<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________
COMMISSION FILE NUMBER 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
OREGON 93-0370304
13900 N.W. SCIENCE PARK DRIVE, PORTLAND, OREGON
97229
(503) 641-4141
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF NOVEMBER 27, 1999 THERE WERE 13,217,934 SHARES OF COMMON STOCK OF ELECTRO
SCIENTIFIC INDUSTRIES, INC. OUTSTANDING.
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Part I. Financial Information
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets 3-4
November 27, 1999 and May 31, 1999*
Consolidated Statements of Income 5
Three Months and Six Months ended
November 27, 1999 and November 30, 1998
Consolidated Statements of Cash Flows 6-7
Six Months ended November 27, 1999 and November 30, 1998
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial 13-17
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Exhibits and Reports on Form 8- K 19
Signature 20
</TABLE>
*Audited
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS November 27, 1999* May 31, 1999
- ------ ------------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 26,144 $ 7,793
Securities available for sale 24,710 24,865
-------- --------
Total cash and securities 50,854 32,658
Trade receivables, net 79,878 78,998
Income tax refund receivable 2,605 2,835
Inventories 53,965 51,313
Deferred income taxes 6,929 6,699
Other current assets 2,161 1,198
-------- --------
Total current assets 196,392 173,701
-------- --------
PROPERTY AND EQUIPMENT, AT COST 72,675 70,047
Less - Accumulated depreciation (39,703) (36,585)
-------- --------
Net property and equipment 32,972 33,462
-------- --------
DEFERRED INCOME TAXES 3,655 2,455
OTHER ASSETS 11,865 12,205
-------- --------
$244,884 $221,823
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY November 27, 1999* May 31, 1999
- -------------------- ------------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 8,945 $ 6,698
Accrued liabilities:
Payroll related 7,320 4,478
Commissions 4,741 5,340
Warranty 2,410 2,103
Other 2,112 1,603
-------- --------
Total accrued liabilities 16,583 13,524
Deferred revenue 140 340
-------- --------
Total current liabilities 25,668 20,562
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value
1,000 shares authorized; no shares issued -- --
Common stock, without par value; Authorized:
40,000 shares; Outstanding:
13,218, and 13,047 respectively 110,786 107,206
Retained earnings 108,257 96,545
Accumulated other comprehensive income (loss) 173 (2,490)
-------- --------
Total shareholders' equity 219,216 201,261
-------- --------
$244,884 $221,823
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
<PAGE>
Page 5/20
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Nov. 27, 1999* Nov. 30, 1998* Nov. 27, 1999* Nov. 30, 1998*
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $66,935 $49,038 $125,909 $97,459
Cost of sales 30,647 24,257 59,000 48,703
------- ------- -------- ------
Gross margin 36,288 24,781 66,909 48,756
Operating expenses:
Selling, service and administrative 19,169 14,193 35,738 28,634
Research, development and engineering 7,297 7,482 14,529 15,567
------- ------- -------- ------
Total operating expenses 26,466 21,675 50,267 44,201
------- ------- -------- ------
Operating income 9,822 3,106 16,642 4,555
Interest income 320 253 577 603
Other income, net 45 60 5 106
------- ------- -------- ------
Income before income taxes 10,187 3,419 17,224 5,264
Provision for income taxes 3,260 960 5,512 1,592
------- ------- -------- ------
Net income $ 6,927 $ 2,459 $ 11,712 $3,672
======= ======= ======== ======
Net income per share:
Basic $ 0.53 $ 0.19 $ 0.89 $0.29
====== ====== ====== =====
Diluted $ 0.51 $ 0.19 $ 0.87 $0.28
====== ====== ====== =====
Weighted average number of shares:
Basic 13,148 12,879 13,103 12,871
Diluted 13,571 13,103 13,478 13,138
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
Nov. 27, 1999* Nov. 30, 1998*
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 11,712 $ 3,672
Depreciation and amortization 4,338 2,940
Deferred Income Taxes (1,430) --
Changes in operating accounts:
(Increase) decrease in trade receivables 2,291 (5,973)
(Increase) decrease in inventories (2,691) 184
(Increase) in other current assets (733) (1,134)
Increase in current liabilities 4,163 2,157
--------- --------
Net cash provided by operating activities: 17,650 1,846
--------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (2,911) (5,445)
Purchase of securities (2,845) (8,740)
Proceeds from sales of securities and maturing securities 3,000 11,050
Increase in other assets (123) (580)
--------- --------
Net cash used in investing activities: (2,879) (3,715)
--------- --------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options and stock plans 3,580 307
--------- --------
Net cash provided by financing activities: 3,580 307
--------- --------
Net Change in Cash and Cash Equivalents 18,351 (1,562)
Cash and Cash Equivalents at Beginning of Period 7,793 10,034
--------- --------
Cash and Cash Equivalents at End of Period $ 26,144 $ 8,472
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
* Unaudited
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(Unaudited)
Cash payments for interest were not significant for the six months ended
November 27, 1999 and November 30, 1998. Cash payments for income taxes were
$6,483 and $1,117 for the six months ended November 27, 1999 and November 30,
1998, respectively.
<PAGE>
Page 8/20
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed, consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in these interim statements. Management believes that the interim
statements include all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of results for the interim periods.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the
Company's 1999 Annual Report filed on Form 10-K.
Results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
The Company filed a Form 8-K on October 14, 1999 indicating a change in its
fiscal quarters and year-end. The Company's fiscal quarters now correspond with
a four week, five week, four week quarter, with the quarters ending on a
Saturday. This change translates into a change in the Company's fiscal year-end
from May 31 to either the Saturday directly following or directly preceding this
date, depending on which Saturday is closest. As a result, the Company may have
either a 52 or 53 week fiscal year. No report was filed to cover the transition
period as activity during this period was deemed to be immaterial.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
November 27, 1999 May 31, 1999*
----------------- -------------
<S> <C> <C>
Raw materials and purchased parts $29,747 $32,419
Work-in-process 11,828 8,575
Finished goods 12,390 10,319
-------- ------
$53,965 $51,313
======= =======
</TABLE>
*Audited
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
NOTE 3 - NET INCOME 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>
Three Months Ended Six Months Ended
Nov. 27, 1999 Nov. 30, 1998 Nov. 27, 1999 Nov. 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $6,927 $2,459 $11,712 $3,672
Weighted average number of shares of
common stock and common stock equivalents
outstanding:
Weighted average number of shares outstanding
for computing basic net income per share 13,148 12,879 13,103 12,871
Dilutive effect of employee stock options
after application of the treasury stock method 423 224 375 267
------ ------ ------ ------
Weighted average number of shares outstanding
for computing diluted net income per share 13,571 13,103 13,478 13,138
====== ====== ====== ======
Net income per share - basic $0.53 $0.19 $0.89 $0.29
===== ===== ===== =====
Net income per share - diluted $0.51 $0.19 $0.87 $0.28
===== ===== ===== =====
</TABLE>
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include the following stock options because inclusion
would have an anti-dilutive effect on the earnings per share calculation. The
following shares have not been recalculated using the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Nov. 27, 1999 Nov. 30, 1998 Nov. 27, 1999 Nov. 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Number of Employee Stock
Options 9 171 31 329
</TABLE>
NOTE 4 - ACQUISITIONS
MICROVISION CORP.
On January 29, 1999, the Company completed the acquisition of
MicroVision, a provider of integrated, vision-based inspection and automation
solutions for use in semiconductor front-end and back-end applications, located
in Chanhassen, Minnesota. The acquisition consideration consisted of 1,018,500
shares of ESI stock. The transaction has been accounted for as a
pooling-of-interests and, accordingly, all data included in the Consolidated
Financial Statements has been restated.
TESTEC, INC.
On December 21, 1998, the Company completed the acquisition of Testec,
a provider of electrical test systems for the passive component marketplace,
located in Phoenix, Arizona. The acquisition consideration consisted of 500,000
shares of ESI common stock. The transaction has been accounted for as a
pooling-of-interests and, accordingly, all data included in the Consolidated
Financial Statements has been restated.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Nov. 30, 1998 Nov. 30, 1998
-------------------------- ------------------------
<S> <C> <C>
Revenue:
ESI $ 45,349 $ 90,541
MICROVISION 2,586 5,148
TESTEC 1,103 1,770
-------- ---------
As Restated $ 49,038 $ 97,459
Net Income:
ESI $ 1,849 $ 3,090
MICROVISION 324 457
TESTEC 286 125
--------- ---------
As Restated $ 2,459 $ 3,672
</TABLE>
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands)
(Unaudited)
NOTE 5 - INCOME TAXES
The effective income tax rate for the interim period is based on estimates of
annual amounts of taxable income, tax credits and other factors.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENT
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.
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
Results of Operations
Revenue of $66.9 million for the quarter ended November 27, 1999 was $17.9
million or 37% higher than the second quarter of fiscal 1998, and was $8.0
million higher than the quarter ended August 31, 1999. Revenue of $125.9 million
for the six months ended November 27, 1999 was $28.5 million or 29.2% higher as
compared to the six months ended November 30, 1998.
Higher revenues over both the prior year and prior quarters were the result of
an increase in units shipped, particularly for electronic component, memory
yield, and vision products. Electronic component manufacturing systems
represented the largest percentage of sales for both the three months and six
months ended November 27, 1999 at 34% and 32%, respectively, as compared to 23%
and 20% for the same periods in the prior year. Overall, memory yield
improvement, electronic component, and machine vision equipment sales were up
significantly over both the first quarter of this fiscal year and prior year
levels, partially offset by decreased sales in advanced packaging equipment.
Circuit fine tuning systems sales remained relatively flat as compared to the
prior year. However, revenues were higher for all products this quarter in
comparison to last quarter. Revenue growth rates are expected to remain in the
mid-teens in the near term. However, a change in general economic conditions or
in business conditions in the electronic industry could cause revenue growth to
vary materially from these expectations.
Gross margin for the three months ended November 27, 1999 increased
substantially to 54.2% from 50.5% for the same period in the prior fiscal year.
Gross margin for the six months ended November 27, 1999 increased to 53.1% from
50.0% for the same period in the prior year. Gross margin for the current period
was also up significantly from 51.9% for the prior quarter. Higher margins were
the result of a shift in product mix, higher average selling prices, and a
higher level of absorption of fixed manufacturing costs.
Selling, service and administrative expenses for the three months ended November
27, 1999 were $5.0 million higher than for the second quarter of fiscal 1999,
but decreased as a percentage of sales from 28.9% to 28.6%. Year-to-date,
selling, service and administrative expenses were $7.1 million higher as
compared to the six months ended November 30, 1998. A higher volume of business
for both the quarter and year-to-date resulted in increased payroll and
commission expense as compared to prior year levels. Expenses for sales,
services and administration were up $2.6 million from the prior quarter as a
result of increased sales volume and increased profits, as well as a shift in
the geography of shipments. These factors resulted in increases in commission
expense and in the profit sharing accrual.
Expenses associated with research, development and engineering for the three
months ended November 27, 1999 decreased by $0.2 million as compared to the same
period in the prior year. Research, development and engineering expenses for the
six months ended November 27, 1999 were $1.0 million lower as compared to the
same period in the prior year. The decrease over prior year levels is
attributable to lower spending on engineering project material. Research,
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
development and engineering spending typically fluctuates from quarter to
quarter as engineering projects move through their life cycles.
Net income for the quarter ended November 27, 1999 was $6.9 million or $0.51 per
diluted share. This represents an increase of 182% over the second quarter in
the prior year, when there were earnings of $2.5 million or $0.19 per diluted
share. Net income for the six months ended November 27, 1999 was $11.7 million
or $0.87 per diluted share. This represents an increase of $8.0 million or 219%
over the same period in the prior year, when earnings were $3.7 million or $0.28
per diluted share.
Ending backlog on November 27, 1999 was $57.1 million as compared to $39.0
million on August 31, 1999 as a result of improved market conditions.
Liquidity, Capital Resources and Business Environment
The Company's principal sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $50.9 million, accounts receivable
of $79.9 million, and a $7.0 million line of credit, none of which was
outstanding at November 27, 1999. Accounts receivable was slightly higher than
on May 31, 1999. ESI has a current ratio of 7.7:1 and no long-term debt. Working
capital increased to $170.7 million at November 27, 1999 as compared to $153.1
million at May 31, 1999. Inventory increased by $2.7 million from May 31, 1999
to November 27, 1999. Increases in work-in-process and finished goods were
partially offset by a decrease in raw materials inventory.
The Company's business depends in large part upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors and
semiconductor memory devices, and circuits used in wireless telecommunications
equipment, such as pagers and cellular phones, automotive electronics and
computers. The markets for products manufactured by the Company's customers are
cyclical and have historically experienced periodic downturns, which often have
had a negative effect on the demand for capital equipment such as that sold by
the Company. Several large, multinational electronics companies constituted
26.9% of the Company's fiscal year 1999 sales and are expected to comprise a
similar ratio in fiscal year 2000. The loss of any of these customers would be
significant.
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards. The Company believes that its future
success will depend on its ability to develop and manufacture new products and
product enhancements, to introduce them
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
successfully into the market and to create and sustain intellectual property
protection for these new products. Failure to do so in a timely fashion could
harm the Company's competitive position. The announcements or introductions of
new products by the Company or its competitors may adversely affect the
Company's operating results, as these announcements may cause customers to defer
or forego ordering products from the Company's existing product lines.
International shipments have accounted for 68% of year-to-date sales for fiscal
year 2000 as compared to 56% for fiscal year 1999. About 63% of the company's
year-to-date product sales are to Asian customers versus 45% for fiscal year
1999. Several countries in this region, notably South Korea, Japan and Taiwan,
have experienced currency devaluation and/or difficulties in financing
short-term obligations. The Company's customers in these countries continued to
purchase and pay for ESI products within agreed upon terms. In addition, a
majority of all Asian end customer receivables are secured by letter of credit.
There can be no assurance that any residual difficulties in the Asian economy
will not adversely affect the demand for the Company's products in that region
or elsewhere.
The Company expects that international shipments will continue to represent a
significant percentage of net sales in the future. As a result, a significant
portion of the Company's net sales will be subject to certain risks. These risks
include changes in demand resulting from fluctuations in interest and currency
exchange rates, as well as factors such as government financed competition,
changes in trade policies, tariff regulations, difficulties in obtaining US
export licenses, and the difficulties of staffing and managing foreign
operations.
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, and ESI
hedges these sales transactions to mitigate currency risks. The European and
Asian subsidiaries' operating expenses are denominated in their respective local
currencies. These transactions represent approximately 9.2% of total
consolidated operating expenses, with 55% attributable to Europe and 45% to
Asia. Changes in the value of the local currency, as measured in US dollars,
will commensurably increase or decrease operating expenses.
Year 2000
The Company created a task force to prepare for Year 2000 (Y2K) issues. The Vice
President and Chief Technology Officer continues to serve as the Y2K coordinator
and has overall responsibility for organizing and managing the Company's Y2K
program. The coordinator reports to President and CEO. As of the end of the
calendar year, The Company had completed
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
its evaluation of its technology and data used in the creation and delivery of
its products and services and in its internal operations, and had identified Y2K
issues related to its customers and suppliers.
As of the end of the calendar year, each of the Company's product lines had
technical and communication resources assigned for Y2K readiness and all of the
Company's current standard products were Y2K ready. Past products had been
evaluated and readiness upgrade kits were being developed and offered where
practical. The overall Y2K coordinator continues to work with each product line
group to develop and implement their product plans. Y2K readiness continues to
be viewed as a necessary capability for doing business. The company arranged for
additional readiness levels of customer service representatives during the
actual Year 2000 date change. No significant customer problems have been
reported to the Company.
The Company has completed the inventory and evaluation of its business systems.
Assessment included facilities, engineering, manufacturing, laboratory, banking,
accounting, procurement, product test, customer order, receiving, warehousing,
and communications. The company had Information Technology personnel evaluating
and testing systems as the Year 2000 date change occurred throughout the world.
As of the end of the calendar year, the Company completed efforts to minimize
the risk of potential Y2K issues affecting our materials suppliers. Materials
providers were assessed based on volume of business with the company as well as
identification as a strategic material supplier. In each business area,
engineering and purchasing teams were formed to identify material that meets
certain criteria for inclusion as strategic material. Vendors supplying this
strategic material were subjected to an in depth assessment of their ability to
continue to supply to the Company. Remediation actions for at risk vendors
included working with the vendors to ensure continued delivery of material and
inventory of some materials within the Company.
To date, there have been no significant issues attributable to 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 estimates 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.
Consequences of not successfully implementing the Company's Y2K plan continues
to include inability to ship product, delay or loss of sales, and delays in
factory operations. The Company believes implementation of the plan has been
successful after the first key rollover date occurred
<PAGE>
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS (CONT.)
on December 31, 1999. Other key dates associated with potential Y2K problems
will occur in the next few months and are also expected to be uneventful and
provided that third parties mitigate their own risks successfully, the Company
believes it will have no material business risk from such Y2K issues. However,
there can be no assurances that third parties, over which the company has no
control, will successfully address their own Y2K issues.
Information in the Management Discussion and Analysis regarding expectations for
future product demand, customers, international shipments and future product
offerings and resources constitute forward-looking statements that involve a
number of risks and uncertainties. In addition, the Company may from time to
time issue other forward-looking statements. The following factors could cause
actual results to differ materially from the forward-looking statements: general
economic conditions, including their impact on capital expenditures; business
conditions in the electronics industry, including the cyclical nature of the
market for the Company's products; rapidly changing technology and evolving
industry standards; availability and continued validity of intellectual property
protection; competitive factors, including increased competition, new product
offerings by competitors and price pressures; availability of supplies from
third party suppliers on a timely basis and at reasonable prices; and
international business conditions, including fluctuations in interest and
currency exchange rates, government financed competition, changes in trade
policies, tariff regulations, and the difficulties of staffing and managing
foreign operations. The forward-looking statements should be considered in light
of these factors.
<PAGE>
Page 18/20
Part II. Other Information
Item 1. Legal Proceedings
ESI initiated litigation against General Scanning Inc. for patent infringement
in December 1996 in the U.S. District Court for the Northern District of
California (Electro Scientific Industries, Inc. v. General Scanning Inc., No.
C-96-4268 SBA). On April 2, 1999 a federal court jury issued a verdict upholding
the validity of ESI's link blowing patent, U.S. patent 5,265,114 entitled
"System and Method for Selectively Laser Processing a Target Structure of One or
More Materials of a Multimaterial, Multilayer Device". The jury found U.S.
patent 5,473,624 entitled "Laser System and Method for Selectively Serving
Links" invalid for reasons of obviousness. On April 8, 1999 the same federal
court jury awarded ESI $13,133,170 in damages, and also concluded that General
Scanning's infringement was willful. On July 8, 1999 the court issued orders
denying General Scanning's motions for a new trial and to set aside the jury
verdict. The court also entered a permanent injunction, prohibiting General
Scanning from making, using, selling, or offering for sale in the United States
memory repair systems and upgrade kits equipped with 1.3 micron lasers. General
Scanning has filed an appeal of the U.S. District Court judgement with the U.S.
Court of Appeals for the Federal Circuit. Separately, the U.S. Patent and
Trademark Office has issued an order granting a request to re-examine ESI's
patent 5,265,114. ESI has not reflected this award in its financial results.
However, ESI continues to record legal expenses related to this litigation as
these expenses are incurred.
In July 1999, ESI announced a settlement with GSI Lumonics Inc. and General
Scanning Inc. in ESI's laser trimming patent infringement suit. ESI initiated
the suit against General Scanning in October 1998 in the United States District
Court for the Northern District of California. The complaint alleged that
General Scanning violated the following ESI's patents: 5,569,398 entitled "Laser
System and Method for Selectively Trimming Films" issued on October 29, 1996;
5,685,995 entitled "Method for Laser Functional Trimming of Films and Devices"
issued on November 11, 1997; and 5,808,272 entitled "Laser System for Functional
Trimming of Films and Devices" issued on September 15, 1998. GSI is not making,
using, selling or offering to sell any laser trim systems operating at a
wavelength between 1.2 and 3.0 microns, or any kit for converting a laser trim
system to operate at a wavelength between 1.2 and 3.0 microns. The terms of the
settlement agreement are confidential.
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.
<PAGE>
Page 19/20
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
27. Financial Data Schedule
(b). Reports on Form 8-K. - A form 8-K was filed on October 14, 1999. On
September 30, 1999, Electro Scientific Industries, Inc. (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. There is no change in the
month in which each of the four quarters ends. However, this does translate 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.
There will be no report filed covering the transition period, as activity during
the transition period is deemed to be immaterial.
<PAGE>
Page 20/20
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Dated: January 14, 2000 By /s/ Jonathan C. Howell
-----------------------------------------
Jonathan C. Howell, Senior Vice President
And Chief Financial Officer.
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<FISCAL-YEAR-END> JUN-03-2000
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