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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 June 3, 2000 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
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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
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The aggregate market value of voting and non-voting Common Stock held by
nonaffiliates of the Registrant at June 30, 2000: $1,182,638,778.
The number of shares of Common Stock outstanding at June 30, 2000: 26,859,078
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document Which is incorporated
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Proxy Statement for 2000 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 11
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 25
Item 8 - Financial Statements and Supplementary Data 26
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 52
PART III
Item 10 - Directors and Executive Officers of the Registrant 52
Item 11 - Executive Compensation 52
Item 12 - Security Ownership of Certain Beneficial Owners and Management 52
Item 13 - Certain Relationships and Related Transactions 52
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 53
SIGNATURES 55
</TABLE>
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PART I
BUSINESS OVERVIEW
Electro Scientific Industries, Inc. and its subsidiaries ("ESI" or
"The Company") provide electronics manufacturers with equipment necessary to
produce key components used in wireless communications, 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 (PWBs) 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 communication and automotive electronics products (AMD,
Burr-Brown, Delphi, Ericsson and IBM); miniature capacitors (AVX, Kyocera,
MuRata, Philips, Samsung, Taiyo Yuden and Walsin); semiconductor memory
devices (Dominion, Hitachi, Hyundai, IBM, Infineon and Samsung); printed
wiring boards (Flextronics, Honeywell, IBM, Nitto Denko and Samsung) and
users of machine vision systems in electronic manufacturing equipment
(Kulicke & Soffa, Lucent Technologies, Motorola, and Universal Instruments).
ELECTRONICS INDUSTRY OVERVIEW
The electronic content of communications 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 provide the
customer with measurable production benefits including improved yield,
increased throughput, greater reliability, and increased flexibility,
resulting in a high return on investment. ESI designs its production systems
with a migration path for 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 semiconductor yield
improvement systems, electronic component manufacturing systems, advanced
electronic packaging equipment, machine vision solutions and circuit fine
tuning systems.
SEMICONDUCTOR YIELD IMPROVEMENT SYSTEMS. Virtually all manufacturers of
dynamic random access memory (DRAM) use semiconductor 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, electronic games and communications equipment require
increasing amounts of memory. Increasingly, other semiconductor device
manufacturers are using memory repair techniques in the manufacture of
non-memory devices including logic with embedded memory, digital signal
processors (DSPs) and high-end electronic game chips. ESI's semiconductor
yield improvement system customers include Dominion, Hitachi Singapore,
Hyundai, IBM, Infineon, King Yuan, NEC, Powerchip, Samsung, Sony, Texas
Instruments, Toshiba, TSMC, White Oak Semiconductor, and Winbond.
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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. Memory device
manufacturers use a laser process to disconnect defective circuit elements
and reconnect spare elements as replacements, thereby increasing the final
yield.
ESI's yield improvement product line is designed and developed to
cost-effectively meet semiconductor production challenges associated with
shrinking geometries, material changes and increased wafer sizes, as needed
by semiconductor manufacturers and with enabling technology for next
generation devices.
In the case of DRAM, the 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
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), DSPs, and other logic
devices with embedded memory.
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 communication products. Customers include AVX,
Ceratech, Holy Stone, Kyocera, MuRata, Phillips, Samsung, Taiyo Yuden, Walsin
and Yageo.
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 and production 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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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
on a PWB. 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 on these
electrical values. 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 laser and mechanical drilling
products enable manufacturers to make electronic products smaller, lighter
and faster. Smaller and lighter requirements push down the physical
dimensions used in electronic interconnections within the semiconductor
package and between the package and the PWB. In addition, higher operating
speeds of computers and communications products require more input and output
channels within semiconductor packages and between the packages and the PWB.
These requirements drive changes in both the materials selected,
density of electrical connections and mode of interconnection. 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 3M, Compeq,
Flextronics, Honeywell, IBM, Nitto Denko, NTK and Samsung.
ESI offers 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 produce vias as small as 25 microns 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 multi-function, 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 and acquired new products to provide complete stand-alone
inspection systems for semiconductor wafer sorting, inspection, and defect
review, and integrated circuit mark and lead inspection.
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Customers for ESI's OEM vision products include Applied Materials,
Electroglas, KLA-Tencor, Kulicke & Soffa, Samsung and Universal Instruments.
Customers for stand-alone inspection equipment include Analog Devices,
Burr-Brown, Conexant Systems, Lucent Technologies, MicroChip Technology,
Motorola, ST Microelectronics and White Oak Semiconductor.
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, increased equipment
speed and fewer errors, machine vision is enabling technology in the
semiconductor manufacturing process, from wafer production through final
assembly and 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 electronics. Products include patented
specialized lighting, wafer alignment and identification products and
application specific solutions for the surface mount industry. ESI's
semiconductor automation and inspection product line includes turn-key,
front-end wafer handling and inspection systems and back-end IC package
handling and inspection systems.
Semiconductor wafer fabs use ESI's equipment to sort and inspect
wafers throughout all phases of processing. These modular systems combine
multiple handling and inspection functions onto single platforms. Device
manufacturers and contract packaging houses use ESI's equipment for mark and
lead inspection and tape and reel packaging.
CIRCUIT FINE TUNING SYSTEMS. ESI's circuit fine tuning systems tune the
operating parameters of electronic circuits. The laser tuning systems
precisely adjust the frequency in wireless communication devices and in
numerous automotive electronics assemblies such as engine control circuits.
Customers include AMD, Burr-Brown, Cyntek, Delphi, Ericsson, LG, Lucent
Technologies, Philips, Samsung, Taiyosha, Tateyama and Yageo.
ESI designs and manufactures application-specific laser systems that
adjust the electrical performance of a 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.
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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 high-volume,
high-accuracy miniature resistor trimming through 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/trimming and very high speed handling to offer
cost-effective solutions for specialized micromachining and trimming of
embedded passives.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service
offices located in or near: Ann Arbor, Michigan; Boston, Massachusetts;
Minneapolis, Minnesota; Portland, Oregon; Austin Texas and San Diego and
Orange County, 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. 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 72.3%, 55.9% and 58.7% of ESI's
net sales for fiscal 2000, 1999 and 1998, respectively. The most significant
sales outside the U.S. were to Japan, Taiwan and Korea, which represented
21%, 16%, and 14% of ESI's net sales for fiscal 2000, respectively.
In fiscal 2000, 1999 and 1998, 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 $168.7 million at June 3, 2000, versus $22.9 million at May 31, 1999 and
$24.5 million at May 31, 1998.
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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, micron-level motion control systems
- Precision optics
- High-speed, small parts handling
- Image processing and optical character recognition
- Real-time production line electronic measurement
- Real-time operating systems
- Systems integration
ESI's research and development expenditures for fiscal 2000, 1999,
and 1998 were $31.1 million (9.8% of net sales), $30.3 million (14.7% of net
sales), and $34.8 million (13.5% 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 dynamic and highly 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 distribution networks 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 principal competitor for semiconductor yield improvement
systems is GSI Lumonics. 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 GSI Lumonics, Sumitomo, Mitsubishi and Hitachi Via
Mechanics. ESI's vision products compete with vision suppliers such as
Cognex, ICOS Systems, and Robotic Vision Systems. 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 GSI
Lumonics.
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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
semiconductor yield improvement, advanced electronic packaging, and circuit
fine tuning product lines. Electronic component manufacturing systems are
produced in ESI's facilities in San Diego, California. ESI's vision systems
are manufactured in ESI's facilities in Ann Arbor, Michigan and Minneapolis,
Minnesota.
ESI is in the process of building a 50,000 square foot facility in
Klamath Falls, Oregon to increase manufacturing capacity. This facility is
scheduled for completion in calendar year 2001. Initial use of this facility
will be for production of consumable products sold to MLCC manufacturers.
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 suppliers. 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 June 3, 2000, ESI employed 1,093 people, including 259 in
engineering, research and development, 422 in manufacturing and 412 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 82 United States patents and has applied for 29 additional patents
in the United States. ESI owns 91 foreign patents and has applied for 94
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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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
196,500 square feet of 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 on
3 acres of land near Minneapolis, Minnesota.
In June 2000 ESI acquired 30 acres of land in Klamath Falls, Oregon.
The Company is constructing a 50,000 square foot manufacturing facility at
this site. Completion is scheduled for calendar year 2001.
In addition, the Company leases 15,000 square feet of industrial
space in Canton, Massachusetts; 9,900 square feet of office and industrial
space in Santa Ana, California; 13,900 square feet of office and industrial
space in San Marcos, 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 these facilities to
be adequate and suitable for the requirements of the business.
LEGAL PROCEEDINGS
ESI initiated litigation against Dynamic Details, Inc. and GSI
Lumonics, Inc. for patent infringement in March 2000 in the U.S. District
Court for the Central District of California (Electro Scientific Industries
v. Dynamic Details, Inc. and GSI Lumonics, Inc., No. SACV00-272 AHS (ANX)).
The complaint alleges that Dynamic Details and GSI Lumonics are violating
ESI's U.S. patent 5,847,960 entitled "Multi-tool Positioning System". The
complaint alleges that Dynamic Details infringes ESI's patent 5,847,960 and
that GSI Lumonics has actively induced infringement of, and contributorily
infringed, ESI's patent 5,847,960. The complaint seeks injunctive relief and
monetary damages. Dynamic Details, Inc. and GSI Lumonics, Inc. have filed a
counterclaim for a declaratory judgment of non-infringement and invalidity of
ESI's patent 5,847,960.
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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 ESI's U.S. patent 5,473,624 entitled "Laser System
and Method for Selectively Severing Links" invalid for reasons of
obviousness. On April 8, 1999, the same federal court jury awarded ESI $13.1
million 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 filed an appeal of the U.S. District Court judgment with the
U.S. Court of Appeals for the Federal Circuit. ESI has not reflected the $13.1
million award in its financial results. Separately, in November 1999 the U.S.
Patent and Trademark Office issued an order granting a request by General
Scanning to re-examine ESI's patent 5,265,114. On July 27, 2000 the Patent
Office issued a non-final first office action in its re-examination of ESI's
patent 5,265,114. The action by the Patent Office states that some of the
claims of the 5,265,114 patent are unpatentable. ESI is responding to the
action under Patent Office procedures and its response will assert the basis
for the patentability of the claims. ESI continues to record legal expenses
related to this litigation and the Patent Office action as these expenses are
incurred.
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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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 June 3, 2000.
EXECUTIVE OFFICERS
The executive officers of the Company, and their ages and positions as of
June 30, 2000 are as follows:
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NAME AGE POSITION
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Donald R. VanLuvanee 56 Chief Executive Officer, President and Director
Robert E. Belter 59 Vice President
Bradford S. Cooley 43 Vice President
Barry A. Glasgow 55 Vice President
James T. Dooley 46 Vice President, Chief Financial Officer
Julia A. Harper 41 Vice President
Gary M. Kapral 44 Vice President
Mark W. Klug 61 Vice President
John R. Kurdock 55 Vice President
Michael J. Murphy 50 Vice President
Larry T. Rapp 60 Vice President
Joseph L. Reinhart 41 Vice President and Corporate Secretary
Edward J. Swenson 61 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 Company, which
designs, manufactures and markets focused ion beam workstations and both ion
and electron emitter and focusing column components.
Mr. Belter joined ESI in May 1997 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. Dooley was elected Vice President and Chief Financial Officer in
June 2000. He joined ESI in 1992 as the controller of its Electronic
Component Systems business and was named Corporate Controller in 1994. In
1996 he was named Director of Portland Manufacturing. Prior to joining ESI he
held various financial management positions at IRT Corporation, Eli Lilly and
Company, INTERMEDICS Inc., and Johnson and Johnson, Inc.
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 Oil and Gas Company.
Mr. Kapral joined ESI in May 2000 as Vice President responsible for
ESI's vision-based businesses. Prior to joining ESI, Mr. Kapral was both a
corporate vice president and a business unit president of SGL Carbon Group, a
major supplier to semiconductor manufacturers, with responsibility for SGL's
semiconductor activities in North America and Europe.
Mr. Klug joined the Company in 1992 and in 1993 was appointed 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.
14
<PAGE>
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.
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 shows, 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 2000 1999
-------------- ---- ----
HIGH LOW CLOSING HIGH LOW CLOSING
---- --- ------- ---- --- -------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter................ $22.438 $17.094 $20.000 $17.438 $9.625 $9.625
2nd Quarter................ 32.313 19.750 30.000 15.813 6.563 14.969
3rd Quarter................ 59.000 28.250 55.000 23.688 14.813 18.282
4th Quarter................ 69.125 41.875 52.688 23.938 17.500 18.750
</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 June 3, 2000 was 785.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Years Ended (4): JUNE 3 MAY 31 MAY 31 MAY 31 MAY 31
(THOUSANDS OF DOLLARS EXCEPT PER SHARE) 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $316,925 $206,242 $258,639 $193,325 $218,268
Net income 40,860 $7,528 $22,347 $16,519 $27,698
Net income per share - basic 1.55 0.29 0.89 0.69 1.16
Net income per share - diluted 1.49 0.28 0.86 0.67 1.13
Proforma net income (1),(2),(3) 40,860 10,399 33,260 16,519 30,154
Proforma net income per share - basic (1),
(2),(3) 1.55 0.40 1.32 0.69 1.27
Proforma net income per share - diluted (1),
(2),(3) 1.49 0.39 1.28 0.67 1.24
Working capital 204,800 153,139 144,840 120,483 105,272
Net property, plant and equipment 36,017 33,462 30,373 22,088 22,675
Total assets 291,641 221,823 209,131 176,003 164,729
Long-term debt - - - - -
Shareholders' equity 256,141 201,261 188,094 148,762 133,719
</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 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,
non-recurring litigation expenses.
(4) All per share amounts have been restated to reflect a two-for-one stock
split in February 2000.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company acquired the following five companies during fiscal 1998
and fiscal 1999: Dynamotion (June 9, 1997), Chip Star (June 26, 1997), AISI
(December 1, 1997), Testec (December 21, 1998) and MicroVision (January 27,
1999). All of these transactions were structured as mergers. 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 JUNE 3, 2000 COMPARED TO FISCAL YEAR ENDED MAY 31, 1999
Revenue for fiscal 2000 was $316.9 million, which was 53.7% or
$110.7 million higher than for fiscal 1999. The increase was due to higher
sales of electronic component systems, machine vision equipment,
semiconductor yield improvement systems and circuit fine tuning systems.
These increases were partially offset by lower sales of advanced electronic
packaging equipment. For fiscal 2000, electronic component systems
represented the largest percentage of revenues at 37.2%. Semiconductor yield
improvement systems contributed the highest revenues for fiscal 1999 at 31.5%
of sales.
Gross margin for the year ended June 3, 2000 was 55.0%, up from
49.9% in the prior fiscal year. The increase in margin from the prior fiscal
year is driven by changes in product mix, higher average selling prices due
to strong industry demand, and increased overhead absorption due to higher
unit volumes.
Selling, service and administrative expenses were $86.0 million, an
increase of $27.3 million or 46.5% from fiscal 1999. Selling, service and
administrative expenses decreased as a percentage of sales from 28.5% to
27.1%. The absolute dollar increase is attributable to higher commission
expenses and an increase in the profit sharing and bonus accruals associated
with increased sales volume and profits.
Research, development and engineering expenses for the year ended
June 3, 2000 increased to $31.1 million from $30.3 million for the prior
year. Research, development and engineering expenses decreased as a
percentage of sales, to 9.8% for 2000 from 14.7% for the prior year due to
increased sales.
The effective tax rate of 31.8% for the year ended June 3, 2000 was
essentially flat compared to fiscal 1999. The lower effective tax rate as
compared to the statutory federal tax rate is largely a result of the benefit
of the Company's foreign sales corporation.
18
<PAGE>
Net income for the year ended June 3, 2000 was $40.9 million or
$1.55 per basic share compared to $7.5 million or $0.29 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 $0.40 per
basic share.
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
semiconductor improvement systems and advanced electronic packaging
equipment. Semiconductor 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 reduced overhead absorption due to lower unit volumes.
Selling, service and administrative expenses were $58.7 million for
the year ended May 31, 1999, a decrease of $4.3 million or 6.9% from 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.
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.
19
<PAGE>
Net income for the year ended May 31, 1999 was $7.5 million or $0.29
per basic share compared to $22.3 million or $0.89 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 $0.40 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 $1.32 per basic share.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are: existing cash,
cash equivalents and marketable debt securities of $98.4 million; accounts
receivable of $73.3 million; and a $7.0 million line of credit, none of which
was outstanding at June 3, 2000. ESI has no long-term debt and a current
ratio of 6.8:1. Working capital increased to $204.8 million at June 3, 2000,
from $153.1 million at May 31, 1999.
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>
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows provided by (used in):
Operating activities $ 67,559 $ 343 $ 1,505
Investing activities (1) (53,410) (7,483) (11,644)
Financing activities 12,934 4,899 (239)
--------- --------- ---------
Increase (decrease) in cash and cash
equivalents (2) $ 27,083 $ (2,241) $ (10,378)
========= ========= =========
</TABLE>
(1) Reflects net purchase of $38.8 million in marketable debt securities during
fiscal 2000 and net proceeds of $4.2 million from the sale of marketable debt
securities during fiscal 1999.
(2) Total cash and securities increased from $32.7 million on May 31, 1999, to
$98.4 million on June 3, 2000.
20
<PAGE>
OPERATING ACTIVITIES: Operating cash flows increased $67.1 million over
fiscal 1999 largely due to higher net income and partially due to net
positive changes in certain working capital accounts. Trade receivables
decreased $6.9 million. This decrease is primarily due to an increased
emphasis on collection and fewer extended terms granted to our customers in
comparison to last fiscal year. Inventory increased by $4.3 million from May
31, 1999 due to increases in raw materials and work in process. Current
liabilities increased $14.5 million due to higher compensation accruals.
On April 8, 1999, a federal court jury awarded ESI a $13.1 million
judgment for damages in its patent infringement suit against General
Scanning, Inc. General Scanning has filed an appeal of this judgment. Due to
the appeal, ESI has not reflected this award in its financial results. ESI
continues to record legal expenses related to this litigation as these
expenses are incurred.
INVESTING ACTIVITIES: Net cash of $53.3 million was used in investing
activities. The Company made net purchases in marketable debt securities of
$38.8 million and purchases in the amount of $9.8 million to upgrade
computing and manufacturing capabilities and to renovate and improve
utilization of office and manufacturing space.
FINANCING ACTIVITIES: Net cash of $12.9 million was generated from financing
activities in the form of cash generated by stock option exercises and sales
under the employee stock purchase plan, as well as the related tax benefit.
CAPITAL COMMITMENTS: The Company has capital commitments of $4.5 million for
construction of an additional domestic manufacturing facility which is
expected to be completed during calendar year 2001.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this report that are not statements of
historical fact, including without limitation, statements containing the
words "believes," "expects," and similar words, constitute forward-looking
statements that involve a number of risks and uncertainties. From time to
time the Company may issue other forward-looking statements. Investors are
cautioned that such forward-looking statements are subject to an inherent
risk that actual results may materially differ. Factors that may result in
such variances include, but are not limited to the following:
INDUSTRY VOLATILITY
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
communications 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 have had a negative effect on the demand for capital
equipment such as that sold by the Company.
21
<PAGE>
CUSTOMER CONCENTRATION
Ten large multinational electronics companies constituted 39.7% of the
Company's fiscal 2000 sales and therefore, the loss of any of these customers
would be significant.
TECHNOLOGICAL CHANGE AND COMPETITION
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
ordering products from the Company's existing product lines.
INTERNATIONAL TRADE AND ECONOMIC CONDITIONS
International shipments accounted for 72.3% of sales for fiscal 2000
compared to 55.9% of sales for fiscal 1999. About 62% of the company's fiscal
2000 product sales are to customers in Asia versus 45% for fiscal year 1999.
Substantially all Asian end customer receivables are secured by letters of
credit. Although the economic conditions in the Asia Pacific region have
stabilized to some degree, there can be no assurance that any remaining
difficulties in Asian economies will not adversely affect the demand for the
Company's products in that region or elsewhere. The Company expects that
international shipments will continue to represent a significant percentage
of net sales in the future. Because of our significant dependence on
international revenues, a continued or additional decline in the economies of
any of the countries in which we do business would negatively affect our
operating results. Other risks involved with international trade 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
risk. The European and Asian sales subsidiaries' operating expenses are
denominated in their respective local currencies. These transactions
represent approximately 8.6% of fiscal 2000 consolidated operating expenses
and are split 54% and 46% respectively between Europe and Asia. Changes in
the value of the local currency, as measured in US dollars, will
commensurately increase or decrease operating expenses.
EURO CONVERSION
The Company's information technology systems will allow for
transactions to take place in both local currencies and the Euro, with the
eventual elimination of the local currency. The Company will continue to
evaluate the impact over time of the introduction of the Euro; however, our
management does not believe that the introduction of the Euro has or will
have a material adverse affect on our results of operations.
22
<PAGE>
FOREIGN SALES CORPORATION BENEFIT
In February 2000, the World Trade Organization (WTO) ruled that
Foreign Sales Corporations (FSC) provisions violated U.S. obligations under
the General Agreement on Tariffs and Trade (GATT). As a result, the Company
is required to discontinue use of its FSC by October 1, 2000. The Company is
currently studying the effects of this ruling on its financial statements.
Legislation for an alternative to the FSC may be forthcoming. Without an
alternative, the Company believes that the WTO ruling will increase its
effective tax rate and have a material effect on its financial statements.
ACQUISITIONS
The Company has made, and may in the future make, acquisitions of,
or significant investments in, businesses with complementary products,
services and/or technologies. Acquisitions involve numerous risks, including
management assimilation and costs in connection with integration of the
operations, technologies, and products of the acquired companies, possible
impairment of acquired intangible assets, and the potential loss of key
employees of the acquired companies. In addition, the Financial Accounting
Standards Board has indicated that they plan to disallow the
pooling-of-interests method of acquisition accounting. This could result is
significant charges resulting from amortization of intangible assets recorded
in connection with future acquisitions, and may alter the Company's
acquisition strategy. The inability to manage these risks effectively could
materially affect the Company's financial condition and results of operations.
KEY SUPPLIERS
The Company uses numerous vendors to supply materials used in
production. Although the Company makes reasonable efforts to ensure that
parts are available from multiple suppliers, key parts may be available only
from a single supplier or a limited group of suppliers. If the Company does
not receive parts for production in a timely and cost effective manner, there
can be no assurance that the Company's results of operations will not be
materially and adversely affected.
MANUFACTURING DELAYS OR INTERRUPTIONS
The Company depends on manufacturing flexibility to meet the
changing demands of its customers. Any significant delay or interruption of
manufacturing operations as a result of software deficiencies, natural
disasters, and other causes, could result in ineffective manufacturing
capabilities or delayed product deliveries. Any or all of which could
materially and adversely affect the Company's results of operations and
financial condition.
23
<PAGE>
PATENT INFRINGEMENT
Our business is characterized by continual technological change,
with frequent introductions of new products and technologies. As a result,
companies often design and develop similar products to those introduced by
others, increasing the risk that their products and processes may give rise
to claims that they infringe on the intellectual property rights of others.
This inherent risk of infringement could cause the Company to incur
significant litigation costs or other expenses.
STOCK MARKET VOLATILITY
ESI believes that it has product offerings and resources needed for
continued success. 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 these factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
YEAR 2000
To date, there have been no significant issues attributable to Year 2000
(Y2K).
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. The Company believes it has
incurred substantially all of its total expected Y2K costs. Total costs of
assessing and implementing the Company's Y2K plan have not had and are not
expected to have a material effect on the Company's consolidated financial
position or the results of its operations.
The Company believes implementation of the plan has been successful
after each key rollover date. The Company believes it will have no material
business risk from any additional Y2K issues. There can be no assurances that
third parties, over which the company has no control, will successfully
address any remaining Y2K issues.
24
<PAGE>
ITEM 7A. MARKET RISK DISCLOSURE
INTEREST RATE RISK
As of June 3, 2000, the Company's investment portfolio includes
marketable debt securities of $63.5 million. These securities are subject to
interest rate risk, and will decline in value if interest rates increase.
These securities are classified as Securities Available for Sale; therefore,
the impact of interest rate changes is reflected as a separate component of
shareholder's equity. 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 Japanese yen. 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% 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.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 3, MAY 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,876 $ 7,793
Securities available for sale 63,522 24,865
--------- ---------
Total cash and securities 98,398 32,658
Trade receivables, less allowance for doubtful accounts 73,346 78,998
Income tax refund receivable 2,091 2,835
Inventories -
Finished goods 14,511 10,319
Work-in-process 12,844 8,575
Raw materials and purchased parts 28,979 32,419
--------- ---------
Total inventories 56,334 51,313
Deferred income taxes 8,171 6,699
Other current assets 1,534 1,198
--------- ---------
Total current assets 239,874 173,701
PROPERTY AND EQUIPMENT, AT COST 79,161 70,047
Less-accumulated depreciation (43,144) (36,585)
--------- ---------
Net property and equipment 36,017 33,462
DEFERRED INCOME TAXES - 2,455
OTHER ASSETS 15,750 12,205
--------- ---------
$ 291,641 $ 221,823
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,061 $ 6,698
Accrued liabilities -
Payroll related 13,820 4,478
Commissions 3,214 5,340
Warranty 2,513 2,103
Other 1,798 1,603
--------- ---------
Total accrued liabilities 21,345 13,524
Deferred revenue 668 340
--------- ---------
Total current liabilities 35,074 20,562
--------- ---------
DEFERRED INCOME TAXES 426 -
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000 shares authorized; no shares issued - -
Common stock, without par value; 40,000 shares authorized; 26,855 and 26,094
shares issued and outstanding at June 3, 2000 and May 31, 1999, respectively.(1) 120,140 107,206
Retained earnings 137,405 96,545
Accumulated other comprehensive income (loss) (1,404) (2,490)
--------- ---------
Total shareholders' equity 256,141 201,261
--------- ---------
$ 291,641 $ 221,823
========= =========
</TABLE>
(1) Share amounts for all periods presented have been restated to reflect a
two-for-one stock split in February 2000. See Notes to the Consolidated
Financial Statements.
The accompanying notes are an integral part of these statements.
26
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 3, 2000, MAY 31, 1999 AND MAY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 316,925 $ 206,242 $ 258,639
Cost of sales 142,460 103,311 115,816
--------- --------- ---------
Gross margin 174,465 102,931 142,823
Operating expenses:
Selling, service and administrative 86,033 58,718 63,043
Research, development and engineering 31,143 30,289 34,806
Non-recurring operating expenses - 4,180 14,634
--------- --------- ---------
Total operating expenses 117,176 93,187 112,483
--------- --------- ---------
Operating income 57,289 9,744 30,340
Interest income 2,695 1,147 1,475
Other income (expense), net (112) 89 501
--------- --------- ---------
Income before income taxes 59,872 10,980 32,316
Provision for income taxes 19,012 3,452 9,969
--------- --------- ---------
Net income $ 40,860 $ 7,528 $ 22,347
========= ========= =========
Net income per share - basic (1) $ 1.55 $ 0.29 $ 0.89
========= ========= =========
Net income per share - diluted (1) $ 1.49 $ 0.28 $ 0.86
========= ========= =========
Weighted average number of shares - basic (1) 26,357 25,854 25,182
Weighted average number of shares - diluted (1) 27,357 26,480 26,062
</TABLE>
(1) Shares and per share amounts for all periods presented have been restated to
reflect a two-for-one stock split in February 2000. See Notes to the
Consolidated Financial Statements.
The accompanying notes are an integral part of these statements.
27
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 3, 2000, MAY 31, 1999 AND MAY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------ OTHER
NUMBER OF RETAINED COMPREHENSIVE
SHARES (1) AMOUNT EARNINGS INCOME (LOSS) TOTAL
---------- ------ -------- ------------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1997 24,281 $ 81,951 $ 68,902 $ (2,090) $ 148,763
Adjustment to align AISI fiscal year with May 31 - - (565) - (565)
Stock plans:
Employee stock plans 720 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 694 11,950 - - 11,950
Comprehensive income:
Net income - - 22,347 - 22,347
Cumulative translation adjustment - - - (1,140) (1,140)
---------
Comprehensive income - - - - 21,207
--------- --------- --------- --------- ---------
BALANCE AT MAY 31, 1998 25,695 101,734 89,590 (3,230) 188,094
Stock plans:
Employee stock plans 399 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 - - - - 8,268
--------- --------- --------- --------- ---------
BALANCE AT MAY 31, 1999 26,094 107,206 96,545 (2,490) 201,261
--------- --------- --------- --------- ---------
Stock plans:
Employee stock plans 761 8,648 - - 8,648
Tax benefit of stock options exercised - 4,286 - - 4,286
Comprehensive income:
Net income - - 40,860 - 40,860
Unrealized loss on securities held for sale - - - (151) (151)
Cumulative translation adjustment - - - 1,237 1,237
---------
Comprehensive income - - - - 41,946
--------- --------- --------- --------- ---------
BALANCE AT JUNE 3, 2000 26,855 $ 120,140 $ 137,405 $ (1,404) $ 256,141
========= ========= ========= ========= =========
</TABLE>
(1) Share amounts for all periods presented have been restated to reflect a
two-for-one stock split in February 2000. See Notes to the Consolidated
Financial Statements.
The accompanying notes are an integral part of these statements.
28
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 3, 2000, MAY 31, 1999 AND MAY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 40,860 $ 7,528 $ 22,347
Adjustment to align pooled companies fiscal years with May 31 - - (565)
Adjustments to reconcile net income to cash provided by
operating activities:
Non-recurring operating expenses - 4,180 14,634
Depreciation and amortization 8,808 6,772 5,879
Non-cash charges (credits) 78 (297) (757)
Deferred income taxes 1,409 (1,674) 528
Changes in operating accounts:
(Increase) decrease in trade receivables 6,857 (12,773) (8,490)
(Increase) decrease in inventories (4,274) 1,670 (14,055)
(Increase) decrease in other current assets 631 (417) (2,959)
Increase (decrease) in current liabilities 13,928 (4,943) (15,814)
-------- -------- --------
Net cash provided by operating activities 68,297 46 748
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (10,004) (9,625) (13,480)
Proceeds from sales of property and equipment 132 1,410 1,662
Purchase of securities (66,169) (16,809) (18,668)
Proceeds from sales of securities and maturing securities 27,361 21,057 17,415
(Increase) decrease in other assets (5,468) (3,219) 2,184
-------- -------- --------
Net cash used in investing activities (54,148) (7,186) (10,887)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and stock plans and related
tax benefits 12,934 5,472 7,833
Repayments of Dynamotion subsidiary debt(1) - - (6,978)
Distribution to S-corp shareholders of pooled acquisitions - (573) (1,094)
-------- -------- --------
Net cash provided by (used in) financing activities 12,934 4,899 (239)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 27,083 (2,241) (10,378)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,793 10,034 20,412
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,876 $ 7,793 $ 10,034
======== ======== ========
The accompanying notes are an integral part of these statements.
29
<PAGE>
(1) Acquisition of Dynamotion:
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 2000, 1999 or 1998.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA UNLESS OTHERWISE NOTED)
BUSINESS ENVIRONMENT
The accompanying consolidated financial statements include the
accounts of Electro Scientific Industries, Inc. and its subsidiaries (the
Company), all of which are wholly owned. The Company designs and manufactures
sophisticated products used around the world in electronics manufacturing
including: laser manufacturing systems for semiconductor yield improvement,
production and test equipment for the manufacture of surface mount ceramic
capacitors, 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 large electronics manufacturers: 39.7%
of fiscal 2000 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.
31
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
STOCK SPLIT
The Company's Board of Directors approved a two-for-one stock split
to shareholders of record at the close of business February 23, 2000,
effective February 24, 2000. All per share and shares outstanding data in the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements have been retroactively restated to reflect the stock split.
CHANGE IN FISCAL YEAR END
On September 30, 1999, the Company decided to change its fiscal
quarters to correspond with a four week, five week, four week quarter, which
means each quarter will end on a Saturday. Previously, the quarters ended on
the last day of the calendar month. This translates to a change in fiscal
year end. Previously, the Company's fiscal year end was May 31. Upon
implementing this change, the fiscal year will end on the Saturday following
or directly preceding May 31, whichever Saturday is the fewest number of days
from May 31. In addition, depending on which Saturday is used, the Company
may have either a 52 or 53 week fiscal year.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1998 and 1999 to conform to the 2000
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. See Recent Accounting Pronouncements
for more information.
32
<PAGE>
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 components of "other comprehensive income" are cumulative foreign
currency translation adjustments and unrealized gain or loss on securities
available for sale.
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 shares
outstanding. Diluted earnings per share is computed by dividing net income by
the weighted average number of shares and 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.
33
<PAGE>
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:
Revenue Recognition
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," in
December 1999. SAB 101 provides guidance for applying Generally Accepted
Accounting Principles (GAAP) to revenue recognition in financial statements
filed with the SEC. Specifically, SAB 101 addresses recognizing revenue upon
installation and acceptance versus shipment. The Company generally recognizes
revenue upon shipment. The Company will be required to adopt SAB 101 in the
fourth fiscal quarter of 2001. Management has not yet determined the
potential effect of the implementation of SAB 101 on the Company's financial
condition or results of operations. Since the implementation of SAB 101 could
result in changes to the timing of the Company's revenue recognition, its
effect could be material and adverse to the Company's financial condition and
results of operations in the period of implementation.
HEDGING ACTIVITIES
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.
34
<PAGE>
PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 3, MAY 31,
2000 1999
---- ----
<S> <C> <C>
Land $ 4,534 $ 4,534
Buildings and improvements 23,990 22,171
Machinery and equipment 48,770 41,756
Construction in progress 1,867 1,586
------- -------
$79,161 $70,047
======= =======
</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 2000. The
Company expects to renew the line through 2001. At the Company's option, the
interest rate is prime or LIBOR plus 1.25 percent. There were no borrowings
outstanding at June 3, 2000 or May 31, 1999.
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 $1,123,
$950 and $830 to the plan for the years ended June 3, 2000, May 31, 1999 and
May 31, 1998, respectively.
35
<PAGE>
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.
The net deferred tax asset as of June 3, 2000 and May 31, 1999
consists of the following tax effects relating to temporary differences and
carryforwards:
<TABLE>
<CAPTION>
JUNE 3, MAY 31,
2000 1999
---- ----
<S> <C> <C>
Deferred Tax Assets:
Receivable and inventory valuation $ 3,384 $ 2,418
Vacation pay 880 963
Warranty costs 930 778
Capitalized merger expenses - 406
Accrued commissions 135 1,561
Payroll related accruals 1,065 -
Other accrued liabilities 988 1,175
---------- ---------
7,382 7,301
Tax loss and credit carryforwards 5,089 7,438
---------- ---------
Total deferred tax assets 12,471 14,739
Deferred Tax Liabilities:
Tax in excess of book depreciation (1,054) (1,257)
Other deferred tax liabilities (597) (891)
---------- ---------
Total deferred tax liabilities (1,651) (2,148)
Valuation allowance (3,075) (3,437)
---------- ---------
Net deferred tax asset $ 7,745 $ 9,154
========== =========
</TABLE>
At June 3, 2000 there were net operating losses of $11,591 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
restricted. Given these limitations, some of these losses may not be
realizable, and accordingly, a valuation allowance has been recorded.
36
<PAGE>
The components of income before income taxes and the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
JUNE 3, MAY 31, MAY 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $ 58,300 $ 12,309 $ 30,775
Foreign 1,572 (1,329) 1,541
--------- --------- ---------
$ 59,872 $ 10,980 $ 32,316
========= ========= =========
Provision (benefit) for income taxes:
Current:
U.S. Federal and State $ 11,905 $ 3,209 $ 6,658
Foreign 1,412 11 579
--------- --------- ---------
13,317 3,220 7,237
Deferred 1,409 (1,674) 528
Income tax effect of stock options exercised 4,286 1,906 2,204
--------- --------- ---------
$ 19,012 $ 3,452 $ 9,969
========= ========= =========
</TABLE>
The tax benefit related to stock option exercises has been recorded
as an increase to common stock rather than a reduction to the provision for
income taxes.
A reconciliation of the provision for income taxes at the federal
statutory income tax rate to the provision for income taxes as reported is as
follows:
<TABLE>
<CAPTION>
JUNE 3, MAY 31, MAY 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Provision computed at federal statutory rate $ 20,956 $ 3,843 $ 11,311
Higher than U.S. tax rates in foreign jurisdictions 822 353 40
Impact of U.S. tax losses and credit carryforwards (1,188) (636) (2,214)
Impact of state taxes 1,314 503 342
Benefit of foreign sales corporation (FSC) (3,500) (1,027) (1,332)
Nondeductible merger related expenses - 487 3,617
Impact of pooled subchapter S corporations - (236) (1,913)
Other, net 608 165 118
-------- -------- --------
$ 19,012 $ 3,452 $ 9,969
======== ======== ========
</TABLE>
Consolidated income tax payments amounted to $12,856, $4,361 and
$9,673 for the years ended June 3, 2000, May 31, 1999 and May 31, 1998,
respectively.
37
<PAGE>
EARNINGS PER SHARE
The Company computes net income per share in accordance with
Statement of Financial Accounting Standards 128, "Earnings Per Share" (SFAS
128). All earnings per share amounts in the following table are presented to
conform to the SFAS 128 requirements
<TABLE>
<CAPTION>
JUNE 3, MAY 31, MAY 31,
2000 1999 1998
---- ---- ----
(IN 000'S EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income $ 40,860 $ 7,528 $ 22,347
======== ======== ========
Weighted average number of shares of common stock and
common stock equivalents outstanding:
Weighted average number of shares - basic 26,357 25,854 25,182
Dilutive effect of employee stock options 1,000 626 880
-------- -------- --------
Weighted average number of shares - diluted 27,357 26,480 26,062
======== ======== ========
Net income per share - basic $ 1.55 $ 0.29 $ 0.89
======== ======== ========
Net income per share - diluted $ 1.49 $ 0.28 $ 0.86
======== ======== ========
</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
1,208,599, 1,154,116 and 41,100 for the years ended June 3, 2000, May 31,
1999, and May 31, 1998, respectively.
38
<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 end of each fiscal period. At June 3, 2000
and May 31, 1999 , the Company had forward exchange contracts totaling
$35,491 and $5,443, respectively. These contracts mature in approximately one
year and the counterparties are large, highly rated, widely recognized banks;
therefore, risk of credit loss as a result of nonperformance by the banks 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 June 3, 2000 is as follows:
<TABLE>
<S> <C>
2001 $1,261
2002 856
2003 501
2004 369
2005 262
Thereafter 552
------
Total $3,801
======
</TABLE>
Rental Expense for all operating leases was $1,314 in 2000, $ 1,854
in 1999, and was insignificant in 1998.
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
securities. The amortized cost of these securities approximates fair market
value.
During fiscal 2000 and 1999, proceeds of $27,361 and $21,057,
respectively, resulted from the sale or maturity of securities. There were no
material realized gains or losses associated with these sales or maturities.
39
<PAGE>
SHAREHOLDER RIGHTS PLAN
The Company renewed its Shareholder Rights Plan in May 1999 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.
STOCK PLANS
In September 1989, the shareholders approved the adoption of the
1989 Stock Option Plan (the "1989 Plan") pursuant to which 500,000 shares of
the Company's common stock have been reserved for issuance. In September
1998, shareholders approved additional shares under this plan increasing the
total available to 2,200,000. The Company's two for one stock split in
February 2000 doubled the total shares available to 4,400,000. Options under
the 1989 Plan generally vest 25% per year over a 4 year period from the date
of grant, expire ten years from the date of grant, and are exercisable at
prices generally not less than the fair market value at the grant date. The
1989 Plan allows for automatic annual grants to non-employee directors for
6,000 shares (as adjusted) 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. The 1989 Plan allows for
grants of incentive stock options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended or non-statutory stock options. Stock
appreciation rights may be granted in connection with options, although no
options have been granted which include stock appreciation rights.
40
<PAGE>
In September 1990, the shareholders approved the adoption of the
1990 Employee Stock Purchase Plan (the "ESPP") pursuant to which 150,000
shares of the Company's common stock have been reserved for issuance to
participating employees. In September 1998, shareholders approved additional
shares under this plan increasing the total available to 450,000. The
Company's two for one stock split in February 2000 doubled the total shares
available to 900,000. Eligible employees may elect to contribute up to 15
percent of their cash compensation during each pay period. The ESPP provides
for one 12-month offering period beginning January 8 of each year. During the
offering period, participants accumulate funds in an account via payroll
deduction. At the end of the offering period, the purchase price is
determined and the accumulated funds are used to automatically purchase
shares of the Company's common stock. The purchase price per share is equal
to 85% of the lower of the fair market value of the common stock (a) on the
enrollment date of the offering period or (b) on the date of purchase.
In September 1996, the shareholders approved the 1996 Stock Incentive Plan
(the "Incentive Plan") pursuant to which 150,000 shares of the Company's
common stock have been reserved for issuance to participating employees. In
September 1998, shareholders approved additional shares under this plan
increasing the total available to 250,000. The Company's two for one stock
split in February 2000 doubled the total shares available to 500,000. The
Incentive Plan allows for the grants of stock bonuses, restricted stock or
performance-based awards. The Company's restricted stock grants vest based on
certain performance criteria that are tied to the Company's stock price.
During fiscal 2000, 1999 and 1998, ESI recorded $2,498, $499 and $455,
respectively, of compensation expense related to restricted stock grants,
respectively.
In April 2000, the Board of Directors approved the adoption of the
2000 Stock Option Plan (the "2000 Plan") pursuant to which 1,000,000 shares
of the Company's common stock have been reserved for issuance. The 2000 Plan
allows for grants to non-officer employees of non-statutory stock options,
stock bonuses or restricted stock.
The Company accounts for its stock option plans and its employee
stock purchase plan in accordance with the provisions of the Accounting
Principles Board's Opinion No. 25 (APB 25), "Accounting For Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board released
Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting
For Stock Based Compensation." SFAS 123 provides an alternative to APB 25.
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.
41
<PAGE>
The Company has computed, for pro forma disclosure purposes, the per
share value of all options granted under the stock option plan to be $29.19,
$22.36 and $17.88 for 2000, 1999 and 1998, respectively. The pro forma value
of options granted under the employee stock purchase plan is immaterial for
2000, 1999 and 1998. 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 2000, 1999, and 1998:
<TABLE>
<CAPTION>
YEAR ENDED: JUNE 3, MAY 31, MAY 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.5% 5.5% 7.5%
Expected dividend yield 0% 0% 0%
Expected life 6 years 5 years 5 years
Expected volatility 66.5% 67.4% 46.5%
</TABLE>
The total value of options granted would be amortized on a pro rata
basis over the vesting period of the options. Options generally vest equally
over four years. If the Company had accounted for these plans in accordance
with SFAS 123, the Company's net income and net income per share would have
decreased as reflected in the following pro forma amounts for the fiscal
years ended as follows:
<TABLE>
<CAPTION>
JUNE 3, MAY 31, MAY 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $40,860 $7,528 $22,347
Pro forma $36,373 $3,990 $21,116
Net income per share: (1)
As reported - basic $ 1.55 $ 0.29 $ 0.89
As reported - diluted $ 1.49 $ 0.28 $ 0.86
Pro forma - basic $ 1.38 $ 0.16 $ 0.84
Pro forma - diluted $ 1.36 $ 0.15 $ 0.81
</TABLE>
(1) Per share amounts for all periods presented have been restated to reflect
a two-for-one stock split in February 2000. See Notes to the Consolidated
Financial Statements
42
<PAGE>
The following table summarizes activity in the stock plans for the
years ended June 3, 2000, May 31, 1999, and May 31, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
2000 1999 1998
---- ---- ----
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 2,566 $14.08 1,886 $10.46 2,394 $ 9.70
Granted ........................... 1,593 46.39 1,068 17.83 416 16.37
Exercised ......................... 685 10.10 322 8.16 780 6.19
Canceled .......................... 201 17.99 66 12.48 144 12.86
------ ------- ------ ------ ------ ------
Options outstanding at end of year ..... 3,273 30.41 2,566 14.08 1,886 10.46
====== ======= ====== ====== ====== ======
Exercisable at end of year ............. 852 $12.53 1,088 $ 9.50 1,030 $ 7.84
====== ======= ====== ====== ====== ======
Shares issued under the ESPP ........... 62 $19.34 75 $14.72 53 $10.99
====== ======= ====== ====== ====== ======
</TABLE>
In addition to the options above, the company had 122,450, 156,946
and 157,022 of restricted stock grants outstanding as of June 3, 2000, May
31, 1999, and May 31, 1998, respectively, none of which were exercisable.
43
<PAGE>
The following table sets forth the exercise price range, number of
shares outstanding at June 3, 2000, 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 JUNE 3, 2000 LIFE (YEARS) EXERCISE PRICE JUNE 3, 2000 EXERCISE PRICE
------ ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 1.35- 9.00 328,854 4.45 $6.11 319,324 $6.06
9.75-13.56 332,580 6.47 12.85 229,561 12.75
14.25-15.75 69,872 7.43 15.45 33,622 15.45
15.78-18.88 730,774 8.82 18.80 184,664 18.72
18.91-26.64 585,613 8.73 23.55 81,303 20.28
27.63-50.38 26,400 9.53 36.75 500 29.03
52.75-52.75 1,133,255 9.86 52.75 - -
54.50-61.00 63,844 9.57 59.31 3,094 55.25
61.63-63.25 1,500 9.84 62.17 - -
------------------------------------------------------------------------------------------------
3,272,692 8.48 $30.41 852,068 $12.53
================================================================================================
</TABLE>
44
<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 semiconductor yield improvement
systems, electronic component manufacturing systems, advanced electronic
packaging equipment, vision and inspection products 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:
<TABLE>
<CAPTION>
JUNE 3, MAY 31, MAY 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Semiconductor Yield Improvement $ 81,947 $ 64,953 $ 61,353
Electronic Component Systems 117,915 46,312 71,729
Advanced Electronic Packaging 40,897 46,149 44,721
Vision Products 45,122 27,021 54,132
Circuit Fine Tuning Products 31,044 21,807 26,704
--------- --------- ---------
Net Sales $ 316,925 $ 206,242 $ 258,639
========= ========= =========
</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 June 3, 2000, May 31, 1999, and May 31, 1998
were as follows:
<TABLE>
<CAPTION>
EUROPE ASIA TOTAL
------ ---- -----
<S> <C> <C> <C>
June 3, 2000...............................$ 13,758 $164,697 $178,455
May 31, 1999...............................$ 5,512 $ 77,527 $ 83,039
May 31, 1998...............................$ 12,112 $ 96,839 $108,951
</TABLE>
The most significant sales outside the U.S. were to Japan, Taiwan
and Korea, which represented 21%, 16%, and 14% of the Company's net sales for
fiscal 2000, respectively.
In fiscal 2000, 1999 and 1998, there were no sales to any one
customer in excess of 10% of consolidated net sales.
45
<PAGE>
The following data represents segment information for the years ending:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED AND
JUNE 3, 2000 STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------------ ------ ------ ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers .... $266,243 $ 17,935 $ 32,747 $ - $316,925
Transfers between geographic areas . 38,944 - 287 (39,231) -
-------- -------- -------- -------- --------
Total revenue ...................... $305,187 $ 17,935 $ 33,034 $(39,231) $316,925
======== ======== ======== ======== ========
Operating income (loss) ........... $ 55,657 $ (146) $ 2,613 $ (835) $ 57,289
======== ======== ======== ======== ========
Identifiable assets at June 3, 2000 $233,025 $ 7,322 $ 19,653 $(66,757) $193,243
======== ======== ======== ========
Corporate assets ................... 98,398
--------
Total assets at June 3, 2000 ....... $291,641
========
MAY 31, 1999
------------
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
========
MAY 31, 1998
------------
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
========
</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.
46
<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
2,037,000 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.
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 1,000,000 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 1,400,000 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.
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 2,799,030 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.
47
<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
---- ----
<S> <C> <C>
Net Sales:
ESI $ 196,735 $ 212,374
MicroVision 6,920 21,889
Testec 2,587 7,131
AISI - 17,245
----------------------------
As Restated $ 206,242 $ 258,639
============================
Net Income :
ESI $ 6,853 $ 13,135
MicroVision 335 3,521
Testec 340 1,943
AISI - 3,748
----------------------------
As Restated $ 7,528 $ 22,347
============================
</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 694,400 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 Income.
48
<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.
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 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.
49
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
YEAR ENDED JUNE 3, 2000 QUARTER QUARTER QUARTER QUARTER
----------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $ 58,974 $ 66,935 $ 82,081 $ 108,935
Gross margin 30,621 36,288 45,899 61,657
Net income 4,785 6,927 11,943 17,205
Net income per share - basic(2) $0.18 $0.26 $0.45 $0.64
Net income per share - diluted(2) $0.18 $0.26 $0.43 $0.61
YEAR ENDED MAY 31, 1999
Net sales $ 48,421 $ 49,038 $ 51,506 $ 57,277
Gross margin 23,975 24,781 26,091 28,084
Net income1 1,213 2,459 920 2,936
Net income per share - basic(1),(2) $ 0.05 $ 0.10 $ 0.04 $ 0.11
Net income per share - diluted(1),(2) $ 0.05 $ 0.09 $ 0.03 $ 0.11
</TABLE>
(1) Operations for fiscal 1999 include $2,773 and $1,407 in pretax
non-recurring operating expenses for the third and fourth quarters,
respectively.
(2) Share and per share amounts for all periods presented have been restated to
reflect a two-for-one stock split in February 2000.
50
<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 June 3, 2000 and May 31, 1999 and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended June 3, 2000. 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 auditing standards
generally accepted in the United States. 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 June 3, 2000 and May 31,
1999, and the results of their operations and their cash flows for each of
the three years in the period ended June 3, 2000 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Portland, Oregon
June 30, 2000
51
<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 2000 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 2000.
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 2000 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 2000 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules.
The following financial statements are included in this Annual Report on Form
10-K on the pages indicated.
Electro Scientific Industries, Inc.
and Subsidiaries:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of
June 3, 2000 and May 31, 1999 26
Consolidated Statements of
Income for the Years Ended
June 3, 2000, May 31, 1999, and May 31, 1998 27
Consolidated Statements of
Shareholders' Equity for the Years Ended
June 3, 2000, May 31, 1999, and May 31, 1998 28
Consolidated Statements of
Cash Flows for the Years Ended
June 3, 2000, May 31, 1999, and May 31, 1998 29
Notes to Consolidated Financial Statements 31-50
Report of Independent Public Accountants 51
</TABLE>
All schedules are omitted, as the required information is inapplicable or not
significant.
53
<PAGE>
(A)(3) Exhibits.
3-A. Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3-A of the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1991.
3-B. Articles of Amendment of Restated Articles of Incorporation of
the Company. Incorporated by reference to Exhibit 3-B of the
Company's Annual Report on Form10K for the fiscal year ended
May 31, 1999.
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 First Chicago Trust Company of New York, 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.
10-F. 2000 Stock Option Plan.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(b) Reports on Form 8-K. No reports of Form 8-K were filed during the
quarter ended June 3, 2000.
(1) Management contract or compensatory plan or arrangement.
54
<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, 2000 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, 2000.
Signature Title
(1) Principal Executive, Financial and
Accounting Officers
/s/ Donald R. Vanluvanee Director, President and Chief
-------------------------------- Executive Officer
Donald R. VanLuvanee
/s/ James T. Dooley Senior Vice President and Chief
-------------------------------- Financial Officer
James T. Dooley
(2) Directors
/s/ David F. Bolender Chairman of the Board
--------------------------------
David F. Bolender
/s/ Larry L. Hansen Director
--------------------------------
Larry L. Hansen
/s/ W. Arthur Porter Director
--------------------------------
W. Arthur Porter
/s/ Vernon B. Ryles Jr. Director
--------------------------------
Vernon B. Ryles
/s/ Gerald F. Taylor Director
--------------------------------
Gerald F. Taylor
/s/ Jon D. Tompkins Director
--------------------------------
Jon D. Tompkins
/s/ Keith L. Thomson Director
--------------------------------
Keith L. Thomson
55
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
3-A. Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3-A of the
Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1991.
3-B. Articles of Amendment of Restated Articles of
Incorporation of the Company. Incorporated by
reference to Exhibit 3-B of the Company's Annual
Report on Form10K for the fiscal year ended May 31,
1999.
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 First Chicago Trust Company of New
York 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.
56
<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.
10-F. 2000 Stock Option Plan
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
57
