<PAGE>
UNITED STATES
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, 1998 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)
<TABLE>
<S> <C>
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)
</TABLE>
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 voting and non-voting Common Stock held by
nonaffiliates of the Registrant at June 30, 1998: $359,160,000.
The number of shares of Common Stock outstanding at June 30, 1998: 11,379,000.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document which is incorporated
- -------- -----------------------
1998 Annual Report to Shareholders Part II
Proxy Statement for 1998 Annual Meeting Part III
of Shareholders
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item of Form 10-K Page
- ----------------- -----
<S> <C>
PART I
Item 1 - Business 3
Item 2 - Properties 9
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to a Vote of Security Holders
and Executive Officers 10
PART II
Item 5 - Market for the Registrant's Common Equity and
Related Shareholder Matters 12
Item 6 - Selected Financial Data 13
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8 - Financial Statements and Supplementary Data 20
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 43
PART III
Item 10 - Directors and Executive Officers of the Registrant 43
Item 11 - Executive Compensation 43
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 43
Item 13 - Certain Relationships and Related Transactions 43
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 44
SIGNATURES 46
</TABLE>
2
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PART I
ITEM 1. BUSINESS
Electro Scientific Industries, Inc. and its subsidiaries ("ESI" or "The
Company") 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 fine tune
electronic circuitry, improve the yield of semiconductor memory devices, and
of high-speed test and termination equipment used in the high-volume
production of miniature capacitors. Additionally, ESI produces a family of
mechanical and laser drilling systems for production of printed wiring boards
and advanced electronic packaging, as well as 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 and automotive electronics
products (Ericsson, LG Semiconductor, Motorola, Siemens and WUS); miniature
capacitors (KEMET, Kyocera/AVX, Philips, Samsung and TDK); semiconductor
memory devices (Fujitsu, Hitachi, Hyundai, IBM, and Samsung); printed wiring
boards (Samsung, Johnson-Matthey/ACI and WUS) and users of machine vision
systems in electronic manufacturing equipment (Kulicke and Soffa, Universal
Instruments, and Canon).
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, fax
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, 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, enabling the existing cellular
frequency bands to accommodate more cellular users without interchannel
interference.
As electronic device densities and performance demands have increased,
the manufacturers of capacitors and resistors 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. ESI's leading-edge technologies provide our customers
with the capability to address these challenges.
3
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Another 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.
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 including improved yield,
increased throughput, greater reliability, and increased flexibility,
resulting in a high return on investment. ESI designs its production systems
with a migration path for system upgrade, providing customers the flexibility
to add capacity or improve product performance at a reasonable incremental
cost.
ESI designs and manufactures products which target several markets
within the electronics industry. These products include circuit fine tuning
systems, electronic component manufacturing equipment, memory yield improvement
systems, machine vision solutions and advanced electronic packaging equipment.
CIRCUIT FINE TUNING SYSTEMS. ESI's circuit fine tuning systems precisely
tune the frequency of electronic circuits that receive and transmit signals
in pagers, cellular telephones and other wireless devices. ESI's laser
trimming systems also tune automotive electronic assemblies such as engine
control circuits. Customers include Analog Devices, Autecs, Burr-Brown,
C-MAC, Ericsson, Motorola, Siemens, and TA-I.
An application-specific laser adjusts the electrical performance of an
electrical product or assembly containing many circuits by removing a precise
amount of material from one or more components in the circuit. This is done
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 product to the desired
frequency.
ELECTRONIC COMPONENT MANUFACTURING EQUIPMENT. ESI's product offerings in the
electronic component market consist 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. MLCCs are used in circuits that process analog
signals or operate at high frequencies in products such as computers, video
equipment, and voice and wireless telecommunication products. Customers
include KEMET, Kyocera/AVX, Pan Overseas, Philips, Samsung, Siemens, Taiyo
Yuden and TDK.
The worldwide miniature surface mount capacitor market is estimated to be
approximately $3.3 billion (300 billion units) in 1998. Most of the leading
producers are in Japan, led by Murata, TDK and Kyocera. Production demands
imposed by miniaturization are leading capacitor manufacturers to
4
<PAGE>
increasingly consider merchant equipment suppliers, such as ESI, as an
alternative to internal development of manufacturing equipment.
As circuit sizes have shrunk, the size of commonly used miniature
capacitors has also shrunk as small as .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.
Virtually all capacitors are tested and sorted by capacitance
(electrical energy storage) and dissipation factor (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. MLCCs are manufactured in a lamination process, which
involves 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. ESI produces a fully automated product line for termination of MLCCs
and capacitor arrays. ESI's component visual inspection system provides
automated machine vision based inspection of MLCCs. Parts are inspected for
dimensional inspection and defect detection.
MEMORY YIELD IMPROVEMENT SYSTEMS. Nearly all manufacturers of dynamic random
access memory (DRAM) use memory yield improvement systems to increase
production yields. Personal computers and high performance workstations are
the largest market for DRAM, though many consumer products, such as
photocopiers, fax machines and telecommunications equipment require
increasing amounts of memory. ESI's memory yield improvement system customers
include Canon, Fujitsu, Hitachi, Hyundai, IBM, LG Semiconductor, NEC,
Samsung, Siemens, and Acer.
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 resulted in lower primary
manufacturing yields, increasing the need for advanced memory repair
technology.
The memory yield enhancement process begins with circuit designers
adding extra (redundant) elements to the memory chip. During the
manufacturing process each device is tested. When a defective element is
identified, its location or address is recorded and given to ESI's memory
yield improvement system to effect a replacement or repair. The system
positions a laser beam over connecting links of the defective element and
cuts the electrical path. Design redundancy is used by every significant
manufacturer of DRAMs and is increasingly being used by manufacturers of
other semiconductor memory applications, such as static random access memory
(SRAMs), digital signal processors (DSPs), and other logic devices with
embedded memory.
VISION PRODUCTS. ESI provides electronics manufacturers with machine vision
solutions for automated process control and visual inspection for the
assembly of computer chips, PWBs and discrete electronic components. ESI has
concentrated its efforts on selling vision products to original equipment
manufacturer (OEM) suppliers of semiconductor and electronics equipment.
Customers for ESI's vision products include Canon, IBM, Kulicke and Soffa,
Lucent Technologies, Motorola, Siemens and Universal Instruments.
5
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Machine vision has emerged as a critical technology as semiconductor
manufacturers move toward higher densities and more complex architectures.
By allowing them to achieve greater precision, increased equipment speed, and
fewer errors, machine vision pervades the integrated circuit (IC)
manufacturing process from wafer production through packaging.
ESI offers machine vision solutions with low cost computer
architecture, easy-to-use software development tools, powerful application
software and advanced lighting and optics. These features reduce application
development time and shorten time to market for producers of computer chips
and PWBs.
ADVANCED ELECTRONIC PACKAGING SYSTEMS. ESI provides a cost-effective method
for forming vias, which are the basis for creating electrical connections
between layers in multiple PWBs and electronic packages. ESI's advanced
electronic packaging customers include Adflex, Greatsino, Hadco, IBM,
Johnson-Matthey/ACI, Nippon Mectron, Nitto Denko, Samsung, and WUS.
ESI uses laser drilling and mechanical drilling and routing technology
to address applications in the IC 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, including
ceramic, traditional glass reinforced circuit boards, copper, and new organic
compounds. ESI produces computer-controlled mechanical routers which cut and
shape individual PWBs out of panels - as well as the larger holes and special
cavities for mounting of semiconductor die. ESI's mechanical and laser
drills produce thousands of tiny holes for mounting components on a PWB.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service
offices located in or near: Ann Arbor, MI, Boston, MA, Portland,
OR, and San Diego, CA in North America; Tokyo and Nagoya, Japan, Seoul,
Korea, and Taipei, Taiwan in Asia; and Munich, Germany, London, England,
Paris, France, and Leiderdorp, The 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 customers 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 by customers. ESI offers a variety of maintenance contracts and
parts replacement programs.
Sales outside the U.S. accounted for 57.6%, 64.1% and 59.9% of ESI's net
sales for fiscal 1998, 1997 and 1996.
In fiscal 1998, 1997 and 1996, no customer exceeded 10% of sales.
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BACKLOG
Backlog consists of written purchase orders for products, spare parts and
service, which ESI expects to ship within twelve months. Backlog was $21.8
million at May 31, 1998 versus $31.8 million at May 31, 1997 and $45.6 million
at May 31, 1996.
RESEARCH, DEVELOPMENT AND TECHNOLOGY
ESI believes that its ability to compete effectively depends, in part, on
its ability to 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 1998, 1997, and
1996 were $28.5 million (12.4% of net sales), $22.7 million (12.6% of net
sales), and $21.5 million (11.4% of net sales), respectively. The foregoing
figures do not include the effect of research and development expenditures
funded by the Defense Advanced Research Projects Agency (DARPA) of the U.S.
Government.
Research and development expenditures for the years ended May 31, 1996
and 1998 do not include the acquired in-process research and development
expense incurred in connection with the purchase of XRL, Inc. ("XRL") and
Dynamotion Corporation ("Dynamotion").
7
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COMPETITION
ESI's markets are competitive. The principal competitive factors in
ESI's markets are product performance, reliability, service, 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 larger service
organizations than ESI. Some of these 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.
Major competitors for circuit fine tuning systems include NEC and
General Scanning. For electronic component manufacturing equipment, ESI's
competition includes Tokyo Weld, Kanebo and Humo in Japan, as well as
manufacturers that develop systems for internal use. ESI's major competitors
for the Memory Yield Improvement are Nikon and General Scanning. ESI
competes with stand alone vision suppliers such as Cognex, Robotic Vision
Systems and ICOS systems. There are also numerous other vision companies and
captive vendors in Japan, North America and Europe. ESI's Advanced
Electronic Packaging systems compete with mechanical drills manufactured by
companies such as Hitachi-Seiko, Excellon and Pluritec and laser systems
providers, Lumonics, Sumitomo, Mitsubishi and Hitachi-Seiko.
MANUFACTURING AND SUPPLY
ESI's principal production facilities are located in Portland, Oregon.
Portland's manufacturing operations consist of electronic subassembly, laser
production and final system assembly for circuit fine tuning, memory yield
improvement, component visual inspection and advanced electronic packaging
systems. Electronic component systems are manufactured by ESI's subsidiaries,
near San Diego, California. The majority of ESI's vision systems are
manufactured by ESI's subsidiary in Ann Arbor, Michigan.
ESI uses qualified manufacturers to supply many components of its
products. ESI's 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 that would have a temporary adverse impact on ESI. ESI believes
it has good relationships with its suppliers.
EMPLOYEES
As of May 31, 1998, ESI employed 900 people, including 238 in
engineering, research and development, 334 in manufacturing and 328 in
marketing, sales, technical support, 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.
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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 78 United States patents and has applied for 23 additional patents
in the United States. ESI has 69 foreign patents and has applied for 97
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.
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 from ESI have received a notice of
infringement from Jerome H. Lemelson, alleging that equipment used in the
manufacture of semiconductor products infringes on 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. Some of ESI's customers have settled litigation with Mr. Lemelson.
While ESI cannot predict the outcome of this or similar litigation or its
effect upon ESI, ESI believes that it will not have a materially adverse
effect on its financial condition or results of operations.
ITEM 2. PROPERTIES
The Company's executive and administrative offices as well as a
manufacturing facility are located in a three-building complex located on 15
acres in Portland, Oregon. The buildings are owned by ESI, and contain
approximately 205,000 square feet of floor space. ESI also owns a 64,000
square foot plant on ten acres of land in Escondido, California.
In addition, the Company leases approximately 13,000 square feet of
office and industrial space in Portland, Oregon; 15,000 square feet of
industrial space in Canton, Massachusetts; 8,000 square feet of office and
industrial space in San Marcos, California; 30,000 square feet of office and
industrial space in Santa Ana, California; 35,000 square feet of office and
industrial space in Ann Arbor, Michigan; and office and service space in
several additional locations in the United States, and in seven foreign
countries.
The Company believes that the productive capacity of the aforementioned
facilities to be adequate and suitable for the requirements of the business.
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. No trial date has been set.
While ESI cannot predict the outcome of this litigation or its effect
upon ESI, the Company believes that it will not have a material adverse
effect on its financial condition or the results of its operations.
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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, 1998.
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages and positions as of
June 30, 1998 are as follows:
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NAME AGE POSITION
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<S> <C> <C>
Donald R. VanLuvanee 54 Chief Executive Officer, President and Director
Robert E. Belter 57 Vice President
Robert C. Cimino 53 Director of Human Resources
Barry A. Glasgow 53 Vice President
Barry L. Harmon 44 Chief Financial Officer and Senior Vice-President
Jonathan C. Howell 44 Vice President
Mark W. Klug 59 Vice President
John R. Kurdock 53 Vice President
Larry T. Rapp 58 Vice President
Joseph L. Reinhart 39 Corporate Secretary and Vice President
Vernon R. Swearingen 58 Vice President
Edward J. Swenson 59 Senior Vice President
</TABLE>
Mr. VanLuvanee joined the Company in 1992 as Chief Executive Officer,
President and a Director. From 1991 to 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, Inc., a supplier of capital
equipment and consumables to the microelectronics industry. Mr. VanLuvanee
is also a Director of Micro Component Technology, a leading manufacturer of
automated test handling equipment, and FEI, 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 a subsidiary and a Corporate Vice President. Mr. Belter is
responsible for ceramic capacitor production equipment products. 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. For the
five years prior to joining ESI, Mr. Cimino was employed by Eastman Kodak.
He held management positions at Kodak in human resources, customer service,
sales, and real estate asset management.
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Mr. Glasgow joined the Company in June 1998 as Vice President of Sales
for Portland Operations. Prior to joining ESI, Mr. Glasgow worked for ADE as
Vice President of Worldwide Sales and Customer Support, where he was
responsible for all sales and service activities. In addition, Mr. Glasgow
previously worked for ESI, and its predecessor, XRL, from 1987 to 1997 in
various sales positions including Director of Worldwide Sales for
semiconductor products from 1995 to 1997.
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. Howell joined ESI in 1993 as Director of Management Information
Systems. In 1995, Mr. Howell was elected Vice President and assumed
responsibility for vision products. Mr. Howell is also 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 the Company in 1992 and in 1993 was elected a Corporate
Vice President. Mr. Klug is responsible for the mechanical drilling product
line of advanced electronic packaging equipment . From 1988 to 1992, Mr. Klug
was Vice President of Engineering for Symtek Systems, and between 1983 and
1988 he held senior management positions with Kulicke and Soffa, including
Senior Vice President of U.S. Operations and Vice President of Engineering.
Mr. Kurdock joined ESI in February 1997 as Vice President and General
Manager of Portland Operations. For the five years prior to joining ESI, Mr.
Kurdock served as Vice President of the Surface Mount Division for Universal
Instruments and held senior operating positions with the Silicon Valley Group
and Perkin Elmer.
Mr. Rapp joined the Company in 1966 and has served in various
engineering capacities. In 1982 he became the Government Relations and Patent
Manager. He served as Assistant Secretary from 1988 to 1991, and from 1992
until June 1998 was 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. Mr.
Reinhart was elected a Vice President in September 1996, and was elected
Corporate Secretary in June 1998. His experience includes finance, venture
funding, mergers and acquisitions and administration in high-technology
businesses.
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Mr. Swearingen joined the Company in 1992 as Director of laser systems,
and was elected Vice President in 1993. From 1990 to 1991, Mr. Swearingen
was President of Quantum Engineering, a project engineering firm, and from
1988 to 1990 he held a management position with Kulicke and Soffa.
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 of Advanced Development in
1979, Vice President of Advanced Technology Division in 1985 and Senior Vice
President, Advanced Technology Group in 1987.
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.
<TABLE>
<CAPTION>
FISCAL QUARTER 1998 1997
- -------------- ---- ----
HIGH LOW CLOSING HIGH LOW CLOSING
---- --- ------- ---- --- -------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter........... $ 53 $ 35 $ 48-1/2 $ 27-1/4 $ 15-1/2 $ 18-1/4
2nd Quarter........... 63-3/4 39-3/8 41-9/16 26 17-1/4 24-1/4
3rd Quarter........... 43-5/8 30-1/2 38 31-3/4 22-1/2 27
4th Quarter........... 42-1/4 32-1/4 33-1/2 39-1/4 23-3/4 38
</TABLE>
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, 1998 was 624.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31,
--------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $229,619 $180,035 $189,439 $130,736 $85,607
Net income (1),(2) 27,795 19,459 22,863 14,781 9,335
Net income per share - Basic (1),(2) 2.50 1.85 2.19 1.58 1.13
Net income per share - Diluted (1),(2) 2.41 1.79 2.13 1.53 1.09
Working capital 141,795 121,505 101,016 79,407 37,691
Net property, plant and equipment 27,638 19,033 19,411 17,619 16,045
Total assets 199,443 167,350 148,532 122,408 68,116
Long-term debt - - - - 200
Shareholders' equity 182,281 146,695 126,166 100,305 56,714
</TABLE>
(1) Fiscal 1996 excludes the $6.0 million In-Process Research and Development
write off associated with the acquisition of XRL.
(2) Fiscal 1998 excludes $14.6 million in merger-related expenses associated
with the acquisitions of Chip Star, Inc. ("Chip Star"), Dynamotion Corp.
and Applied Intelligence Systems, Inc. ("AISI").
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company completed three mergers in fiscal 1998 including the
acquisition of AISI on December 1, 1997, Chip Star on June 26, 1997, and
Dynamotion on June 9, 1997. The AISI and Chip Star acquisitions were accounted
for under the pooling-of-interests method, and the Dynamotion acquisition was
accounted for as a purchase. Refer to the Notes to Consolidated Financial
Statements for additional information.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
Revenue for fiscal 1998 was $229.6 million, which was 27.5% or $49.6
million higher than for fiscal 1997. The increase was due to higher sales of
advanced electronic packaging systems, electronic component equipment and
machine vision systems. The three mergers discussed above added both product and
selling capabilities to the Company's portfolio.
Gross margin for the year ended May 31, 1998 was 54.4%, up from 53.4% in
the prior fiscal year. Increased shipments of relatively high margin electronic
component systems and machine vision equipment, both in total and as a
percentage of total sales, contributed to the overall increase.
Selling, service and administrative expenses were $13.8 million or 31.8%
higher for the year ended May 31, 1998 as compared to fiscal 1997. The
increase is attributable to higher commission expenses associated with
increased sales, higher recruiting and relocation costs and increased legal fees
associated with on-going litigation. Selling, service and administrative
expenses increased marginally as a percentage of sales from 24.1% to 24.9%.
Research, development and engineering expenses for the year ended May
31, 1998 were $5.8 million higher than the prior year due to higher project
expenses and an increased commitment to research. Research, development and
engineering expenses declined slightly as a percentage of sales, to 12.4% for
1998 from 12.6% for the prior year. In connection with the purchase price
allocation for Dynamotion, the Company estimated the fair value of the
intangible assets which indicated that a majority of all of the acquired
intangible assets consisted of research and development projects in process.
At that time, the development of these projects had not reached technological
feasibility and the technology was believed to have no alternative future
use. In accordance with generally accepted accounting principles, the
acquired in-process research and development of $9.0 million has been
reflected in merger related expenses in the accompanying financial
statements. The Company currently believes that the research and development
efforts will result in commercially feasible products in the next 18 months
at an additional estimated cost of $1.5 million.
The effective tax rate of 37.1% for the year ended May 31, 1998 was
consistent with fiscal 1997. The benefit of the utilization of net operating
losses was offset by non-deductible merger-related expenses.
Net income for the year ended May 31, 1998 was $16.9 million or $1.52 per
basic share compared to $19.5 million or $1.85 per basic share for the same
period of the prior year. Fiscal 1998 net income includes merger-related
expenses of $14.6 million, including $9.0 million for acquired in-process
research and development and $5.6 million for professional service fees and
expenses associated with consolidating operations. Excluding merger-related
expenses, fiscal 1998 net income was $27.8 million or $2.50 per basic share.
14
<PAGE>
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
Revenue for fiscal 1997 was $180.0 million, which was 5.0% or $9.4 million
lower than for fiscal 1996. The decline was due to lower shipments of capacitor
production equipment during the first half of fiscal 1997, due to customers
absorbing 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 advanced electronic
packaging systems and smaller increases in the sales of memory yield improvement
and vision systems.
Gross margin of 53.4% for the year ended May 31, 1997 was slightly below
the 54.6% gross margin for fiscal 1996. Increased manufacturing overhead cost
per unit sold was the most significant factor causing the decrease in margin.
Increased sales of higher margin memory yield improvement systems and advanced
electronic packaging equipment positively affected gross margin.
Selling, service and administrative expenses were $2.9 million lower for
the year ended May 31, 1997 versus fiscal 1996. 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 24.1% from 24.4%.
Research, development and engineering expenses for the year ended May 31,
1997 were $1.2 million higher than the prior year. Research, development and
engineering expenses increased, as a percentage of sales, to 12.6% for 1997 from
11.4% for the prior year.
The effective tax rate of 37.1% for the year ended May 31, 1997 increased
from 32.2% as a result of benefits from U.S. tax losses during the year ended
May 31, 1996.
Net income for the year ended May 31, 1997 was $19.5 million or $1.85 per
basic share compared to $20.4 million or $1.96 per basic share for the same
period of the prior year.
The acquired in-process research and development expense if $6.0 million,
which occurred in connection with the purchase price allocation of XRL, was
expensed during the first quarter of fiscal 1996 in accordance with generally
accepted accounting principals. ESI estimated the fair market value of the
intangible assets, indicating that a majority of the acquired intangible assets
consisted of research and development in process.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are existing cash, cash
equivalents and marketable debt securities of $38.9 million, accounts receivable
of $61.9 million, and a $7.0 million line of credit, none of which was
outstanding at May 31, 1998. ESI has no debt and a current ratio of 9.3:1.
Working capital increased to $141.8 million at May 31, 1998, from $121.5 million
at May 31, 1997.
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. However, capital
expenditures for the fiscal 1999 are expected to decrease approximately 50% over
the level incurred during the past year due to the high volume of renovations
and the acquisition of a building that occurred during fiscal 1998.
15
<PAGE>
A summary of cash flow activities follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in):
Operating activities $ 5,082 $ 12,845 $ 15,469
Investing activities (1) (17,073) (14,955) (6,854)
Financing activities 1,479 2,053 200
--------- --------- --------
Increase (decrease) in cash and cash
equivalents (2) $(10,512) $ (57) $ 8,815
--------- --------- --------
--------- --------- --------
</TABLE>
(1) Reflects the net purchase of $1.3 million, $9.5 million, and $1.1 million
in marketable debt securities during fiscal 1998, 1997, and 1996, respectively.
(2) Total cash and securities decreased from $48.2 million on May 31, 1997 to
$38.9 million on May 31, 1998.
OPERATING ACTIVITIES: Operating activities provided $5.1 million in cash.
This was mainly due to net income and the effect of non-cash merger related
expenses offset by cash used in trade receivables, inventory purchases, and
for the pay down of current liabilities. Trade receivables increased $6.9
million due to longer payment terms granted in conjunction with entry into
new Asian markets for our advanced electronic packaging equipment. Collection
of receivables in June 1998 reduced this balance by approximately $3.2
million. The increase in inventories was primarily due to increased levels of
inventories needed to support the increase in the Company's sales,
particularly those related to the three merged businesses. This increase in
sales activity resulted in a corresponding increase in inventory. The
decrease in current liabilities of $13.1 million is a function of the
liquidation of substantial past due balances for the acquired Dynamotion
subsidiary as well as an acceleration of income tax payments.
INVESTING ACTIVITIES: Net cash of $17.1 million was used in investing
activities. The Company made purchases in the amount of $12.5 million to
upgrade computing and manufacturing capabilities and to renovate and improve
utilization of office and manufacturing space. Associated with this was the
purchase of a third building in Portland to accommodate future manufacturing
and office space needs. In addition, net purchases of highly liquid
marketable debt securities utilized $1.3 million.
FINANCING ACTIVITIES: Net cash of $1.5 million was generated from financing
activities in the form of $8.5 million in stock option exercises and the
related tax benefit, partially offset by the liquidation of acquired
Dynamotion debt of $7.0 million.
16
<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. Ten large multinational
electronics companies constituted 41.4% of the Company's fiscal 1998 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 57.6% of sales for fiscal 1998
compared to 64.1% of sales for fiscal 1997. The Company expects that
international shipments will continue to represent a significant percentage
of net sales in the future. In the Asia/Pacific region, sharp slowdowns have
occurred in many countries. In response to declines in their currencies,
many governments have raised interest rates, cut spending, and begun
restructuring their economies. The short-term effect is likely to be slower
growth in Japan, China and the Asia/Pacific region. As a result, a
significant portion of the Company's net sales will be subject to certain
risks. These risks include 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. At May 31, 1998, substantially all Asian
end customer receivables were secured by letters of credit.
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 9.1% of fiscal 1998 consolidated operating expenses and are
split 60% and 40% respectively 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.
YEAR 2000
17
<PAGE>
The Year 2000 (Y2K) issue is the result of computer programs operating
incorrectly when the calendar year changes to January 1, 2000. Any of the
Company's computer programs that have date-sensitive software may recognize a
two-digit date using "00" as calendar year 1900 rather than the year 2000.
This could result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to engage in
normal business activities.
The Company has a task force to prepare for Y2K issues. The Company has
evaluated its technology and data used in the creation and delivery of its
products and services and in its internal operations and has identified Y2K
issues related to its customers and suppliers. The core business systems ESI
uses and all major products are compliant, or a migration path to a compliant
version will be in place by the year 2000. A plan has been put in place to
mitigate the risks associated with these issues for ESI suppliers and
customers, but there can be no assurances that such third parties will
successfully address their own Y2K issues over which the company has no
control. The Company believes that it will substantially complete the
implementation of its Y2K plan before the year 2000, and provided that third
parties mitigate their own risks successfully, the Company believes it will
have no material business risk from such Y2K issues. ESI believes that the
total costs associated with addressing the Y2K issue will have an immaterial
affect on the Company's financial statements.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-------
ASSETS 1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,803 $ 20,315
Securities available for sale 29,113 27,860
-------- --------
Total cash and securities 38,916 48,175
Trade receivables, less allowance for doubtful accounts 61,890 54,321
Inventories -
Finished goods 9,339 5,726
Work-in-process 8,975 6,952
Raw materials and purchased parts 31,491 22,345
-------- --------
Total inventories 49,805 35,023
Deferred income taxes 4,788 3,966
Other current assets 3,558 675
-------- --------
Total current assets 158,957 142,160
PROPERTY AND EQUIPMENT, AT COST 57,550 46,236
Less-Accumulated depreciation (29,912) (27,203)
-------- --------
Net property and equipment 27,638 19,033
DEFERRED INCOME TAXES 2,692 1,042
OTHER ASSETS 10,156 5,115
-------- --------
$199,443 $167,350
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,184 $ 8,269
Accrued liabilities -
Payroll related 5,138 4,749
Commissions 4,025 2,241
Warranty 1,948 1,870
Income taxes - 1,215
Other 578 1,645
-------- --------
Total accrued liabilities 11,689 11,720
Deferred revenue 289 666
-------- --------
Total current liabilities 17,162 20,655
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000 shares authorized; no shares issued - -
Common stock, without par value; 40,000 shares authorized; 11,368 and
10,560 shares issued and outstanding at May 31, 1998 and 1997 101,831 81,423
Retained earnings 80,450 65,272
-------- --------
Total shareholders' equity 182,281 146,695
-------- --------
$199,443 $167,350
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales $229,619 $180,035 $189,439
Cost of sales 104,692 83,926 86,065
-------- -------- --------
Gross margin 124,927 96,109 103,374
Operating expenses:
Selling, service and administrative 57,145 43,359 46,230
Research, development and engineering 28,511 22,675 21,517
Merger related expenses 14,634 - 6,000
-------- ------- -------
Total operating expenses 100,290 66,034 73,747
Operating income 24,637 30,075 29,627
Interest income 1,715 1,516 1,280
Other income (expense), net 500 (664) (789)
-------- -------- -------
Income before income taxes 26,852 30,927 30,118
Provision for income taxes 9,969 11,468 9,711
-------- -------- -------
Net income $ 16,883 $ 19,459 $ 20,407
-------- -------- --------
-------- -------- --------
Net income per share - Basic $1.52 $1.85 $1.96
---- ---- ----
---- ---- ----
Net income per share - Diluted $1.47 $1.79 $1.90
---- ---- ----
---- ---- ----
Weighted average number of shares - Basic 11,112 10,499 10,432
Weighted average number of shares - Diluted 11,512 10,875 10,740
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1995 10,124 $73,384 $27,821 $101,205
Net Income - - 20,407 20,407
Stock plans:
Employee stock plans 99 870 - 870
Tax benefit of stock options exercised - 540 - 540
Shares issued for acquisitions 196 4,782 - 4,782
Unrealized gain on securities - - (42) (42)
Cumulative translation adjustment - - (1,596) (1,596)
-------- ------- ------- --------
BALANCE AT MAY 31, 1996 10,419 79,576 46,590 126,166
Net Income - - 19,459 19,459
Adjustment to align Chip Star Inc., fiscal year with May 31 - - (325) (325)
Stock plans:
Employee stock plans 141 1,286 - 1,286
Tax benefit of stock options exercised - 561 - 561
Unrealized loss on securities - - (19) (19)
- - (433) (433)
-------- ------- ------- --------
BALANCE AT MAY 31, 1997 10,560 81,423 65,272 146,695
Net Income - - 16,883 16,883
Adjustment to align AISI fiscal year with May 31 - - (565) (565)
Stock plans:
Employee stock plans 461 6,254 - 6,254
Tax benefit of stock options exercised - 2,204 - 2,204
Shares issued for Dynamotion acquisition 347 11,950 11,950
Cumulative translation adjustment - - (1,140) (1,140)
-------- -------- -------- ---------
BALANCE AT MAY 31, 1998 11,368 $101,831 $80,450 $182,281
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 16,883 $ 19,459 $ 20,407
Adjustment to align pooled companies fiscal years with May 31 (565) (325) -
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Merger related expense 14,634 - 6,000
Depreciation and amortization 5,467 4,043 3,830
Other non-cash charges (credits) - 156 52
Deferred income taxes 528 476 (1,470)
Changes in operating accounts:
Increase in trade receivables (6,849) (11,862) (4,347)
(Increase) decrease in inventories (8,991) 83 (3,682)
(Increase) decrease in other current assets (2,922) 1,846 (1,851)
Decrease in current liabilities (13,103) (1,031) (3,470)
--------- -------- --------
Net cash provided by operating activities 5,082 12,845 15,469
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash acquired (1) - - (492)
Purchase of property and equipment (12,484) (4,599) (5,263)
Purchase of securities (18,668) (42,316) (30,986)
Proceeds from sales of securities and maturing securities 17,415 32,800 29,850
(Increase) decrease in other assets (3,336) (840) 37
--------- -------- --------
Net cash used in investing activities (17,073) (14,955) (6,854)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of Dynamotion subsidiary debt (2) (6,979) - -
Net (repayments) borrowings of AISI subsidiary - 206 (1,210)
Proceeds from exercise of stock options and stock plans and related
tax benefits 8,458 1,847 1,410
--------- -------- -------
Net cash provided by financing activities 1,479 2,053 200
--------- -------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (10,512) (57) 8,815
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,315 20,372 11,557
--------- -------- --------
CASH AND CASH EQUIVALENTS ATEND OF PERIOD $ 9,803 $ 20,315 $ 20,372
--------- -------- --------
--------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
(1) Acquisition of XRL:
<TABLE>
<S> <C>
Assets less liabilities acquired, net of cash acquired $(5,073)
Issuance of common stock 4,581
-------
Net cash used to acquire business $(492)
</TABLE>
(2) Acquisition of Dynamotion:
<TABLE>
<S> <C>
Assets less liabilities acquired, net of cash $(11,950)
Issuance of common stock and common stock options 11,950
--------
Net cash used to acquire business $(0)
</TABLE>
Cash payments for interest were not significant in 1998, 1997 or 1996.
23
<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 memory yield improvement, production and test
equipment for the manufacture of surface mount ceramic capacitors, circuit fine
tuning systems, precision laser and mechanical advanced 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: 41.4% of fiscal 1998 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.
24
<PAGE>
BASIS OF PRESENTATION
In June, 1997, ESI merged with Chip Star, Inc. (Chip Star), a
privately-held company based in San Marcos, California. Chip Star produces
capital equipment for producers of surface mount ceramic capacitors.
Consideration paid to Chip Star was 700 shares of ESI stock. The merger was
accounted for as a pooling-of-interests. Accordingly, all financial
statements and footnote data have been restated.
In December 1997, ESI merged with AISI, a privately-held company based
in Ann Arbor, Michigan. AISI provides machine vision solutions for the
semiconductor and electronics industries. Consideration paid to AISI was
1,400 shares of ESI stock, of which 1,126 have been issued and the remaining
have been reserved for stock options assumed in the acquisition. The merger
was accounted for as a pooling-of-interests. Accordingly, all financial
statements and footnote data have been restated.
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.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1996 and 1997 to conform to the 1998
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.
25
<PAGE>
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," (SFAS 128). SFAS 128 requires the dual presentation of
basic and diluted earnings per share and other additional disclosures. Basic
earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per common
share are computed by dividing net income by the weighted average number of
common shares and common share equivalents (stock options) outstanding. Prior
year earnings per share have been restated to conform to the standards
established by SFAS 128.
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.
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 total cumulative translation adjustment included in retained
earnings is $(1,144), $(4) and $429 at May 31, 1998, 1997 and 1996,
respectively. Foreign currency transaction gains were $48 and $380 for the
years ended May 31, 1998 and 1996, with a loss of $176 for the year ended May
31, 1997. These amounts are included in other expense in the accompanying
Consolidated Statements of Income.
26
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS130). This statement will be effective for the Company's year
ending May 31, 1999. The statement establishes presentation and disclosure
requirements for reporting comprehensive income. Comprehensive income includes
charges or credits to equity that are not the result of transactions with
shareholders. The Company expects there will be no material impact on its
consolidated financial position or results of operations as a result of the
adoption of this new accounting standard.
PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
MAY 31,
-------
1998 1997
---- ----
<S> <C> <C>
Land $ 4,237 $ 3,419
Buildings and improvements 16,083 13,803
Machinery and equipment 32,851 28,652
Construction in progress 4,379 362
------- -------
$57,550 $46,236
------- -------
------- -------
</TABLE>
27
<PAGE>
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 1998.
Management expects to renew the revolver under similar terms or secure
alternate financing. At the Company's option, the interest rate is prime or
LIBOR plus 1.25 percent. There were no borrowings outstanding under the line
at anytime during fiscal 1998.
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 $763, $406 and
$462 to the plan for the years ended May 31, 1998, 1997 and 1996,
respectively.
INCOME TAXES
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, 1998 and May 31, 1997 consists
of the following tax effects relating to temporary differences and
carryforwards:
<TABLE>
<CAPTION>
MAY 31,
--------
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Receivable and inventory valuation $ 1,670 $ 2,065
Vacation pay 827 695
Warranty costs 721 654
Other accrued liabilities 920 1,114
-------- --------
4,138 4,528
Tax loss and credit carryforwards 9,224 6,847
-------- --------
Total deferred tax assets 13,362 11,375
Deferred tax liabilities (895) (571)
Valuation allowance (4,987) (5,796)
-------- --------
Net deferred tax asset $ 7,480 $ 5,008
-------- --------
-------- --------
</TABLE>
At May 31, 1998, there were net operating losses of $26,353 available
for U.S. federal income tax purposes. These losses were principally acquired
as part of the Dynamotion and AISI acquisitions and expire through 2013.
These losses are subject to certain limitations caused by the change in
ownership. Accordingly, their utilization in future periods may be severely
restricted. Given these limitations and uncertainties regarding future
profitability, some of these losses may not be realizable, and accordingly, a
valuation allowance has been recorded.
28
<PAGE>
The components of income before income taxes and the provision for income
taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Income before income taxes:
Domestic $25,311 $26,415 $28,481
Foreign 1,541 4,512 1,637
------- ------- --------
$26,852 $30,927 $30,118
------- ------- -------
------- ------- -------
Provision for income taxes:
Current:
U.S. Federal and State $ 6,658 $ 8,528 $ 9,754
Foreign 579 1,903 887
------- ------- -------
$ 7,237 $10,431 $10,641
Deferred 528 476 (1,470)
Income tax effect of stock options exercised 2,204 561 540
------- ------- -------
$ 9,969 $11,468 $ 9,711
------- ------- -------
------- ------- -------
</TABLE>
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.
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,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision computed at federal statutory rate $9,398 $10,825 $10,541
Higher than U.S. tax rates in foreign jurisdictions 40 323 314
Impact of U.S. tax losses (2,214) 546 (1,411)
Impact of state taxes 342 1,386 1,259
Benefit of foreign sales corporation (FSC) (1,332) (1,468) (137)
Nondeductible merger related expenses 3,617 - -
Other, net 118 (144) (855)
------- ------- -------
$9,969 $11,468 $ 9,711
------- ------- -------
------- ------- -------
</TABLE>
Consolidated income tax payments amounted to $9,673, $12,364 and $9,042 for
the years ended May 31, 1998, 1997 and 1996, respectively.
29
<PAGE>
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No.128,
"Earnings Per Share" (SFAS 128), in the third fiscal quarter of 1998. Under
the provisions of SFAS 128, primary earnings per share has been replaced by
basic earnings per share, which does not include the dilutive effect of stock
options in its calculation. In addition, fully diluted earnings per share
has been replaced by diluted earnings per share. All prior period earnings
per share amounts have been restated to reflect the requirements of SFAS 128.
Basic earnings per share has been computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share
has been computed using the weighted average number of common shares and
equivalents (representing the dilutive effect of stock options) outstanding
during the period. No adjustments to net income were required for any period
presented for purposes of presenting basic and diluted earnings per share.
All earnings per share amounts in the following table are presented and,
where necessary, restated to conform to the SFAS 128 requirements.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 16,883 $ 19,459 $ 20,407
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Weighted average number of shares - basic 11,112 10,499 10,432
Dilutive effect of employee stock options 400 376 308
------- ------- -------
Weighted average number of shares - diluted 11,512 10,875 10,740
------- ------- -------
------- ------- -------
Net income per share - basic $1.52 $1.85 $1.96
----- ----- -----
----- ----- -----
Net income per share - diluted $1.47 $1.79 $1.90
----- ----- -----
----- ----- -----
</TABLE>
30
<PAGE>
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, 1998 and 1997, the Company had forward
exchange contracts totaling $5,319 and $5,470, 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.
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, 1998 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 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, 1998 and 1997 is $29,113 and
$27,860, 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 1998 and 1997, proceeds of $17,415 and $32,800, respectively,
resulted from the sales or maturities of securities; there were no realized
gains or losses associated with these sales or maturities.
31
<PAGE>
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.
STOCK PLANS
The Company has stock option and restricted stock grant plans for officers
and employees. During fiscal 1998, ESI recorded $455 and $475 of compensation
expense related to stock grants earned in 1998 and 1997, respectively. The
Company incurred no such compensation expense in fiscal 1996. The Compensation
Committee of the Board of Directors determines awards under these plans. 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 on January 8, 1998 or January 7, 1999.
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.
32
<PAGE>
The Company has computed, for pro forma disclosure purposes, the per share
value of all options granted under the stock option plan to be $17.88, $14.16
and $11.99 for 1998, 1997 and 1996. The pro forma value of options granted
under the employee stock purchase plan is immaterial for 1998, 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 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rate 7.5% 7.5% 7.5%
Expected dividend yield 0% 0 0
Expected life 5 years 7 years 7 years
Expected volatility 46.5% 48.5% 48.5%
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $16,883 $19,459 $20,407
Pro forma $15,652 $18,693 $20,020
Net income per share:
As reported - basic $1.52 $1.85 $1.96
As reported - diluted $1.47 $1.79 $1.90
Pro forma - basic $1.42 $1.80 $1.93
Pro forma - diluted $1.37 $1.74 $1.87
</TABLE>
33
<PAGE>
The following table summarizes activity in the stock plans for the years
ended May 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997 1996
---- ---- ----
WEIGHTED - WEIGHTED - WEIGHTED -
AVERAGE AVERAGE AVERAGE
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year . . . . . 1,197 $19.40 1102 $17.53 892 $14.90
Granted . . . . . . . . . . . . . . . . . . . 208 32.74 243 25.26 332 20.70
Exercised . . . . . . . . . . . . . . . . . . 390 12.38 93 16.47 78 8.68
Canceled. . . . . . . . . . . . . . . . . . . 72 25.71 55 20.93 44 20.35
----- ------ ---- ------ ---- ------
Options outstanding at end of year . . . . . . . . 943 20.91 1197 19.40 1102 17.53
----- ------ ---- ------ ---- ------
----- ------ ---- ------ ---- ------
Exercisable at end of year . . . . . . . . . . . . 515 $15.67 581 $13.89 465 $11.24
----- ------ ---- ------ ---- ------
----- ------ ---- ------ ---- ------
</TABLE>
The following table sets forth the exercise price range, number of shares
outstanding at May 31, 1998, 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>
WEIGHTED-
AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
EXERCISE AS OF CONTRACTUAL AVERAGE AS OF AVERAGE
PRICES MAY 31, 1998 LIFE (YEARS) EXERCISE PRICE MAY 31, 1998 EXERCISE PRICE
------ ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$2.75-9.88 226 4.83 $ 7.89 226 $ 7.89
9.89-18.00 243 7.50 16.17 125 15.52
18.01-24.00 155 6.97 23.20 104 23.00
24.01-33.00 229 8.73 28.05 52 27.69
33.01-150.00 90 9.18 42.65 8 66.16
-------------------------------------------------------------------------------
943 7.28 $20.91 515 $15.67
</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, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
EUROPE ASIA TOTAL
------ ---- -----
<S> <C> <C> <C>
May 31, 1998 . . . . . . . . . . . . . . . . . . . $9,821 $79,586 $89,407
May 31, 1997 . . . . . . . . . . . . . . . . . . . 5,208 60,411 $65,619
May 31, 1996 . . . . . . . . . . . . . . . . . . . 2,543 70,311 $72,854
</TABLE>
In fiscal 1998, 1997 and 1996, there were no sales to any one customer in
excess of 10% of consolidated net sales.
35
<PAGE>
The following data represents segment information for the years ending May 31:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
1998 STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
- ---- ------ ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers. . . . . . . . . . $186,854 $24,089 $18,676 $ - $229,619
Transfers between geographic areas . . . . . . . . 31,361 - 217 (31,578) -
-------- ------- ------- -------- --------
Total revenue. . . . . . . . . . . . . . . . . . . $218,215 $24,089 $18,893 $(31,578) $229,619
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
Operating income (1) . . . . . . . . . . . . . . . $ 23,064 $ 497 $ 935 $ 141 $ 24,637
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
Identifiable assets at May 31, 1998. . . . . . . . $179,583 $ 8,739 $ 8,425 $(36,220) $160,527
-------- ------- ------- --------
-------- ------- ------- --------
Corporate assets . . . . . . . . . . . . . . . . . 38,916
--------
Total assets at May 31, 1998 . . . . . . . . . . . $199,443
--------
--------
1997
- ----
Sales to unaffiliated customers. . . . . . . . . . $130,204 $28,872 $20,959 $ - $180,035
Transfers between geographic areas . . . . . . . . 35,986 - 427 (36,413) -
-------- ------- ------- -------- --------
Total revenue. . . . . . . . . . . . . . . . . . . $166,190 $28,872 $21,386 $(36,413) $180,035
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
Operating income . . . . . . . . . . . . . . . . . $ 25,691 $ 2,899 $ 1,623 $ (138) $ 30,075
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
Identifiable assets at May 31, 1997. . . . . . . . $106,322 $11,374 $ 9,480 $ (8,001) $119,175
-------- ------- ------- --------
-------- ------- ------- --------
Corporate assets . . . . . . . . . . . . . . . . . 48,175
--------
Total assets at May 31, 1997 . . . . . . . . . . . $167,350
--------
--------
1996
- ----
Sales to unaffiliated customers. . . . . . . . . . $148,798 $18,329 $22,312 $ - $189,439
Transfers between geographic areas . . . . . . . . 28,009 8 543 (28,560) -
-------- ------- ------- -------- --------
Total revenue. . . . . . . . . . . . . . . . . . . $176,807 $18,337 $22,855 $(28,560) $189,439
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
Operating income (2) . . . . . . . . . . . . . . . $ 27,638 $ 260 $ 1,965 $ (236) $ 29,627
-------- ------- ------- -------- --------
-------- ------- ------- -------- --------
Identifiable assets at May 31, 1996. . . . . . . . $113,699 $ 8,624 $ 8,049 $(20,575) $109,797
-------- ------- ------- --------
-------- ------- ------- --------
Corporate assets . . . . . . . . . . . . . . . . . 38,735
--------
Total assets at May 31, 1996 . . . . . . . . . . . $148,532
--------
--------
</TABLE>
(1) Includes the $14,634 in merger related expenses associated with the
acquisition of Dynamotion, Chip Star and AISI.
(2) Includes the $6,000 in-process research and development charge associated
with the acquisition of XRL.
36
<PAGE>
ACQUISITIONS
CHIP STAR, INC.
On June 26, 1997, the Company completed the acquisition of Chip Star Inc., a
provider of ceramic capacitor termination systems located in San Marcos,
California, through the issuance of 700 shares of ESI stock. The transaction
has been accounted for as a pooling of interests and, accordingly, all data
included in the Consolidated Financial Statements has been restated to
reflect the Chip Star acquisition. Disclosure of ESI and Chip Star's revenue
and net income, on an individual company basis from June 1 to June 25, 1997
is not significant.
APPLIED INTELLIGENT SYSTEMS, INC. (AISI)
On December 1, 1997, the Company completed the acquisition of AISI, a
provider of machine vision solutions for the semiconductor and electronics
industries, located in Ann Arbor, Michigan. The acquisition consideration
consists of 1,400 shares of ESI common stock, of which 1,126 have been issued
and the remaining 274 were reserved for stock options assumed in the
acquisition. The transaction has been accounted for as a
pooling-of-interests and, accordingly, all data included in the Consolidated
Financial Statements has been restated.
The following is a reconciliation of certain restated amounts with amounts
previously reported. Chip Star operations from the period June 1, 1997 to
the date of acquisition were immaterial and as such were combined in ESI
activity for the fiscal year 1998. AISI activity shown for fiscal 1998 is
for the period from June to December 1, 1997, the date of acquisition.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales:
ESI $212,374 $150,159 $159,705
Chip Star - 9,990 6,605
AISI 17,245 19,886 23,129
--------------------------------------
As Restated $229,619 $180,035 $189,439
Net Income:
ESI $ 13,135 $ 18,952 $16,082
Chip Star - 2,298 1,217
AISI 3,748 (1,791) 3,108
--------------------------------------
As Restated $ 16,883 $ 19,459 $20,407
</TABLE>
37
<PAGE>
DYNAMOTION CORP.
On June 9 1997, the Company acquired all of the outstanding stock of
Dynamotion Corp., a producer of high performance mechanical drilling and
routing systems based in Santa Ana, California. The preliminary purchase
consideration consisted of 347 shares of ESI stock. The transaction was
accounted for as a purchase. In connection with the purchase price
allocation, the Company estimated the fair value of the intangible assets
indicating that a majority of the acquired intangible assets consisted of
research and development projects in process. At that time, the development
of these projects had not reached technological feasibility and the
technology was believed to have no alternative future use. In accordance with
generally accepted accounting principles, the acquired in-process research
and development of $9.0 million has been reflected in merger-related expenses
in the accompanying financial statements.
Pro forma combined income statement data for the year ended 1998 is equal
to consolidated income statement figures for the year as the activity of
Dynamotion from June 1, 1997 to the date of acquisition was insignificant.
Pro forma combined income statement data for the years ended May 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
UNAUDITED
----------
1997 1996
---- ----
<S> <C> <C>
Sales $192,673 $202,942
Operating Income 13,465 17,021
Net income per share - basic 1.24 1.58
Net income per share - diluted 1.20 1.53
</TABLE>
38
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED MAY 31, 1998 QUARTER QUARTER QUARTER QUARTER TOTAL
- ----------------------- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Net sales $57,119 $59,872 $57,594 $55,034 $229,619
Gross margin (1) 32,235 32,606 32,299 27,787 $124,927
Net income (1) (1,918) 7,975 4,534 6,292 16,883
Net income per share - basic (1) $(0.17) $0.72 $0.41 $0.56 $1.52
Net income per share - diluted (1) $(0.17) $0.70 $0.40 $0.54 $1.47
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED MAY 31, 1997 QUARTER QUARTER QUARTER QUARTER TOTAL
- ----------------------- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Net sales $39,583 $40,495 $45,764 $54,193 $180,035
Gross margin 22,263 20,912 25,011 27,923 96,109
Net income 3,861 2,237 6,020 7,341 19,459
Net income per share - basic $0.37 $0.21 $0.57 $0.70 $1.85
Net income per share - diluted $0.36 $0.21 $0.55 $0.67 $1.79
</TABLE>
(1) Operations for the fiscal 1998 include $11,124 and $3,510 in merger related
expenses for the first and third quarters, respectively.
39
<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, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended May 31, 1998. 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended May 31, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
June 30, 1998
40
<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 1998 Annual Meeting of Shareholders and
is incorporated herein by reference.
Information with respect to executive officers of the Company is included under
Item 4 of Part I of this Report. No information is required to be included for
Item 405 of Regulation S-K for 1998.
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 1998 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 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
41
<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.
<TABLE>
<CAPTION>
Electro Scientific Industries, Inc.
and Subsidiaries: Page
----
<S> <C>
Consolidated Balance Sheets as of
May 31, 1998 and 1997 20
Consolidated Statements of
Income for the Years Ended
May 31, 1998, 1997, and 1996 21
Consolidated Statements of
Shareholders' Equity for the Years Ended
May 31, 1998, 1997, and 1996 22
Consolidated Statements of
Cash Flows for the Years Ended
May 31, 1998, 1997, and 1996 23
Notes to Consolidated Financial Statements 25-37
Report of Independent Public Accountants 38
</TABLE>
All schedules are omitted, as the required information is inapplicable or not
significant.
42
<PAGE>
<TABLE>
<CAPTION>
(a)(3) Exhibits.
<S> <C> <C>
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) Incorporated by
reference to Exhibit 10-B of the Company's Annual report on
Form 10-K for the fiscal year ended May 31, 1997.
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. 1996 Stock Incentive Plan. Incorporated by reference to
Exhibit 10-E of the Company's Annual report on Form 10-K for
the fiscal year ended May 31, 1997.
11. Statement of Calculation of Earnings Per Share.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of fiscal year 1998. However, a Form 8-K was filed on
July 7 and December 1, 1997.
- ------------
(1) Management contract or compensatory plan or arrangement.
43
<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, 1998 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, 1998.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
(1) Principal Executive, Financial and
Accounting Officers
/s/ Donald R. VanLuvanee Director, 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/ Gerald F. Taylor Director
- --------------------------
Gerald F. Taylor
/s/ Jon D. Thompkins Director
- --------------------------
Jon D. Thompkins
/s/ Keith L. Thomson Director
- --------------------------
Keith L. Thomson
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
---------- -------------------
<S> <C>
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. Incorporated by reference
to Exhibit 10-B of the Company's Annual report on Form 10-K for
the fiscal year ended May 31, 1997.
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. 1996 Stock Incentive Plan. Incorporated by reference to Exhibit
10-E of the Company's Annual report on Form 10-K for the fiscal
year ended May 31, 1997.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
</TABLE>
45
<PAGE>
EXHIBIT 21
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF MAY 31, 1998
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE/COUNTRY VOTING SECURITIES
SUBSIDIARIES OF INCORPORATION OWNED (1)
- ------------ ---------------- -----------------
<S> <C> <C>
Applied Intelligence Systems, Inc. (AISI) Michigan 100%
Chicago Laser Systems, Inc. Oregon 100%
CHINT, Ltd. U.S. Virgin Islands 100%
Chip Star, Inc. California 100%
CLS GmbH Germany 100%
CLS Ltd England 100%
Dynamotion, 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%
ESI Taiwan Taiwan 100%
Palomar Systems, Inc. Oregon 100%
XRL, Corp. Oregon 100%
</TABLE>
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 10, 1998
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 9803
<SECURITIES> 29113
<RECEIVABLES> 62309
<ALLOWANCES> 419
<INVENTORY> 49805
<CURRENT-ASSETS> 158957
<PP&E> 57550
<DEPRECIATION> 29912
<TOTAL-ASSETS> 199443
<CURRENT-LIABILITIES> 17162
<BONDS> 0
0
0
<COMMON> 101831
<OTHER-SE> 80450
<TOTAL-LIABILITY-AND-EQUITY> 199443
<SALES> 229619
<TOTAL-REVENUES> 229619
<CGS> 104692
<TOTAL-COSTS> 104692
<OTHER-EXPENSES> 100290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26852
<INCOME-TAX> 9969
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16883
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.47
</TABLE>
