-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rtn/JnGLrA8HRdJr+GarzxSHvmRDrtRxpBVuSJGN/Wa9zZoGPkFSPcGxfjOL0tas fyxRS5M9Ihx3aTew0psgPg== 0000912057-96-017433.txt : 19960919 0000912057-96-017433.hdr.sgml : 19960919 ACCESSION NUMBER: 0000912057-96-017433 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO SCIENTIFIC INDUSTRIES INC CENTRAL INDEX KEY: 0000726514 STANDARD INDUSTRIAL CLASSIFICATION: 3690 IRS NUMBER: 930370304 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12853 FILM NUMBER: 96610106 BUSINESS ADDRESS: STREET 1: 13900 NW SCIENCE PARK DR CITY: PORTLAND STATE: OR ZIP: 97229 BUSINESS PHONE: 5036414141 MAIL ADDRESS: STREET 1: 13900 NW SCIENCE PARK DRIVE CITY: PORTLAND STATE: OR ZIP: 97229-5497 10-K 1 FORM 10-K THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF REGULATION S-T SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT (Mark One) (X) Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended May 31, 1996 or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from______________ to _______________ Commission File Number: 0-12853 ELECTRO SCIENTIFIC INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Oregon 93-0370304 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13900 NW Science Park Drive Portland, Oregon 97229 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 641-4141 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Preferred Stock Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------ The aggregate market value of Common Stock held by nonaffiliates of the Registrant at June 18, 1996: $194,197,050. The number of shares of Common Stock outstanding at June 18, 1996: 8,656,726. Documents Incorporated by Reference ----------------------------------- Part of Form 10-K into Document which is incorporated - - -------- --------------------- 1996 Annual Report to Shareholders Part II Proxy Statement for 1996 Annual Meeting Part III of Shareholders Page 1 of 44 TABLE OF CONTENTS ITEM OF FORM 10-K PAGE - - ----------------- ---- 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 . . . . 11 Item 4(a) -Executive Officers of the Registrant. . . . . . . . . . . . 12 PART II Item 5 - Market for the Registrant's Common Equity and Related Shareholder Matters. . . . . . . . . . . . . . 14 Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . . 14 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 15 Item 8 - Financial Statements and Supplementary Data . . . . . . . . 19 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . 37 PART III Item 10 - Directors and Executive Officers of the Registrant. . . . . 37 Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . . 37 Item 12 - Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . 37 Item 13 - Certain Relationships and Related Transactions. . . . . . . 37 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 38 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Page 2 of 44 PART I ITEM 1. BUSINESS ESI provides electronics manufacturers with equipment necessary to produce key components used in wireless telecommunications, computers, automotive electronics, and many other electronic products. ESI believes it is the leading supplier of advanced laser systems used to adjust (trim) electronic circuitry and to improve the yield of semiconductor memory devices. ESI believes it is the leading producer of high-speed test and handling equipment used in the high-volume production of miniature capacitors. Additionally, ESI designs and manufactures machine vision products and laser electronic packaging systems for manufacturers of electronics and other products. ESI's products enable these manufacturers to reduce production costs, increase yields and improve the quality of their products. ESI's customers include manufacturers of: wireless telecommunication products (Ericsson, Motorola and Siemens); automotive electronics (Bosch, Delco, Ford, Nippon-Denso and Siemens); miniature capacitors (Kemet, Kyocera/AVX, Murata, Philips, Samsung and TDK) and semiconductor memory devices (Fujitsu, Hitachi, Hyundai, IBM, Samsung and Texas Instruments). ELECTRONICS INDUSTRY OVERVIEW The electronic content of telecommunications products, automobiles and personal computers continues to increase substantially. 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, new markets for consumer-oriented electronic products such as cellular telephones, facsimile machines, pagers, camcorders and personal computers have developed rapidly as increasingly affordable products have been introduced. Demand for electronics manufacturing equipment is driven by the demand for electronic devices and circuits. Electronic components are used in virtually all electronic products, from inexpensive consumer electronics to the most sophisticated computers. These components are produced in very large unit volumes. The demands upon manufacturers to supply increasing quantities of electronic components have been accompanied by demands for increased complexity and reduced size. As electronic products become more powerful and portable, the devices in these products must be faster, smaller and more reliable. To achieve these attributes of higher performance, the electronic device manufacturers use finer device geometries, increase densities, and tune the devices to precise electrical values. Manufacturers of cellular telephones, for example, must use miniaturized circuits to accommodate the size limitations of the finished product. These circuits must also operate within precise frequency specifications, typically requiring component values with less than 0.5 percent tolerance, in order for the existing cellular frequency bands to accommodate the expanding number of cellular users without interchannel interference. As electronic device densities and performance demands have increased, the manufacturers of capacitors and resistors that are basic components of assembled electronic devices have been compelled to reduce size and to improve performance of these individual components. The increasing miniaturization of these components makes production, testing and handling difficult. Page 3 of 44 In addition to quantity, size and performance demands, a 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 seek to reduce device costs by improving throughput, yield and quality in device production. OVERVIEW OF MARKETS, PRODUCTS AND STRATEGY Pagers, cellular telephones, personal computers and automotive electronics represent the largest end-market applications for electronic devices and circuits that are produced using ESI's systems. ESI's customers also serve a wide range of other electronic applications. ESI believes that it is critical that each of its products provide the customer with measurable production benefits, such as improved yield, increased throughput, greater reliability, or increased flexibility, resulting in a high return on investment. ESI also designs its production systems with a migration path for system upgrade, thereby providing its customers flexibility to add capacity or improve product performance at a reasonable incremental cost. ESI believes it is the leading merchant equipment supplier to three specialized markets: laser trimming, miniature capacitors test and production and memory repair. ESI also serves the machine vision and laser electronic packaging markets. LASER TRIMMING SYSTEMS. ESI's laser trimming systems are used to tune the precise frequency of electronic circuits that receive and transmit signals in pagers, cellular telephones and other wireless devices. ESI's laser trimming systems are also used to tune automotive electronic assemblies such as engine control circuits. ESI's laser systems are used by manufacturers supplying the telecommunications, automotive, and consumer markets. Customers include Bosch, Delco, Ericsson, Ford, IBM, Motorola, Nippon-Denso, Philips, Siemens, Sumitomo and Vishay Intertechnology. The laser adjusts the electrical performance of an electrical product or assembly containing many circuits. The laser removes a precise amount of material from one or more circuits to achieve the desired electrical specification for the entire product. This process is called "functional trimming," and is performed while the product or assembly is under power. For example, in pagers, laser trimming of a few selected circuits in the product is used to tune the electrical performance of the entire product to the desired frequency specification. ESI's systems also adjust the electrical performance of individual devices such as film resistors, resistor networks, capacitors and hybrid circuits. Laser trimming is required because the screening process used to manufacture resistors cannot cost effectively deposit material precisely enough to provide consistent electrical values. The trimming system can also be rapidly reprogrammed to trim devices to different values, enabling the manufacturer to efficiently convert volume-produced devices of a single value into devices with a variety of values. Page 4 of 44 The following chart summarizes the models, typical applications and key features of ESI's current laser trimming products: - - ------------------------------------------------------------------------------- ESI LASER TRIMMING PRODUCTS BEAM ---- POSITIONING THROUGHPUT WORK ----------- ---------- ---- RESOLUTION (TRIMS PER AREA ---------- ---------- ---- PRODUCT TYPICAL APPLICATION (MICRONS) SECOND) (INCHES) ------- ------------------- --------- ------- -------- Model 4210 Surface mount capacitor and resistor trimming 2.50 50 4 x 4 Model 977 Test intensive, thick film, functional trimming 1.55 50 3 x 3 Model 960 Thick film functional trimming 1.27 50 3 x 3 Model 907 Chip resistor trimming 1.27 100 3 x 3 Model 4410 Thick/thin film functional trimming 1.01 15 3 x 3 - - ------------------------------------------------------------------------------- TEST AND PRODUCTION SYSTEMS FOR MINIATURE CAPACITORS. ESI's product offering consists of automated test, production and handling equipment for manufacture of miniature multi-layer ceramic capacitors (MLCCs) which are used in very large numbers in nearly all types of electronic circuits. Large numbers of MLCCs are used in circuits that process analog signals or operate at high frequencies such as in video products (VCRs and camcorders), voice communication products, wireless telecommunication products and computers. Principal customers for ESI's MLCC test and production equipment are Kemet, Kyocera/AVX, Murata, Philips, Samsung and TDK. The worldwide miniature capacitor market is estimated to be $4.5 billion (225 billion units) in 1996. Most of the leading producers are in Japan, led by Kyocera, Murata and TDK. ESI believes it is the leading merchant supplier of equipment to the MLCC industry for production of miniature capacitors. Production demands imposed by miniaturization are leading capacitor manufacturers to increasingly consider merchant equipment suppliers as an alternative to internal development of manufacturing equipment. As circuit sizes have shrunk, the size of commonly used miniature capacitors has also shrunk to as small as .04" x .02" x .01". These minute sizes and the high unit volumes place extraordinary demands on manufacturers. ESI's products combine high-speed, small parts handling technology with microprocessor-based systems to provide highly automated solutions for MLCC manufacturers. ESI's test and termination equipment and specialty handling tools perform a broad range of functions in the manufacturing process. TEST. Virtually all capacitors are tested and sorted by capacitance (electrical energy storage) and dissipation (electrical energy leakage). ESI's equipment employs high-speed handling and positioning techniques to precisely load, test and sort capacitors based upon these electrical values. TERMINATION. MLCCs are manufactured in a lamination process, layering conducting and insulating materials. ESI's microprocessor-based termination systems apply conductive material to the ends of surface mountable MLCCs, permitting connection of the device in a circuit. Page 5 of 44 HANDLING TOOLING. ESI offers a wide range of specialized production fixtures and tools for various stages of the manufacturing process, including a series of patented carrier plates capable of handling up to 8,000 devices per plate for termination application. The decreasing size and growing volumes of MLCCs produced cause manufacturers to continuously seek new tools and fixtures to improve throughput and handling efficiency. The following chart summarizes certain of ESI's current products, applications and key features:
- - ------------------------------------------------------------------------------- ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS PRODUCT APPLICATION KEY FEATURES ------- ----------- ------------ TEST SYSTEMS Models 16A and 18 Tests capacitance, dissipation factor and High speed rotary tester with throughput voltage capability for small (Model 18) and of up to 50,000 parts/hour. medium (Model 16A) size MLCCs Models 12-4 and 3001 IR Tests insulation resistance (IR) High speed parallel tester with throughput of of MLCCs up to 50,000 parts/hour. Model 3001 IR includes automatic bulk loading. Model 3300 Test capacitance dissipation factor and voltage High speed rotary tester with throughput of up capability for small and medium size MLCCs; to 180,000 parts/hour. tests insulation resistance TERMINATION SYSTEMS Models 2001 and 2020 Electrical contact attachment Microprocessor controlled surface mount on MLCCs termination system with throughput up to 130,000 parts/hour. Model 2020 includes an integrated kiln. Model 2007 Electrical contact attachment High productivity microprocessor controlled on MLCCs surface mount termination system with throughput up to 470,000 parts/hour. HANDLING TOOLING Carrier Plates Plates to batch handle MLCCs for test and Patented composite carriers to handle the full termination range of MLCC sizes and up to 8,000 pieces per batch. Test Tooling Test fixtures for use with Permits precise location and positioning of ESI systems MLCCs during the test operation.
- - ------------------------------------------------------------------------------- Page 6 of 44 MEMORY YIELD IMPROVEMENT SYSTEMS. Memory yield improvement systems are used by nearly all manufacturers of dynamic random access memories (DRAMs) to increase production yields. Personal computers and high performance workstations are the largest market for semiconductor memory, although photocopiers, facsimile machines and telecommunications equipment represent products requiring increasing amounts of memory. Customers of ESI's memory systems include Fujitsu, Lucky Goldstar, Hitachi, Hyundai, IBM, Motorola, NEC, Samsung, Siemens, and Texas Instruments. The laser process used by memory device manufacturers replaces defective circuit elements with spare elements, and thereby salvages a memory device. Lower cost, higher capacity memory devices have been achieved by reducing the size of circuit elements and increasing the number of circuit elements per device, thereby requiring leading edge semiconductor processes. These processes generally result in lower manufacturing yields, especially in the early stages of producing a new generation of memory devices. Yield improvement is thus critical in the early stages of producing a new generation device. The primary method used by memory manufacturers to maintain and increase yield is to include extra circuit elements on each device. These "redundant" elements can then be used to replace defective elements found by test after fabrication. ESI's laser systems perform this repair by determining the optimum number and location of connections and disconnections necessary to repair the device, rapidly positioning links under the laser, and directing a laser energy pulse to cut those links to deactivate defective memory cells and activate spare cells. Redundancy is used by every significant manufacturer of DRAMs and is increasingly being used by manufacturers of other semiconductor memory devices such as static random access memories (SRAMS). ESI currently offers the Model 9200HT PLUS and the Model 1225HP laser processing systems for memory repair. The Model 9200HT PLUS is designed to process increasingly dense memory devices, including 16 and 64 megabit DRAMs. To accommodate the range of memory sizes, the Model 9200HT PLUS includes a programmable laser spot size feature. ESI's Model 9200HT PLUS has a guaranteed mean time between failure of better than 1,500 hours and has a raw throughput rate of 1,200 links per second. The Model 1225HP laser memory repair system utilizes patented stage plus galvanometer beam positioning to achieve 0.35 micron positioning accuracy. ESI holds the patent for the ScribeView 2 illuminator, which is used in the 1225HP and is used for optical character recognition (OCR), a vital step in the memory repair process. In June 1996, the Company announced the release of the new Model 9300 Laser Repair System. This system features a patented laser system technology operating at a wavelength of 1.321 microns and offers memory manufacturers using the latest advances in link material structure a method to increase yields that would not exist using other products. VISION SYSTEMS. ESI designs and manufactures machine vision products. ESI's vision systems combine advanced computer technology, proprietary software and optical equipment to reduce application development time and provide machine vision inspection that facilitates quality products and fast throughput. The TurboHR+ vision system is integrated in ESI's laser memory repair systems and is also marketed independently to electronic and semiconductor industry customers for general purpose inspection, part position verification for manufacturing processes, wafer identification using OCR, measurement, alignment, machine guidance and assembly verification. Customers for ESI's vision products include Hewlett Packard, Motorola and Seagate. Page 7 of 44 ELECTRONIC PACKAGING SYSTEMS. ESI's advanced laser technology provides a cost effective method for forming electrical connections between layers, called vias, in a multiple layer substrate. The initial product, the Model 5000, is targeted for use in small geometry substrate production. The Model 5100, introduced in June 1996, represents the next generation and offers productivity improvement by providing the capability to drill over 10,000 vias per minute. Applications in this market include new generations of integrated circuits packages, multi chip modules, and high density circuit boards. The primary advantage of the ESI technology is the ability to process the wide variety of materials used in the electronics industry, including ceramic, traditional glass reinforced circuit boards, copper, and new organic compounds. Customers include Automata, Erricson, Sheldahl, Siemens and W.L. Gore. SALES, MARKETING AND SERVICE ESI sells its products worldwide through direct sales and service offices located in or near: Boston, Dallas, Portland and San Diego in the United States; Tokyo, Nagoya, Seoul and Taipei in Asia; and Munich, London, Paris and Leiderdorp, Netherlands in Europe. ESI serves customers in approximately 30 additional countries through manufacturers representatives. ESI has a substantial base of installed products in use by leading worldwide electronics manufacturers. ESI emphasizes strong working relationships with these leading manufacturers in order to meet their needs for additional systems and to facilitate the successful development and sale of new products to these customers. ESI maintains service personnel wherever it has a significant installed base and provides service anywhere its equipment is installed. New systems are tested to ensure they meet requirements and acceptance criteria incorporated into customer orders. ESI also offers a variety of maintenance contracts and parts replacement programs. ESI has an OEM contract with Advantest Ltd. to supply memory yield improvement systems in Japan. Sales to Advantest amounted to 6.8%, 7.2% and 7.0% of net sales for the fiscal years 1996, 1995, and 1994. ESI maintains a presence in Korea through a wholly-owned subsidiary. International sales accounted for 66.8%, 70.9% and 54.7% of ESI's net sales for fiscal years 1996, 1995 and 1994. In fiscal year 1996, no one customer exceeded 10% of sales. One customer accounted for 12.4% and 10.8% of ESI's sales in fiscal 1995 and 1994, respectively. BACKLOG Backlog consists of written purchase orders for products for which ESI has assigned shipment dates within the following twelve months. Backlog also includes written purchase orders for spare parts and service to be delivered or performed within the next twelve months. Backlog was $35 million at May 31, 1996 versus $26 million at May 31, 1995 and $8 million at May 31, 1994. ESI expects all of its existing backlog to ship within the next twelve months. Page 8 of 44 RESEARCH, DEVELOPMENT AND TECHNOLOGY ESI believes that its ability to compete effectively depends, in part, on whether it can maintain and expand its expertise in core technologies and product applications. The primary emphasis of ESI's research and development is to advance ESI's capabilities in: - Lasers and laser/ material interaction - High speed, sub-micron motion control systems - Precision optics - High speed, small parts handling - Image processing and optical character recognition - Real-time production line electronic measurement - Real-time software - Systems integration ESI's research and development expenditures for fiscal years 1996, 1995, and 1994 were $16.3 million (10.2% of net sales), $13.7 million (12.7% of net sales), and $8.9 million (12.3% of net sales), respectively. The foregoing figures do not include research and development expenditures funded by the Advanced Research Projects Agency (ARPA) of the U.S. Government described below. In September 1993, ESI was awarded a cost-shared contract from ARPA. Under the initial terms of the contract, ARPA provided $1 million of funding towards the development of a flat panel display laser interconnect and repair system. In March 1995 and September 1995, the contract scope of work was expanded and an additional $100,000 and $210,000, respectively, of funding was awarded. This project is consistent with ESI's technology strategy. During fiscal years 1996, 1995, and 1994 ESI received $1.2 million of funding from ARPA which offset research and development expenses. In addition, research and development expenditures for the year ended May 31, 1996 do not include the acquired in-process research and development expense of $6.0 million incurred in connection with the purchase price allocation of XRL, Inc. COMPETITION ESI's markets are competitive. The principal competitive factors in the industry are product performance, reliability, service and 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 than ESI and larger service organizations. In addition, certain 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. Page 9 of 44 For laser trimming systems, major competitors are NEC and General Scanning. In miniature capacitor test and production equipment, ESI's competition comes mainly from manufacturers that develop systems for internal use, and in Japan, from test equipment manufactured by Tokyo Weld and Humo, among others. ESI's major competitors for memory repair systems are Nikon and General Scanning. ESI also competes with stand alone vision suppliers such as Cognex and Robotic Vision Systems, and with robotics and factory automation companies, such as Allen Bradley. There are also numerous small vision companies and captive vendors in Japan, North America and Europe. MANUFACTURING AND SUPPLY ESI's laser system manufacturing operations consist of electronic subassembly, laser production and final system assembly. Principal production facilities are headquartered in Portland, Oregon. In addition to the Portland, Oregon facility, memory systems are also produced at ESI's facility in Canton, Massachusetts. Miniature capacitor test and production systems are manufactured by ESI's Palomar subsidiary near San Diego. ESI also uses qualified manufacturers to supply many components of its products. ESI's laser systems use high performance computers, peripherals, lasers and other components from various vendors. Some components used by ESI are obtained from a single source or a limited group of suppliers. An interruption in the supply of a particular component could require substitutions which would have a temporary adverse impact on ESI. ESI believes it has good relationships with its suppliers. EMPLOYEES As of May 31, 1996, ESI employed 740 persons, including 196 in engineering, research and development, 316 in manufacturing and 138 in marketing, sales and customer service and support. 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 on-going research, development and manufacturing activities. ESI owns 35 United States patents and has applied for 13 patents in the United States. In addition, ESI has 32 foreign patents and has applied for 37 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. Page 10 of 44 ESI relies on copyright protection for its proprietary software. ESI also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques, or that ESI can meaningfully protect its trade secrets. Some customers using certain products of ESI have received a notice of infringement from Jerome H. Lemelson, alleging that equipment used in the manufacture of semiconductor products infringes patents issued to Mr. Lemelson relating to "machine vision" or "barcode reader" technologies. Certain of these customers have notified ESI that they may be seeking indemnification from ESI for any damages and expenses resulting from this matter. One of ESI's customers has settled litigation with Mr. Lemelson, and several other customers are currently engaged in litigation involving Mr. Lemelson's patents. While ESI cannot predict the outcome of this or similar litigation or its effect upon ESI, ESI believes that it will not have a material adverse effect on its financial condition or results of operations. ITEM 2. PROPERTIES The Company's executive and administrative offices, and principal laser system manufacturing facilities are located in a two-building complex located on 16 acres in Sunset Science Park, in Portland, Oregon. The buildings are owned by ESI, and contain approximately 134,000 square feet of floor space. Palomar is located in an owned 64,000 square foot plant on ten acres of land in Escondido, California. In addition, approximately 14,000 square feet of industrial space is leased in Canton, Massachusetts. The Company also leases 7,000 square feet of office space in Portland, Oregon for its Vision Products Division and office and service space in several additional locations in the United States, and in seven foreign countries. The Company believes its facilities are adequate to meet its current needs. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the security holders of the Company during the fourth quarter ended May 31, 1996. Page 11 of 44 ITEM 4(a): EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company, and their ages and positions as of May 31, 1996, are as follows: NAME AGE POSITION - - ---- --- -------- Donald R. VanLuvanee 52 President, Chief Executive Officer and Director Robert C. Cimino 51 Director of Human Resources Barry L. Harmon 42 Senior Vice President and Chief Financial Officer Jonathan C. 42 Vice President and Managing Director, Howell Vision Products Division Mark W. Klug 57 Vice President of ESI, President and General Manager of Palomar Systems, Inc. David B. Moser 49 Vice President Larry T. Rapp 56 Vice President and Corporate Secretary Joseph L. Reinhart 37 Director of Business Development Joseph Z. Rivlin 61 Vice President of Sales E. Frederick Schiele 44 Vice President of Manufacturing Vernon R. Swearingen 56 Vice President Edward J. Swenson 57 Senior Vice President of Technology Assessment Mr. VanLuvanee joined the Company in July 1992 as President, Chief Executive Officer and a Director. From July 1991 to July 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, Inc., 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. Cimino joined ESI in 1993 as Director of Human Resources. Mr. Cimino was employed by Eastman Kodak prior to joining ESI. He held management positions at Kodak in human resources, customer service, sales, and real estate asset management. Mr. Harmon joined the Company in September 1992 and has served the Company in various financial management positions. In January 1995, he was elected Senior Vice President and Chief Financial Officer. Mr. Harmon served as a consultant to the Company in 1992 before joining the Company, and held various management positions with the Global Private Banking Group of Citibank from 1985 to 1991. He was employed by Arthur Andersen LLP from 1976 until 1983. Mr. Harmon is a licensed CPA. Page 12 of 44 Mr. Howell joined ESI in April 1993 as Director of MIS. In June 1995, he was appointed Managing Director of the Vision Products Division. In September 1995, Mr. Howell was elected Vice President. Mr. Howell has extensive management experience from Citibank, Gulf and Western and Arthur Young & Co. Mr. Klug was appointed President and General Manager of Palomar Systems, Inc. in August 1992 and in April 1993 was elected Corporate Vice President of the Company. From 1988 to 1992, Mr. Klug was Vice President of Engineering for Symtek Systems, Inc., and between 1983 and 1988 he held senior management positions with Kulicke and Soffa Industries, Inc., including Senior Vice President of U.S. Operations and Vice President of Engineering. Mr. Moser joined the Company in October 1991 as the General Manager of the Vision Products Division. In January 1993 Mr. Moser was appointed Director of Portland Manufacturing. In January 1994 he became a Vice President. From 1977 to 1990, Mr. Moser held various general and engineering management positions with Tektronix, Inc. Mr. Rapp joined the Company in 1966 and has served in various capacities in engineering. In 1982 he became the Government Relations and Patent Manager. He served as Assistant Secretary from 1988 to 1991, and in January 1992 was elected Corporate Secretary and Legal Manager. In September 1995, Mr. Rapp was elected Vice President. Mr. Reinhart joined ESI in 1993 as Communications and Contracts Manager and was promoted to Director of Business Development in April 1995. His experience includes finance, venture funding, mergers and acquisitions and administration in high-technology businesses. Mr. Rivlin, who joined the Company in 1994, was elected Vice President of Sales in February 1995. Prior to joining ESI, Mr. Rivlin was Vice President of Sales and Service of Solbourne Computer, and President and CEO of XRL, Inc. He has held other management positions at GenRad, Fairchild Camera and Instrument Corp., and Veeco Instruments, Inc. Mr. Schiele joined ESI in 1993 as Materials Manager and assumed Portland manufacturing responsibilities in February 1994. In September 1995, Mr. Schiele was elected Vice President of Manufacturing. Previously, Mr. Schiele held senior and general management positions at Xerox, INMOS, and RTE Corporation. Mr. Swearingen joined the Company in November 1992 as Director of Laser Systems Business Unit and was elected Vice President in April 1993. From 1990 to 1991, Mr. Swearingen was President of Quantum Engineering, Inc., a project engineering firm, and from 1988 to 1990 he held a management position with Kulicke and Soffa Industries, Inc. 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, Advanced Development in 1979, Vice President, Advanced Technology Division in 1985 and Senior Vice President, Advanced Technology Group in 1987. Page 13 of 44 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS COMMON STOCK PRICES/DIVIDENDS The Company's Common Stock trades on the Nasdaq National Market under the symbol ESIO. The following table sets forth, for the fiscal quarters indicated, the high, low and closing sales prices for the Common Stock as reported on the Nasdaq National Market. FISCAL QUARTER 1996 1995 - - -------------- ---- ---- HIGH LOW CLOSING HIGH LOW CLOSING ---- --- ------- ---- --- ------- 1st Quarter... $39-3/4 $24-5/8 $33-3/4 $13-3/4 $ 8-5/8 $12-3/8 2nd Quarter... 41-1/2 24-1/2 28-1/2 20-1/4 12-1/4 19-3/8 3rd Quarter... 30-1/2 18-3/4 21-1/2 23-1/4 17-1/2 18-7/8 4th Quarter... 28-3/4 16-3/4 26-1/2 29-5/8 18-3/4 24-3/8 The Company has not paid any cash dividends on its Common Stock during the last five fiscal years. The Company currently intends to retain its earnings for its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The approximate number of shareholders of record at May 31, 1996 was 347. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is included under "Selected Financial Data" opposite page 1 of the Company's 1996 Annual Report to Shareholders and is incorporated herein by reference. Page 14 of 44 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO FISCAL YEAR ENDED MAY 31, 1995 Net sales increased 47.6% or $51.5 million. The increasing electronics content, complexity and decreasing size of consumer communication devices, automotive components and computers is directly related to the increased demand for ESI's products. Sales of semiconductor yield improvement systems more than doubled; the acquisition of XRL, Inc. in July 1995 contributed $18.9 million toward the increase in semiconductor yield improvement sales. Increased volume and more favorable product mix of capacitor manufacturing products and circuit fine tuning systems also contributed significantly to the revenue growth. ESI's emerging electronic packaging business reported modest growth. Gross margin increased from 52.5% for fiscal 1995 to 54.4% as a result of increased volume of semiconductor yield improvement equipment sold, increased sales of higher margin circuit fine tuning systems, and productivity improvements in the capacitor carrier plate manufacturing process. As a percentage of sales, selling, service and administrative expenses decreased to 25.0% from 25.5% for fiscal 1996 compared to the same period of the prior year. Selling, service and administrative expenses increased $12.2 million compared to the prior year as a result of higher selling commissions and travel associated with increased sales levels, salaries and employee profit sharing accruals. Research, development and engineering expenses increased $3.1 million for the year ended May 31, 1996 compared to the prior year; increased product development efforts resulted in additional project material costs and compensation related to new hires. Engineering costs associated with XRL also contributed to the increase. As a percentage of sales, research, development and engineering expenses declined to 10.2% for fiscal 1996 from 12.1% for the prior year as sales grew faster than the spending increases. The acquired in-process research and development expense of $6.0 million occurred in connection with the purchase price allocation of XRL, Inc. ESI obtained an appraisal of the intangible assets which indicated that substantially all of the acquired intangible assets consisted of research and development in process. In accordance with generally accepted accounting principles, the acquired in-process research and development was expensed during the first quarter ended August 31, 1995. The Company currently believes that these research and development efforts will result in a commercially viable product in the next twelve months, at an additional cost of $0.6 million. The effective tax rate of 36.5% for the year ended May 31, 1996 increased from 30.0% for the prior year as a result of utilizing tax loss and credit carryovers in fiscal 1995. Net income for the year ended May 31, 1996 was $16.1 million or $1.87 per share compared to $11.5 million or $1.53 per share for the prior year. Net income per share, excluding the effect of the acquired in-process research and development charge of $6.0 million, was $2.31 in fiscal 1996, a 51% increase over the prior year. Page 15 of 44 FISCAL YEAR ENDED MAY 31, 1995 COMPARED TO FISCAL YEAR ENDED MAY 31, 1994 Consolidated net sales increased $35.7 million or 49.2% to $108.2 million for fiscal 1995. Excluding the effect of revenue changes related to product lines sold in fiscal 1994, net sales would have increased $39.7 million or 57.9%. The increasing electronics content in everyday products such as cellular telephones, personal computers and automobiles is directly related to the increased demand for ESI's products. Laser system sales increased $24.4 million or 71.5% primarily as a result of increased unit sales of both laser trimming systems and memory repair systems. The addition of Chicago Laser Systems, Inc. (Chicago Laser) in August 1994 contributed $11.8 million to the increased sales of laser trimming systems. Palomar sales increased $14.1 million or 56.5% as a result of increased volume of miniature capacitor test and production systems. Laser service and vision system revenues did not change significantly from the prior year. The Company's gross margin percentage improved to 52.5% for fiscal 1995 from 50.6% for fiscal year 1994. The primary factors contributing to this improvement were increased unit sales of higher gross margin laser systems and higher sales volume of miniature capacitor test and production systems. In addition, higher production volumes resulted in reduced per unit manufacturing costs. Total operating expenses increased $12.5 million or 44.0% over the prior year. However, as a percentage of sales, operating expenses declined from 39.0% for fiscal 1994 to 37.7% for fiscal 1995. Selling, service and administrative expenses increased $7.6 million or 37.8% as a result of $2.4 million of increased selling commissions associated with the higher level of sales, $1.3 million in discretionary compensation awards and salary increases, and $2.1 million of salaries and rents associated with the Chicago Laser business. Research, development and engineering expenses increased $4.9 million or 59.2% over the prior year as a result of $1.4 million of engineering costs associated with Chicago Laser, $2.0 million related to compensation increases and salaries associated with new hires and $0.8 million of increased project material costs associated with product enhancements and new product development. Interest income (expense) changed from $0.6 million in net interest expense in fiscal 1994 to $0.6 million in net interest income in fiscal 1995 as a result of interest earned on $22.5 million in proceeds from a stock offering and repaying all debt in November 1994. Other income (expense) changed from $2.1 million in income in fiscal 1994 to $0.2 million in expense in fiscal 1995; the prior year amount includes a one- time gain of $2.6 million associated with the disposition of product lines. The consolidated tax rate of 30.0% for fiscal 1995 is higher than the prior year rate of 20.9% because higher U.S. earnings were only partially offset by remaining tax credit carryforwards; the prior year rate reflects higher usage of both net operating loss and tax credit carryforwards. In addition, higher taxable earnings for fiscal 1995 by the Company's European and Japanese subsidiaries and the relatively higher European and Japanese tax rates also contributed to the increased consolidated tax rate. ESI reported net income of $11.5 million or $1.53 per share for the year ended May 31, 1995 compared to net income of $7.9 million or $1.23 per share for the year ended May 31, 1994. Net income in fiscal 1994 includes an after tax gain of $1.6 million or $0.24 per share associated with the sale of product lines. Page 16 of 44 FINANCIAL CONDITION AND LIQUIDITY The Company's current sources of liquidity are existing cash and cash equivalents and marketable debt securities of $37.0 million, trade receivables of $40.0 million and a $7.0 million line of credit which has no outstanding borrowings. ESI has no long-term or bank debt and a current ratio of 6.3:1; working capital increased to $94.0 million at May 31, 1996 from $74.4 million at May 31, 1995. The capital requirements for the Company's current businesses are satisfied by existing sources. The Company may, from time to time, as market and business conditions warrant, invest in or acquire complimentary businesses, products or technologies. The Company may require additional equity or debt financing to fund such activities, which could result in additional dilution to the Company's shareholders. On May 14, 1996, ESI announced a definitive agreement to acquire Applied Intelligent Systems, Inc. (AISI), a significant supplier of machine vision. The transaction is subject to certain closing conditions. A SUMMARY OF CASH FLOW ACTIVITIES IS AS FOLLOWS (IN THOUSANDS): 1996 1995 1994 ---- ---- ---- CASH FLOWS PROVIDED BY (USED IN): OPERATING ACTIVITIES.............. $ 10,888 $ 96 $5,470 INVESTING ACTIVITIES(1)........... (4,897) (21,456) 4,666 FINANCING ACTIVITIES(2)........... 1,246 24,524 (4,706) ------- ------- ------ INCREASE IN CASH AND CASH EQUIVALENTS.......................... $ 7,237 $ 3,164 $5,430 ------- ------- ------ ------- ------- ------ (1) Reflects the net purchase of $17.0 million in marketable debt securities during fiscal 1995. (2) Reflects net proceeds from stock offering in fiscal 1995. OPERATING ACTIVITIES: Operating activities provided $10.9 million in cash. The increases in trade receivables and inventories of $5.0 million and $3.2 million, respectively, reflect the increase in sales of 47.6% during the year. In addition, an increase in shipments near year end relative to the prior year contributed to the increase in trade receivables. The decrease in accounts payable of $3.9 million is a function of an unusually high prior year balance as a result of a competitive decision to have added inventory on hand and hence higher accounts payable during the transition of the Chicago Laser manufacturing facility from Illinois to Oregon. The increase in income taxes payable of $1.2 million is a function of the increased income tax provision. INVESTING ACTIVITIES: Net cash of $4.9 million was used in investing activities primarily as a result of purchases in the amount of $3.6 million to upgrade computing resources and improve manufacturing capabilities by investing in equipment that will decrease costs and improve quality. In addition, net purchases of highly liquid marketable debt securities utilized $1.1 million. FINANCING ACTIVITIES: Net cash of $1.2 million was generated from financing activities in the form of stock option exercises and the related tax benefit. Page 17 of 44 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business depends in large part upon the capital expenditures of manufacturers of electronic devices, including miniature capacitors and semiconductor memory devices, and circuits used in wireless telecommunications equipment, including pagers and cellular phones, automotive electronics and computers. The markets for products manufactured by the Company's customers are cyclical and have historically experienced periodic downturns, which often have had a negative effect on the demand for capital equipment such as that sold by the Company. Several large, multinational electronics companies constituted 41.8% of the Company's fiscal 1996 sales; the loss of any of these customers would be significant. The market for the Company's products is characterized by rapidly changing technology and evolving industry standards. The Company believes that its future success will depend on its ability to develop and manufacture new products and product enhancements and to introduce them successfully into the market. Failure to do so in a timely fashion could harm the Company's competitive position. The announcements or introductions of new products by the Company or its competitors may adversely affect the Company's operating results, since these announcements or introductions may cause customers to defer or forego ordering products from the Company's existing product lines. International sales accounted for 66.8% of the Company's net sales for fiscal 1996. The Company expects that international sales will continue to represent a significant percentage of net sales in the future. As a result, a significant portion of the Company's net sales will be subject to certain risks, including changes in demand resulting from fluctuations in interest and currency exchange rates, as well as factors such as government financed competition, changes in trade policies, tariff regulations, difficulties in obtaining U.S. export licenses and the difficulties of staffing and managing foreign operations. Most of the Company's sales transactions are based in dollars and the Company's products are made in the United States. Many Japanese customers pay in yen; therefore, ESI hedges these sales transactions to mitigate currency risks. The European and Asian sales subsidiaries' operating expenses are denominated in their respective local currencies. These transactions represent approximately 15.3% of total consolidated operating expenses, equally split between Europe and Asia. Changes in the value of the local currency, as measured in U.S. dollars, will commensurably increase or decrease operating expenses. ESI believes that it has the product offerings and resources needed for continuing success; however, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations. Factors external to the company can result in volatility of the Company's common stock price. Because of the foregoing factors, recent trends should not be considered reliable indicators of future stock prices or financial results. Page 18 of 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. CONSOLIDATED BALANCE SHEETS ASSETS MAY 31, ------- 1996 1995 ---- ---- (IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents. . . . . . . . . . . . . . . . $ 18,622 $ 11,385 Securities available for sale. . . . . . . . . . . . . . 18,363 17,269 Trade receivables, less allowance for doubtful accounts of $314 and $299 at May 31, 1996 and 1995. . . . . . . 39,792 33,331 Inventories - Finished goods . . . . . . . . . . . . . . . . . . . . 2,979 2,091 Work-in-process. . . . . . . . . . . . . . . . . . . . 6,188 7,225 Raw materials and purchased parts. . . . . . . . . . . 21,000 15,566 --------- --------- Total inventories. . . . . . . . . . . . . . . . . . 30,167 24,882 Deferred income taxes. . . . . . . . . . . . . . . . . . 3,884 2,946 Other current assets . . . . . . . . . . . . . . . . . . 819 760 --------- --------- Total current assets . . . . . . . . . . . . . . . . . 111,647 90,573 PROPERTY AND EQUIPMENT, AT COST. . . . . . . . . . . . . . 38,853 36,003 Less-Accumulated depreciation. . . . . . . . . . . . . . (22,191) (20,387) --------- --------- Net property and equipment . . . . . . . . . . . . . . 16,662 15,616 OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . 4,216 4,409 --------- --------- $132,525 $110,598 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable . . . . . . . . . . . . . . . . . . . . $ 5,142 $ 7,002 Accrued liabilities - Payroll related. . . . . . . . . . . . . . . . . . . . 3,433 3,398 Commissions. . . . . . . . . . . . . . . . . . . . . . 1,890 1,706 Income taxes . . . . . . . . . . . . . . . . . . . . . 2,463 1,258 Other. . . . . . . . . . . . . . . . . . . . . . . . . 4,405 1,758 --------- --------- Total accrued liabilities. . . . . . . . . . . . . . . 12,191 8,120 Deferred revenue . . . . . . . . . . . . . . . . . . . . . 276 1,032 --------- --------- Total current liabilities. . . . . . . . . . . . . . . 17,609 16,154 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, without par value; 1,000 shares authorized; no shares issued . . . . . . . . . . . . . -- -- Common stock, without par value; 40,000 shares authorized; 8,655 and 8,374 shares issued and outstanding at May 31, 1996 and 1995 . . . . . . . . . 55,790 49,762 Retained earnings. . . . . . . . . . . . . . . . . . . . 59,126 44,682 --------- --------- Total shareholders' equity . . . . . . . . . . . . . . 114,916 94,444 --------- --------- $132,525 $110,598 --------- --------- --------- --------- The accompanying notes are an integral part of these statements. Page 19 of 44 CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED MAY 31, ------------------ 1996 1995 1994 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales. . . . . . . . . . . . . . . . . . . . $159,705 $108,215 $72,550 Cost of sales. . . . . . . . . . . . . . . . . . 72,754 51,413 35,838 ------ ------ ------ Gross margin . . . . . . . . . . . . . . . . . 86,951 56,802 36,712 Operating expenses: Selling, service and administrative. . . . . . 39,858 27,635 20,049 Research, development and engineering. . . . . 16,243 13,108 8,235 Acquired in-process research and development . 6,000 -- -- ----- ------ ----- Total operating expenses. . . . . . . . . . . 62,101 40,743 28,284 ------ ------ ------ Operating income . . . . . . . . . . . . . . . . 24,850 16,059 8,428 Interest income (expense), net . . . . . . . . . 1,185 565 (557) Other income (expense), net. . . . . . . . . . . (719) (167) 2,081 ----- ----- ----- Income before income taxes . . . . . . . . . . . 25,316 16,457 9,952 Provision for income taxes . . . . . . . . . . . 9,234 4,940 2,078 ----- ----- ----- Net income . . . . . . . . . . . . . . . . . . . $ 16,082 $ 11,517 $ 7,874 -------- -------- ------- Net income per share. . . . . . . . . . . . . . $ 1.87 $ 1.53 $ 1.23 -------- -------- ------- Weighted average number of shares used in computing per share amounts. . . . . . 8,606 7,510 6,414 The accompanying notes are an integral part of these statements. Page 20 of 44 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996
COMMON STOCK ------------ NUMBER OF RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------ -------- ----- (IN THOUSANDS) BALANCE AT MAY 31, 1993 . . . . . . . . . . . . . 6,182 $19,961 $23,989 $ 43,950 Net income . . . . . . . . . . . . . . . . . . -- -- 7,874 7,874 Non-employee directors stock incentive plan. . -- 25 -- 25 Stock plans: Employee stock purchase plan . . . . . . . 7 80 -- 80 Reduction of loans to employees. . . . . . -- 30 -- 30 Exercise of stock options. . . . . . . . . 231 1,479 -- 1,479 Tax benefit of stock options exercised . . -- 522 -- 522 Cumulative translation adjustment. . . . . . . -- -- (413) (413) ----- ------- ------- -------- BALANCE AT MAY 31, 1994 . . . . . . . . . . . . . 6,420 22,097 31,450 53,547 Net income . . . . . . . . . . . . . . . . . . -- -- 11,517 11,517 Non-employee directors stock incentive plan. . -- 19 -- 19 Stock plans: Employee stock purchase plan . . . . . . . 7 141 -- 141 Exercise of stock options. . . . . . . . . 234 1,963 -- 1,963 Tax benefit of stock options exercised . . -- 1,068 -- 1,068 Shares issued for acquisition of Chicago Laser 333 1,939 -- 1,939 Shares issued in stock offering. . . . . . . . 1,380 22,535 -- 22,535 Change in unrealized gain on investments . . . -- -- 60 60 Cumulative translation adjustment. . . . . . . -- -- 1,655 1,655 ----- ------- ------- -------- BALANCE AT MAY 31, 1995 . . . . . . . . . . . . . 8,374 49,762 44,682 94,444 Net income . . . . . . . . . . . . . . . . . . -- -- 16,082 16,082 Stock plans: Employee stock purchase plan . . . . . . . 11 223 -- 223 Exercise of stock options. . . . . . . . . 74 483 -- 483 Tax benefit of stock options exercised . . -- 540 -- 540 Shares issued for acquisitions . . . . . . . . 196 4,782 -- 4,782 Change in unrealized loss on investments . . . -- -- (42) (42) Cumulative translation adjustment. . . . . . . -- -- (1,596) (1,596) ----- ------- ------- -------- BALANCE AT MAY 31, 1996 . . . . . . . . . . . . . 8,655 $55,790 $59,126 $114,916 ----- ------- ------- -------- ----- ------- ------- --------
The accompanying notes are an integral part of these statements. Page 21 of 44 CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED MAY 31, ------------------ 1996 1995 1994 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . $16,082 $11,517 $7,874 Aquired in-process research and development. . . 6,000 -- -- Depreciation and amortization. . . . . . . . . . 2,759 2,618 2,261 (Gain) loss on sale of property and equipment. . -- (433) 142 Deferred income taxes. . . . . . . . . . . . . . (770) (1,626) -- Gain on sale of product lines. . . . . . . . . . -- -- (2,623) Stock compensation agreement . . . . . . . . . . -- 19 25 (Increase) decrease in trade receivables . . . . (5,036) (15,575) 3,920 Increase in inventories. . . . . . . . . . . . . (3,153) (2,858) (3,670) Decrease (increase) in other current assets. . . 15 (347) 24 (Decrease) increase in accounts payable and accrued liabilities. . . . . . . . . . . . . . (2,657) 4,293 (2,015) Deferred revenue . . . . . . . . . . . . . . . . (756) 833 (55) Effect of exchange rates on operating accounts . (1,596) 1,655 (413) ------- ------- ------ Net cash provided by operating activities. . . . 10,888 96 5,470 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of XRL subsidiary, net of cash acquired (1) . . . . . . . . . . . . . . . . . (492) -- -- Purchase of Chicago Laser subsidiary, net of cash acquired (2). . . . . . . . . . . . . . . -- (707) -- Purchase of property and equipment . . . . . . . (3,635) (2,989) (2,149) Proceeds from the sale of property and equipment. . . . . . . . . . . . . . . . . . . -- 648 2,077 Purchase of securities . . . . . . . . . . . . . (30,986) (20,950) -- Proceeds from sales of securities and maturing securities. . . . . . . . . . . . . . 29,850 4,000 -- Proceeds from sales of product lines . . . . . . -- -- 4,843 Decrease (increase) in other assets. . . . . . . 366 (1,458) (105) ------- ------- ------ Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . (4,897) (21,456) 4,666 ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Payments to retire long-term debt. . . . . . . . -- (768) (6,358) Reduction of notes payable (3) . . . . . . . . . -- (415) (459) Proceeds from stock offering . . . . . . . . . . -- 22,535 -- Proceeds from exercise of stock options and stock plans and related tax benefits . . . 1,246 3,172 2,111 ------- ------- ------ Net cash provided by (used in) financing activities . . . . . . . . . . . . . 1,246 24,524 (4,706) ------- ------- ------ NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . 7,237 3,164 5,430 CASH AND CASH EQUIVALENTS AT JUNE 1. . . . . . . . 11,385 8,221 2,791 ------- ------- ------ CASH AND CASH EQUIVALENTS AT MAY 31. . . . . . . . $18,622 $11,385 $8,221 ------- ------- ------ ------- ------- ------ The accompanying notes are an integral part of these statements. Page 22 of 44 (1) Acquisition of the XRL subsidiary: Assets less liabilities acquired, net of cash acquired . . . $(5,073) Issuance of common stock . . . . . . . . . . . . . . . . . . 4,581 ------- Net cash used to acquire business. . . . . . . . . . . . . . $ (492) (2) Acquisition of the Chicago Laser subsidiary: Assets less liabilities acquired, net of cash acquired . . . $(2,646) Issuance of common stock . . . . . . . . . . . . . . . . . . 1,939 ------- Net cash used to acquire business. . . . . . . . . . . . . . $ (707) (3) For the year ended May 31, 1995, this included debt acquired in August 1994 related to the Chicago Laser acquisition which was subsequently paid off in August 1994. (4) Cash payments for interest were not significant in 1996 and 1995. In 1994, cash payments for interest were $654. Page 23 of 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) BUSINESS ENVIRONMENT The accompanying consolidated financial statements include the accounts of Electro Scientific Industries, Inc. and its subsidiaries (the Company), all of which are wholly owned. The Company designs and manufactures sophisticated products used around the world in electronics manufacturing including: laser manufacturing systems for semiconductor yield improvement, production and test equipment for the manufacture of surface mount ceramic capacitors, circuit fine tuning systems, precision laser electronic packaging systems and machine vision systems. The Company serves the global electronics market from its headquarters in Portland, Oregon and through subsidiaries located in the United States, Europe and Asia. CONCENTRATIONS OF CREDIT RISK The Company uses financial instruments that potentially subject it to concentrations of credit risk. Such instruments include cash equivalents, securities held for sale, trade receivables and financial instruments used in hedging activities. The Company invests its cash in cash deposits, money market funds, commercial paper, certificates of deposit and readily marketable debt securities. The Company places its investments with high credit quality financial institutions and limits the credit exposure from any one institution or instrument. To date, the Company has not experienced losses on any of these investments. The Company sells a significant portion of its products to a small number of electronics manufacturers: 41.8% of fiscal 1996 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 deteriorate substantially. CONCENTRATIONS OF OTHER RISKS The Company's operations involve a number of other risks and uncertainies including but not limited to the cyclicality of the electronics market, rapidly changing technology, international operations and hedging exposures. Refer to Management's Discussion and Analysis for additional commentary. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION All material intercompany accounts and transactions have been eliminated. Page 24 of 44 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and such differences could be material to the financial statements. RECLASSIFICATIONS Certain reclassifications have been made in the accompanying consolidated financial statements for 1994 and 1995 to conform with the 1996 presentation. REVENUE RECOGNITION The Company recognizes revenue at the time of shipment except for contracts related to complex equipment built to a buyer's specifications. Revenue from these contracts is recognized on the percentage-of-completion method. 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. NET INCOME PER SHARE Net income per share is computed using the weighted average number of common shares and common stock equivalents (stock options) outstanding, if significant. 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. Page 25 of 44 INVENTORIES Inventories are principally valued at standard costs which approximate the lower of cost (first-in, first-out) or market. Costs utilized for inventory valuation purposes include material, labor and manufacturing overhead. DEPRECIATION AND CAPITALIZATION POLICIES Depreciation is determined on the declining balance and straight-line methods based on the following useful lives: buildings: 25 to 40 years; building improvements: 5 to 15 years; and machinery and equipment: 3 to 10 years. Expenditures for maintenance, repairs and minor improvements are charged to expense. Major improvements and additions are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other income (expense). FOREIGN CURRENCY TRANSLATION The Company accounts for foreign currency translation in accordance with Statement of Financial Accounting Standards No. 52. The total cumulative translation adjustment included in retained earnings is $429, $2,025 and $370 at May 31, 1996, 1995 and 1994, respectively. Foreign currency transaction gains were $380 for the year ended May 31, 1996, and losses of $227 and $22 for the years ended May 31, 1995 and 1994, respectively. These amounts are included in other income (expense) in the accompanying Consolidated Statements of Income. SALES OF PRODUCT LINES During the second quarter of fiscal year 1994, the Company sold the product lines and certain assets of the MSI Material Division of its wholly owned subsidiary Palomar Systems, Inc., to Ferro Corporation of Cleveland, Ohio. The proceeds of $4,000 were received in cash and the funds were used to reduce the current portion of long term debt and other short term debt. A gain of $2,100 from the sale of these product lines was reflected in other income (expense) in the accompanying Consolidated Statements of Income. During the fourth quarter of fiscal year 1994, the Company sold its electronic calibration standards and measurement instrument product lines to Tegam, Inc. of Geneva, Ohio. The proceeds included cash and notes of $800 and potential royalties on future sales of the products. The agreement also provided for future sales of consigned inventory. A gain of $500 from the sale of these product lines is included in other income (expense) in the accompanying Consolidated Statements of Income. Page 26 of 44 PROPERTY AND EQUIPMENT Major classes of property and equipment consist of the following: MAY 31, ------- 1996 1995 ---- ---- Land ......................... $ 3,419 $ 3,419 Buildings and improvements.... 12,957 12,588 Machinery and equipment....... 22,135 19,493 Construction in progress..... 342 503 ------- ------- $38,853 $36,003 ------- ------- ------- ------- In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires an assessment of impairment of long-lived assets under certain conditions and recognition of loss in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. In such instances a loss would be recorded based on the fair market value of the applicable asset. SFAS 121 is effective for fiscal years beginning after December 15, 1995. Adoption of SFAS 121 is not expected to have a material impact on the Company's financial position or results of operations. 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 1996. Management expects to renew the revolver under similar terms or secure alternate financing. At the Company's option, the interest rate is either prime or LIBOR plus 1.25 percent. There were no borrowings outstanding under the line at anytime during fiscal 1996. EMPLOYEE BENEFIT PLANS The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting For Stock Issued to Employees." In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting For Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1995. The Company expects to continue to account for its employee stock plans in accordance with the provisions of APB 25. Accordingly, the Company has elected to provide detailed disclosures in lieu of adoption. SFAS 123 is not expected to have any impact on the Company's financial position or results of operations. The Company has an employee savings plan under the provisions of section 401(k) of the Internal Revenue Code. The Company contributed $462, $334 and $255 to the plan for the years ended May 31, 1996, 1995 and 1994, respectively. Page 27 of 44 INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability method specified by SFAS 109, the deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates for the years in which the taxes are expected to be paid. The net deferred tax asset as of May 31, 1996 and May 31, 1995 consists of the following tax effects relating to temporary differences and carryforwards: MAY 31, ------- 1996 1995 ---- ---- Deferred tax assets: Inventory valuation. . . . . . . . . . . . . . $1,129 $1,617 Vacation pay . . . . . . . . . . . . . . . . . 560 426 Warranty costs . . . . . . . . . . . . . . . . 350 314 Accrued compensation . . . . . . . . . . . . . 392 202 Deferred revenue . . . . . . . . . . . . . . . 89 275 Other. . . . . . . . . . . . . . . . . . . . . 38 389 ------ ------ 2,558 3,223 Tax loss and credit carryforwards. . . . . . . 1,874 185 ------ ------ Total deferred tax assets. . . . . . . . . . 4,432 3,408 Less deferred tax liabilities . . . . . . . 548 462 ------ ------ Net deferred tax asset. . . . . . . . . . . . . . $3,884 $2,946 ------ ------ ------ ------ At May 31, 1996, there was a net operating loss carryforward of $4,511 available for U.S. federal income tax purposes. These losses were acquired as part of the XRL acquisition and expire through 2008. During fiscal 1995 the net change in the valuation allowance was a reduction of $2,413, which results from continued profitability and a realization in fiscal 1995 of significant tax loss and credit carryforwards. Page 28 of 44 The components of income before income taxes and the provision for income taxes are as follows: YEAR ENDED MAY 31, ------------------ 1996 1995 1994 ---- ---- ---- Income before income taxes: Domestic . . . . . . . . . . . . . . . . $ 23,679 $13,369 $ 9,788 Foreign . . . . . . . . . . . . . . . . 1,637 3,088 164 -------- ------- ------- $ 25,316 $16,457 $ 9,952 -------- ------- ------- -------- ------- ------- Provision for income taxes: Current: Federal and State . . . . . . . . . . . $ 8,577 $ 3,762 $ 1,119 Foreign . . . . . . . . . . . . . . . . 887 1,736 437 -------- ------- ------- 9,464 5,498 1,556 Deferred. . . . . . . . . . . . . . . . (770) (1,626) -- Income tax effect of stock options exercised 540 1,068 522 -------- ------- ------- Total provision for income taxes. . . . . $ 9,234 $ 4,940 $ 2,078 -------- ------- ------- -------- ------- ------- In accordance with SFAS 109, 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: YEAR ENDED MAY 31, ------------------ 1996 1995 1994 ---- ---- ---- Provision computed at federal statutory rate. . . . . . . . . . . . . . $8,861 $5,595 $3,384 Higher than U.S. tax rates in foreign jurisdictions . . . . . . . . . . . . . . 314 687 256 Foreign operating losses with no tax benefits -- 66 307 Impact of U.S. tax loss and credit carryforwards utilization . . . . . . . . (434) (1,236) (2,232) Revision of prior year estimates . . . . . -- -- 274 Impact of state taxes. . . . . . . . . . . 711 273 101 Benefit of foreign sales corporation (FSC) . . . . . . . . . . . . . . . . . . (137) (217) -- Other, net . . . . . . . . . . . . . . . . (81) (228) (12) ------ ------ ------ $9,234 $4,940 $2,078 ------ ------ ------ ------ ------ ------ Consolidated income tax payments amounted to $7,968, $4,388 and $1,663 for the years ended May 31, 1996, 1995 and 1994, respectively. Page 29 of 44 COMMITMENTS AND CONTINGENCIES The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. Derivatives are used to manage well defined foreign currency risks: the Company enters into forward exchange contracts to hedge the value of accounts receivable denominated in a foreign currency. Foreign exchange contracts have gains and losses that are recognized at the settlement date. At May 31, 1996 and 1995, the Company had forward exchange contracts totaling $7,460 and $6,863, respectively. These contracts generally mature in less than one year and the counterparty is a large, widely recognized international bank; therefore, risk of credit loss as a result of nonperformance by the bank is minimal. The use of derivatives does not have a significant effect on the Company's results of operations or its financial position. The Company leases equipment and office space under operating leases which are non-cancelable and expire on various dates through 2002. Rental expense was $1,495, $1,402 and $1,050 for the years ended May 31, 1996, 1995 and 1994, respectively. The aggregate minimum commitment for rentals under operating leases beyond May 31, 1996 is not significant. The Company is a party to various legal proceedings. Management believes that the outcome of such proceedings will not have a material effect on the business, financial position or results of operations of the Company. SECURITIES AVAILABLE FOR SALE In fiscal 1995, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The Company classifies its marketable debt securities as Securities Available for Sale in the accompanying Consolidated Balance Sheets. The fair market value of these securities at May 31, 1996 and 1995 is $18,363 and $17,269, respectively. All of the Company's marketable debt securities are invested in high-credit quality tax advantaged securities with maturities of less than one year from the date of purchase; the amortized cost of these securities is $18,345 and $17,209 at May 31, 1996 and 1995, respectively. During fiscal 1996 and 1995, proceeds of $29,850 and $4,000, respectively, resulted from the sales or maturities of securities; there were no realized gains or losses associated with these sales or maturities. Page 30 of 44 SHAREHOLDER RIGHTS PLAN In May 1989, the Company adopted a Shareholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of Common Stock, payable to holders of record on June 23, 1989. Under certain conditions, each Right may be exercised to purchase 1/100 of a share of Series A No Par Preferred Stock at a purchase price of $55, subject to adjustment. The Rights are not presently exercisable and will only become exercisable following the occurrence of certain specified events. If these specified events occur, each Right will be adjusted to entitle its holder to receive, upon exercise, Common Stock (or, in certain circumstances, other assets of the Company) having a value equal to two times the exercise price of the Right or each Right will be adjusted to entitle its holder to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right, depending on the circumstances. The Rights expire on May 12, 1999 and may be redeemed by the Company for $0.01 per Right. The Rights do not have voting or dividend rights, and until they become exercisable, have no dilutive effect on the earnings of the Company. STOCK PLANS The Company has stock option plans for officers and employees. Awards under the stock option plans are determined by the Compensation Committee of the Board of Directors. Stock appreciation rights may be granted in connection with options, although no options have been granted that include stock appreciation rights. Option prices are at fair market value at the date of the grant and all expire ten years from the date of grant. The following table summarizes activity in plans for the years ended May 31, 1994, 1995 and 1996: OPTIONS OUTSTANDING ------------------- SHARES PRICE PER SHARE ------ --------------- BALANCE AT MAY 31, 1993 . . . . . . . . . . 737,821 $ 2.63 - $14.50 Granted . . . . . . . . . . . . . . . . . 257,660 9.88 - 10.50 Exercised . . . . . . . . . . . . . . . . (231,395) 3.50 - 16.13 Canceled or expired . . . . . . . . . . . (44,503) 3.50 - 13.88 ------- ------ ------ BALANCE AT MAY 31, 1994 . . . . . . . . . . 719,583 $ 2.63 - $14.50 Granted . . . . . . . . . . . . . . . . . 220,367 10.50 - 24.00 Exercised . . . . . . . . . . . . . . . . (233,780) 2.63 - 14.25 Canceled or expired . . . . . . . . . . . (30,862) 3.50 - 14.25 ------- ------ ------ BALANCE AT MAY 31, 1995 . . . . . . . . . . 675,308 $ 2.63 - $24.00 Granted . . . . . . . . . . . . . . . . . 276,904 18.00 - 39.38 Exercised . . . . . . . . . . . . . . . . (73,510) 2.63 - 24.00 Canceled or expired . . . . . . . . . . . (43,806) 3.50 - 33.00 ------- ------ ------ BALANCE AT MAY 31, 1996 . . . . . . . . . . 834,896 $ 2.63 - $39.38 ------- ------ ------ ------- ------ ------ Options exercisable at May 31, 1996. . . . . 260,482 $ 2.63 - $24.00 Options available for grant at May 31, 1996. . . . . . . . . . . . . . 320,410 Page 31 of 44 The Company has an employee stock purchase plan which allows qualified employees to direct up to 15% of monthly base pay for purchases of stock. The purchase price for shares purchased under the Plan is 85% of the fair market value of stock on the purchase date. GEOGRAPHIC REPORTING The Company operates in the capital equipment segment of the electronics industry with geographic operations in the United States, Europe and Asia. Transfers between geographic areas are made at prevailing market prices. Operating income is total revenue less operating expenses. In computing operating income, none of the following items have been added or deducted: interest income (expense), other income (expense) or the provision for income taxes. Identifiable assets are those assets of the Company that are identified with the operations in each geographic location. Corporate assets are primarily cash and cash equivalents and securities available for sale. Export sales included in United States sales to unaffiliated customers for the years ended May 31, 1996, 1995 and 1994 were as follows: EUROPE ASIA TOTAL ------ ---- ----- May 31, 1996 . . . . . . . . . . . $1,532 $64,446 $65,978 May 31, 1995 . . . . . . . . . . . 3,741 33,890 37,631 May 31, 1994 . . . . . . . . . . . 853 15,234 16,087 In fiscal year 1996, there were no sales to any one customer in excess of 10% of consolidated net sales. During fiscal 1995 and 1994, one customer accounted for 12.4% and 10.8%, respectively, of consolidated net sales. Page 32 of 44 The following data represents segment information for the years ending May 31:
ADJUSTMENTS UNITED AND STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED ------ ------ ---- ------------ ------------ 1996 - - ---- Sales to unaffiliated customers. . . . . . . . . . . . $ 119,064 $18,329 $ 22,312 $ -- $ 159,705 Transfers between geographic areas . . . . . . . . . . 28,009 8 543 (28,560) -- --------- ------- -------- --------- --------- Total revenue. . . . . . . . . . . . . . . . . . . . . $ 147,073 $18,337 $ 22,855 $ (28,560) $ 159,705 --------- ------- -------- --------- --------- --------- ------- -------- --------- --------- Operating income(1). . . . . . . . . . . . . . . . . . $ 22,861 $ 260 $ 1,965 $ (236) $ 24,850 --------- ------- -------- --------- --------- --------- ------- -------- --------- --------- Identifiable assets at May 31, 1996. . . . . . . . . . $ 99,442 $ 8,624 $ 8,049 $ (20,575) $ 95,540 --------- ------- -------- --------- --------- ------- -------- --------- Corporate assets . . . . . . . . . . . . . . . . . . . 36,985 --------- Total assets at May 31, 1996 . . . . . . . . . . . . . $ 132,525 --------- --------- 1995 - - ---- Sales to unaffiliated customers. . . . . . . . . . . . $ 69,168 $15,869 $ 23,178 $ -- $ 108,215 Transfers between geographic areas . . . . . . . . . . 24,631 9 434 (25,074) -- --------- ------- -------- --------- --------- Total revenue. . . . . . . . . . . . . . . . . . . . . $ 93,799 $15,878 $ 23,612 $ (25,074) $ 108,215 --------- ------- -------- --------- --------- --------- ------- -------- --------- --------- Operating income . . . . . . . . . . . . . . . . . . . $ 12,415 $ 791 $ 2,605 $ 248 $ 16,059 --------- ------- -------- --------- --------- --------- ------- -------- --------- --------- Identifiable assets at May 31, 1995. . . . . . . . . . $ 82,774 $ 7,994 $ 10,922 $ (19,746) $ 81,944 --------- ------- -------- --------- --------- ------- -------- --------- Corporate assets . . . . . . . . . . . . . . . . . . . 28,654 --------- Total assets at May 31, 1995 . . . . . . . . . . . . . $ 110,598 --------- --------- 1994 - - ---- Sales to unaffiliated customers. . . . . . . . . . . . $ 48,947 $ 7,910 $ 15,693 $ -- $ 72,550 Transfers between geographic areas . . . . . . . . . . 14,817 -- 189 (15,006) -- --------- ------- -------- --------- --------- Total revenue. . . . . . . . . . . . . . . . . . . . . $ 63,764 $ 7,910 $ 15,882 $ (15,006) $ 72,550 --------- ------- -------- --------- --------- --------- ------- -------- --------- --------- Operating income (loss). . . . . . . . . . . . . . . . $ 8,130 $ (825) $ 1,055 $ 68 $ 8,428 --------- ------- -------- --------- --------- --------- ------- -------- --------- --------- Identifiable assets at May 31, 1994. . . . . . . . . . $ 53,650 $ 2,620 $ 6,390 $ (8,515) $ 54,145 --------- ------- -------- --------- --------- ------- -------- --------- Corporate assets . . . . . . . . . . . . . . . . . . . 8,221 --------- Total assets at May 31, 1994 . . . . . . . . . . . . . $ 62,366 --------- ---------
(1) Includes the $6.0 million in-process research and development charge associated with the acquisition of XRL, Inc. ACQUISITIONS XRL, INC. AND OTHER In July 1995, the Company acquired all of the outstanding stock of XRL, Inc., a privately held company based in Canton, Massachusetts. XRL provides capital equipment for semiconductor yield improvement. The preliminary purchase consideration consisted of 207 shares of ESI stock. These shares were subsequently reduced by 28 shares due to stock repurchases and price adjustments provided for by the agreement. The transaction was accounted for as a purchase. Page 33 of 44 In connection with the purchase price allocation, the Company obtained an appraisal of the intangible assets which indicated that substantially all of the acquired intangible assets consisted of research and development projects in process. The development of these projects had not reached technological feasibility and the technology has no alternative future use. In accordance with generally accepted accounting principles, the acquired in-process research and development of $6.0 million was charged to expense during the quarter ended August 31, 1995 and is reflected in the accompanying Consolidated Statements of Income. Pro-forma combined income statement data for the years ended May 31, 1996 and 1995 was not materially different from results presented in the accompanying Consolidated Statements of Income. The Company acquired certain assets of one other company during fiscal 1996; the acquisition was not significant to the financial position or results of operations of the Company. CHICAGO LASER SYSTEMS, INC. On August 12, 1994, the Company acquired the stock of Chicago Laser Systems, Inc. ("Chicago Laser"), a privately held company based in Des Plaines, Illinois. The transaction was completed on August 12, 1994. The purchase consideration consists of $1,280 in cash and 333 shares of the Company's stock. The transaction was accounted for as a purchase. The Company has recorded the acquisition at the estimated fair value of the assets acquired and liabilities assumed including the recognition of deferred tax assets of $1,320. The following pro forma combined income statement data for the year ended May 31, 1994 was prepared as if the acquisition had occurred at the beginning of the period. The impact of combining the pro forma information from June 1 through August 12, 1994 with the historical results of operations of the Company for the year ended May 31, 1995 was not significant. PRO FORMA COMBINED STATEMENT OF INCOME ------------------- (UNAUDITED) YEAR ENDED MAY 31, 1994 ----------------------- Net sales $82,372 Net income 7,493 Net income per share 1.11 Chicago Laser's fiscal year end was October 31. The above proforma data has been prepared by adjusting Chicago Laser's income statement data so that it is within one month of ESI reported amounts. Page 34 of 44 PENDING MERGER On May 14, 1996, the Company announced the signing of a definitive agreement to merge with Applied Intelligent Systems, Inc. (AISI), a privately held company based in Ann Arbor, Michigan. AISI provides machine vision solutions for automated process control and visual inspection; its products are primarily used in the semiconductor and electronics industries to assemble computer chips and electronic printed circuit boards. The closing of the transaction is subject to completion of certain closing conditions. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) YEAR ENDED MAY 31, 1996 1ST 2ND 3RD 4TH - - ----------------------- QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Net sales. . . . . $35,975 $40,836 $41,626 $41,268 $159,705 Gross margin . . . 19,208 22,113 22,592 23,038 86,951 Net income . . . . 540(1) 4,881 5,244 5,417 16,082 Net income per share $ 0.06 $ 0.57 $ 0.61 $ 0.63 $ 1.87 YEAR ENDED MAY 31, 1995 1ST 2ND 3RD 4TH - - ----------------------- QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Net sales. . . . . $21,006 $24,803 $29,398 $33,008 $108,215 Gross margin . . . 10,832 13,357 15,606 17,007 56,802 Net income . . . . 2,200 2,583 3,176 3,558 11,517 Net income per share $ 0.33 $ 0.36 $ 0.39 $ 0.43 $ 1.53(2) (1) Includes the $6.0 million in-process research and development charge associated with the acquisition of XRL, Inc. (2) For fiscal year 1995, the quarterly net income per share amounts do not add up to $1.53 because of changes in average shares outstanding due to the acquisition of Chicago Laser Systems, Inc. in the first quarter and a stock offering in the second quarter. Page 35 of 44 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Electro Scientific Industries, Inc.: We have audited the accompanying consolidated balance sheets of Electro Scientific Industries, Inc. (an Oregon corporation) and subsidiaries as of May 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the three years in the period ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electro Scientific Industries, Inc. and subsidiaries as of May 31, 1996 and 1995, and the results of their operations and their cash flows for the three years in the period ended May 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon July 3, 1996 Page 36 of 44 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 in the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein by reference. Information with respect to executive officers of the Company is included under Item 4(a) of Part I of this Report. The information required to be included for Item 405 of Regulation S-K for 1996 is included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein by reference. 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 1996 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 1996 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. Page 37 of 44 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: Page ---- Consolidated Balance Sheets as of May 31, 1996 and 1995 19 Consolidated Statements of Income for the Years Ended May 31, 1996, 1995, and 1994 20 Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1996, 1995, and 1994 21 Consolidated Statements of Cash Flows for the Years Ended May 31, 1996, 1995, and 1994 22 Notes to Consolidated Financial Statements 24-35 Report of Independent Public Accountants 36 All schedules are omitted as the required information is inapplicable or not significant. Page 38 of 44 (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. Bylaws of the Company. Incorporated by reference to Exhibit 3-B of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. 4-A. Rights Agreement, dated as of May 12, 1989, between the Company and United States National Bank of Oregon relating to rights issued to all holders of Company Common Stock. Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated May 12, 1989. 10-A. ESI 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10-E of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1986. (1) 10-B. ESI 1989 Stock Option Plan, as amended. (1) 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) 11. Statement of Calculation of Earnings Per Share. 13. Portion of the 1996 Annual Report to Shareholders that is incorporated herein by reference. 21. Subsidiaries of the Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the last quarter of fiscal year 1996. - - --------------- (1) Management contract or compensatory plan or arrangement. Page 39 of 44 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: July 22, 1996 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 July 22, 1996. Signature Title (1) Principal Executive, Financial and Accounting Officers /s/ Donald R. VanLuvanee President and Chief Executive - - ----------------------------------- Officer Donald R. VanLuvanee /s/ Barry L. Harmon Senior Vice President and Chief - - ----------------------------------- Financial Officer Barry L. Harmon (2) Directors /s/ David F. Bolender Chairman of the Board - - ----------------------------------- David F. Bolender /s/ Douglas C. Strain Vice Chairman of the Board - - ----------------------------------- Douglas C. Strain /s/ Larry L. Hansen Director - - ----------------------------------- Larry L. Hansen /s/ W. Arthur Porter Director - - ----------------------------------- W. Arthur Porter /s/ Vernon B. Ryles Director - - ----------------------------------- Vernon B. Ryles /s/ Keith L. Thomson Director - - ----------------------------------- Keith L. Thomson Page 40 of 44 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. Bylaws of the Company. Incorporated by reference to Exhibit 3-B of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. 4-A Rights Agreement, dated as of May 12, 1989, between the Company and United States National Bank of Oregon relating to rights issued to all holders of Company Common Stock. Incorporated by reference to Exhibit 1 to the Company's Report on Form 8-K dated May 12, 1989. 10-A. ESI 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10-E of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1986. 10-B. ESI 1989 Stock Option Plan, as amended. 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. 11. Statement of Calculation of Earnings Per Share. 13. Portion of the 1996 Annual Report to Shareholders that is incorporated herein by reference. 21. Subsidiaries of the Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. Page 41 of 44 EX-10.B 2 EXHIBIT 10.B EXHIBIT 10-B ELECTRO SCIENTIFIC INDUSTRIES, INC. 1989 STOCK OPTION PLAN (as amended as of September 22, 1995) PURPOSE. The purpose of this 1989 Stock Option Plan (the "Plan") is to enable Electro Scientific Industries, Inc. (the "Company") to attract and retain people of training, experience, and ability, and to provide additional incentive to employees and non-employee directors by giving them an opportunity to participate in the ownership of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. SHARES SUBJECT TO THE PLAN. Except as provided in Paragraph 15, the total number of shares of the Company's Common Stock, without par value ("Common Stock"), covered by all options granted under the Plan shall not exceed 1,300,000 authorized but unissued or reacquired shares. In the event any option under the Plan expires or is cancelled or terminated and is unexercised in whole or in part, the shares allocable to the unexercised portion shall again become available for options under the Plan. DURATION OF THE PLAN. The Plan shall continue in effect until options have been granted and exercised with respect to all of the shares available for the Plan under paragraph 2 (subject to any adjustments under paragraph 15), unless sooner terminated by action of the Board of Directors of the Company (the "Board of Directors"). The Board of Directors shall have the right to suspend or terminate the Plan at any time except with respect to options then outstanding under the Plan. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company, which shall determine and designate from time to time the employees to whom options shall be granted and the number of shares, the option price, the period of each option, and the time or times at which options may be exercised. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt rules and regulations relating to administration of the Plan, and the interpretation and construction of the provisions of the Plan by the Board of Directors shall be final and conclusive. No director who holds or is eligible to hold an option under the Plan, other than an option under Paragraph 16, shall vote upon any action taken by the Board of Directors involving such matter. The Board of Directors, if it so determines, may delegate to a committee of the Board of Directors, or specified officers of the Company, or both (the "Committee") any or all authority for administration of the Plan. If authority is delegated to a Committee, all references to the Board of Directors in the Plan shall mean and relate to the Committee except (i) as otherwise provided by the Board of Directors, and (ii) that only the Board of Directors may terminate or amend the Plan as provided in paragraphs 3 and 19. GRANTS. (a) Options granted under the Plan may be Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Non-Statutory Stock Options. For the purpose of the Plan, a Non-Statutory Stock Option means an option other than an Incentive Stock Option. The Board of Directors or Committee, as the case may be, has the sole discretion to determine which options shall be Incentive Stock Options and which options shall be Non-Statutory Stock Options, and shall specifically designate each option granted under the Plan as an Incentive Stock Option or Non-Statutory Stock Option. No Incentive Stock Option may be granted under the Plan on or after the tenth anniversary of the last action by the Board of Directors approving an increase in the number of shares available for issuance under the Plan, which action was subsequently approved within 12 months by the shareholders. (b) No employee may be granted Incentive Stock Options under the Plan such that the aggregate fair market value, on the date of grant, of the stock with respect to which Incentive Stock Options are exercisable for the first time by the employee during any calendar year under the Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any parent or subsidiary of the Company exceeds $100,000. (c) No employee may be granted options under the Plan for more than 250,000 shares of Common Stock in any fiscal year. ELIGIBILITY. Incentive Stock Options and Non-Statutory Stock Options may be granted under the Plan to employees of the Company or any parent or subsidiary of the Company (including employees who are directors). Directors who are not employees shall only be eligible to receive options granted pursuant to paragraph 16. OPTION PRICE. The option price per share under each option granted under the Plan shall be determined by the Board of Directors at the time of grant. Except as provided in paragraph 9, the option price shall be not less than 100 percent of the fair market value of the shares covered by the option on the date the option is granted. The fair market value of shares covered by an option shall be deemed to be the last price for the Common Stock as reported to NASDAQ and published in the Wall Street Journal for the day preceding the date of grant, or such other value of the Common Stock as shall be determined by the Board of Directors of the Company. DURATION OF OPTIONS. Subject to paragraphs 9 and 13, each option granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after ten years from the date it is granted and no Non-Statutory Stock Option shall be exercisable after the expiration of 10 years plus seven days from the date it is granted. LIMITATIONS ON GRANTS TO 10 PERCENT SHAREHOLDERS. An Incentive Stock Option may be granted under the Plan to an employee possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any parent or subsidiary of the Company only if the option price is at least 110 percent of the fair market value of the stock subject to the option on the date it is granted, as described in paragraph 7, and the Incentive Stock Option by its terms is not exercisable after the expiration of five years from the date it is granted. EXERCISE OF OPTIONS. Options granted under the Plan may be exercised from time to time over the period stated in each option in such amounts and at such times as shall be prescribed by the Board of Directors. If the optionee does not exercise an option in any one year with respect to the full number of shares to which the optionee is entitled in that year, the optionee's rights shall be cumulative and the optionee may purchase those shares in any subsequent year during the term of the option. LIMITATION ON RIGHTS TO EXERCISE. Except as provided in paragraph 13 or as otherwise approved by the Board of Directors, no option granted under the Plan may be exercised unless at the time of such exercise the optionee is employed by or a director of the Company or any parent or subsidiary of the Company and shall have been so employed or engaged continuously since the date such option was granted. Absence on leave or on account of illness or disability under rules established by the Board of Directors shall not, however, be deemed an interruption of employment for this purpose. NONASSIGNABILITY. Each option granted under the Plan by its terms shall be nonassignable and nontransferable by the optionee except by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death, and each such option by its terms shall be exercisable during the optionee's domicile at the time of death, and each such option by its terms shall be exercisable during the optionee's lifetime only by the optionee. 1. TERMINATION OF EMPLOYMENT. (a) In the event the employment of an optionee by the Company or by any parent or subsidiary of the Company is terminated by retirement or for any reason, voluntarily or involuntarily with or without cause, other than in the circumstances specified in subsection (b) or (c) below, any option held by such optionee may be exercised at any time prior to its expiration date or the expiration of three months after the date of such termination of employment, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option on the date of such termination. (b) In the event an optionee's employment by the Company or by any parent or subsidiary of the Company is terminated because of death or physical disability (within the meaning of Section 22(e)(3) of the Code), any option held by such optionee may be exercised with respect to all remaining shares subject thereto, free of any limitation on the number of shares with respect to which the option may be exercised in any one year, at any time prior to its expiration date or the expiration of one year after the date of such termination, whichever is the shorter period. If an optionee's employment is terminated by death, any option held by the optionee shall be exercisable only by the person or persons to whom such optionee's rights under such option shall pass by the optionee's will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death. (c) In the event an optionee's employment by the Company or by any parent or subsidiary of the Company terminates within one year after a change in control of the Company for any reason other than retirement, death, or physical disability (within the meaning of Section 22(e)(3) of the Code), any option held by such optionee may be exercised with respect to all remaining shares subject thereto, free of any limitation on the number of shares with respect to which the option may be exercised in any one year, at any time prior to its expiration date or the expiration of three months after the date of such termination of employment, whichever is the shorter period. A "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"); provided that, without limitation, such a change in control shall be deemed to have occurred if (1) any "person" (as such term is used in Sections 13(d) or 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; or (2) during any period of two consecutive years, individuals who at the beginning such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. A change in control of the Company shall not include any change in control pursuant to a written agreement between the Company and another person, which agreement is approved and adopted by the Board of Directors of the Company or pursuant to any tender offer or exchange offer which the Board of Directors has in any manner recommended acceptance of to the shareholders of the Company. (d) Unless otherwise approved by the Board of Directors, to the extent an option held by any deceased optionee or by any optionee whose employment is terminated shall not have been exercised within the limited periods provided above, all further rights to purchase shares pursuant to such option shall cease and terminate at the expiration of such periods. PURCHASE OF SHARES. Shares may be purchased or acquired pursuant to an option granted under the Plan only upon receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of shares as to which the optionee desires to exercise the option and the date on which the optionee desires to complete the transaction, which shall not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the optionee's present intention to acquire the shares for investment and not with a view to distribution. On or before the date specified for completion of the purchase of shares pursuant to an option, the optionee must have paid the Company the full purchase price of such shares in cash (including cash which may be the proceeds of a loan from the Company), in shares of Common Stock of the Company previously acquired and held for not less than one year by the optionee, valued at fair market value as defined in paragraph 7, or in any combination of cash and shares of Common Stock of the Company. No shares shall be issued until full payment therefor has been made, and an optionee shall have none of the rights of a shareholder until a certificate for shares is issued to such optionee. Each optionee who has exercised an option shall, upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares with respect to which the option was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the optionee shall pay such amount to the Company on demand. 1. CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or another corporation, by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for the purchase of which options may be granted under the Plan. In addition, the Board of Directors shall make appropriate adjustment in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable, to the end that each optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in outstanding options shall be made without change in the total price applicable to the unexercised portion of any option and with a corresponding adjustment in the option price per share. Any such adjustment made by the Board of Directors shall be conclusive. In the event of dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation, in lieu of providing for options as provided for above in this paragraph 15, the Board of Directors may, in its sole discretion, provide a 30-day period immediately prior to such event during which optionees shall have the right to exercise options in whole or in part without any limitation on exercisability. OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. (a) ANNUAL GRANTS. Each Non-Employee Director shall be automatically granted an option to purchase 1,000 shares of Common Stock on July 31 of each year, provided the Non-Employee Director is a director on such date. A "Non-Employee Director" is a director who is not a full-time employee of the Company or any of its subsidiaries and has not been a full-time employee of the Company or any of its subsidiaries within one year of any date as of which a determination of eligibility is made. Options automatically granted under this paragraph 16 as of July 31, 1995 shall be subject to and conditioned upon approval by the shareholders at the 1995 annual meeting of shareholders of the amendment adding this paragraph 16 to the Plan. (b) EXERCISE PRICE. The exercise price of the options granted pursuant to this paragraph 16 shall be equal to 100 percent of the fair market value of the Common Stock determined pursuant to paragraph 7. (c) TERM OF OPTION. The term of each option granted pursuant to this paragraph 16 shall be 10 years from the date of grant. (d) EXERCISABILITY. Until an option expires or is terminated and except as provided in paragraphs 16(e) and 15, an option granted under this paragraph 16 shall be exercisable according to the following schedule: PERIOD OF NON-EMPLOYEE DIRECTORS' CONTINUOUS SERVICE AS A DIRECTOR OF THE COMPANY FROM THE DATE PORTION OF TOTAL OPTION THE OPTION IS GRANTED WHICH IS EXERCISABLE --------------------- -------------------- Less than 1 year 0% After 1 year 25% After 2 years 50% After 3 years 75% After 4 years 100% (e) TERMINATION AS A DIRECTOR. If an optionee ceases to be a director of the Company for any reason, other than death or physical disability (within the meaning of Section 22(e)(3) of the Code), the option may be exercised at any time prior to the expiration date of the option or the expiration of three months after the last day the optionee served as a director, whichever is the shorter period, but only if and to the extent the optionee was entitled to exercise the option as of the last day the optionee served as a director. If an optionee ceases to be a director of the Company as a result of death or physical disability (within the meaning of Section 22(e)(3) of the Code), the option may be exercised with respect to all remaining shares subject thereto, free of any limitation on the number of shares with respect to which the option may be exercised in any one year, at any time prior to the expiration date of the option or the expiration of one year after the last day the optionee served as a director, whichever is the shorter period. (f) EXERCISE OF OPTIONS. Options may be exercised upon payment of cash or shares of Common Stock of the Company in accordance with paragraph 14. STOCK APPRECIATION RIGHTS. (a) GRANT. Stock appreciation rights may be granted under the Plan by the Board of Directors, subject to such rules, terms and conditions as the Board of Directors may prescribe; provided, however, that stock appreciation rights may only be granted in connection with an option grant or in connection with an outstanding option previously granted under the Plan and shall not be assignable other than in conjunction with assignment of the related option pursuant to paragraph 12. (b) EXERCISE. (i) A stock appreciation right shall be exercisable only at the time or times established by the Board of Directors and only to the extent and on the same conditions that the related option could be exercised. Upon exercise of a stock appreciation right, the option or portion thereof to which the stock appreciation right relates must be surrendered. No stock appreciation right may be exercised during the six-month period following the date it is granted. Option shares with respect to which a stock appreciation right has been exercised may not again be subjected to options under the Plan. (ii) The Board of Directors may withdraw any stock appreciation right granted under the Plan at any time and may impose any conditions upon the exercise of a stock appreciation right or adopt rules and regulations from time to time affecting the rights of holders of stock appreciation rights. Such rules and regulations may govern the right to exercise stock appreciation rights prior to the adoption or amendment of such rules and regulations as well as stock appreciation rights granted thereafter. (iii) Each stock appreciation right shall entitle the holder, upon exercise, to receive from the Company in exchange therefor an amount equal in value to the excess of the fair market value on the date of exercise of one share of Common Stock of the Company over the option price per share to which the stock appreciation right relates, times the number of shares covered by the option, or portion thereof, which is surrendered. No stock appreciation right shall be exercisable at a time that the amount determined under this subparagraph is negative. Payment upon exercise of a stock appreciation right by the Company may be made in Common Stock valued at its fair market value, or in cash, or partly in shares and partly in cash, all as shall be determined by the Board of Directors. (iv) The fair market value of the Common Stock shall be determined as specified in paragraph 7. (v) Shares issued upon exercise of a stock appreciation right may consist either in whole or in part of authorized and unissued Common Stock or issued Common Stock held as treasury shares. No fractional shares shall be issued upon exercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of the fraction or, if the Board of Directors shall determine, the number of shares may be rounded downward to the next whole share. (vi) In the event of any adjustment, pursuant to paragraph 15, in the number of shares of Common Stock subject to an option granted under the Plan, the stock appreciation rights granted hereunder in connection with such option shall be proportionately adjusted. CORPORATE MERGERS, ACQUISITION, ETC. The Board of Directors may also grant options and stock appreciation rights having terms and provisions which vary from those specified in this Plan provided that any options and stock appreciation rights granted pursuant to this section are granted in substitution for, or in connection with the assumption of, existing options and stock appreciation rights granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary is a party. AMENDMENT OF PLAN. The Board of Directors may at any time and from time to time modify or amend the Plan in such respects as it shall deem advisable because of changes in the law while the Plan is in effect or for any other reason. Except as provided in paragraph 15, however, no change in an option already granted to an employee shall be made without the written consent of such employee. Furthermore, unless approved by the shareholders at an annual meeting or a special meeting, no amendment or change shall be made in the Plan (a) increasing the total number of shares which may be purchased under the Plan, (b) changing the minimum option price specified in the Plan, (c) increasing the maximum option period, or (d) materially modifying the requirements for eligibility for participation in the Plan. APPROVALS. The obligations of the Company under the Plan shall be subject to the approval of such state or federal authorities or agencies, if any, as may have jurisdiction in the matter. The Company will use its best efforts to take such steps as may be required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange in which the Company's shares may then be listed, in connection with the granting of any option under the Plan, the issuance or sale of any shares purchased upon exercise of any option under the Plan, or the listing of such shares on said exchange. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver shares of Common Stock under the Plan if the Company is advised by the legal counsel that such issuance or delivery would violate applicable state of federal securities laws. EMPLOYMENT RIGHTS. Nothing in the Plan or any option granted pursuant to the Plan shall confer upon any optionee any right to be continued in the employment of the Company or any parent or subsidiary of the Company, or to interfere in any way with the right of the Company or any parent or subsidiary of the Company by whom such optionee is employed to terminate such optionee's employment at any time, with or without cause. EX-11 3 EXHIBIT 11 EXHIBIT 11 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CALCULATION OF EARNINGS PER SHARE (thousands of dollars except per share amounts) NUMBER OF SHARES ----------------- YEARS ENDED MAY 31, ------------------- 1996 1995 1994 ----- ---- ----- Weighted average number of shares of common stock outstanding 8,605,782 7,510,191 6,332,833 Common stock equivalents: Application of the treasury stock method to the stock option plan - - 81,110 --------- --------- --------- Weighted average number of shares used in net income per share 8,605,782 7,510,191 6,413,943 --------- --------- --------- --------- --------- --------- Net income $ 16,082 $ 11,517 $ 7,874 --------- --------- --------- --------- --------- --------- Net income per share (primary and fully diluted) (1): $ 1.87 $ 1.53 $ 1.23 --------- --------- --------- --------- --------- --------- (1) No additional shares related to outstanding options are included in the primary and fully diluted calculation for the years ended May 31, 1996 and 1995, as the differences were not significant. Page 42 of 44 EX-13 4 EXHIBIT 13 EXHIBIT 13 SELECTED FINANCIAL DATA (Thousands of Dollars Except Per Share)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- NET SALES $159,705 $108,215 $ 72,550 $ 67,851 $ 58,170 LASER SYSTEMS AND SERVICE 108,577 66,045 41,985 36,742 30,134 CAPACITOR MANUFACTURING EQUIPMENT 47,531 39,115 23,961 20,393 18,206 VISION SYSTEMS 3,597 3,055 2,562 2,736 1,523 DIVESTED PRODUCT LINES 1 - - 4,042 7,980 8,307 NET INCOME (LOSS) 19,894(2) 11,517 7,874 2,244 (6,122) NET INCOME (LOSS) PER SHARE 2.31(2) 1.53 1.23 0.37 (1.00) WORKING CAPITAL 94,038 74,419 36,247 28,883 23,739 NET PP&E 16,662 15,616 14,592 16,696 19,128 TOTAL ASSETS 132,525 110,598 62,366 61,161 58,536 LONG-TERM DEBT - - - 4,809 4,954 SHAREHOLDERS EQUITY 114,916 94,444 53,547 43,950 41,533
1. SEE MANAGEMENT'S DISCUSSION AND ANALYSIS 2. EXCLUDES $6.0 MILLION IN-PROCESS RESEARCH AND DEVELOPMENT WRITE-OFF ASSOCIATED WITH THE ACQUISITION OF XRL, INC. FOR FISCAL 1996 EX-21 5 EXHIBIT 21 EXHIBIT 21 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF MAY 31, 1996 PERCENTAGE OF STATE AND COUNTRY VOTING SECURITIES SUBSIDIARIES OF INCORPORATION OWNED (1) - - ------------ ---------------- ---------------- AISI Merger Corp. Oregon 100% Chicago Laser Systems, Inc. Oregon 100% CHINT, Ltd. U.S. Virgin Islands 100% CLS GmbH Germany 100% CLS Ltd England 100% ESI BV The Netherlands 100% ESI Foreign Sales Corporation Guam 100% ESI GmbH Germany 100% ESI International (DISC) Oregon 100% ESI KK Japan 100% ESI Korea Korea 100% ESI Ltd England 100% ESI SARL France 100% ESI SRL Italy 100% Palomar Systems, Inc. Oregon 100% XRL, Corp. Oregon 100% (1) Other than qualifying shares, where applicable. Page 43 of 44 EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into Electro Scientific Industries, Inc. and subsidiaries previously filed Form S-8, Form S-4 and Form S-3 Registration Statements File Nos., 2-91731, 33-2623, 33-2624, 33-34098, 33- 37148, 33-46970, 33-58292, 33-70584, 33-63705, 33-65477 and 333-5603. ARTHUR ANDERSEN LLP Portland, Oregon July 22, 1996 Page 44 of 44 EX-27 7 EXHIBIT 27
5 0000726514 ELECTRO SCIENTIFIC INDUSTRIES, INC. 1,000 YEAR MAY-31-1996 JUN-01-1995 MAY-31-1996 18,622 18,363 40,106 314 30,167 111,647 38,853 22,191 132,525 17,609 0 0 0 55,790 59,126 132,525 159,705 159,705 72,754 72,754 62,101 0 7 25,316 9,234 0 0 0 0 16,082 1.87 1.87
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