior year as a result of utilizing tax loss and credit
carryovers in fiscal 1995.
Net income for the year ended May 31, 1996 was $16.1 million or $1.87 per
share compared to $11.5 million or $1.53 per share for the prior year. Net
income per share, excluding the effect of the acquired in-process research
and development charge of $6.0 million, was $2.31 in fiscal 1996, a 51%
increase over the prior year.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are existing cash, cash
equivalents and marketable debt securities of $43.2 million, accounts
receivable of $48.9 million, and a $7.0 million line of credit, none of which
was outstanding at May 31, 1997. ESI has no debt and a current ratio of
9.3:1. Working capital increased to $113.2 million at May 31, 1997, from
$92.9 million at May 31, 1996. Accounts receivable increased as product
payment terms are longer for the recently introduced models 9300, 5100 and
3300. Current liabilities decreased from May 31, 1996 due to acceleration of
income tax payments and reduced incentive compensation accruals.
In June 1997, the Company closed two mergers, Dynamotion / ATI Corp. and Chip
Star, Inc. Both of these companies operate from a single location in Southern
California and develop and sell capital equipment that is complementary to
existing ESI markets and customers. Refer to Business Environment in the Notes
to Consolidated Financial Statements for additional information.
19
<PAGE>
The total consideration for both mergers was 1,047,000 shares of ESI stock.
In addition, Dynamotion debt liabilities of approximately $11.0 million were
liquidated immediately after the merger was closed with ESI's existing
resources. Debt liabilities are not expected to be used to finance future
Dynamotion working capital requirements.
Production capacity for these acquired businesses is expected to be satisfied
from existing facilities, which are leased, or their replacement. In
connection with ESI's Portland based operations, the Company is undertaking
renovations to improve space utilization and may consider the lease or
purchase of additional facilities to satisfy growth potential. The fiscal
1998 capital expenditures are expected to increase approximately 50.0% over
the level incurred during the past three years due to these renovations and
will be satisfied with existing cash resources. The Company may acquire or
invest in other complementary businesses, product lines or technologies.
These acquisitions or investments may require additional debt or equity
capital to fund such activities.
A summary of cash flow activities is as follows (in thousands):
1997 1996 1995
---- ---- ----
Cash flows provided by (used in):
Operating activities................... $ 8,529 $10,888 $ 96
Investing activities (1)............... (13,621) (4,897) (21,456)
Financing activities (2)............... 1,796 1,246 24,524
-------- ------- --------
Increase (decrease) in cash and cash
equivalents (3).................. $ (3,296) $ 7,237 $ 3,164
-------- ------- --------
(1) Reflects the net purchase of $9.5 million, $1.1 million, and $17.0 million
in marketable debt securities during fiscal 1997, 1996, and 1995,
respectively.
(2) Reflects net proceeds from stock offering in fiscal 1995.
(3) Total cash and securities increased from $37.0 million on May 31, 1996 to
$43.2 million on May 31, 1997.
OPERATING ACTIVITIES: Operating activities provided $8.5 million in cash.
The increase in trade receivables of $10.2 million is due to longer product
payment terms for the recently introduced models 9300, 5100 and 3300.
Collection of receivables in June 1997 reduced this balance by approximately
$10.0 million. The decrease in accrued liabilities of $4.8 million is a
function of lower incentive compensation and an acceleration of income tax
payments.
INVESTING ACTIVITIES: Net cash of $13.6 million was used in investing
activities. The Company made purchases in the amount of $3.4 million to
upgrade computing resources and improve manufacturing capabilities by
investing in equipment that will decrease costs and improve quality. In
addition, net purchases of highly liquid marketable debt securities utilized
$9.5 million.
FINANCING ACTIVITIES: Net cash of $1.8 million was generated from financing
activities in the form of stock option exercises and the related tax benefit.
20
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business depends in large part upon the capital expenditures
of manufacturers of electronic devices, including miniature capacitors,
semiconductor memory devices, and circuits used in wireless telecommunications
equipment, including pagers and cellular phones, automotive electronics and
computers. The markets for products manufactured by the Company's customers are
cyclical and have historically experienced periodic downturns, which often have
had a negative effect on the demand for capital equipment such as that sold by
the Company. Several large, multinational electronics companies constituted
47.1% of the Company's fiscal 1997 sales and therefore, the loss of any of these
customers would be significant.
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards. The Company believes that its
future success will depend on its ability to develop and manufacture new
products and product enhancements and to introduce them successfully into the
market. Failure to do so in a timely fashion could harm the Company's
competitive position. The announcements or introductions of new products by
the Company or its competitors may adversely affect the Company's operating
results, since these announcements may cause customers to defer or forego
ordering products from the Company's existing product lines.
International shipments accounted for 71.0% of sales for fiscal 1997 compared
to 66.8% of sales for fiscal 1996. The Company expects that international
shipments will continue to represent a majority of net sales in the future.
As a result, a significant portion of the Company's net sales will be subject
to certain risks, including changes in demand resulting from fluctuations in
interest and currency exchange rates, as well as factors such as government
financed competition, changes in trade policies, tariff regulations,
difficulties in obtaining US export licenses and the difficulties of staffing
and managing foreign operations.
Most of the Company's sales are transacted in dollars and the Company's
products are made in the United States. Many Japanese customers pay in yen;
therefore, ESI hedges these sales transactions to mitigate currency risks.
The European and Asian sales subsidiaries' operating expenses are denominated
in their respective local currencies. These transactions represent
approximately 15.6% of fiscal 1997 consolidated operating expenses and are
equally split between Europe and Asia. Changes in the value of the local
currency, as measured in US dollars, will commensurably increase or decrease
operating expenses.
ESI believes that it has the product offerings and resources needed for
continuing success; however, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations.
Factors external to the Company can result in volatility of the Company's
common stock price. Because of the foregoing factors, recent trends should
not be considered reliable indicators of future stock prices or financial
results.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31,
-------
1997 1996
---- ----
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents.................... $ 15,326 $ 18,622
Securities available for sale................ 27,860 18,363
--------- ---------
Total cash and securities................ 43,186 36,985
Trade receivables, less allowance for doubtful
accounts of $230 and $314 at May 31, 1997
and 1996................................... 48,870 39,792
Inventories -
Finished goods............................. 4,322 2,979
Work-in-process............................ 6,757 6,188
Raw materials and purchased parts.......... 20,794 21,000
--------- ---------
Total inventories........................ 31,873 30,167
Deferred income taxes........................ 2,366 2,747
Other current assets......................... 580 819
--------- ---------
Total current assets....................... 126,875 110,510
PROPERTY AND EQUIPMENT, AT COST 40,631 38,853
Less-Accumulated depreciation................ (24,446) (22,191)
--------- ---------
Net property and equipment.................. 16,185 16,662
DEFERRED INCOME TAXES.......................... 1,042 1,137
OTHER ASSETS................................... 4,784 4,216
--------- ---------
$148,886 $132,525
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................. $ 6,219 $ 5,142
Accrued liabilities -
Payroll related............................ 3,457 3,433
Commissions................................ 1,933 1,890
Income taxes............................... 245 2,463
Other...................................... 1,742 4,405
--------- ---------
Total accrued liabilities.................. 7,377 12,191
Deferred revenue............................. 78 276
--------- ---------
Total current liabilities.................. 13,674 17,609
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000 shares
authorized; no shares issued................. -- --
Common stock, without par value; 40,000 shares
authorized; 8,768 and 8,655 shares issued and
outstanding at May 31, 1997 and 1996......... 57,586 55,790
Retained earnings............................. 77,626 59,126
--------- ---------
Total shareholders' equity.................. 135,212 114,916
--------- ---------
$148,886 $132,525
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
22
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MAY 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................ $150,159 $159,705 $108,215
Cost of sales............................ 69,676 72,754 51,413
-------- -------- --------
Gross margin........................... 80,483 86,951 56,802
Operating expenses:
Selling, service and administrative.... 36,593 39,858 27,635
Research, development and engineering.. 16,538 16,243 13,108
Acquired in-process research and
development........................... -- 6,000 --
-------- -------- --------
Total operating expenses.............. 53,131 62,101 40,743
Operating income......................... 27,352 24,850 16,059
Interest income.......................... 1,460 1,185 565
Other expense, net....................... (75) (719) (167)
-------- -------- --------
Income before income taxes............... 28,737 25,316 16,457
Provision for income taxes............... 9,785 9,234 4,940
-------- -------- --------
Net income............................... $ 18,952 $ 16,082 $ 11,517
-------- -------- --------
Net income per share.................... $ 2.19 $ 1.87 $ 1.53
-------- -------- --------
Weighted average number of shares
used in computing per share amounts.... 8,673 8,606 7,510
The accompanying notes are an integral part of these statements.
23
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------ -------- -----
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE AT MAY 31, 1994.................................... 6,420 $22,097 $31,450 $ 53,547
Net income.............................................. -- -- 11,517 11,517
Non-employee directors stock incentive plan............. -- 19 -- 19
Stock plans:
Employee stock plans................................ 241 2,104 -- 2,104
Tax benefit of stock options exercised.............. -- 1,068 -- 1,068
Shares issued for acquisition of Chicago Laser.......... 333 1,939 -- 1,939
Shares issued in stock offering......................... 1,380 22,535 -- 22,535
Unrealized gain on securities........................... -- -- 60 60
Cumulative translation adjustment....................... -- -- 1,655 1,655
----- ------- ------- --------
BALANCE AT MAY 31, 1995.................................... 8,374 49,762 44,682 94,444
Net income.............................................. -- -- 16,082 16,082
Stock plans:
Employee stock plans................................ 85 706 -- 706
Tax benefit of stock options exercised.............. -- 540 -- 540
Shares issued for acquisitions.......................... 196 4,782 -- 4,782
Unrealized loss on securities........................... -- -- (42) (42)
Cumulative translation adjustment....................... -- -- (1,596) (1,596)
----- ------- ------- --------
BALANCE AT MAY 31, 1996.................................... 8,655 55,790 59,126 114,916
Net income.............................................. -- -- 18,952 18,952
Stock plans:
Employee stock plans................................ 113 1,235 -- 1,235
Tax benefit of stock options exercised.............. -- 561 -- 561
Unrealized loss on securities........................... -- -- (19) (19)
Cumulative translation adjustment....................... -- -- (433) (433)
----- ------- ------- --------
BALANCE AT MAY 31, 1997.................................... 8,768 $57,586 $77,626 $135,212
----- ------- ------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $18,952 $16,082 $11,517
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Acquired in-process research and development...................... -- 6,000 --
Depreciation and amortization..................................... 3,070 2,759 2,618
Other non-cash charges (credits).................................. -- -- (414)
Deferred income taxes............................................. 476 (770) (1,626)
Changes in operating accounts:
Increase in trade receivables................................... (10,219) (6,680) (13,913)
Increase in inventories......................................... (940) (3,138) (2,795)
Decrease (increase) in other current assets..................... 239 15 (347)
(Decrease) increase in current liabilities...................... (3,049) (3,380) 5,056
------- ------- -------
Net cash provided by operating activities......................... 8,529 10,888 96
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash acquired (1).............. -- (492) --
Purchase of Chicago Laser subsidiary, net of cash acquired (2).... -- -- (707)
Purchase of property and equipment................................ (3,370) (3,635) (2,989)
Proceeds from the sale of property and equipment.................. -- -- 648
Purchase of securities............................................ (42,316) (30,986) (20,950)
Proceeds from sales of securities and maturing securities......... 32,800 29,850 4,000
(Increase) decrease in other assets............................... (735) 366 (1,458)
------- ------- -------
Net cash used in investing activities............................. (13,621) (4,897) (21,456)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to retire debt........................................... -- -- (1,183)
Proceeds from secondary stock offering............................ -- -- 22,535
Proceeds from exercise of stock options and stock plans and
related tax benefits........................................... 1,796 1,246 3,172
------- ------- -------
Net cash provided by financing activities......................... 1,796 1,246 24,524
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............................. (3,296) 7,237 3,164
CASH AND CASH EQUIVALENTS AT JUNE 1.................................. 18,622 11,385 8,221
------- ------- -------
CASH AND CASH EQUIVALENTS AT MAY 31.................................. $15,326 $18,622 $11,385
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
(1) Acquisition of XRL subsidiary:
Assets less liabilities acquired, net of cash acquired $(5,073)
Issuance of common stock 4,581
-------
Net cash used to acquire business $ (492)
(2) Acquisition of Chicago Laser subsidiary:
Assets less liabilities acquired, net of cash acquired $(2,646)
Issuance of common stock 1,939
-------
Net cash used to acquire business $ (707)
Cash payments for interest were not significant in 1997, 1996 or 1995.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BUSINESS ENVIRONMENT
The accompanying consolidated financial statements include the accounts of
Electro Scientific Industries, Inc. and its subsidiaries (the Company), all
of which are wholly owned. The Company designs and manufactures
sophisticated products used around the world in electronics manufacturing
including: laser manufacturing systems for semiconductor yield improvement,
production and test equipment for the manufacture of surface mount ceramic
capacitors, circuit fine tuning systems, precision laser and mechanical
electronic packaging production systems and machine vision systems. The
Company serves the global electronics market from its headquarters in
Portland, Oregon and through subsidiaries located in the United States,
Europe and Asia.
CONCENTRATIONS OF CREDIT RISK
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents,
securities held for sale, trade receivables and financial instruments used in
hedging activities. The Company invests its cash in cash deposits, money
market funds, commercial paper, certificates of deposit and readily
marketable debt securities. The Company places its investments with high
credit quality financial institutions and limits the credit exposure from any
one institution or instrument. To date, the Company has not experienced
losses on any of these investments. The Company sells a significant portion
of its products to a small number of electronics manufacturers: 47.1% of
fiscal 1997 revenues were derived from ten customers. The Company's
operating results could be adversely affected if the financial condition and
operations of these key customers decline.
CONCENTRATIONS OF OTHER RISKS
The Company's operations involve a number of other risks and uncertainties
including but not limited to the cyclicality of the electronics market,
rapidly changing technology, international operations and hedging exposures.
Refer to Management's Discussion and Analysis for additional commentary.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates and such
differences could be material to the financial statements.
27
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1995 and 1996 to conform with the 1997 presentation.
REVENUE RECOGNITION
The Company generally recognizes revenue at the time of shipment.
PRODUCT WARRANTY
The Company generally warrants its systems for a period of up to 12 months
for material and labor to repair and service the system. A provision for the
estimated cost related to warranty is recorded upon shipment.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
TAXES ON INCOME
Deferred income taxes have not been provided on unremitted earnings of
foreign subsidiaries as the Company believes any U.S. tax on such earnings
would be substantially offset by associated foreign tax credits.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common shares and common stock equivalents (stock options) outstanding, if
significant.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
INVENTORIES
Inventories are principally valued at standard costs which approximate the
lower of cost (first-in, first-out) or market. Costs utilized for inventory
valuation purposes include material, labor and manufacturing overhead.
DEPRECIATION AND CAPITALIZATION POLICIES
Depreciation is determined on the declining balance and straight-line methods
based on the following useful lives: buildings: 25 to 40 years; building
improvements: 5 to 15 years; and machinery and equipment: 3 to 10 years.
28
<PAGE>
Expenditures for maintenance, repairs and minor improvements are charged to
expense. Major improvements and additions are capitalized. When property is
sold or retired, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is included in other expense.
FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency translation in accordance with
Statement of Financial Accounting Standards No. 52. The total cumulative
translation adjustment included in retained earnings is $(4), $429 and $2,025
at May 31, 1997, 1996 and 1995, respectively. Foreign currency transaction
losses were $176 and $227 for the years ended May 31, 1997 and 1995,
respectively, with a gain of $380 for the year ended May 31, 1996. These
amounts are included in other expense in the accompanying Consolidated
Statements of Income.
PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
MAY 31,
-------
1997 1996
---- ----
Land...................................... $ 3,419 $ 3,419
Buildings and improvements................ 13,060 12,957
Machinery and equipment................... 23,883 22,135
Construction in progress.................. 269 342
------- -------
$40,631 $38,853
------- -------
LINE OF CREDIT
The Company has a short-term revolving line of credit with a large foreign
bank totaling $7,000. This line expires in September 1997. Management
expects to renew the revolver under similar terms or secure alternate
financing. At the Company's option, the interest rate is either prime or
LIBOR plus 1.25 percent. There were no borrowings outstanding under the line
at anytime during fiscal 1997.
EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan under the provisions of section
401(k) of the Internal Revenue Code. The Company contributed $406, $462 and
$334 to the plan for the years ended May 31, 1997, 1996 and 1995,
respectively.
29
<PAGE>
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the liability method specified by SFAS 109, the deferred tax
assets and liabilities are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates for the years in which the taxes are
expected to be paid.
The net deferred tax asset as of May 31, 1997 and May 31, 1996 consists of
the following tax effects relating to temporary differences and
carryforwards:
MAY 31,
-------
1997 1996
---- ----
Deferred tax assets:
Inventory valuation........................ $1,385 $1,129
Vacation pay............................... 629 560
Warranty costs............................. 440 350
Accrued compensation....................... 443 392
------ ------
2,897 2,431
Tax loss and credit carryforwards.......... 1,405 1,874
------ ------
Total deferred tax assets........... 4,302 4,305
Deferred tax liabilities..................... (894) (421)
------ ------
Net deferred tax asset....................... $3,408 $3,884
------ ------
At May 31, 1997, there was a net operating loss carryforward of $4,015
available for U.S. federal income tax purposes. These losses were acquired
as part of the XRL acquisition and expire through 2008.
The components of income before income taxes and the provision for income
taxes are as follows:
YEAR ENDED MAY 31,
------------------
1997 1996 1995
---- ---- ----
Income before income taxes:
Domestic............................ $24,225 $23,679 $13,369
Foreign............................. 4,512 1,637 3,088
------- ------- -------
$28,737 $25,316 $16,457
------- ------- -------
Provision for income taxes:
Current:
U.S. Federal and State............ $ 6,845 $ 8,577 $ 3,762
Foreign........................... 1,903 887 1,736
------- ------- -------
8,748 9,464 5,498
Deferred............................ 476 (770) (1,626)
Income tax effect of stock
options exercised................. 561 540 1,068
------- ------- -------
$ 9,785 $ 9,234 $ 4,940
------- ------- -------
In accordance with SFAS 109, the tax benefit related to stock option exercises
has been recorded as an increase to Common Stock rather than a reduction to the
provision for income taxes.
30
<PAGE>
A reconciliation of the provision for income taxes at the federal statutory
income tax rate to the provision for income taxes as reported is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision computed at federal statutory rate..................... $10,059 $8,861 $5,595
Higher than U.S. tax rates in foreign jurisdictions.............. 323 314 753
Impact of U.S. tax loss and credit carryforwards utilization..... -- (434) (1,236)
Impact of state taxes............................................ 878 711 273
Benefit of foreign sales corporation (FSC)....................... (1,468) (137) (217)
Other, net....................................................... (7) (81) (228)
------- ----- ------
$ 9,785 $9,234 $4,940
------- ----- ------
</TABLE>
Consolidated income tax payments amounted to $11,020, $7,968 and $4,388 for
the years ended May 31, 1997, 1996 and 1995, respectively.
EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement 128,
EARNINGS PER SHARE ("SFAS 128"), superseding APB Opinion 15. SFAS 128 is
required to be adopted for periods ending after December 15, 1997. When
adopted, all prior earnings per share ("EPS") calculations will be restated
to conform to SFAS 128. The pro forma effects of applying SFAS 128 to EPS
are as follows:
YEAR ENDED MAY 31,
------------------
1997 1996 1995
------- ------- -------
Primary EPS as reported $2.19 $1.87 $1.53
Effect of SFAS 128 0.00 0.00 0.00
----- ----- -----
Basic EPS as restated $2.19 $1.87 $1.53
----- ----- -----
Fully diluted EPS as reported $2.19 $1.87 $1.53
Effect of SFAS 128 (0.06) (0.04) (0.03)
----- ----- -----
Diluted EPS as restated $2.13 $1.83 $1.50
----- ----- -----
COMMITMENTS AND CONTINGENCIES
The Company has limited involvement with derivative financial instruments and
does not use them for trading purposes. Derivatives are used to manage well
defined foreign currency risks: the Company enters into forward exchange
contracts to hedge the value of accounts receivable denominated in a foreign
currency. Foreign exchange contracts have gains and losses that are recognized
at the settlement date. At May 31, 1997 and 1996, the Company had forward
exchange contracts totaling $5,470 and $7,460, respectively. These contracts
generally mature in less than one year and the counterparty is a large, widely
recognized international bank; therefore, risk of credit loss as a result of
nonperformance by the bank is minimal. The use of derivatives does not have a
significant effect on the Company's results of operations or its financial
position.
31
<PAGE>
The Company leases equipment and office space under operating leases which
are non-cancelable and expire on various dates through 2002. The aggregate
minimum commitment for rentals under operating leases beyond May 31, 1997 is
not significant.
The Company is a party to various legal proceedings. Management believes that
the outcome of such proceedings will not have a material effect on the
business, financial position or results of operations of the Company.
SECURITIES AVAILABLE FOR SALE
The Company accounts for securities in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). The Company classifies its marketable debt
securities as Securities Available for Sale in the accompanying Consolidated
Balance Sheets. The fair market value of these securities at May 31, 1997 and
1996 is $27,860 and $18,363, respectively. All of the Company's marketable debt
securities are invested in high-credit quality tax advantaged securities with
maturities of less than one year from the date of purchase; the amortized cost
of these securities approximates fair market value.
During fiscal 1997 and 1996, proceeds of $32,800 and $29,850, respectively,
resulted from the sales or maturities of securities; there were no realized
gains or losses associated with these sales or maturities.
SHAREHOLDER RIGHTS PLAN
In May 1989, the Company adopted a Shareholder Rights Plan and declared a
dividend distribution of one Right for each outstanding share of Common
Stock, payable to holders of record on June 23, 1989. Under certain
conditions, each Right may be exercised to purchase 1/100 of a share of
Series A No Par Preferred Stock at a purchase price of $55, subject to
adjustment. The Rights are not presently exercisable and will only become
exercisable following the occurrence of certain specified events. If these
specified events occur, each Right will be adjusted to entitle its holder to
receive, upon exercise, Common Stock (or, in certain circumstances, other
assets of the Company) having a value equal to two times the exercise price
of the Right or each Right will be adjusted to entitle its holder to receive,
upon exercise, common stock of the acquiring company having a value equal to
two times the exercise price of the Right, depending on the circumstances.
The Rights expire on May 12, 1999 and may be redeemed by the Company for
$0.01 per Right. The Rights do not have voting or dividend rights, and until
they become exercisable, have no dilutive effect on the earnings of the
Company.
32
<PAGE>
STOCK PLANS
The Company has stock option and restricted stock grant plans for officers
and employees. During fiscal 1997, ESI recorded $475 of compensation expense
related to stock grants earned in April 1997. Awards under these plans are
determined by the Compensation Committee of the Board of Directors. Stock
appreciation rights may be granted in connection with options, although no
options have been granted that include stock appreciation rights. Option
prices are at fair market value at the date of the grant and all expire ten
years from the date of grant.
The Company has an employee stock purchase plan which allows qualified
employees to direct up to 15% of base pay for purchases of stock. The
purchase price for shares purchased under the Plan is 85% of the fair market
value of stock.
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting For Stock Issued to Employees."
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting For Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and was effective
beginning with the Company's 1996 fiscal year. The Company will continue to
account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, the Company has elected to provide pro forma disclosures as
required by SFAS 123.
The Company has computed, for pro forma disclosure purposes, the value of all
options granted under the stock option plan to be $16.04 and $13.26 for 1997
and 1996. The pro forma value of options granted under the employee stock
purchase plan is immaterial for both 1997 and 1996. These computations were
made using the Black-Scholes option-pricing model, as prescribed by SFAS 123,
with the following weighted average assumptions for grants in 1997 and 1996:
Risk-free interest rate 7.5%
Expected dividend yield 0%
Expected life stock option plan 7 years
Expected volatility 48.5%
The total value of options granted would be amortized on a pro rata basis
over the vesting period of the options. Options generally vest equally over
four years. If the Company had accounted for these plans in accordance with
SFAS 123, the Company's net income and net income per share would have
decreased as reflected in the following pro forma amounts:
YEAR ENDED MAY 31,
-----------------------
1997 1996
---- ----
NET INCOME:
As reported................ $18,952 $16,082
Pro forma.................. $18,216 $15,831
NET INCOME PER SHARE:
As reported................ $ 2.19 $ 1.87
Pro forma.................. $ 2.13 $ 1.86
33
<PAGE>
The following table summarizes activity in the stock plans for the years
ended May 31, 1997 and 1996:
<TABLE>
YEAR ENDED MAY 31,
------------------
1997 1996
---------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year............................ 835 $20.60 675 $17.61
Granted........................... 230 25.95 277 22.20
Exercised......................... 93 16.47 73 9.05
Canceled.......................... 55 20.93 44 20.35
--- ------ --- ------
Options outstanding at end of year... 917 22.83 835 20.60
--- ------ --- ------
Exercisable at end of year........... 355 $18.27 260 $15.03
--- ------ --- ------
</TABLE>
The following table sets forth the exercise price range, number of shares
outstanding at May 31, 1997, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable options by groups of similar price and
grant date:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - --------------------------------------------- --------------------------------------------
WEIGHTED-
AVERAGE
OUTSTANDING REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF EXERCISE AS OF CONTRACTUAL AVERAGE AS OF AVERAGE
PRICES MAY 31, 1997 LIFE (YEARS) EXERCISE PRICE MAY 31, 1997 EXERCISE PRICE
- - ----------------- ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.63-$ 9.88 267 5.76 $ 8.86 217 $ 8.53
$ 9.88-$18.00 210 8.60 17.46 51 16.58
$18.01-$24.00 183 7.96 23.62 75 23.75
$24.01-$33.00 243 9.59 28.22 9 32.80
$33.01-$39.38 14 8.25 38.36 3 38.36
--- ---- ------ --- ------
917 8.18 $22.83 355 $18.27
</TABLE>
34
<PAGE>
GEOGRAPHIC REPORTING
The Company operates in the capital equipment segment of the electronics
industry with geographic operations in the United States, Europe and Asia.
Transfers between geographic areas are made at prevailing market prices.
Operating income is total revenue less operating expenses. In computing
operating income, none of the following items have been added or deducted:
interest income, other expense or the provision for income taxes.
Identifiable assets are those assets of the Company that are identified with
the operations in each geographic location. Corporate assets are primarily
cash and cash equivalents and securities available for sale.
Export sales included in United States sales to unaffiliated customers for
the years ended May 31, 1997, 1996 and 1995 were as follows:
EUROPE ASIA TOTAL
------ ---- -----
May 31, 1997........... $2,595 $54,250 $56,845
May 31, 1996........... 1,532 64,446 65,978
May 31, 1995........... 3,741 33,890 37,631
In fiscal year 1997, one customer accounted for 10.5% of consolidated net
sales. In fiscal 1996, there were no sales to any one customer in excess of
10% of consolidated net sales. During fiscal 1995, one customer accounted
for 12.4% of consolidated net sales.
35
<PAGE>
The following data represents segment information for the years ending May 31:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
1997 STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
- - ---- ------ ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers......... $100,328 $28,872 $20,959 $ -- $150,159
Transfers between geographic areas...... 35,986 -- 427 (36,413) --
-------- ------- ------- -------- --------
Total revenue........................... $136,314 $28,872 $21,386 $(36,413) $150,159
-------- ------- ------- -------- --------
Operating income........................ $ 22,968 $ 2,899 $ 1,623 $ (138) $ 27,352
-------- ------- ------- -------- --------
Identifiable assets at May 31, 1997..... $ 92,847 $11,374 $ 9,480 $ (8,001) $105,700
-------- ------- ------- --------
Corporate assets........................ 43,186
--------
Total assets at May 31, 1997............ $148,886
--------
--------
1996
----
Sales to unaffiliated customers......... $119,064 $18,329 $22,312 $ -- $159,705
Transfers between geographic areas...... 28,009 8 543 (28,560) --
-------- ------- ------- -------- --------
Total revenue........................... $147,073 $18,337 $22,855 $(28,560) $159,705
-------- ------- ------- -------- --------
Operating income (1).................... $ 22,861 $ 260 $ 1,965 $ (236) $ 24,850
-------- ------- ------- -------- --------
Identifiable assets at May 31, 1996..... $ 99,442 $ 8,624 $ 8,049 $(20,575) $ 95,540
-------- ------- ------- --------
Corporate assets........................ 36,985
--------
Total assets at May 31, 1996............ $132,525
--------
--------
1995
----
Sales to unaffiliated customers......... $ 69,168 $15,869 $23,178 $ -- $108,215
Transfers between geographic areas...... 24,631 9 434 (25,074) --
-------- ------- ------- -------- --------
Total revenue........................... $ 93,799 $15,878 $23,612 $(25,074) $108,215
-------- ------- ------- -------- --------
Operating income........................ $ 12,415 $ 791 $ 2,605 $ 248 $ 16,059
-------- ------- ------- -------- --------
Identifiable assets at May 31, 1995..... $ 82,774 $ 7,994 $10,922 $(19,746) $ 81,944
-------- ------- ------- --------
Corporate assets........................ 28,654
--------
Total assets at May 31, 1995............ $110,598
--------
--------
</TABLE>
(1) Includes the $6,000 in-process research and development charge associated
with the acquisition of XRL, Inc.
ACQUISITIONS
XRL, INC.
In July 1995, the Company acquired all of the outstanding stock of XRL, Inc.,
a privately held company based in Canton, Massachusetts. XRL provides
capital equipment for semiconductor yield improvement. The purchase
consideration consisted of 179 shares of ESI stock. The transaction was
accounted for as a purchase.
36
<PAGE>
In connection with the purchase price allocation, the Company obtained an
appraisal of the intangible assets which indicated that substantially all of
the acquired intangible assets consisted of research and development projects
in process. The development of these projects had not reached technological
feasibility and the technology has no alternative future use. In accordance
with generally accepted accounting principles, the acquired in-process
research and development of $6,000 was charged to expense during the quarter
ended August 31, 1995 and is reflected in the accompanying Consolidated
Statements of Income.
Pro forma combined income statement data for the years ended May 31, 1996 and
1995 was not materially different from results presented in the accompanying
Consolidated Statements of Income.
SUBSEQUENT EVENT - CHIP STAR, INC.
In June 1997, ESI merged with Chip Star, Inc. (Chip Star), a privately-held
company based in San Marcos, California. Chip Star provides capital
equipment for producers of surface mount ceramic capacitors. Consideration
paid to Chip Star was 700 shares of ESI stock. The merger will be accounted
for as a pooling-of-interests. On May 31, 1997, Chip Star's total assets
were $5,927 and shareholders' equity was $3,902.
PRO FORMA QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
PRO FORMA YEAR ENDED MAY 31, 1997 QUARTER QUARTER QUARTER QUARTER TOTAL
- - --------------------------------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Net sales........................ $36,199 $37,415 $40,347 $46,188 $160,149
Gross margin..................... 20,690 20,932 22,160 23,270 87,052
Net income....................... 4,603 5,103 5,758 5,786 21,250
Net income per share............. $ 0.49 $ 0.54 $ 0.61 $ 0.62 $ 2.27
</TABLE>
SUBSEQUENT EVENT - DYNAMOTION CORP.
In June 1997, ESI acquired all of the equity of Dynamotion/ATI Corp.
(Dynamotion), a publicly-held company based in Santa Ana, California.
Dynamotion provides mechanical drilling equipment for printed circuit board
manufacturers. The preliminary purchase consideration was $11,950 (347
shares of ESI stock) and assumption of $14,352 of liabilities. The purchase
consideration includes the fair market value of all Dynamotion stock options.
The purchase price allocation includes $2,361 of goodwill which will be
amortized over seven years. The Company is still obtaining certain data
related to the acquisition, and accordingly, the purchase price allocation
remains open. The transaction was accounted for as a purchase.
37
<PAGE>
In connection with the purchase price allocation, the Company obtained an
appraisal of the intangible assets which indicated that substantially all of
the acquired intangible assets consisted of research and development projects
in process. The development of these projects had not reached technological
feasibility and the technology has no alternative future use. In accordance
with generally accepted accounting principles, the acquired in-process
research and development of $9,000 will be charged to expense during the
quarter ended August 31, 1997. The Company currently believes that the
research and development efforts will result in commercially feasible
products in the next 24 months at an estimated additional cost of $2,000.
Pro forma combined income statement data, excluding any impact of the
previously discussed pooling-of-interests merger with Chip Star, Inc. for the
years ended May 31, 1997 and 1996 are as follows:
1997 1996
-------- --------
Sales..................................... $162,797 $173,208
Income from continuing operations......... $ 12,958 $ 12,696
Net income per share...................... $ 1.44 $ 1.42
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED MAY 31, 1997 QUARTER QUARTER QUARTER QUARTER TOTAL
- - ----------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $34,856 $35,101 $37,202 $43,000 $150,159
Gross margin.................. 19,812 19,395 20,072 21,204 80,483
Net income.................... 4,379 4,587 4,862 5,124 18,952
Net income per share.......... $ 0.51 $ 0.53 $ 0.56 $ 0.59 $ 2.19
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED MAY 31, 1996 QUARTER QUARTER QUARTER QUARTER TOTAL
- - ----------------------- ------- ------- ------- ------- --------
Net sales..................... $35,975 $40,836 $41,626 $41,268 $159,705
Gross margin.................. 19,208 22,113 22,592 23,038 86,951
Net income.................... 540(1) 4,881 5,244 5,417 16,082
Net income per share.......... $ 0.06 $ 0.57 $ 0.61 $ 0.63 $ 1.87
</TABLE>
(1) Includes the $6,000 in-process research and development charge associated
with the acquisition of XRL, Inc.
38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Electro Scientific Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Electro
Scientific Industries, Inc. (an Oregon corporation) and subsidiaries as of
May 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electro Scientific
Industries, Inc. and subsidiaries as of May 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended May 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 3, 1997
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under "Election of Directors"
in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and
is incorporated herein by reference.
Information with respect to executive officers of the Company is included under
Item 4(a) of Part I of this Report. No information is required to be included
for Item 405 of Regulation S-K for 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under "Board Compensation,"
"Executive Compensation" (excluding the performance graph) and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy Statement
for its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners and
management is included under "Voting Securities and Principal Shareholders" in
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules.
The following financial statements are included in this Annual Report on Form
10-K on the pages indicated.
Electro Scientific Industries, Inc.
and Subsidiaries: Page
Consolidated Balance Sheets as of ----
May 31, 1997 and 1996 22
Consolidated Statements of
Income for the Years Ended
May 31, 1997, 1996, and 1995 23
Consolidated Statements of
Shareholders' Equity for the Years Ended
May 31, 1997, 1996, and 1995 24
Consolidated Statements of
Cash Flows for the Years Ended
May 31, 1997, 1996, and 1995 25
Notes to Consolidated Financial Statements 27-38
Report of Independent Public Accountants 39
All schedules are omitted as the required information is inapplicable or not
significant.
41
<PAGE>
(a)(3) Exhibits.
3-A. Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3-A of the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1991.
3-B. Bylaws of the Company. Incorporated by reference
to Exhibit 3-B of the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1994.
4-A. Rights Agreement, dated as of May 12, 1989, between
the Company and United States National Bank of Oregon relating to
rights issued to all holders of Company Common Stock.
Incorporated by reference to Exhibit 1 to the Company's Report on
Form 8-K dated May 12, 1989.
10-A. ESI 1983 Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10-E of the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1986. (1)
10-B. ESI 1989 Stock Option Plan, as amended. (1)
10-C. Form of Indemnity Agreement between the Company and
each of its Directors. Incorporated by reference to Appendix C
to the Company's definitive Proxy Statement for its 1986 Annual
Meeting of Shareholders. (1)
10-D. Form of Severance Agreement between the Company and
each of its executive officers. Incorporated by reference to
Exhibit 10-H of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1992. (1)
10-E. ESI 1996 Stock Incentive Plan.
11. Statement of Calculation of Earnings Per Share.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the last quarter of fiscal year 1997. However, a Form
8-K was filed on July 7, 1997.
- - -------------------
(1) Management contract or compensatory plan or arrangement.
42
<PAGE>
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.
Date: August 1, 1997 ELECTRO SCIENTIFIC INDUSTRIES, INC.
By /s/ Donald R. VanLuvanee
----------------------------------
Donald R. VanLuvanee
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on August 1, 1997.
Signature Title
(1) Principal Executive, Financial and
Accounting Officers
/s/ Donald R. VanLuvanee President and Chief Executive Officer
- - ------------------------------
Donald R. VanLuvanee
/s/ Barry L. Harmon Senior Vice President and Chief
- - ------------------------------ Financial Officer
Barry L. Harmon
(2) Directors
/s/ David F. Bolender Chairman of the Board
- - ------------------------------
David F. Bolender
/s/ Douglas C. Strain Vice Chairman of the Board
- - ------------------------------
Douglas C. Strain
/s/ Larry L. Hansen Director
- - ------------------------------
Larry L. Hansen
/s/ W. Arthur Porter Director
- - ------------------------------
W. Arthur Porter
/s/ Vernon B. Ryles Director
- - ------------------------------
Vernon B. Ryles
/s/ Keith L. Thomson Director
- - ------------------------------
Keith L. Thomson
43
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
3-A. Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3-A of the
Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1991.
3-B. Bylaws of the Company. Incorporated by reference to
Exhibit 3-B of the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1994.
4-A Rights Agreement, dated as of May 12, 1989, between
the Company and United States National Bank of
Oregon relating to rights issued to all holders of
Company Common Stock. Incorporated by reference to
Exhibit 1 to the Company's Report on Form 8-K dated
May 12, 1989.
10-A. ESI 1983 Stock Option Plan, as amended. Incorporated
by reference to Exhibit 10-E of the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1986.
10-B. ESI 1989 Stock Option Plan, as amended.
10-C. Form of Indemnity Agreement between the Company and
each of its Directors. Incorporated by reference to
Appendix C to the Company's definitive Proxy Statement
for its 1986 Annual Meeting of Shareholders.
10-D. Form of Severance Agreement between the Company and
each of its executive officers. Incorporated by reference to
Exhibit 10-H of the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1992.
10-E. ESI 1996 Stock Incentive Plan.
11. Statement of Calculation of Earnings Per Share.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
44
<PAGE>
EXHIBIT 1O-B
ELECTRO SCIENTIFIC INDUSTRIES, INC.
1989 STOCK OPTION PLAN
(as amended as of September 20, 1996)
PURPOSE. The purpose of this 1989 Stock Option Plan (the "Plan") is
to enable Electro Scientific Industries, Inc. (the "Company") to attract and
retain people of training, experience, and ability, and to provide additional
incentive to employees and non-employee directors by giving them an
opportunity to participate in the ownership of the Company, thereby
stimulating their efforts on the Company's behalf and strengthening their
desire to remain with the Company.
SHARES SUBJECT TO THE PLAN. Except as provided in Paragraph 15, the
total number of shares of the Company's Common Stock, without par value
("Common Stock"), covered by all options granted under the Plan shall not
exceed 1,700,000 authorized but unissued or reacquired shares. In the event
any option under the Plan expires or is cancelled or terminated and is
unexercised in whole or in part, the shares allocable to the unexercised
portion shall again become available for options under the Plan.
DURATION OF THE PLAN. The Plan shall continue in effect until
options have been granted and exercised with respect to all of the shares
available for the Plan under paragraph 2 (subject to any adjustments under
paragraph 15), unless sooner terminated by action of the Board of Directors
of the Company (the "Board of Directors"). The Board of Directors shall have
the right to suspend or terminate the Plan at any time except with respect to
options then outstanding under the Plan.
ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to
time the employees to whom options shall be granted and the number of shares,
the option price, the period of each option, and the time or times at which
options may be exercised. Subject to the provisions of the Plan, the Board
of Directors may from time to time adopt rules and regulations relating to
administration of the Plan, and the interpretation and construction of the
provisions of the Plan by the Board of Directors shall be final and
conclusive. No director who holds or is eligible to hold an option under the
Plan, other than an option under Paragraph 16, shall vote upon any action
taken by the Board of Directors involving such matter. The Board of
Directors, if it so determines, may delegate to a committee of the Board of
Directors, or specified officers of the Company, or both (the "Committee")
any or all authority for administration of the Plan. If authority is
delegated to a Committee, all references to the Board of Directors in the
Plan shall mean and relate to the Committee except (i) as otherwise provided
by the Board of Directors, and (ii) that only the Board of Directors may
terminate or amend the Plan as provided in paragraphs 3 and 19.
GRANTS.
(a) Options granted under the Plan may be Incentive Stock Options,
as defined in Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or Non-Statutory Stock Options. For the purpose of the Plan, a
Non-Statutory Stock Option means an option other than an Incentive Stock
Option. The Board of Directors or Committee, as the case may be, has the sole
discretion to determine which options shall be Incentive Stock Options and
which options shall be Non-Statutory Stock Options, and shall specifically
<PAGE>
designate each option granted under the Plan as an Incentive Stock Option or
Non-Statutory Stock Option. No Incentive Stock Option may be granted under
the Plan on or after the tenth anniversary of the last action by the Board of
Directors approving an increase in the number of shares available for
issuance under the Plan, which action was subsequently approved within 12
months by the shareholders.
(b) No employee may be granted Incentive Stock Options under the Plan
such that the aggregate fair market value, on the date of grant, of the stock
with respect to which Incentive Stock Options are exercisable for the first time
by the employee during any calendar year under the Plan and under any other
incentive stock option plan (within the meaning of Section 422 of the Code) of
the Company or any parent or subsidiary of the Company exceeds $100,000.
(c) No employee may be granted options under the Plan for more than
250,000 shares of Common Stock in any fiscal year.
ELIGIBILITY. Incentive Stock Options and Non-Statutory Stock Options
may be granted under the Plan to employees of the Company or any parent or
subsidiary of the Company (including employees who are directors). Directors
who are not employees shall only be eligible to receive options granted pursuant
to paragraph 16.
OPTION PRICE. The option price per share under each option granted
under the Plan shall be determined by the Board of Directors at the time of
grant. Except as provided in paragraph 9, the option price shall be not less
than 100 percent of the fair market value of the shares covered by the option on
the date the option is granted. The fair market value of shares covered by an
option shall be deemed to be the last price for the Common Stock as reported to
NASDAQ and published in the Wall Street Journal for the day preceding the date
of grant, or such other value of the Common Stock as shall be determined by the
Board of Directors of the Company.
DURATION OF OPTIONS. Subject to paragraphs 9 and 13, each option
granted under the Plan shall continue in effect for the period fixed by the
Board of Directors, except that no Incentive Stock Option shall be exercisable
after ten years from the date it is granted and no Non-Statutory Stock Option
shall be exercisable after the expiration of 10 years plus seven days from the
date it is granted.
LIMITATIONS ON GRANTS TO 10 PERCENT SHAREHOLDERS. An Incentive Stock
Option may be granted under the Plan to an employee possessing more than 10
percent of the total combined voting power of all classes of stock of the
Company or of any parent or subsidiary of the Company only if the option price
is at least 110 percent of the fair market value of the stock subject to the
option on the date it is granted, as described in paragraph 7, and the Incentive
Stock Option by its terms is not exercisable after the expiration of five years
from the date it is granted.
EXERCISE OF OPTIONS. Options granted under the Plan may be exercised
from time to time over the period stated in each option in such amounts and at
such times as shall be prescribed by the Board of Directors. If the optionee
does not exercise an option in any one year with respect to the full number of
shares to which the optionee is entitled in that year, the optionee's rights
shall be cumulative and the optionee may purchase those shares in any subsequent
year during the term of the option.
<PAGE>
LIMITATION ON RIGHTS TO EXERCISE. Except as provided in paragraph 13
or as otherwise approved by the Board of Directors, no option granted under the
Plan may be exercised unless at the time of such exercise the optionee is
employed by or a director of the Company or any parent or subsidiary of the
Company and shall have been so employed or engaged continuously since the date
such option was granted. Absence on leave or on account of illness or
disability under rules established by the Board of Directors shall not, however,
be deemed an interruption of employment for this purpose.
NONASSIGNABILITY. Each option granted under the Plan by its terms
shall be nonassignable and nontransferable by the optionee except by will or by
the laws of descent and distribution of the state or country of the optionee's
domicile at the time of death, and each such option by its terms shall be
exercisable during the optionee's domicile at the time of death, and each such
option by its terms shall be exercisable during the optionee's lifetime only by
the optionee.
1. TERMINATION OF EMPLOYMENT.
(a) In the event the employment of an optionee by the Company or by
any parent or subsidiary of the Company is terminated by retirement or for any
reason, voluntarily or involuntarily with or without cause, other than in the
circumstances specified in subsection (b) or (c) below, any option held by such
optionee may be exercised at any time prior to its expiration date or the
expiration of three months after the date of such termination of employment,
whichever is the shorter period, but only if and to the extent the optionee was
entitled to exercise the option on the date of such termination.
(b) In the event an optionee's employment by the Company or by any
parent or subsidiary of the Company is terminated because of death or physical
disability (within the meaning of Section 22(e)(3) of the Code), any option held
by such optionee may be exercised with respect to all remaining shares subject
thereto, free of any limitation on the number of shares with respect to which
the option may be exercised in any one year, at any time prior to its expiration
date or the expiration of one year after the date of such termination, whichever
is the shorter period. If an optionee's employment is terminated by death, any
option held by the optionee shall be exercisable only by the person or persons
to whom such optionee's rights under such option shall pass by the optionee's
will or by the laws of descent and distribution of the state or country of the
optionee's domicile at the time of death.
(c) In the event an optionee's employment by the Company or by any
parent or subsidiary of the Company terminates within one year after a change in
control of the Company for any reason other than retirement, death, or physical
disability (within the meaning of Section 22(e)(3) of the Code), any option held
by such optionee may be exercised with respect to all remaining shares subject
thereto, free of any limitation on the number of shares with respect to which
the option may be exercised in any one year, at any time prior to its expiration
date or the expiration of three months after the date of such termination of
employment, whichever is the shorter period. A "change in control of the
Company" shall mean a change in control of a nature that would be required to be
reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided
that, without limitation, such a change in control shall be deemed to have
occurred if (1) any "person" (as such term is used in Sections 13(d) or 14(d)(2)
of the Exchange Act) is or becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 20 percent or more of the combined
voting power of the Company's then outstanding securities; or (2) during any
period of two
<PAGE>
consecutive years, individuals who at the beginning such period constitute
the Board of Directors of the Company cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for election
by the Company's shareholders, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who were directors
at the beginning of the period. A change in control of the Company shall not
include any change in control pursuant to a written agreement between the
Company and another person, which agreement is approved and adopted by the
Board of Directors of the Company or pursuant to any tender offer or exchange
offer which the Board of Directors has in any manner recommended acceptance
of to the shareholders of the Company.
(d) Unless otherwise approved by the Board of Directors, to the
extent an option held by any deceased optionee or by any optionee whose
employment is terminated shall not have been exercised within the limited
periods provided above, all further rights to purchase shares pursuant to such
option shall cease and terminate at the expiration of such periods.
PURCHASE OF SHARES. Shares may be purchased or acquired pursuant to
an option granted under the Plan only upon receipt by the Company of notice in
writing from the optionee of the optionee's intention to exercise, specifying
the number of shares as to which the optionee desires to exercise the option and
the date on which the optionee desires to complete the transaction, which shall
not be more than 30 days after receipt of the notice, and, unless in the opinion
of counsel for the Company such a representation is not required in order to
comply with the Securities Act of 1933, as amended, containing a representation
that it is the optionee's present intention to acquire the shares for investment
and not with a view to distribution. On or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee must
have paid the Company the full purchase price of such shares in cash (including
cash which may be the proceeds of a loan from the Company), in shares of Common
Stock of the Company previously acquired and held for not less than one year by
the optionee, valued at fair market value as defined in paragraph 7, or in any
combination of cash and shares of Common Stock of the Company. No shares shall
be issued until full payment therefor has been made, and an optionee shall have
none of the rights of a shareholder until a certificate for shares is issued to
such optionee. Each optionee who has exercised an option shall, upon
notification of the amount due, if any, and prior to or concurrently with
delivery of the certificates representing the shares with respect to which the
option was exercised, pay to the Company amounts necessary to satisfy any
applicable federal, state and local withholding tax requirements. If additional
withholding becomes required beyond any amount deposited before delivery of the
certificates, the optionee shall pay such amount to the Company on demand.
CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding
shares of Common Stock of the Company are hereafter increased or decreased or
changed into or exchanged for a different number or kind of shares or other
securities of the Company or another corporation, by reason of any
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, combination of shares, or dividend payable in shares, appropriate
adjustment shall be made by the Board of Directors in the number and kind of
shares for the purchase of which options may be granted under the Plan. In
addition, the Board of Directors shall make appropriate adjustment in the number
and kind of shares as to which outstanding options, or portions thereof then
unexercised, shall be exercisable, to the end that each optionee's proportionate
interest shall be maintained as before the occurrence of such event. Such
adjustment in outstanding options shall be made without change in the total
price applicable to the unexercised portion of any option and with a
corresponding adjustment in the option price per share. Any such adjustment
made by the Board of Directors shall be conclusive. In the event of dissolution
or liquidation of the Company or a merger or
<PAGE>
consolidation in which the Company is not the surviving corporation, in lieu
of providing for options as provided for above in this paragraph 15, the
Board of Directors may, in its sole discretion, provide a 30-day period
immediately prior to such event during which optionees shall have the right
to exercise options in whole or in part without any limitation on
exercisability.
1. OPTION GRANTS TO NON-EMPLOYEE DIRECTORS.
(a) ANNUAL GRANTS. Each Non-Employee Director shall be
automatically granted an option to purchase 3,000 shares of Common Stock on
July 31 of each year, provided the Non-Employee Director is a director on
such date. A "Non-Employee Director" is a director who is not a full-time
employee of the Company or any of its subsidiaries and has not been a
full-time employee of the Company or any of its subsidiaries within one year
of any date as of which a determination of eligibility is made. The increase
in the number of shares covered by options automatically granted under this
paragraph 16 as of July 31, 1996 from 1,000 to 3,000 shares shall be subject
to and conditioned upon approval by the shareholders at the 1996 annual
meeting of shareholders of the amendment to this paragraph 16 to the Plan.
(b) EXERCISE PRICE. The exercise price of the options granted
pursuant to this paragraph 16 shall be equal to 100 percent of the fair market
value of the Common Stock determined pursuant to paragraph 7.
(c) TERM OF OPTION. The term of each option granted pursuant to this
paragraph 16 shall be 10 years from the date of grant.
(d) EXERCISABILITY. Until an option expires or is terminated and
except as provided in paragraphs 16(e) and 15, an option granted under this
paragraph 16 shall be exercisable according to the following schedule:
Period of Non-Employee
Directors' Continuous Service
as a Director of the
Company from the Date Portion of Total Option
the Option is Granted Which is Exercisable
- - -----------------------------------------------------------------
Less than 1 year 0%
After 1 year 25%
After 2 years 50%
After 3 years 75%
After 4 years 100%
(e) TERMINATION AS A DIRECTOR. If an optionee ceases to be a
director of the Company for any reason, other than death or physical
disability (within the meaning of Section 22(e)(3) of the Code), the option
may be exercised at any time prior to the expiration date of the option or
the expiration of three months after the last day the optionee served as a
director, whichever is the shorter period, but only if and to the extent the
optionee was entitled to exercise the option as of the last day the optionee
served as a director. If an optionee ceases to be a director of the Company
as a result of death or physical disability (within the meaning of Section
22(e)(3) of the Code), the option may be exercised with respect to all
remaining shares subject thereto, free of any limitation on the number of
shares with respect to which the option may be exercised in any one year, at
any time prior to the expiration date of the option
<PAGE>
or the expiration of one year after the last day the optionee served as a
director, whichever is the shorter period.
(f) EXERCISE OF OPTIONS. Options may be exercised upon payment of
cash or shares of Common Stock of the Company in accordance with paragraph 14.
STOCK APPRECIATION RIGHTS.
(a) GRANT. Stock appreciation rights may be granted under the Plan
by the Board of Directors, subject to such rules, terms and conditions as the
Board of Directors may prescribe; provided, however, that stock appreciation
rights may only be granted in connection with an option grant or in connection
with an outstanding option previously granted under the Plan and shall not be
assignable other than in conjunction with assignment of the related option
pursuant to paragraph 12.
(b) EXERCISE.
(i) A stock appreciation right shall be exercisable only at the
time or times established by the Board of Directors and only to the extent and
on the same conditions that the related option could be exercised. Upon
exercise of a stock appreciation right, the option or portion thereof to which
the stock appreciation right relates must be surrendered. No stock appreciation
right may be exercised during the six-month period following the date it is
granted. Option shares with respect to which a stock appreciation right has
been exercised may not again be subjected to options under the Plan.
(ii) The Board of Directors may withdraw any stock appreciation
right granted under the Plan at any time and may impose any conditions upon the
exercise of a stock appreciation right or adopt rules and regulations from time
to time affecting the rights of holders of stock appreciation rights. Such
rules and regulations may govern the right to exercise stock appreciation rights
prior to the adoption or amendment of such rules and regulations as well as
stock appreciation rights granted thereafter.
(iii) Each stock appreciation right shall entitle the holder,
upon exercise, to receive from the Company in exchange therefor an amount equal
in value to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over the option price per share to which
the stock appreciation right relates, times the number of shares covered by the
option, or portion thereof, which is surrendered. No stock appreciation right
shall be exercisable at a time that the amount determined under this
subparagraph is negative. Payment upon exercise of a stock appreciation right
by the Company may be made in Common Stock valued at its fair market value, or
in cash, or partly in shares and partly in cash, all as shall be determined by
the Board of Directors.
(iv) The fair market value of the Common Stock shall be
determined as specified in paragraph 7.
(v) Shares issued upon exercise of a stock appreciation right
may consist either in whole or in part of authorized and unissued Common Stock
or issued Common Stock held as treasury shares. No fractional shares shall be
issued upon exercise of a stock appreciation right. In lieu thereof, cash may
be paid in an amount equal to the value of the
<PAGE>
fraction or, if the Board of Directors shall determine, the number of shares
may be rounded downward to the next whole share.
(vi) In the event of any adjustment, pursuant to paragraph 15, in
the number of shares of Common Stock subject to an option granted under the
Plan, the stock appreciation rights granted hereunder in connection with such
option shall be proportionately adjusted.
CORPORATE MERGERS, ACQUISITION, ETC. The Board of Directors may also
grant options and stock appreciation rights having terms and provisions which
vary from those specified in this Plan provided that any options and stock
appreciation rights granted pursuant to this section are granted in substitution
for, or in connection with the assumption of, existing options and stock
appreciation rights granted by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of property
or stock, separation, reorganization or liquidation to which the Company or a
subsidiary is a party.
AMENDMENT OF PLAN. The Board of Directors may at any time and from
time to time modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraph 15, however, no change in an
option already granted to an employee shall be made without the written consent
of such employee. Furthermore, unless approved by the shareholders at an annual
meeting or a special meeting, no amendment or change shall be made in the Plan
(a) increasing the total number of shares which may be purchased under the Plan,
(b) changing the minimum option price specified in the Plan, (c) increasing the
maximum option period, or (d) materially modifying the requirements for
eligibility for participation in the Plan.
APPROVALS. The obligations of the Company under the Plan shall be
subject to the approval of such state or federal authorities or agencies, if
any, as may have jurisdiction in the matter. The Company will use its best
efforts to take such steps as may be required by state or federal law or
applicable regulations, including rules and regulations of the Securities and
Exchange Commission and any stock exchange in which the Company's shares may
then be listed, in connection with the granting of any option under the Plan,
the issuance or sale of any shares purchased upon exercise of any option under
the Plan, or the listing of such shares on said exchange. The foregoing
notwithstanding, the Company shall not be obligated to issue or deliver shares
of Common Stock under the Plan if the Company is advised by the legal counsel
that such issuance or delivery would violate applicable state of federal
securities laws.
EMPLOYMENT RIGHTS. Nothing in the Plan or any option granted pursuant
to the Plan shall confer upon any optionee any right to be continued in the
employment of the Company or any parent or subsidiary of the Company, or to
interfere in any way with the right of the Company or any parent or subsidiary
of the Company by whom such optionee is employed to terminate such optionee's
employment at any time, with or without cause.
<PAGE>
EXHIBIT 10-E
ELECTRO SCIENTIFIC INDUSTRIES, INC.
1996 STOCK INCENTIVE PLAN
1. PURPOSE. The purpose of this Stock Incentive Plan (the "Plan") is to
enable Electro Scientific Industries, Inc. (the "Company") to attract and retain
the services of selected employees, officers and directors of the Company or of
any subsidiary of the Company.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below
and in paragraph 9, the shares to be offered under the Plan shall consist of
Common Stock of the Company, and the total number of shares of Common Stock that
may be issued under the Plan shall not exceed 150,000 shares. The shares issued
under the Plan may be authorized and unissued shares or reacquired shares. If a
Performance-based Award granted under the Plan expires, terminates or is
cancelled, the unissued shares subject to such Performance-based Award shall
again be available under the Plan. If shares sold or issued as a bonus or
Performance-based Award under the Plan are forfeited to the Company or
repurchased by the Company, the number of shares forfeited or repurchased shall
again be available under the Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective as of April 12,
1996. However, all awards under the Plan shall be conditioned on and subject to
approval of the Plan by the shareholders of the Company. Subject to this
limitation, Performance-based Awards may be granted and shares may be awarded as
bonuses or sold under the Plan at any time after the effective date and before
termination of the Plan.
(b) DURATION. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to Performance-based Awards and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any right of the Company to repurchase shares or the forfeitability of
shares issued under the Plan.
4. ADMINISTRATION.
(a) BOARD OF DIRECTORS. The Plan shall be administered by the Board
of Directors of the Company, which shall determine and designate from time to
time the individuals to whom awards shall be made, the amount of the awards and
the other terms and conditions of the awards. Subject to the provisions of the
Plan, the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the Board
of Directors shall be final and conclusive. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the
<PAGE>
Plan or in any related agreement in the manner and to the extent it shall
deem expedient to carry the Plan into effect, and it shall be the sole and
final judge of such expediency.
(b) COMMITTEE. The Board of Directors may delegate to a committee of
the Board of Directors or specified officers of the Company, or both (the
"Committee") any or all authority for administration of the Plan. If authority
is delegated to a Committee, all references to the Board of Directors in the
Plan shall mean and relate to the Committee except (i) as otherwise provided by
the Board of Directors, and (ii) that only the Board of Directors may amend or
terminate the Plan as provided in paragraphs 3 and 10.
5. TYPES OF AWARDS; ELIGIBILITY. The Board of Directors may, from time
to time, take the following action, separately or in combination, under the
Plan: (i) award stock bonuses as provided in paragraph 6; (ii) sell shares
subject to restrictions as provided in paragraph 7; and (iii) grant
Performance-based Awards as provided in paragraph 8. An award may be made to
any employee, officer or director of the Company or any subsidiary of the
Company. The Board of Directors shall select the individuals to whom awards
shall be made and shall specify the action taken with respect to each
individual to whom an award is made. At the discretion of the Board of
Directors, an individual may be given an election to surrender an award in
exchange for the grant of a new award.
6. STOCK BONUSES. The Board of Directors may award shares under the Plan
as stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. The Board of Directors may require the
recipient to sign an agreement as a condition of the award, but may not require
the recipient to pay any monetary consideration other than amounts necessary to
satisfy tax withholding requirements. The agreement may contain any terms,
conditions, restrictions, representations and warranties required by the Board
of Directors. The certificates representing the shares awarded shall bear any
legends required by the Board of Directors. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the recipient fails to pay the amount demanded, the Company
may withhold that amount from other amounts payable by the Company to the
recipient, including salary or fees for services, subject to applicable law.
With the consent of the Board of Directors, a recipient may deliver Common Stock
to the Company to satisfy this withholding obligation. The number of shares
reserved for issuance under the Plan shall be reduced by the number of shares
issued as a stock bonus, less the number of shares surrendered or withheld to
satisfy withholding obligations.
7. RESTRICTED STOCK. The Board of Directors may issue shares under the
Plan for such consideration (including promissory notes and services) as
determined by the Board of Directors. Shares issued under the Plan shall be
subject to the terms, conditions and restrictions determined by the Board of
Directors. The restrictions may include restrictions concerning
transferability, repurchase by the Company and forfeiture of the shares issued,
together with such other restrictions as may be determined by the Board of
Directors. All Common Stock issued pursuant to this paragraph 7 shall be
subject to a purchase agreement, which shall be executed by the Company and the
prospective recipient of the shares prior to the delivery of certificates
representing such shares to the recipient. The purchase agreement may
<PAGE>
contain any terms, conditions, restrictions, representations and warranties
required by the Board of Directors. The certificates representing the shares
shall bear any legends required by the Board of Directors. The Company may
require any purchaser of restricted stock to pay to the Company in cash upon
demand amounts necessary to satisfy any applicable federal, state or local
tax withholding requirements. If the purchaser fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by
the Company to the purchaser, including salary, subject to applicable law.
With the consent of the Board of Directors, a purchaser may deliver Common
Stock to the Company to satisfy this withholding obligation. The number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued as restricted stock, less the number of shares surrendered or
withheld to satisfy withholding obligations.
8. PERFORMANCE-BASED AWARDS. The Board of Directors may grant awards
intended to qualify as performance-based compensation under Section 162(m) of
the Internal Revenue Code of 1986, as amended, and the regulations thereunder
("Performance-based Awards"). Performance-based Awards shall be denominated at
the time of grant either in Common Stock ("Stock Performance Awards") or in
dollar amounts ("Dollar Performance Awards"). Payment under a Stock Performance
Award or a Dollar Performance Award shall be made, at the discretion of the
Board of Directors, in Common Stock ("Performance Shares"), or in cash or in any
combination thereof. Performance-based Awards shall be subject to the following
terms and conditions:
(a) AWARD PERIOD. The Board of Directors shall determine the period
of time for which a Performance-based Award is made (the "Award Period").
(b) PERFORMANCE GOALS AND PAYMENT. The Board of Directors shall
establish in writing objectives ("Performance Goals") that must be met by the
Company or any subsidiary, division or other unit of the Company ("Business
Unit") during the Award Period as a condition to payment being made under the
Performance-based Award. The Performance Goals for each award shall be one or
more targeted levels of performance with respect to one or more of the following
objective measures with respect to the Company or any Business Unit: earnings,
earnings per share, stock price increase, total shareholder return (stock price
increase plus dividends), return on equity, return on assets, return on capital,
economic value added, revenues, operating income, inventories, inventory turns,
cash flows or any of the foregoing before the effect of acquisitions,
divestitures, accounting changes, and restructuring and special charges
(determined according to criteria established by the Board of Directors). The
Board of Directors shall also establish the number of Performance Shares or the
amount of cash payment to be made under a Performance-based Award if the
Performance Goals are met or exceeded, including the fixing of a maximum payment
(subject to paragraph 8(d)). The Board of Directors may establish other
restrictions to payment under a Performance-based Award, such as a continued
employment requirement, in addition to satisfaction of the Performance Goals.
Some or all of the Performance Shares may be issued at the time of the award as
restricted shares subject to forfeiture in whole or in part if Performance Goals
or, if applicable, other restrictions are not satisfied.
(c) COMPUTATION OF PAYMENT. During or after an Award Period, the
performance of the Company or Business Unit, as applicable, during the period
shall be measured against the Performance Goals. If the Performance Goals
are not met, no payment shall be made under a Performance-based Award. If
the Performance Goals are met or
<PAGE>
exceeded, the Board of Directors shall certify that fact in writing and
certify the number of Performance Shares earned or the amount of cash payment
to be made under the terms of the Performance-based Award.
(d) MAXIMUM AWARDS. No participant may receive Stock Performance
Awards in any fiscal year under which the maximum number of shares of Common
Stock issuable under the award exceeds 100,000 shares or Dollar Performance
Awards in any fiscal year under which the maximum amount of cash payable under
the award exceeds $750,000.
(e) TAX WITHHOLDING. Each participant who has received Performance
Shares shall, upon notification of the amount due, pay to the Company in cash
amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant, including salary, subject to applicable law. With the
consent of the Board of Directors, a participant may satisfy this obligation, in
whole or in part, by having the Company withhold from any shares to be issued
that number of shares that would satisfy the withholding amount due or by
delivering shares of Common Stock to the Company to satisfy the withholding
amount.
(f) EFFECT ON SHARES AVAILABLE. The payment of a Performance-based
Award in cash shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan. The number of shares of Common Stock reserved for
issuance under the Plan shall be reduced by the number of shares issued upon
payment of an award, less the number of shares surrendered or withheld to
satisfy withholding obligations.
9. CHANGES IN CAPITAL STRUCTURE. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company
by reason of any stock split, combination of shares or dividend payable in
shares, recapitalization or reclassification, appropriate adjustment shall be
made by the Board of Directors in the number and kind of shares available for
grants under the Plan. In addition, the Board of Directors shall make
appropriate adjustment in the number and kind of shares subject to
outstanding Performance-based Awards so that the recipient's proportionate
interest before and after the occurrence of the event is maintained.
Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the
issuance of fractional shares, and any fractional shares resulting from any
adjustment may be disregarded or provided for in any manner determined by the
Board of Directors. Any such adjustments made by the Board of Directors
shall be conclusive.
10. AMENDMENT OF PLAN. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraph 9, however, no change in an award
already granted shall be made without the written consent of the holder of such
award.
11. APPROVALS. The obligations of the Company under the Plan are subject
to the approval of state and federal authorities or agencies with jurisdiction
in the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the
<PAGE>
grants under the Plan. The foregoing notwithstanding, the Company shall not
be obligated to issue or deliver Common Stock under the Plan if such issuance
or delivery would violate applicable state or federal securities laws.
12. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
13. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except
as otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
<PAGE>
EXHIBIT 11
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Number of Shares
----------------
Years Ended May 31,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average number of shares of
common stock outstanding 8,673,287 8,605,782 7,510,191
--------- --------- ---------
Common stock equivalents:
Application of the treasury stock method
to the stock option plan -- -- --
--------- --------- ---------
Weighted average number of shares used
in net income per share 8,673,287 8,605,782 7,510,191
--------- --------- ---------
Net income $ 18,952 $ 16,082 $ 11,517
--------- --------- ---------
Net income per share (primary and fully
diluted) 1 : $ 2.19 $ 1.87 $ 1.53
--------- --------- ---------
</TABLE>
1. No additional shares related to outstanding options are included in the
primary and fully diluted calculations for the years ended May 31, 1997,
1996 and 1995, as the differences were not significant.
45
<PAGE>
EXHIBIT 21
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF MAY 31, 1997
Percentage of
State and Country Voting Securities
Subsidiaries Of Incorporation Owned (1)
- - ------------ ----------------- -----------------
Chicago Laser Systems, Inc. Oregon 100%
CHINT, Ltd. U.S. Virgin Islands 100%
CLS GmbH Germany 100%
CLS Ltd England 100%
Dynamotion Merger Corp. New York 100%
ESI BV The Netherlands 100%
ESI Foreign Sales Corporation Guam 100%
ESI GmbH Germany 100%
ESI International (DISC) Oregon 100%
ESI KK Japan 100%
ESI Korea Korea 100%
ESI Ltd England 100%
ESI SARL France 100%
ESI SRL Italy 100%
Palomar Systems, Inc. Oregon 100%
XRL Corporation Oregon 100%
(1) Other than qualifying shares, where applicable.
46
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into Electro
Scientific Industries, Inc. and subsidiaries previously filed Form S-8 and
Form S-3 Registration Statements File Nos., 2-91731, 33-2623, 33-2624,
33-34098, 33-37148, 33-46970, 33-58292, 33-70584, 33-63705, 33-65477,
333-16485, 333-16487 and 333-29513.
ARTHUR ANDERSEN LLP
Portland, Oregon
August 1, 1997
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 15,326
<SECURITIES> 27,860
<RECEIVABLES> 49,100
<ALLOWANCES> 230
<INVENTORY> 31,873
<CURRENT-ASSETS> 126,875
<PP&E> 40,631
<DEPRECIATION> 24,446
<TOTAL-ASSETS> 148,886
<CURRENT-LIABILITIES> 13,674
<BONDS> 0
0
0
<COMMON> 57,586
<OTHER-SE> 77,626
<TOTAL-LIABILITY-AND-EQUITY> 148,886
<SALES> 150,159
<TOTAL-REVENUES> 150,159
<CGS> 69,676
<TOTAL-COSTS> 69,676
<OTHER-EXPENSES> 53,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,737
<INCOME-TAX> 9,785
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,952
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.19
</TABLE>
