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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, 1999 or
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_______________
Commission File Number: 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0370304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13900 NW Science Park Drive
Portland, Oregon 97229
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 641-4141
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of voting and non-voting Common Stock held by
nonaffiliates of the Registrant at June 30, 1999: $545,214,000.
The number of shares of Common Stock outstanding at June 30, 1999: 13,049,000.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K into
Document which is incorporated
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Proxy Statement for 1999 Annual Meeting Part III
of Shareholders
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TABLE OF CONTENTS
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Item of Form 10-K Page
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PART I
Item 1 - Business 3
Item 2 - Properties 11
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a Vote of Security Holders and
Executive Officers 13
PART II
Item 5 - Market for the Registrant's Common Equity and Related Shareholder Matters 16
Item 6 - Selected Financial Data 17
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A - Quantitative and Qualitative Disclosures about Market Risk 23
Item 8 - Financial Statements and Supplementary Data 25
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III
Item 10 - Directors and Executive Officers of the Registrant 49
Item 11 - Executive Compensation 49
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 49
Item 13 - Certain Relationships and Related Transactions 49
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 50
SIGNATURES 52
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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 improve the yield
of semiconductor memory devices, of high-speed test and termination equipment
used in the high-volume production of miniature passive electronic
components, and of advanced laser systems used to fine tune electronic
circuitry. 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 the
following: wireless telecommunication and automotive electronics products
(AT&S, Ericsson, IBM, Motorola, Multek, VDO, and W.L. Gore); miniature
capacitors (AVX, Kyocera, Phillips, Samwha, Taiyo Yuden, and Walsin);
semiconductor memory devices (Hitachi, Hyundai, IBM, and Samsung); printed
wiring boards (IBM, Johnson-Matthey/ACI, Maxedge, and Multek) and users of
machine vision systems in electronic manufacturing equipment (Canon, Kulicke
& Soffa, and Universal Instruments).
ELECTRONICS INDUSTRY OVERVIEW
The electronic content of telecommunications products, automobiles and
personal computers continues to increase. For example, automobile manufacturers
now routinely include electronic ignition, anti-lock brakes, electronic fuel
injection and other electronic systems in place of components that in the past
were predominantly mechanical. In addition, markets for consumer-oriented
electronic products such as wireless telephones, fax machines, pagers,
camcorders and personal computers have developed rapidly as increasingly
affordable products have been introduced and as they have become small enough
and light enough to be easily portable.
Demand for electronics manufacturing equipment is driven by the demand
for electronic devices and circuits. Electronic components are used in virtually
all electronic products, from inexpensive consumer electronics to the most
sophisticated computers. These components are produced in very large unit
volumes.
The demands upon manufacturers to supply increasing quantities of
electronic components have been accompanied by demands for increased
complexity, reduced size and improved quality. As electronic products become
more powerful and portable, the devices and circuits in these products must
be faster, smaller and more reliable. To achieve these attributes of higher
performance, the electronic device manufacturers increase densities and tune
the devices to precise electrical values. Manufacturers of wireless 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 wireless frequency
bands to accommodate more users without interchannel interference.
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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 more difficult. ESI's leading-edge technologies provide our
customers with the capability to address these challenges.
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. The manufacturers continuously seek to reduce device costs by
improving throughput, yield, and quality in device production.
OVERVIEW OF MARKETS, PRODUCTS AND STRATEGY
Pagers, wireless 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 provides 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 next generation capability 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 memory yield
improvement systems, electronic component manufacturing systems, advanced
electronic packaging equipment, machine vision solutions, and circuit fine
tuning systems.
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, although many consumer products such as personal
digital assistants (PDA's), photocopiers, fax machines and telecommunications
equipment require increasing amounts of memory. ESI's memory yield
improvement system customers include Hitachi Singapore (HNS), Hyundai, IBM,
LG Electronics, NEC, Samsung, Texas Instruments, Toshiba, and Winbond.
Memory device manufacturers use a laser process that disconnects
defective circuit elements and reconnects spare elements as replacements,
thereby salvaging the memory device. Cost reductions and demand for higher
capacity memory devices have led 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 as provided by ESI.
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ESI's memory yield improvement product line is designed and
developed to cost-effectively meet memory production challenges associated
with shrinking geometries, material changes and increased wafer sizes, as
needed by memory manufacturers and with enabling technology for next
generation devices.
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 in 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
products, such as static random access memory (SRAMs), digital signal
processors (DSPs), and other logic devices with embedded memory. The market
for semiconductor devices that use memory repair for production is estimated
to be approximately $76 billion in 2000.
ELECTRONIC COMPONENT MANUFACTURING SYSTEMS. ESI's product offerings in the
electronic component market consist of automated test, production, handling
and visual inspection equipment for manufacture of miniature multi-layer
ceramic capacitors (MLCCs), and other passive components, including arrays,
inductors, and varistors, which are used in very large numbers in nearly all
types of electronic circuits. MLCCs are used in circuits that process analog
and digital signals or operate at high frequencies in products such as
computers, video equipment, and voice and wireless telecommunication
products. Customers include AVX, Ceratech, Holy Stone, Kyocera, Phillips,
Samwha, Taiyo Yuden, Walsin, and Yageo.
The worldwide miniature surface mount capacitor market is estimated
to be approximately $3.3 billion (350 billion units) in 2000. Most of the
leading producers are in Japan, led by Murata, TDK and Kyocera. Production
demands imposed by miniaturization are leading capacitor manufacturers to
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 miniature capacitors has
also shrunk as small as .02" x .01". These minute sizes and high unit volumes
place extraordinary demands on manufacturers. ESI designs and manufactures
products that combine high-speed, small parts handling technology with
microprocessor-based systems to provide highly automated, cost-effective
solutions for MLCC manufacturers.
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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, or
terminations, 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
systems provide automated machine vision based inspection of MLCCs. Parts are
inspected for dimensional criteria and defects.
ADVANCED ELECTRONIC PACKAGING SYSTEMS. ESI's advanced packaging products
enable electronics manufacturers to make devices smaller, lighter and faster.
Smaller and lighter requirements push down the physical dimensions of the
circuits used in electronic packages. These requirements drive changes in
both the material selection and density of electrical connections. ESI's
products are designed to provide a cost-effective method for increasing the
density of vias (holes) used to create electrical connections between layers
in high density circuit boards and electronic packages. ESI's products are
targeted at small via applications requiring the highest accuracy and
smallest hole dimensions.
ESI's customers for advanced packaging products include: Allied
Signal, AT&S, IBM, Johnson-Matthey/ACI, Korea Circuits, Maxedge, Multek,
Nitto Denko, NTK, and W.L. Gore.
ESI uses laser and mechanical drilling and routing technology to
address these rapidly changing applications in integrated circuit (IC)
packages, multi-chip modules, and high-density printed wiring boards (PWBs).
ESI's technology, developed for its laser and mechanical drilling products,
allows manufacturers to process very small vias in a wide variety of
materials, including traditional glass reinforced circuit boards, copper, and
new organic compounds.
VISION PRODUCTS. ESI provides semiconductor and electronics manufacturers
with machine vision solutions for automated process control and visual
inspection for the handling and assembly of semiconductors, PWBs and discrete
electronic components. This includes both machine vision subsystems sold to
original equipment manufacturers (OEMs), and stand alone inspection systems
sold to end users. In the OEM marketplace, ESI has concentrated its efforts
on selling complete vision solutions and integration expertise to suppliers
of semiconductor and electronics equipment. ESI has also developed or
acquired new products to provide complete stand alone inspection systems for
semiconductor wafer inspection and review, integrated circuit package
inspection, and passive component measurement and quality inspection.
Customers for ESI's OEM vision products include Applied Materials,
Canon, Electroglas, KLA-Tencor, Kulicke & Soffa, Samsung, and Universal
Instruments. Customers for stand alone inspection equipment include Analog
Devices, Anam/Ankor, AVX, Motorola, ST Micro, and Xilinx.
Machine vision has emerged as a critical technology as semiconductor
manufacturers move toward higher densities and more complex architectures. By
allowing manufacturers to achieve greater precision,
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increased equipment speed, and fewer errors, machine vision is a critical
enabling technology in the IC manufacturing process from wafer production
through packaging. In addition, the manufacture and placement of components
in the surface mount assembly area requires high speed and accuracy obtained
through integrated machine vision solutions.
ESI offers machine vision solutions with low cost computer
architecture, easy-to-integrate software modules, powerful application
specific software and advanced lighting and optics, supported by ESI's
production equipment expertise. These elements reduce application development
time and shorten time to market for producers of equipment used to
manufacture semiconductors and PWBs. Products include patented specialized
lighting, wafer alignment and identification products, and application
specific solutions for the surface mount industry. Vision enabled stand alone
systems, included in ESI's MicroVision product line include semiconductor
front-end turnkey wafer handling and inspection systems; and back-end IC and
plastic leaded chip carrier (PLCC) device handling and inspection systems.
CIRCUIT FINE TUNING SYSTEMS. ESI's circuit fine tuning systems precisely tune
the frequency of electronic circuits that receive and transmit signals in
wireless communication devices. ESI's laser trimming systems also tune
automotive electronic assemblies such as engine control circuits. Customers
include C-MAC, Delphi, Ericsson, Motorola, Nokia, Styly, USI, and VDO.
ESI designs and manufactures an application-specific laser that
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 wireless phones, laser trimming of a few
selected components in the product is used to tune the product to the desired
frequency.
ESI's circuit fine tuning systems also adjust the resistance value
of discrete devices manufactured on ceramic substrates for use in surface
mount technology end products. Typically these discrete resistors are
produced at values 30% below nominal levels and need to be trimmed to value
with very high accuracy. ESI's systems meet the demands for ultra small size
resistor processing by precise positioning of the laser beam and high speed
measurement capability.
The circuit fine tuning product line leverages ESI's strength in
precise laser machining and very high speed handling to offer cost-effective
solutions for tuning electronic circuits.
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SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service
offices located in or near: Ann Arbor, Michigan; Canton, Massachusetts;
Chanhassen, Minnesota; Phoenix, Arizona; Portland, Oregon; and Escondido and
Santa Ana, California in North America; Tokyo and Nagoya, Japan; Seoul, Korea,
and Taipei and Chungli, Taiwan in Asia; and Munich, Germany; West Sussex,
England; and Paris, France 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 55.9%, 58.7% and 63.8% of ESI's
net sales for fiscal 1999, 1998 and 1997, respectively.
In fiscal 1999, 1998 and 1997, no customer exceeded 10% of sales.
BACKLOG
Backlog consists of written purchase orders for products, spare
parts and service, which ESI expects to ship within twelve months. Backlog
was $22.9 million at May 31, 1999 versus $24.5 million at May 31, 1998 and
$34.5 million at May 31, 1997.
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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 1999, 1998, and
1997 were $30.3 million (14.7% of net sales), $34.8 million (13.5% of net
sales), and $27.3 million (14.1% of net sales), respectively.
Research and development expenditures for the year ended May 31, 1998
do not include the acquired in-process research and development expense incurred
in connection with the purchase of Dynamotion Corporation ("Dynamotion").
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, and larger
service organizations than ESI. Some of ESI's customers develop, or have the
ability to develop, similar manufacturing equipment. There can be no
assurance that competition in ESI's markets will not intensify or that ESI's
technological advantages may not be reduced or lost as a result of
technological advances by competitors or customers or changes in electronic
device processing technology.
ESI's major competitors for memory yield improvement systems are
Nikon and General Scanning. For electronic component manufacturing equipment,
ESI's competitors include Tokyo Weld, Kanebo and Humo in Japan, as well as
manufacturers that develop systems for internal use. ESI's advanced
electronic packaging systems compete with mechanical drills manufactured by
companies such as Hitachi Via Mechanics, Excellon and Pluritec and laser
systems provided by Lumonics, Sumitomo, Mitsubishi and Hitachi Via Mechanics.
ESI's vision products compete with vision suppliers such as Cognex, ICOS
Systems, and Robotic Vision Systems, Inc. There are also numerous other
vision companies and captive vendors in Japan, North America and Europe.
Major competitors for circuit fine tuning systems include NEC and General
Scanning.
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MANUFACTURING AND SUPPLY
ESI's largest production facilities are located in Portland, Oregon
and San Diego, California. Portland's manufacturing operations consist of
electronic subassembly, laser production and final system assembly for memory
yield improvement, advanced electronic packaging, and circuit fine tuning
product lines. Electronic component manufacturing systems are produced by
ESI's subsidiary near San Diego, California. ESI's vision systems are
manufactured by ESI's subsidiaries in Ann Arbor, Michigan and Minneapolis,
Minnesota.
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, 1999, ESI employed 875 people, including 237 in
engineering, research and development, 304 in manufacturing and 334 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.
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 ongoing research, development and manufacturing activities.
ESI owns 77 United States patents and has applied for 28 additional patents
in the United States. ESI has 72 foreign patents and has applied for 99
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.
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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 196,500 square feet of floor space. ESI also owns a 60,000 square
foot plant on ten acres of land in Escondido, California, and a 29,000 square
foot building near Minneapolis, Minnesota.
In addition, the Company leases approximately 15,000 square feet of
industrial space in Canton, Massachusetts; 9,900 square feet of office and
industrial space in Santa Ana, California; 19,000 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 the productive capacity of the aforementioned
facilities to be adequate and suitable for the requirements of the business.
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ITEM 3. LEGAL PROCEEDINGS
ESI initiated litigation against General Scanning Inc. for patent
infringement in December 1996 in the U.S District Court for the Northern
District of California (Electro Scientific Industries, Inc. v. General Scanning
Inc., No. C-96-4268 SBA). On April 2, 1999 a federal court jury issued a verdict
upholding the validity of ESI's link blowing patent, U.S. patent 5,265,114
entitled "System and Method for Selectively Laser Processing a Target Structure
of One or More Materials of a Multimaterial, Multilayer Device". The jury found
U.S. patent 5,473,624 entitled "Laser System and Method for Selectively Serving
Links" invalid for reasons of obviousness. On April 8, 1999 the same federal
court jury awarded ESI $13,133,170 in damages, and also concluded that General
Scanning's infringement was willful. On July 8, 1999 the court issued orders
denying General Scanning's motions for a new trial and to set aside the jury
verdict. The court also entered a permanent injunction, prohibiting General
Scanning from making, using, selling, or offering for sale in the United States
memory repair systems and upgrade kits equipped with 1.3 micron lasers. General
Scanning has announced that it intends to appeal the verdict. ESI has not
reflected this award in its financial results. However, ESI continues to record
legal expenses related to this litigation as these expenses are incurred.
On October 20, 1998 the Company filed a second action 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 violating the following ESI's patents: 5,569,398 entitled "Laser System and
Method for Selectively Trimming Films" issued on October 29, 1996; 5,685,995
entitled "Method for Laser Functional Trimming of Films and Devices" issued on
November 11, 1997; and 5,808,272 entitled "Laser System for Functional Trimming
of Films and Devices" issued on September 15, 1998. This lawsuit is still
pending.
Numerous users of the Company's products have received notice of patent
infringement from the Lemelson Medical, Educational & Research Foundation
Limited Partnership ("Partnership") alleging that their use of the Company's
products infringes certain patents transferred to the Partnership by the late
Jerome H. Lemelson. Certain of these users have notified the Company that, in
the event it is subsequently determined that their use of the Company's products
infringes any of the Partnership's patents, they may seek indemnification from
the Company for damages or expenses resulting from this matter.
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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, 1999.
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages and positions as of June
30, 1999 are as follows:
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NAME AGE POSITION
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Donald R. VanLuvanee 55 Chief Executive Officer, President and Director
Robert E. Belter 58 Vice President
Bradford S. Cooley 42 Vice President
Barry A. Glasgow 54 Vice President
Julia A. Harper 40 Vice President
Jonathan C. Howell 45 Chief Financial Officer and Senior Vice President
Mark W. Klug 60 Vice President
John R. Kurdock 54 Vice President
Michael J. Murphy 49 Vice President
Larry T. Rapp 59 Vice President
Joseph L. Reinhart 40 Vice President and Corporate Secretary
Edward J. Swenson 60 Senior Vice President
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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 Industries, a supplier of capital equipment and consumables to
the microelectronics industry. Mr. VanLuvanee is also a Director of Micro
Component Technology Inc., a leading manufacturer of automated test handling
equipment, and FEI, 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 as a Vice President and General
Manager of a subsidiary. Mr. Belter is responsible for electronic component
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.
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Mr. Cooley was elected Vice President in January 1999 and is
responsible for engineering and corporate research and development. Mr. Cooley
joined ESI in April 1993 as Director of Engineering for ESI's laser based
equipment products. Prior to ESI, he held engineering management positions with
Texas Instruments and Kulicke and Soffa Industries as well as several startup
companies engaged in equipment development.
Mr. Glasgow joined the Company in June 1998 as Vice President of Sales
for Portland Operations and was named Vice President of Worldwide Sales and
Marketing in December 1998. 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 a company ESI acquired, XRL, Inc., from 1987 to 1997 in various
sales positions including Director of Worldwide Sales for semiconductor products
from 1995 to 1997.
Ms. Harper joined ESI in May 1997 as Treasury and SEC Reporting
Manager, was named Controller in 1998, and Vice President of Finance in April
1999. From 1995 to 1997, Ms. Harper was Accounting Manager at Instromedix
Incorporated, a medical electronics manufacturer. She has also held a number
of management positions with ARCO Gas and Oil Company.
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. In 1996, Mr. Howell was named Chief
Technology Officer and in April 1999, Mr. Howell was elected Senior Vice
President and Chief Financial Officer. Mr. Howell has extensive financial and
management experience from Citibank, Gulf and Western and Arthur Young & Co.
Mr. Klug joined the Company in 1992 and in 1993 was elected a Vice
President. Mr. Klug is responsible for the engineering activities 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 Industries, 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. During the five years prior to joining ESI, Mr.
Kurdock served as Vice President of the Surface Mount Division for Universal
Instruments and previously held senior operating positions with the Silicon
Valley Group and Perkin Elmer.
Mr. Murphy joined ESI in 1999 as Vice President of Human Resources.
From 1989 to 1999, he was with ITT Automotive in Auburn Hills, Michigan where he
held Human Resources positions of increasing responsibility, ending as Vice
President of Human Resources for Electrical Systems. He previously held
management roles within NVRyan, Air Products and Chemicals, Fiber Industries
Inc. and Brunswick Corporation.
Mr. Rapp joined the Company in 1966 and has served in various
engineering and management 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.
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Mr. Reinhart joined ESI in 1993 as Communications and Contracts Manager
and was named 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.
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
of Advanced Technology Group in 1987.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK PRICES/DIVIDENDS
The Company's Common Stock trades on the Nasdaq National Market under the symbol
ESIO. The following table sets forth, for the fiscal quarters indicated, the
high, low and closing sales prices for the Common Stock as reported on the
Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL QUARTER 1999 1998
- -------------- ---- ----
HIGH LOW CLOSING HIGH LOW CLOSING
------ ----- -------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter................ $ 34.875 $ 19.250 $ 19.250 $ 52.938 $35.000 $48.500
2nd Quarter................ 31.625 13.125 29.938 63.750 39.375 41.563
3rd Quarter................ 47.375 29.625 36.563 43.625 30.500 38.000
4th Quarter................ 47.875 35.000 37.500 42.250 32.250 33.500
</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, 1999 was 630.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY 31(4),
-----------------------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 206,242 $ 258,639 $ 193,325 $ 218,268 $ 139,745
Net income(1,2,3) 10,399 33,260 16,519 30,154 14,305
Net income per share - basic(1,2,3) 0.80 2.64 1.38 2.53 1.32
Net income per share - diluted(1,2,3) 0.79 2.55 1.35 2.47 1.29
Working capital 153,139 144,840 120,483 105,272 77,409
Net property, plant and equipment 33,462 30,373 22,088 22,675 18,816
Total assets 221,823 209,131 176,003 164,729 127,443
Long-term debt - - - - -
Shareholders' equity 201,261 188,094 148,762 133,719 100,589
</TABLE>
(1) Fiscal 1996 excludes the pretax charge of $6.0 million in-process research
and development associated with the acquisition of XRL, Inc.
(2) Fiscal 1998 excludes the pretax charge of $14.6 million in merger-related
expenses associated with the acquisitions of Chip Star, Inc. ("Chip Star"),
Dynamotion Corp. ("Dynamotion") and Applied Intelligence Systems, Inc.
("AISI").
(3) Fiscal 1999 excludes the pretax charges of $2.8 million in merger-related
expenses associated with the acquisitions of Testec, Inc. ("Testec"), and
MicroVision Corp. ("MicroVision") and $1.4 million in trial-related,
nonrecurring litigation expenses.
(4) All prior year amounts shown above have been restated to reflect the
acquisitions of MicroVision and Testec in fiscal 1999, which were accounted
for under the pooling-of-interests method.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company completed two mergers in fiscal 1999 including the
acquisition of Testec on December 21, 1998 and MicroVision on January 29,
1999. The Company also 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, Chip Star, MicroVision, and Testec
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, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998
Revenue for fiscal 1999 was $206.2 million, which was 20.3% or $52.4
million lower than for fiscal 1998. The decrease was due to lower sales of
electronic component systems, machine vision equipment and circuit fine tuning
systems. These decreases were partially offset by higher sales of memory yield
improvement systems and advanced electronic packaging equipment. Memory yield
improvement systems contributed the highest revenues for fiscal 1999 at 31.5% of
sales. For fiscal 1998, electronic component systems represented the largest
percentage of revenues at 27.7%.
Gross margin for the year ended May 31, 1999 was 49.9%, down from 55.2%
in the prior fiscal year. The decrease in margin from the prior fiscal year is
driven by changes in product mix, a slight decrease in average selling prices
stemming from industry-wide delays in capital equipment investment, and lower
levels of overhead absorption due to lower unit volumes.
Selling, service and administrative expenses were $4.3 million or
6.9% lower for the year ended May 31, 1999 as compared to fiscal 1998. The
decrease is attributable to lower commission expenses associated with
decreased sales, reductions associated with the continued consolidation of
selling and administrative functions for the Dynamotion, Chip Star, AISI and
Testec acquisitions and cost containment measures initiated in response to
the decline in revenues in fiscal 1999. Selling, service and administrative
expenses increased as a percentage of sales from 24.4% to 28.5% due mainly to
lower sales volume.
Research, development and engineering expenses for the year ended
May 31, 1999 were $4.5 million or 13.0% lower than the prior year due to
fiscal 1999 cost containment measures. Research, development and engineering
expenses increased as a percentage of sales, to 14.7% for 1999 from 13.5% for
the prior year. In connection with the purchase price allocation for
Dynamotion in fiscal 1998, the Company estimated the fair value of the
intangible assets, which indicated 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, acquired
in-process research and development of $9.0 million has been reflected in
non-recurring operating expenses for fiscal 1998 in the accompanying
financial statements.
18
<PAGE>
The effective tax rate of 31.4% for the year ended May 31, 1999 was
slightly higher than the fiscal 1998 rate of 30.8%. The impact of pooled
Subchapter S corporation earnings for the MicroVision and Testec mergers
reduced the fiscal 1998 rate by about 6%. The fiscal 1999 tax rate was
reduced by an increased benefit from the foreign sales corporation as a
percent of income and lower non-deductible merger-related expenses as
compared to fiscal 1998.
Net income for the year ended May 31, 1999 was $7.5 million or $0.58
per basic share compared to $22.3 million or $1.77 per basic share for the
same period of the prior year. Fiscal 1999 net income includes non-recurring
expenses of $4.2 million, including $2.8 million in merger-related expenses
for professional service fees and expenses associated with consolidating
operations, and $1.4 million for incremental legal fees and trial expenses
for intellectual property litigation. Excluding non-recurring expenses,
fiscal 1999 net income was $10.4 million or $0.80 per basic share. Fiscal
1998 net income includes non-recurring expenses of $14.6 million, including
$9.0 million for acquired in-process research and development associated with
the Dynamotion purchase and $5.6 million in professional service fees and
expenses associated with consolidating operations for the AISI, Chip Star and
Dynamotion acquisitions. Excluding non-recurring expenses, fiscal 1998 net
income was $33.3 million or $2.64 per basic share.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
Revenue for fiscal 1998 was $258.6 million, which was 33.8% or $65.3
million higher than for fiscal 1997. The increase was due to higher sales of
advanced electronic packaging systems, electronic component systems and
machine vision systems.
Gross margin of 55.2% for the year ended May 31, 1998 was slightly
above the 53.2% gross margin for fiscal 1997. The higher margin resulted from
increased shipments of relatively high margin electronic component systems
and machine vision equipment plus lower manufacturing overhead costs per unit.
Selling, service and administrative expenses were $15 million higher
for the year ended May 31, 1998 versus fiscal 1997. The increase is a result
of higher selling commissions associated with increased sales volumes,
increased recruiting and relocation costs and higher legal expenses
associated with ongoing intellectual property litigation. Selling, service
and administrative expenses decreased, as a percentage of sales, to 24.4%
from 24.8%.
Research, development and engineering expenses for the year ended
May 31, 1998 were $7.5 million higher than in the prior year. Research,
development and engineering expenses decreased, as a percentage of sales, to
13.5% for 1998 from 14.1% for the prior year.
The effective tax rate of 30.8% for the year ended May 31, 1998
decreased from 41.0% as a result of the impact of lower state and foreign
taxes in the year and the pooling effect of MicroVision and Testec which were
both subchapter S corporations.
19
<PAGE>
Net income for the year ended May 31, 1998 was $22.3 million or
$1.77 per basic share compared to $16.5 million or $1.38 per basic share for
the prior year. The increase in net income was primarily a factor of
increased sales in fiscal 1998 over fiscal 1997. Fiscal 1998 net income
includes non-recurring expenses of $14.6 million related to the Dynamotion,
Chip Star and AISI acquisitions. Excluding non-recurring expenses, fiscal
1998 net income was $33.3 million or $2.64 per basic share.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are: existing cash,
cash equivalents and marketable debt securities of $32.7 million; accounts
receivable of $79.0 million; and a $7.0 million line of credit, none of which
was outstanding at May 31, 1999. ESI has no long term debt and a current
ratio of 8.4:1. Working capital increased to $153.1 million at May 31, 1999,
from $144.8 million at May 31, 1998.
The Company may acquire or invest in other complementary businesses,
product lines or technologies. These acquisitions or investments may require
additional debt or equity capital to fund such activities. A summary of cash
flow activities follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in):
Operating activities $ 343 $ 1,505 $14,407
Investing activities(1) (7,483) (11,644) (14,648)
Financing activities 4,899 (239) (492)
-------- --------- -------
Decrease in cash and cash
equivalents(2) $(2,241) $(10,378) $ (733)
======== ========= =======
</TABLE>
(1) Reflects net proceeds of $4.2 million from the sale of marketable debt
securities during fiscal 1999 and the net purchase of $1.3 million and $9.5
million in marketable debt securities during fiscal 1998, and 1997,
respectively.
(2) Total cash and securities decreased from $39.1 million on May 31, 1998
to $32.7 million on May 31, 1999.
20
<PAGE>
OPERATING ACTIVITIES: Operating cash flows decreased $1.2 million over fiscal
1998 largely due to lower net income offset partially by positive changes in
certain working capital accounts. Trade receivables increased $12.8 million.
Collection of receivables in June 1999 reduced this balance by approximately
$18.9 million. The increase in receivables is a function of increased
flexibility with regard to customer payment terms, and does not include a
significant increase in past due receivables. Inventory decreased by $1.7
million from May 31, 1998 due to decreases in raw materials and work in
process. The decrease in current liabilities is a function of lower
compensation accruals.
On April 8, 1999, a federal court jury awarded ESI a $13.1 million
damage judgment in its patent infringement suit against General Scanning,
Inc. General Scanning has announced that it intends to appeal the verdict. As
such, ESI has not reflected this award in its financial results. However, ESI
continues to record legal expenses related to this litigation as these
expenses are incurred.
INVESTING ACTIVITIES: Net cash of $7.5 million was used in investing
activities. The Company made purchases in the amount of $8.5 million to
upgrade computing and manufacturing capabilities and to renovate and improve
utilization of office and manufacturing space. This was offset by net
proceeds from the sales of highly liquid marketable debt securities to meet
short-term cash demands during the year.
FINANCING ACTIVITIES: Net cash of $4.9 million was generated from financing
activities in the form of $5.5 million in cash generated by stock option
exercises and the employee stock purchase plan, as well as the related tax
benefit, offset by distributions to S-corporation shareholders of Microvision
and Testec.
CAPITAL COMMITMENTS: As of May 31, 1999, the Company had no material capital
commitments.
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 wireless 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 26.9% of the Company's fiscal 1999 sales
and therefore, the loss of any of these customers would be significant.
21
<PAGE>
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 55.9% of sales for fiscal 1999
compared to 58.7% of sales for fiscal 1998. About 45% of the company's fiscal
1999 product sales are to Asian customers versus 44% for 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 products within agreed upon terms. In addition,
substantially all Asian end customer receivables are secured by letters of
credit. 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 continue to 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 United States export licenses and the
difficulties of staffing and managing foreign operations.
Most of the Company's sales are transacted in dollars and the
Company's products are made in the United States. Many Japanese customers pay
in yen; therefore, ESI hedges these sales transactions to mitigate currency
risks. The European and Asian sales subsidiaries' operating expenses are
denominated in their respective local currencies. These transactions
represent approximately 9.5% of fiscal 1999 consolidated operating expenses
and are split 62% and 38% 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
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.
22
<PAGE>
The Company has a task force to prepare for Y2K issues. A Vice
President serves as the Y2K coordinator and has overall responsibility for
organizing and managing the Company's Y2K program. The coordinator reports
directly to the President and CEO of the Company. 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 has technical and communication
resources assigned for Y2K readiness. ESI uses Sematech tests to determine
equipment product readiness. All of the Company's current standard products
are now Y2K ready. 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.
The Company has completed the inventory and evaluation of its
business systems with regard to Y2K readiness. Assessment includes
facilities, engineering, manufacturing, laboratory, banking, accounting,
procurement, product test, customer order, receiving, warehousing, and
communications. The Company's core business systems are now Y2K ready.
Non-critical business systems that have been previously identified as not
ready have either been upgraded, replaced, or otherwise made obsolete. Year
2000 date related tests are part of normal systems tests for new business
systems integration.
The Company has a Director level manager assigned the responsibility
for ESI's supplier Y2K readiness evaluation. The plan included automatic
assessment of the top 80% of the suppliers and key supplier identification of
the remaining 20%. Additionally, in each business area, engineering and
purchasing teams were formed to identify material that met certain criteria
for inclusion as strategic material. Vendors supplying this strategic
material were subjected to an in depth assessment of their ability to
continue to supply to the Company. Remediation actions for at-risk vendors
include working with the vendors to ensure continued delivery of material and
inventory of some materials within the Company. Material and vendor
assessment activity has been completed and processes for Y2K evaluation of
new material and new vendors have been implemented.
The Company has incurred costs associated with assessing the Y2K
issue and implementing its Y2K plan. These costs have included consultants,
software upgrades, and security system upgrades. Total costs of assessing and
implementing the Company's Y2K plan are not material to the Company's
consolidated financial position or the results of its operations.
Consequences of the Company's Y2K plan not being successful include
inability to ship product, delay or loss of sales, and delays in factory
operations. The Company believes that, 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.
23
<PAGE>
ITEM 7A. MARKET RISK DISCLOSURE
INTEREST RATE RISK
As of May 31, 1999, the Company's investment portfolio includes marketable
debt securities of $ 24.9 million. These securities are subject to interest
rate risk, and will decline in value if the interest rates increase. Due to
the short duration of the Company's investment portfolio, an immediate 10%
increase in interest rates would not have a material effect on the Company's
financial condition or the results of its operations.
FOREIGN CURRENCY EXCHANGE RATE RISK
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 (Japanese yen). Accordingly, the impact of exchange rates on the
forward contracts will be substantially offset by the impact of such changes
on the underlying transactions. The effect of an immediate 10 percent change
in exchange rates on the forward exchange contracts and the underlying hedged
positions denominated in Japanese yen would not be material to the Company's
financial position or the results of its operations.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-------
ASSETS 1999 1998
----- ----
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,793 $ 10,034
Securities available for sale 24,865 29,113
--------- --------
Total cash and securities 32,658 39,147
Trade receivables, less allowance for doubtful accounts 78,998 65,605
Income tax refund receivable 2,835 1,872
Inventories -
Finished goods 10,319 10,009
Work-in-process 8,575 9,193
Raw materials and purchased parts 32,419 33,519
--------- --------
Total inventories 51,313 52,721
6,699 4,788
Other current assets 1,198 1,744
--------- --------
Total current assets 173,701 165,877
PROPERTY AND EQUIPMENT, AT COST 70,047 62,735
Less-accumulated depreciation (36,585) (32,362)
--------- --------
Net property and equipment 33,462 30,373
DEFERRED INCOME TAXES
2,455 2,692
OTHER ASSETS 12,205 10,189
--------- --------
$ 221,823 $ 209,131
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,698 $ 5,857
Accrued liabilities -
Payroll related 4,478 6,595
Commissions 5,340 4,289
Warranty 2,103 2,010
Other 1,603 1,939
--------- --------
Total accrued liabilities 13,524 14,833
Deferred revenue 340 347
--------- --------
Total current liabilities 20,562 21,037
--------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000 shares authorized; no shares issued - -
Common stock, without par value; 40,000 shares authorized; 13,047 and
12,848 shares issued and outstanding at May 31, 1999 and 1998 107,206 101,734
Retained earnings 96,545 89,590
Accumulated other comprehensive income (loss) (2,490) (3,230)
--------- --------
Total shareholders' equity 201,261 188,094
--------- --------
$ 221,823 $ 209,131
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1999 1998 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales $ 206,242 $ 258,639 $ 193,325
Cost of sales 103,311 115,816 90,560
--------- --------- ---------
Gross margin 102,931 142,823 102,765
Operating expenses:
Selling, service and administrative 58,718 63,043 48,035
Research, development and engineering 30,289 34,806 27,315
Non-recurring operating expenses 4,180 14,634 -
--------- --------- ---------
Total operating expenses 93,187 112,483 75,350
--------- --------- ---------
Operating income 9,744 30,340 27,415
Interest income 1,147 1,475 1,174
Other income (expense), net 89 501 (602)
--------- --------- ---------
Income before income taxes 10,980 32,316 27,987
Provision for income taxes 3,452 9,969 11,468
--------- --------- ---------
Net income $ 7,528 $ 22,347 $ 16,519
--------- --------- ---------
--------- --------- ---------
Net income per share - basic $ 0.58 $ 1.77 $ 1.38
--------- --------- ---------
--------- --------- ---------
Net income per share - diluted $ 0.57 $ 1.71 $ 1.35
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares - basic 12,927 12,591 11,978
Weighted average number of shares - diluted 13,240 13,031 12,279
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1997, 1998, 1999
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
NUMBER OF RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------ ------ -------- ------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1996 11,898 $79,583 $55,774 ($1,638) $ 133,719
Adjustment to align Chip Star Inc., fiscal year with May 31 - - (325) - (325)
Stock plans:
Employee stock plans 242 1,807 - - 1,807
Tax benefit of stock options exercised - 561 - - 561
Distribution to S-corp shareholders of pooled acquisitions - - (3,066) - (3,066)
Comprehensive income:
Net income - - 16,519 - 16,519
Unrealized loss on securities - - - (19) (19)
Cumulative translation adjustment - - - (433) (433)
--------
Comprehensive income (loss) - - - - 16,067
------- -------- -------- -------- --------
BALANCE AT MAY 31, 1997 12,140 81,951 68,902 (2,090) 148,763
Adjustment to align AISI, fiscal year with May 31 - - (565) - (565)
Stock plans:
Employee stock plans 361 5,629 - - 5,629
Tax benefit of stock options exercised - 2,204 - - 2,204
Distribution to S-corp shareholders of pooled acquisitions - - (1,094) - (1,094)
Shares issued for Dynamotion acquisition 347 11,950 - - 11,950
Comprehensive income:
Net income - - 22,347 - 22,347
Cumulative translation adjustment - - - (1,140) (1,140)
--------
Comprehensive income (loss) - - - - 21,207
------- -------- -------- -------- --------
BALANCE AT MAY 31, 1998 12,848 101,734 89,590 (3,230) 188,094
Stock plans:
Employee stock plans 199 3,566 - - 3,566
Tax benefit of stock options exercised - 1,906 - - 1,906
Distribution to S-corp shareholders of pooled acquisitions - - (573) - (573)
Comprehensive income:
Net income - - 7,528 - 7,528
Cumulative translation adjustment - - - 740 740
--------
Comprehensive income (loss) - - - - 8,268
------- -------- -------- -------- --------
BALANCE AT MAY 31, 1999 13,047 $107,206 $ 96,545 $ (2,490) $201,261
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,528 $ 22,347 $ 16,519
Adjustment to align pooled companies fiscal years with May 31 - (565) (325)
Adjustments to reconcile net income to cash provided by operating activities:
Non-recurring operating expenses 4,180 14,634 -
Depreciation and amortization 6,772 5,879 4,597
Other non-cash charges - - 156
Deferred income taxes (1,674) 528 476
Changes in operating accounts:
Increase in trade receivables (12,773) (8,490) (5,715)
(Increase) decrease in inventories 1,670 (14,055) (71)
(Increase) decrease in other current assets (417) (2,959) 1,859
Decrease in current liabilities (4,943) (15,814) (3,089)
------- -------- --------
Net cash provided by operating activities 343 1,505 14,407
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (8,512) (12,575) (4,946)
Purchase of securities (16,809) (18,668) (42,316)
Proceeds from sales of securities and maturing securities 21,057 17,415 32,800
(Increase) decrease in other assets (3,219) 2,184 (186)
------- -------- --------
Net cash used in investing activities (7,483) (11,644) (14,648)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of Dynamotion subsidiary debt1 - (6,978) -
Net borrowings of AISI subsidiary - - 206
Distribution to S-corp shareholders of pooled acquisitions (573) (1,094) (3,066)
Proceeds from exercise of stock options and stock plans and related
tax benefits 5,472 7,833 2,368
------- -------- --------
Net cash provided by (used in) financing activities 4,899 (239) (492)
------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,241) (10,378) (733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,034 20,412 21,145
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,793 $ 10,034 $ 20,412
------- -------- --------
------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
1 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 $ -
</TABLE>
Cash payments for interest were not significant in 1999, 1998 or 1997.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT 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, precision
laser and mechanical advanced electronic packaging production systems, machine
vision systems, and circuit fine tuning 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: 26.9% of fiscal 1999 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 of Financial Conditions
and Results of Operations for additional commentary.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been
eliminated.
30
<PAGE>
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 1997 and 1998 to conform to the 1999
presentation.
REVENUE RECOGNITION
The Company generally recognizes revenue at the time of shipment and
when collection of the receivable is probable. Revenue associated with
service or maintenance contracts is recognized ratably over the life of the
contract, which is generally one year.
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.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes
standards for reporting and presentation of comprehensive income and its
components in financial statements. Comprehensive income includes net income
and "other comprehensive income," which includes charges or credits to equity
that are not the result of transactions to shareholders. The Company's only
material component of "other comprehensive income" is cumulative foreign
currency translation adjustments.
31
<PAGE>
NET INCOME PER SHARE
The Company computes net income per share in accordance with
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
is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted earnings per common share is computed by dividing
net income by the weighted average number of common shares and common share
equivalents (stock options) outstanding.
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 straight-line method 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), in June 1998. SFAS
133 requires 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 2002. 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.
PROPERTY AND EQUIPMENT
32
<PAGE>
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
MAY 31,
------
1999 1998
---- ----
<S> <C> <C>
Land $ 4,534 $ 4,521
Buildings and improvements 22,171 17,253
Machinery and equipment 41,756 36,580
Construction in progress 1,586 4,381
-------- --------
$ 70,047 $ 62,735
-------- --------
-------- --------
</TABLE>
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 1999. At the
Company's option, the interest rate is prime or LIBOR plus 1.25 percent. There
were no borrowings outstanding at May 31, 1999 or 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 $950, $830
and $474 to the plan for the years ended May 31, 1999, 1998 and 1997,
respectively.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method as defined by the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," (SFAS 109). Under this
method, deferred income taxes are recognized for the future tax consequences
attributable to temporary differences between the financial statement and tax
balances of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
33
<PAGE>
The net deferred tax asset as of May 31, 1999 and May 31, 1998
consists of the following tax effects relating to temporary differences and
carryforwards:
<TABLE>
<CAPTION>
MAY 31,
------
1999 1998
---- ----
<S> <C> <C>
Deferred Tax Assets:
Receivable and inventory valuation $ 2,418 $ 1,670
Vacation pay 963 827
Warranty costs 778 721
Capitalized merger expenses 406 192
Accrued commissions 1,561 881
Other accrued liabilities 1,175 819
-------- --------
7,301 5,110
Tax loss and credit carryforwards 7,438 9,224
-------- --------
Total deferred tax assets 14,739 14,334
Deferred Tax Liabilities:
Tax in excess of book depreciation (1,257) (895)
Other deferred tax liabilities (891) (972)
-------- --------
Total deferred tax liabilities (2,148) (1,867)
Valuation allowance (3,437) (4,987)
-------- --------
Net deferred tax asset $ 9,154 $ 7,480
-------- --------
-------- --------
</TABLE>
At May 31, 1999, there were net operating losses of $21,251
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.
34
<PAGE>
The components of income before income taxes and the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $ 12,309 $ 30,775 $ 23,475
Foreign (1,329) 1,541 4,512
--------- -------- --------
$ 10,980 $ 32,316 $ 27,987
--------- -------- --------
--------- -------- --------
Provision (benefit) for income taxes:
Current:
U.S. Federal and State $ 3,209 $ 6,658 $ 8,528
Foreign 11 579 1,903
--------- -------- --------
3,220 7,237 10,431
Deferred (1,674) 528 476
Income tax effect of stock options exercised 1,906 2,204 561
--------- -------- --------
$ 3,452 $ 9,969 $ 11,468
--------- -------- --------
--------- -------- --------
</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.
35
<PAGE>
A reconciliation of the provision for income taxes at the federal
statutory income tax rate to the provision for income taxes as reported is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision computed at federal statutory rate $ 3,843 $ 11,311 $ 9,795
Higher than U.S. tax rates in foreign jurisdictions 353 40 323
Impact of U.S. tax losses and credit carryforwards (636) (2,214) 546
Impact of state taxes 503 342 1,386
Benefit of foreign sales corporation (FSC) (1,027) (1,332) (1,468)
Nondeductible merger related expenses 487 3,617 -
Impact of pooled subchapter S corporations (236) (1,913) 1,030
Other, net 165 118 (144)
------- -------- --------
$ 3,452 $ 9,969 $ 11,468
------- -------- --------
------- -------- --------
</TABLE>
Consolidated income tax payments amounted to $4,361, $9,673 and $12,364
for the years ended May 31, 1999, 1998 and 1997, respectively.
36
<PAGE>
EARNINGS PER SHARE
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.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1999 1998 1997
---- ---- ----
(IN 000'S EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income $ 7,528 $ 22,347 $ 16,519
-------- -------- --------
-------- -------- --------
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Weighted average number of shares - basic 12,927 12,591 11,978
Dilutive effect of employee stock options 313 440 301
-------- -------- --------
Weighted average number of shares - diluted 13,240 13,031 12,279
-------- -------- --------
-------- -------- --------
Net income per share - basic $ 0.58 $ 1.77 $ 1.38
-------- -------- --------
-------- -------- --------
Net income per share - diluted $ 0.57 $ 1.71 $ 1.35
-------- -------- --------
-------- -------- --------
</TABLE>
The number of options to purchase shares of common stock that were excluded from
the table above (as the effect would have been anti-dilutive) were 577,058;
20,550; and 297,021 for the years ended May 31, 1999, 1998, and 1997,
respectively.
37
<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, 1999 and 1998, the Company had
forward exchange contracts totaling $5,443 and $5,319, 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 financial position or the results of
its operations.
The Company leases certain equipment, cars, and office space under
operating leases, which are non-cancelable and expire on various dates through
2011. The aggregate minimum commitment for rentals under operating leases beyond
May 31, 1999 is as follows:
<TABLE>
<S> <C>
2000 $1,112
2001 813
2002 545
2003 365
2004 357
Thereafter 733
------
Total $3,925
------
------
</TABLE>
Rental Expense for all operating leases was $ 1,854 in 1999, and was
insignificant in 1998 and 1997.
On April 8, 1999 a federal court jury awarded ESI $13,133,170 in
damages in its patent lawsuit against General Scanning, Inc. In addition, the
jury also concluded that General Scanning's infringement was willful. On July 8,
1999 the court issued orders denying General Scanning's motions for a new trial
and to set aside the jury verdict. The court also entered a permanent
injunction, prohibiting General Scanning from making, using, selling, or
offering for sale in the United States memory repair systems and upgrade kits
equipped with 1.3 micron lasers. General Scanning has announced that it intends
to appeal the verdict. As such, ESI has not reflected this award in its
financial results. However, ESI continues to record legal expenses related to
this litigation as these expenses are incurred.
The Company is a party to various other 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.
38
<PAGE>
SECURITIES AVAILABLE FOR SALE
The Company classifies its marketable debt securities as Securities
Available for Sale in the accompanying Consolidated Balance Sheets. All of the
Company's marketable debt securities are invested in high credit quality
tax-advantaged securities. The amortized cost of these securities approximates
fair market value.
During fiscal 1999 and 1998, proceeds of $21,057 and $17,415,
respectively, resulted from the sales or maturities of securities; there were no
realized gains or losses associated with these sales or maturities.
SHAREHOLDER RIGHTS PLAN
In conjunction with the lapse of the existing Shareholders Rights Plan,
in May 1999, the Company adopted a new Shareholder Rights Plan and accordingly
declared a dividend distribution of one Right for each outstanding share of
Common Stock, payable to holders of record on June 4, 1999. 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 $270, subject to adjustment. The
Rights are not presently exercisable and will only become exercisable following
the occurrence of certain specified events. Generally the rights become
exercisable after a person or group acquires or commences a tender offer that
would result in beneficial ownership of 15 percent or more of the Company's
outstanding common stock. In addition, the rights become exercisable if any
party becomes a beneficial owner of 10 percent or more of the Company's
outstanding Common Stock and is determined by the Board of Directors to be an
adverse party. If a person or group acquires 15 percent of the Company's
outstanding common stock or the Board of Directors declares a person to be an
Adverse Person, 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. If,
after the Rights become exercisable, the Company is acquired in a merger or
other business combination, 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 7, 2009 and may be redeemed by the
Company for $0.001 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.
39
<PAGE>
STOCK PLANS
The Company has stock option and restricted stock grant plans for
officers, directors, and employees. The Compensation Committee of the Board of
Directors determines awards under these plans. During fiscal 1999, 1998 and
1997, ESI recorded $499, $455 and $475, respectively of compensation expense
related to restricted stock grants, respectively. The Company's restricted stock
grants vest based on certain performance criteria that are tied to the Company's
stock price. Non-employee directors are also automatically granted an option for
3,000 shares of Common Stock on July 31 of each year, with an option price equal
to the closing market price on the date of the grant, a ten-year term and a
four-year vesting schedule. Stock appreciation rights may be granted in
connection with options, although no options have been granted which 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 (ESPP), which allows
eligible employees to contribute up to 15% of their cash compensation during
each pay period. The ESPP provides for one enrollment period in January of each
year. During the ESPP year, participants accumulate funds in an account via
payroll deduction. At the end of year, the purchase price is determined and the
accumulated funds are used to automatically purchase shares of the Company's
Common Stock. The purchase price for shares purchased under the Plan is 85% of
the lesser of the fair market value of stock at the beginning of the ESPP year
or the end of the ESPP year.
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. The Company continues
to account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, the Company has elected to provide pro forma disclosures as
required by SFAS 123.
The Company has computed, for pro forma disclosure purposes, the per
share value of all options granted under the stock option plan to be $22.36,
$17.88 and $14.16 for 1999, 1998 and 1997, respectively. The pro forma value of
options granted under the employee stock purchase plan is immaterial for 1999,
1998 and 1997. 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 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 5.5% 7.5% 7.5%
Expected dividend yield 0% 0% 0%
Expected life 5 years 5 years 7 years
Expected volatility 67.4% 46.5% 48.5%
</TABLE>
40
<PAGE>
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>
YEAR ENDED MAY 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $7,528 $22,347 $16,519
Pro forma 3,990 21,116 15,753
Net income per share:
As reported - basic $0.58 $1.77 $1.38
As reported - diluted 0.57 1.71 1.35
Pro forma - basic 0.31 1.68 1.32
Pro forma - diluted 0.30 1.62 1.28
</TABLE>
The following table summarizes activity in the stock plans for the
years ended May 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------
1999 1998 1997
---- ---- ----
WEIGHTED - WEIGHTED - WEIGHTED -
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(IN 000'S) EXER. PRICE (IN 000'S) EXER. PRICE (IN 000'S) EXER. PRICE
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year.......... 943 $ 20.91 1,197 $ 19.40 1,202 $ 16.26
Granted ..................................... 534 35.66 208 32.74 243 25.26
Exercised.................................... 161 16.31 390 12.38 193 9.13
Canceled..................................... 33 24.95 72 25.71 55 20.93
----- ------- ----- ------- ----- -------
Options outstanding at end of year................ 1,283 28.15 943 20.91 1,197 19.40
----- ------- ----- ------- ----- -------
----- ------- ----- ------- ----- -------
Exercisable at end of year........................ 544 $ 18.99 515 $ 15.67 581 $ 13.89
----- ------- ----- ------- ----- -------
----- ------- ----- ------- ----- -------
</TABLE>
In addition to the options above, the company had 78,473; 78,511 and
48,511 of restricted stock grants outstanding as of May 31, 1999, 1998, and
1997, respectively, none of which were exercisable.
41
<PAGE>
The following table sets forth the exercise price range, number of
shares outstanding at May 31, 1999, 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, 1999 LIFE (YEARS) EXERCISE PRICE MAY 31, 1999 EXERCISE PRICE
------ ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0-5.81 40,982 2.73 $3.28 40,982 $3.28
5.81-11.61 127,004 3.85 9.02 127,003 9.02
11.61-17.42 24,800 7.20 16.28 10,800 16.09
17.42-23.22 193,279 6.06 17.58 155,680 17.56
23.22-29.03 263,278 7.10 25.59 157,730 25.18
29.03-34.84 59,386 6.30 30.88 13,261 31.10
34.84-40.64 477,055 9.70 37.70 25,505 37.53
40.64-46.45 63,850 9.40 41.32 2,912 41.18
46.45-52.25 30,000 8.10 50.04 7,500 50.04
$ 52.25-150.00 2,903 4.84 105.19 2,528 112.18
-------------------------------------------------------------------------------------------
1,282,537 7.54 $ 28.15 543,901 $ 18.99
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS
131), effective May 31, 1999. ESI designs and manufactures products that target
several markets within the capital equipment segment of the electronics
industry. These products include memory yield improvement systems, electronic
component manufacturing systems, advanced electronic packaging equipment,
machine vision solutions and circuit fine tuning systems. The Company generally
manages its resources on an enterprise-wide basis for assessing performance.
Accordingly, based on the provisions of SFAS 131, the Company operates in one
segment.
The following data represents sales by product line for the years
ending May 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Memory Yield Improvement $ 64,953 $ 61,353 $ 65,271
Electronic Component Systems 46,312 71,729 53,574
Advanced Packaging 46,149 44,721 10,781
Vision 27,021 54,132 35,216
Circuit Fine Tuning Products 21,807 26,704 28,483
--------- --------- ---------
Net Sales $ 206,242 $ 258,639 $ 193,325
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has 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 income or 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, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
EUROPE ASIA TOTAL
------ ---- -----
<S> <C> <C> <C>
May 31, 1999................................... $ 5,512 $ 77,527 $ 83,039
May 31, 1998................................... 12,112 96,839 108,951
May 31, 1997................................... 6,138 67,353 73,491
</TABLE>
In fiscal 1999, 1998 and 1997, there were no sales to any one
customer in excess of 10% of consolidated net sales.
43
<PAGE>
The following data represents segment information for the years ending May 31:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
1999 STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
- ---- ------ ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers................ $ 173,912 $ 17,472 $ 14,858 $ - $ 206,242
Transfers between geographic areas............. 23,643 - 229 (23,872) -
--------- --------- -------- --------- ---------
Total revenue.................................. $ 197,555 $ 17,472 $ 15,087 $ (23,872) $ 206,242
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
Operating income (loss) 1...................... $ 11,220 $ (1,553) $ 290 $ (213) $ 9,744
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
Identifiable assets at May 31, 1999.... $ 226,612 $ 6,099 $ 10,286 $ (53,832) $ 189,165
--------- --------- -------- ---------
--------- --------- -------- ---------
Corporate assets........................... 32,658
---------
Total assets at May 31, 1999............. $ 221,823
---------
---------
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers................ $ 215,874 $ 24,089 $ 18,676 $ - $ 258,639
Transfers between geographic areas............. 31,361 - 217 (31,578) -
--------- --------- -------- --------- ---------
Total revenue.................................. $ 247,235 $ 24,089 $ 18,893 $ (31,578) $ 258,639
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
Operating income 2............................. $ 28,767 $ 497 $ 935 $ 141 $ 30,340
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
Identifiable assets at May 31, 1998......... $ 189,040 $ 8,739 $ 8,425 $ (36,220) $ 169,984
--------- --------- -------- ---------
--------- --------- -------- ---------
Corporate assets........................... 39,147
----------
Total assets at May 31, 1998............. $ 209,131
----------
----------
<CAPTION>
1997
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers................. $ 143,494 $ 28,872 $ 20,959 $ - $ 193,325
Transfers between geographic areas.............. 35,986 - 427 (36,413) -
--------- --------- -------- --------- ---------
Total revenue................................... $ 179,480 $ 28,872 $ 21,386 $ (36,413) $ 193,325
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
Operating income................................ $ 23,031 $ 2,899 $ 1,623 $ (138) $ 27,415
--------- --------- -------- --------- ---------
--------- --------- -------- --------- ---------
Identifiable assets at May 31, 1997......... $ 114,878 $ 11,374 $ 9,480 $ (8,001) $ 127,731
--------- --------- -------- ---------
--------- --------- -------- ---------
Corporate assets........................... 48,272
---------
Total assets at May 31, 1997............. $ 176,003
---------
---------
</TABLE>
1 Includes $2,773 in non-recurring operating expenses associated with the
acquisition of Microvision and Testec and $1,407 in trial-related expenses
associated with the General Scanning lawsuit
2 Includes $14,634 in merger-related expenses associated with the acquisition
of Dynamotion, Chip Star and AISI.
44
<PAGE>
ACQUISITIONS
MICROVISION CORP.
On January 29, 1999, the Company completed the acquisition of
MicroVision, a provider of integrated, vision-based inspection and automation
solutions for use in semiconductor front-end and back-end applications,
located in Chanhassen, Minnesota. The acquisition consideration consisted of
1,018,500 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.
TESTEC, INC.
On December 21, 1998, the Company completed the acquisition of
Testec, a provider of electrical test systems for the passive component
marketplace, located in Phoenix, Arizona. The acquisition consideration
consisted of 500,000 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.
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 700,000 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.
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 1,399,515 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.
45
<PAGE>
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. Testec and Microvision
activity shown for fiscal 1999 is for the period from June 1 to December 21 and
January 29, respectively, their dates of acquisition.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales:
ESI $ 196,735 $ 212,374 $ 150,159
Microvision 6,920 21,889 10,163
Testec 2,587 7,131 3,127
Chip Star - - 9,990
AISI - 17,245 19,886
-----------------------------------------------
As Restated $ 206,242 $ 258,639 $ 193,325
Net Income (loss):
ESI $ 6,853 $ 13,135 $ 18,952
Microvision 335 3,521 (3,473)
Testec 340 1,943 533
Chip Star - - 2,298
AISI - 3,748 (1,791)
-----------------------------------------------
As Restated $ 7,528 $ 22,347 $ 16,519
</TABLE>
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 purchase consideration consisted of
347,200 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 indicating 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 merger-related
expense during the quarter ended August 31, 1997 and is reflected in the
accompanying Consolidated Statements of Operations.
46
<PAGE>
Pro forma combined income statement data reflecting the Dynamotion
transaction for the year ended May 31, 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 year ended May 31, 1997:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net Sales $ 205,963
Operating Income 10,805
Net income per share - basic 0.85
Net income per share - diluted 0.83
</TABLE>
NON-RECURRING OPERATING EXPENSES
In fiscal 1999, the Company incurred $2,773 in professional service
fees and expenses associated with the acquisitions of Testec and MicroVision. In
addition, the Company incurred $1,407 in incremental trial-related legal costs
associated with the General Scanning Lawsuit. Both of these amounts are included
in non-recurring operating expenses on the income statement in the current year.
In fiscal 1998, the Company incurred $14,634 in merger-related expenses
associated with the acquisitions of Dynamotion, Chip Star and AISI. These
expenses included $9,000 for acquired in-process research and development
associated with the Dynamotion purchase and $5,634 in professional and service
fees and expenses associated with the consolidation of operations for AISI, Chip
Star, and Dynamotion purchases.
The Company incurred no such costs in fiscal 1997.
47
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED MAY 31, 1999 QUARTER QUARTER QUARTER QUARTER
- ----------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 48,421 $ 49,038 $ 51,506 $ 57,277
Gross margin(1) 23,975 24,781 26,091 28,084
Net income(1) 1,213 2,459 920 2,936
Net income per share - basic(1) $ 0.09 $ 0.19 $ 0.07 $ 0.23
Net income per share - diluted(1) $ 0.09 $ 0.19 $ 0.07 $ 0.22
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED MAY 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ----------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 61,712 $ 67,941 $ 68,152 $ 60,834
Gross margin(2) 35,365 37,764 38,387 31,307
Net income (loss)(2) (2,174) 9,619 7,426 7,476
Net income (loss) per share - basic(2) $ (0.17) $ 0.77 $ 0.60 $ 0.58
Net income (loss) per share - diluted(2) $ (0.17) $ 0.75 $ 0.58 $ 0.57
</TABLE>
(1) Operations for fiscal 1999 include $2,773 and $1,407 in non-recurring
operating expenses for the third and fourth quarters, respectively.
(2) Operations for fiscal 1998 include $11,124 and $3,510 in merger-related
expenses for the first and third quarters, respectively.
48
<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, 1999 and 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended May 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1999 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 2, 1999
49
<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 1999 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 1999.
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 1999 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 1999 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
50
<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, 1999 and 1998 25
Consolidated Statements of
Income for the Years Ended
May 31, 1999, 1998, and 1997 26
Consolidated Statements of
Shareholders' Equity for the Years Ended
May 31, 1999, 1998, and 1997 27
Consolidated Statements of
Cash Flows for the Years Ended
May 31, 1999, 1998, and 1997 28
Notes to Consolidated Financial Statements 30-48
Report of Independent Public Accountants 49
</TABLE>
All schedules are omitted, as the required information is inapplicable or not
significant.
51
<PAGE>
(a)(3) Exhibits.
<TABLE>
<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. Articles of Amendment of Restated Articles of Incorporation of
the Company.
3-C. 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 7, 1999, 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 4.1 to the Company's Report on Form 8-K
dated May 7, 1999.
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.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. No reports of Form 8-K were filed during the
quarter ended May 31, 1999.
(1) Management contract or compensatory plan or arrangement.
52
<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, 1999 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, 1999.
Signature Title
(1) Principal Executive, Financial and
Accounting Officers
/s/ Donald R. VanLuvanee Director, President and Chief Executive Officer
- ----------------------------
Donald R. VanLuvanee
/s/ Jonathan C. Howell Senior Vice President and Chief
- ---------------------------- Financial Officer
Jonathan C. Howell
(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
53
<PAGE>
/s/ Keith L. Thomson Director
- ----------------------------
Keith L. Thomson
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
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. Articles of Amendment of Restated Articles of
Incorporation of the Company.
3-C. 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 7, 1999, 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
4.1 to the Company's Report on Form 8-K dated May 7,
1999.
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.
55
<PAGE>
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>
56
<PAGE>
ARTICLES OF AMENDMENT
OF THE
THIRD RESTATED ARTICLES OF INCORPORATION
OF ELECTRO SCIENTIFIC INDUSTRIES, INC.
Pursuant to ORS 60.434, Electro Scientific Industries, Inc. (the
"Corporation") has adopted an amendment to its Third Restated Articles of
Incorporation.
1. The name of the Corporation is Electro Scientific Industries, Inc.
2. Article XII of the Corporation's Third Restated Articles of
Incorporation shall be amended to read in its entirety as set forth on Exhibit
A (the "Amendment").
3. The Amendment was adopted by the Corporation's Board of Directors on
May 7, 1999.
4. The Amendment does not require shareholder action.
5. The person to contact about this filing is:
Peter J. Bragdon
Stoel Rives LLP
900 SW Fifth Ave. Suite 2600
Portland, Oregon 97204
(503) 294-9517
Dated: May 28, 1999
ELECTRO SCIENTIFIC INDUSTRIES, INC.
By: JOSEPH L. REINHART
--------------------------------
Name: JOSEPH L. REINHART
------------------------------
Title: VICE PRESIDENT AND
CORPORATE SECRETARY
-----------------------------
<PAGE>
EXHIBIT A
AMENDMENT TO
THIRD RESTATED ARTICLES OF INCORPORATION
OF ELECTRO SCIENTIFIC INDUSTRIES, INC.
AMENDING TERMS OF
SERIES A NO PAR PREFERRED STOCK
ARTICLE XI
This Article XI sets forth the designation, preferences, limitations and
relative rights of a series of No Par Preferred Stock of the corporation as
determined by the board of directors of the corporation pursuant to its
authority under Oregon Revised Statutes 60.134 and Section 2(i) of Article III
of these Articles of Incorporation.
1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A No Par Preferred Stock" and the number of shares
constituting such series shall be 300,000.
2. DIVIDENDS AND DISTRIBUTIONS.
(i) The holders of shares of Series A No Par Preferred Stock shall
be entitled to receive, when and as declared by the board of directors, out of
funds legally available for the purpose, dividends in an amount per share
equal to 100 (the "Adjustment Number") multiplied by the aggregate per share
amount of all cash dividends, and the Adjustment Number multiplied by the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions other than a dividend payable in shares of Common Stock or
a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock, without par value, of the
corporation (the "Common Stock") after the first issuance of any share or
fraction of a share of Series A No Par Preferred Stock.
(ii) The corporation shall declare a dividend or distribution on the
Series A No Par Serial Preferred Stock as provided in paragraph (i) above at
the same time that it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(iii) Dividends shall not be cumulative. Unpaid dividends shall not
bear interest. Dividends paid on the shares of Series A No Par Preferred Stock
in an amount less than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro rata on a share-by-share
basis among all such shares at the time outstanding.
3. VOTING RIGHTS. Except as otherwise provided by law, shares of
Series A No Par Preferred Stock shall be entitled to a number of votes equal to
the Adjustment Number on any
A-1
<PAGE>
matter submitted to the shareholders and the Series A No Par Preferred Stock,
any other series of Preferred Stock and the Common Stock shall vote together
as one class.
4. CERTAIN RESTRICTIONS.
(i) Whenever dividends or distributions payable on the Series A No
Par Preferred Stock as provided in Section 2 have not been declared or paid
for any fiscal year, until all such dividends and distributions for such
fiscal year on shares of Series A No Par Preferred Stock outstanding shall
have been declared and paid in full, the corporation shall not in such fiscal
year
(a) declare or pay dividends on or make any other
distributions on any shares of stock ranking junior or on a parity (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A No
Par Preferred Stock except dividends paid ratably on the Series A No Par
Preferred Stock and-all such parity stock on which dividends are payable in
proportion to the total amounts to which the holders of all such shares are
then entitled and dividends or distributions payable in Common Stock;
(b) purchase or otherwise acquire for consideration any
shares of Series A No Par Preferred Stock or any shares of stock ranking on a
parity with the Series A No Par Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the board of
directors) to all holders of such shares upon such terms as the board of
directors, after consideration of the respective dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(ii) The corporation shall not permit any subsidiary of the
corporation to purchase or otherwise acquire for consideration any shares of
stock of the corporation unless the corporation could, under paragraph (i) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. RESTRICTION ON ISSUANCE OF SHARES; REACQUIRED SHARES. The
corporation shall not issue any shares of Series A No Par Preferred Stock
except upon exercise of rights (the "Rights") issued pursuant to the Rights
Agreement dated as of May 7, 1999, between the corporation and First Chicago
Trust Company of New York (the "Rights Agreement"), a copy of which is on file
with the secretary of the corporation at its principal executive office and
shall be made available to stockholders of record without charge upon written
request. Any shares of Series A No Par Preferred Stock purchased or otherwise
acquired by the corporation in any manner whatsoever may be restored to the
status of authorized but unissued shares after the acquisition thereof. All
such shares shall upon any such restoration become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred
A-2
<PAGE>
Stock to be created by the board of directors, subject to the conditions and
restrictions on issuance set forth herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(i) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A No Par Preferred Stock unless,
prior thereto, the holders of shares of Series A No Par Preferred Stock shall
have received the Adjustment Number multiplied by the per share amount to be
distributed to holders of Common Stock, plus an amount equal to declared and
unpaid dividends and distributions thereon to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of the full amount
of the Series A Liquidation Preference, no additional distributions shall be
made to the holders of shares of Series A No Par Preferred Stock.
(ii) In the event that there are not sufficient assets available to
permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock, if any, which
rank on a parity with the Series A No Par Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences.
7. CONSOLIDATION, MERGER, ETC. In case the corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A No Par Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share equal to the Adjustment Number
multiplied by the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. ANTI-DILUTION ADJUSTMENTS TO ADJUSTMENT NUMBER. In the event the
corporation shall at any time after May 7, 1999 (the "Rights Declaration Date")
(i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the
Adjustment Number for all purposes of this Article XI shall be adjusted by
multiplying the Adjustment Number then in effect by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event. In the event the
corporation shall at any time after the Rights Declaration Date, fix a record
date for the issuance of rights, options or warrants to all holders of Common
Stock entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or purchase Common Stock or securities
convertible into
A-3
<PAGE>
Common Stock at a price per share of Common Stock (or having a conversion
price per share, if a security convertible into Common Stock) less than the
then Current Per Share Market Price of the Common Stock (as defined in Section
11(d) of the Rights Agreement) on such record date, then in each such case the
Adjustment Number for all purposes of this Article XI shall be adjusted by
multiplying the Adjustment Number then in effect by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding on such
record date plus the number of additional shares of Common Stock to be offered
for subscription or purchase (or into which the convertible securities so to
be offered are initially convertible) and the denominator of which shall be
the number of shares of Common Stock outstanding on such record date plus the
number of shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such Current Per Share Market Price (as defined in Section 11(d)
of the Rights Agreement). In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the board
of directors. Common Stock owned by or held for the account of the
corporation shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a
record date is fixed. In the event that such rights, options or warrants are
not so issued, the Adjustment Number shall be readjusted as if such record
date had not been fixed; and to the extent such rights, options or warrants
are issued but not exercised prior to their expiration, the Adjustment Number
shall be readjusted to be the number which would have resulted from the
adjustment provided for in this Section 8 if only the rights, options or
warrants that were exercised had been issued.
9. NO REDEMPTION. The shares of Series A No Par Preferred Stock shall
not be redeemable at the option of the corporation or any holder thereof.
Notwithstanding the foregoing sentence, the corporation may acquire shares of
Series A No Par Preferred Stock in any other manner permitted by law.
10. AMENDMENT. Subsequent to the Distribution Date (as defined in the
Rights Agreement) these articles of incorporation shall not be further amended
in any manner which would materially alter or change the preferences,
limitations and relative rights of the Series A No Par Preferred Stock so as
to affect them adversely without the affirmative vote of the holders of a
majority of the outstanding shares of Series A No Par Preferred Stock, voting
separately as a class.
11. FRACTIONAL SHARES. Series A No Par Preferred Stock may be issued in
fractions of a share in integral multiples of one one-hundredth of a share,
which shall entitle the holder, in proportion to such holders' fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of Series
A No Par Preferred Stock.
A-4
<PAGE>
EXHIBIT 21
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF MAY 31, 1999
<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%
Chip Star, Inc. California 100%
CLS Ltd England 100%
Dynamotion, Inc. 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%
Microvision, Inc. Minnesota 100%
Palomar Systems, Inc. Oregon 100%
Testec, Inc. Arizona 100%
XRL, Corp. Oregon 100%
</TABLE>
(1) Other than qualifying shares, where applicable.
<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, 333-29513, 333-35917 and 333-46443.
ARTHUR ANDERSEN LLP
Portland, Oregon
August 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 7,793
<SECURITIES> 24,865
<RECEIVABLES> 79,667
<ALLOWANCES> 669
<INVENTORY> 51,313
<CURRENT-ASSETS> 173,701
<PP&E> 70,047
<DEPRECIATION> 36,585
<TOTAL-ASSETS> 221,823
<CURRENT-LIABILITIES> 20,562
<BONDS> 0
0
0
<COMMON> 107,206
<OTHER-SE> 94,055
<TOTAL-LIABILITY-AND-EQUITY> 221,823
<SALES> 206,242
<TOTAL-REVENUES> 206,242
<CGS> 103,311
<TOTAL-COSTS> 103,311
<OTHER-EXPENSES> 93,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,980
<INCOME-TAX> 3,452
<INCOME-CONTINUING> 7,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,528
<EPS-BASIC> .58
<EPS-DILUTED> .57
</TABLE>
