<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 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.
OREGON 93-0370304
13900 N.W. SCIENCE PARK DRIVE, PORTLAND, OREGON
97229
(503) 641-4141
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
--- ---
AS OF AUGUST 31, 1998 THERE WERE 11,397,181 SHARES OF COMMON STOCK OF ELECTRO
SCIENTIFIC INDUSTRIES, INC. OUTSTANDING.
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Part I. Financial Information
Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets 3-4
August 31, 1998 and May 31, 1998*
Consolidated Statements of Operations 5
Three Months ended
August 31, 1998 and August 31, 1997
Consolidated Statements of Cash Flows 6-7
Three Months ended
August 31, 1998 and August 31, 1997
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial 13-17
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18-19
Signature 20
*Audited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS August 31, 1998* May 31, 1998
- ------ ---------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,313 $ 9,803
Securities available for sale 28,200 29,113
Trade receivables, net 69,569 61,890
Inventories 49,491 49,805
Deferred income taxes 4,788 4,788
Other current assets 5,315 3,558
-------- --------
Total current assets 160,676 158,957
-------- --------
PROPERTY AND EQUIPMENT, AT COST 59,593 57,550
Less - Accumulated depreciation (30,847) (29,912)
-------- --------
Net property and equipment 28,746 27,638
-------- --------
DEFERRED INCOME TAXES 2,692 2,692
OTHER ASSETS 10,835 10,156
-------- --------
$202,949 $199,443
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY August 31, 1998* May 31, 1998
- -------------------- ---------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,676 $ 5,184
Accrued liabilities:
Payroll related 4,751 5,138
Commissions 4,797 4,025
Warranty 1,903 1,948
Other 865 578
-------- --------
Total accrued liabilities 12,316 11,689
Deferred revenue 464 289
-------- --------
Total current liabilities 18,455 17,162
-------- --------
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, without par value;
Authorized:
40,000 shares; Outstanding:
11,397, and 11,368 respectively 102,299 101,831
Retained earnings 82,195 80,450
-------- --------
Total shareholders' equity 184,494 182,281
-------- --------
$202,949 $199,443
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share)
<TABLE>
<CAPTION>
Three Months Ended * Three Months Ended *
August 31, 1998 August 31, 1997
-------------------- --------------------
<S> <C> <C>
Net sales $45,192 $57,119
Cost of sales 22,792 24,884
------- -------
Gross margin 22,400 32,235
Operating expenses:
Selling, service and administrative 13,466 13,569
Research, development and engineering 7,473 6,786
Acquired in-process research and development
and merger related expenses -- 11,124
------- -------
Total operating expenses 20,939 31,479
------- -------
Operating income 1,461 756
Interest income 369 490
Other income, net 43 57
------- -------
Income before income taxes 1,873 1,303
Provision for income taxes 632 3,221
------- -------
Net income (loss) $ 1,241 $(1,918)
------- -------
------- -------
Net income (loss) per share:
Basic $ 0.11 $ (0.17)
------- -------
------- -------
Diluted $ 0.11 $ (0.17)
------- -------
------- -------
Weighted average number of shares:
Basic 11,384 10,968
Diluted 11,654 10,968
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
August 31, 1998* August 31, 1997*
---------------- ----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 1,241 $(1,918)
Adjustment to align AISI fiscal year with May 31, 1997 (565)
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Acquired in-process research and development and
merger-related expenses (1) -- 11,124
Depreciation and amortization 1,424 1,342
Changes in operating accounts:
(Increase) decrease in trade receivables (7,370) 2,483
Decrease (increase) in inventories 1,238 (1,159)
Increase in other current assets (1,757) (1,010)
Increase (decrease) in current liabilities 1,465 (4,331)
-------- -------
Net cash (used in) provided by operating activities: (3,759) 5,966
-------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment (2,640) (2,158)
Purchase of securities (10,137) (9,972)
Proceeds from sales of securities and maturing securities 11,050 7,500
Increase in other assets (1,472) (145)
-------- -------
Net cash used in investing activities: (3,199) (4,775)
-------- -------
Cash Flows From Financing Activities:
Repayment of Dynamotion subsidiary debt (2) -- (6,979)
Payments to retire other debt -- (29)
Proceeds from exercise of stock options and stock plans 468 2,591
-------- -------
Net cash, provided by (used in) financing activities: 468 (4,417)
-------- -------
Net Change in Cash and Cash Equivalents (6,490) (3,226)
Cash and Cash Equivalents at Beginning of Period 9,803 20,315
-------- -------
Cash and Cash Equivalents at End of Period $ 3,313 $17,089
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
*Unaudited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(Unaudited)
Cash payments for interest were not significant for the three months ended
August 31, 1998 and August 31, 1997. Cash payments for income taxes were $902
and $573 for the three months ended August 31, 1998 and August 31, 1997,
respectively.
Notes:
(1) See Note 5 in Notes to Consolidated Financial Statements.
(2) Acquisition of Dynamotion subsidiary:
Assets less liabilities acquired, net of cash $(11,950)
Issuance of common stock and common stock options 11,950
--------
Net cash used to acquire Dynamotion: $ 0
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in these interim statements. Management believes that the interim
statements include all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of results for the interim periods.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's 1998 Annual Report filed on Form 10-K.
Results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $321 at
August 31, 1998 and $419 at May 31, 1998*.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31, 1998 May 31, 1998*
--------------- -------------
<S> <C> <C>
Raw materials and purchased parts $30,233 $31,491
Work-in-process 8,851 8,975
Finished goods 10,407 9,339
------- -------
$49,491 $49,805
------- -------
------- -------
</TABLE>
*Audited
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
NOTE 4 - NET INCOME (LOSS) PER SHARE
The Company adopted the Financial Accounting Standards Board's Statement 128,
Earnings Per Share ("SFAS 128"), in the third fiscal quarter of 1998. All
earnings per share amounts in the following table are presented and, where
necessary, restated to conform to the SFAS 128 requirements.
<TABLE>
<CAPTION>
Three Months Ended
August 31, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
Net income (loss) $ 1,241 $(1,918)
Weighted average number of shares of common stock and common stock
equivalents outstanding:
Weighted average number of shares outstanding for computing
basic net income per share 11,384 10,968
Dilutive effect of employee stock options after application
of the treasury stock method 270 0
------- -------
Weighted average number of shares outstanding for computing
diluted net income per share 11,654 10,968
------- -------
------- -------
Net income (loss) per share - basic $ 0.11 $ (0.17)
------- -------
------- -------
Net income (loss) per share - diluted $ 0.11 $ (0.17)
------- -------
------- -------
</TABLE>
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include the following stock options because inclusion
would have an anti-dilutive effect on the earnings per share calculation.
<TABLE>
<CAPTION>
Three Months Ended
August 31, 1998 August 31, 1997
--------------- ---------------
<S> <C> <C>
Number of Employee Stock Options 63 703
</TABLE>
NOTE 5 - ACQUISITIONS
DYNAMOTION, INC.
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 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 obtained an
appraisal of the intangible assets that indicated that substantially 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 was charged to expense during the
quarter ended August 31, 1997 and is reflected in the accompanying Consolidated
Statements of Operations.
The statement of operations data for the three months ended August 31, 1997 was
prepared as if the acquisition had occurred at the beginning of the period. The
pro forma effect of Dynamotion's revenue and net income for the period from
June 1 to June 9, 1997 is not significant.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
NOTE 5 - CONT.
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.
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 deemed to be 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 consisted of
1,400 shares of ESI common 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.
A reconciliation of amounts previously reported to amounts included in the
financial statements is as follows:
<TABLE>
<CAPTION>
Three Months Ended
August 31, 1997
---------------
<S> <C>
Revenue:
ESI $48,356
AISI 8,763
-------
As Restated $57,119
Net Loss:
ESI $(3,861)
AISI 1,943
-------
As Restated $(1,918)
</TABLE>
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
NOTE 6 - INCOME TAXES
The effective income tax rate for the interim period is based on estimates of
annual amounts of taxable income, tax credits and other factors.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS130). The Company has adopted SFAS 130 in the first fiscal quarter of
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. Components
of the Company's comprehensive income consist of cummulative transation
adjustments and unrealized gains/losses of securities available for sale, none
of which are material to the Company's consolidated financial position or
results of operations.
HEDGING ACTIVITIES
The Financial Accounting Standards Board issued "Accounting for Derivative
Instruments and Hedging Activities"("SFAS 133"), in June 1998. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The change in the derivative's fair value
related to the ineffective portion of a hedge, if any, will be immediately
recognized in earnings. The Company expects to adopt this Standard as of the
beginning of its fiscal year 2001. The effect of adopting this standard is
currently being evaluated, but is not expected to have a material effect on the
Company's financial position or its results of operations.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Revenue of $45.2 million for the quarter ended August 31, 1998 was $11.9
million or 20.9 % lower than in the first quarter of fiscal 1998, and $9.8
million or 17.9% lower than in the quarter ended May 31, 1998. Consistent with
the first quarter of the prior year, memory yield equipment made up the largest
percentage of sales for the quarter at 32.5% of total revenues versus 31.1% in
the prior year. Overall, memory yield improvement, electronic component and
machine vision equipment sales were down over the same quarter in the prior
year, offset by increased sales in circuit fine tuning and advanced packaging
equipment. Revenues from electronic component, circuit fine tuning, advanced
packaging, and vision systems were down this quarter in comparison to last
quarter, offset by an increase in memory yield improvement system revenues over
last quarter of 20.5%.
Gross margin for the three months ended August 31, 1998 decreased to 49.6% from
56.4% for the first quarter of the prior fiscal year. Lower margins were the
result of a shift in product mix, a slight decrease in average selling prices,
and underabsorption of overhead costs due to lower unit volumes. Gross margin
for the current period was also slightly lower than for the quarter ended May
31, 1998.
Selling, service and administrative expenses for the three months ended August
31, 1998 were $0.1 million lower than for the first quarter of fiscal 1998. The
decrease is due to mainly to lower professional fees and bonus accruals.
Expenses for sales, services and administration were down about $1.1million from
the prior quarter as reduced sales volume lowered commissions.
Expenses associated with research, development and engineering increased in
absolute terms and as a percentage of sales over both the first quarter of
fiscal 1998 and the fourth quarter of fiscal 1998. The $0.7 million increase
over the first quarter, prior year, is attributable higher labor costs and
project spending. R&D expenses increased $0.3 million over the prior quarter.
R&D spending typically fluctuates from quarter to quarter as engineering
projects move through their life cycles.
Net income for the quarter ended August 31, 1998 was $1.2 million or $0.11 per
basic share. This represents an increase of 164.7% over the first quarter of
fiscal 1997, when there were negative earnings of $1.9 million or negative
$0.17 per basic share. The first quarter of fiscal 1997 included $11.1 million
in merger-related expenses.
Ending backlog on August 31, 1998 was $12.9 million as compared to $21.8 million
for May 31, 1998 as book to ship time continues to decrease.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (cont.)
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $31.5 million, accounts receivable
of $69.6 million, and a $7.0 million line of credit, none of which was
outstanding at August 31, 1998. Accounts receivable was significantly higher
than on May 31, 1998, however cash received in the first two weeks of September
brought receivables down to May 31, 1998 levels. ESI has a current ratio of
8.7:1 and no long-term debt. Working capital increased to $142.2 million at
August 31, 1998 vs. $141.8 million at May 31, 1998. Inventory decreased by $.3
million as compared to the May 31, 1998 level. Reductions in raw materials and
WIP were partially offset by an increase in finished goods inventory.
The Company's business depends in large part upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors and
semiconductor memory devices, and circuits used in wireless telecommunications
equipment, such as pagers and cellular phones, automotive electronics and
computers. The markets for products manufactured by the Company's customers are
cyclical and have historically experienced periodic downturns, which often have
had a negative effect on the demand for capital equipment such as that sold by
the Company. Several large, multinational electronics companies constituted
41.4% of the Company's fiscal 1998 sales and are expected to comprise a similar
ratio in fiscal 1999. 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, to introduce them successfully into the
market and to create and sustain intellectual property protection for these new
products. 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 have accounted for 60% of year-to-date sales for fiscal
1999 as compared to 57% for the fiscal year 1998. About 39% of the company's
year-to-date product sales are to Asian customers versus 26% for the fiscal year
1998. Several countries in this region, notably South Korea, Japan and Taiwan,
have experienced currency devaluation and/or difficulties in financing short-
term obligations. The Company's customers in these countries continued to
purchase and pay for ESI products within agreed upon terms. In addition,
substantially all Asian end customer receivables are secured by letter of
credit.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (cont.)
There can be no assurance that difficulties in the Asian economy will not
adversely affect the demand for the company's products in that region or
elsewhere.
The Company expects that international shipments will continue to represent a
significant percentage of net sales in the future. As a result, a significant
portion of the Company's net sales will be subject to certain risks, including
changes in demand resulting from fluctuations in interest and currency exchange
rates, as well as factors such as government financed competition, changes in
trade policies, tariff regulations, difficulties in obtaining US export licenses
and the difficulties of staffing and managing foreign operations.
Most of the Company's sales are transacted in dollars and the Company's products
are made in the United States. Many Japanese customers pay us in yen, and 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 10% of total
consolidated operating expenses with about 60% attributable to Europe and 40% to
Asia. Changes in the value of the local currency, as measured in US dollars,
will commensurably increase or decrease operating expenses.
The Company has a task force to prepare for Year 2000 (Y2K) issues. The Director
of Corporate Technology serves as the Y2K coordinator and has overall
responsibility for organizing and managing the Company's Y2K program. The
coordinator reports to the Chief Technical Officer and Vice President. 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.
Each of the Company's product lines have technical and communication resources
assigned for Y2K readiness. ESI uses Sematech Tests to determine equipment
product readiness. The product line groups have a responsibility to meet
corporate commitments for current product readiness before the end of calendar
1998. Past products have been evaluated and readiness upgrade kits are being
developed and offered where practical. The overall Y2K coordinator is working
with each product line group to develop and implement their product plans. Y2K
readiness is viewed as a necessary capability for doing business. Contingency
plans are based around tactical moves to make current products compliant.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (cont.)
The Company has completed the evaluation of its core business systems.
Assessment includes facilities, manufacturing, laboratory, banking, accounting,
procurement, product test, customer order, receiving, warehousing, and
communications. The few areas that were found not to be Y2K ready at the time of
this assessment include security systems, and a variety of interfaces to
databases within the company. For each deficiency identified, a responsible
party has been identified to ensure compliance. The Company is 90% complete with
ready business systems. The target date for completion of this activity is
December 31, 1998. Contingency plans will be implemented if non-compliant
systems are identified for which remedies are not readily available.
The Company has a director level manager assigned the responsibility for ESI's
supplier year 2000 readiness evaluation. The plan includes automatic assessment
of the top 80% of the suppliers and key supplier identification of the remaining
20%. Target date for completion of this activity is December 31, 1998.
Contingency plans include switching vendors for suppliers that are not able to
demonstrate Y2K readiness.
The Company has incurred costs associated with assessing the Y2K issue and
implementing its Y2K Plan. These costs have included consultants, software and
security system upgrades. The Company estimates it has incurred approximately
two-thirds of its total expected Y2K costs. Total costs of assessing and
implementing the Company's Y2K Plan are not expected to have a material effect
on the consolidated financial position or results of operations.
Consequences of not successfully implementing the Company's Y2K plan include
inability to ship product, delay or loss of sales and delays in factory
operations. 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. However, there can be no
assurances that third parties over which the company has no control will
successfully address their own Y2K issues.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (cont.)
Information in the Management Discussion and Analysis regarding expectations for
future product demand, customers, international shipments and future product
offerings and resources constitute forward-looking statements that involve a
number of risks and uncertainties. In addition, the Company may from time to
time issue other forward-looking statements. The following factors could cause
actual results to differ materially from the forward-looking statements: general
economic conditions, including their impact on capital expenditures; business
conditions in the electronics industry, including the cyclical nature of the
market for the Company's products; rapidly changing technology and evolving
industry standards; availability and continued validity of intellectual property
protection; competitive factors, including increased competition, new product
offerings by competitors and price pressures; availability of supplies from
third party suppliers on a timely basis and at reasonable prices; and
international business conditions, including fluctuations in interest and
currency exchange rates, government financed competition, changes in trade
policies, tariff regulations, and the difficulties of staffing and managing
foreign operations. The forward-looking statements should be considered in
light of these factors.
<PAGE>
Page 18/20
Part II Other Information
Item 1. Legal Proceedings
On September 30, 1998 the U.S. District Court for the Northern District of
California issued a series of orders regarding ESI's lawsuit against General
Scanning, Inc. for patent infringement. The lawsuit alleges General Scanning is
infringing certain claims of ESI's patents. The Court granted ESI's Motion for
Summary Judgment of Literal Infringement by General Scanning. The Court granted
ESI's Motion for Summary Judgment on the issue of no inequitable conduct by ESI
in the prosecution of ESI's patent. The Court denied General Scanning's Motion
for Summary Judgment of Invalidity of the asserted claims of ESI patents. ESI
initiated litigation against General Scanning in December 1996. The lawsuit is
still pending in the U.S. District Court for the Northern District of
California.
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Shareholders was held on Friday, September 25, 1998.
The following items were approved by the vote indicated:
1. Larry L. Hansen, Vernon B. Ryles, Jr., and Donald R. VanLuvanee were re-
elected to the Board of Directors for a three-year term. Jon D. Tompkins
was re-elected for his remaining two-year term and Gerald F. Taylor for his
remaining one-year term. David F. Bolender, W. Arthur Porter, Douglas C.
Strain and Keith L. Thomson continue as Directors.
For 9,013,030
Against 0
Abstain 43,199
No Vote 0
2. Amendment of the 1989 Stock Option Plan was approved. The shares reserved
for issuance was increased by 500,000 to a total of 2,200,000 shares.
Approval of the amendment constitutes reapproval of the per-employee limit
on grants of options under the Option Plan of 250,000 shares annually.
This reapproval is required every five years for compliance with Internal
Revenue Service regulations.
For 6,787,524
Against 709,828
Abstain 162,974
No Vote 1,395,903
<PAGE>
Page 19/20
3. Amendment of the 1990 Employee Stock Purchase Plan was approved. The shares
reserved for purchase under the Plan was increased by 150,000 to a total of
450,000 shares.
For 7,432,042
Against 64,520
Abstain 163,764
No Vote 1,395,903
4. Amendment of the 1996 Stock Incentive Plan was approved. The shares
reserved for issuance under the Plan was increased by 100,000 to a total of
250,000 shares. Approval of the amendment constitutes reapproval of the
performance criteria on which Performance-Based Awards are based. This
reapproval is required every five years for compliance with Internal
Revenue Service regulations.
For 7,280,888
Against 213,095
Abstain 166,343
No Vote 1,395,903
5. Selection of Arthur Andersen LLP as independent auditors for the Company
was approved.
For 9,000,417
Against 19,049
Abstain 36,763
No Vote 0
<PAGE>
Page 20/20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Dated: October 14, 1998 By /s/ Barry L. Harmon
------------------------------
Barry L. Harmon, Senior Vice
President and Chief Financial
Officer
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<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> MAY-31-1998
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0
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