-----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, VvRBJ4ji6ZzXocZoJZAzMNnMF4baEXnE8XUePBZ1a6xHhCqb0I9amK1TftqdV4Ob SMOATmTS87Qt510/TINV/Q== 0000912057-97-028562.txt : 19970912 0000912057-97-028562.hdr.sgml : 19970912 ACCESSION NUMBER: 0000912057-97-028562 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970819 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-K405 SEC ACT: SEC FILE NUMBER: 000-12853 FILM NUMBER: 97666639 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-K405 1 FORM 10K-405 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, 1997 or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________ to _______________ Commission File Number: 0-12853 ELECTRO SCIENTIFIC INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Oregon 93-0370304 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13900 NW Science Park Drive Portland, Oregon 97229 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 641-4141 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Preferred Stock Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of Common Stock held by nonaffiliates of the Registrant at July 15, 1997: $471,712,000. The number of shares of Common Stock outstanding at July 15, 1997: 9,853,000. Documents Incorporated by Reference ----------------------------------- Part of Form 10-K into Document which is incorporated - - -------- ---------------------- 1997 Annual Report to Shareholders Part II Proxy Statement for 1997 Annual Meeting Part III of Shareholders TABLE OF CONTENTS Item of Form 10-K Page - - ----------------- ---- PART I Item 1 - Business................................................ 3 Item 2 - Properties.............................................. 13 Item 3 - Legal Proceedings....................................... 13 Item 4 - Submission of Matters to a Vote of Security Holders..... 13 Item 4(a) - Executive Officers of the Registrant.................... 14 PART II Item 5 - Market for the Registrant's Common Equity and Related Shareholder Matters............................. 17 Item 6 - Selected Financial Data................................. 17 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 18 Item 8 - Financial Statements and Supplementary Data............. 22 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 40 PART III Item 10 - Directors and Executive Officers of the Registrant...... 40 Item 11 - Executive Compensation.................................. 40 Item 12 - Security Ownership of Certain Beneficial Owners and Management................................... 40 Item 13 - Certain Relationships and Related Transactions.......... 40 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 41 SIGNATURES.......................................................... 43 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 termination equipment used in the high-volume production of miniature capacitors. ESI produces a family of mechanical and laser drilling systems for production of printed circuit boards and advanced electronic packaging. Additionally, ESI designs and manufactures machine vision products for manufacturers of semiconductors, electronics and other products. ESI's products enable these manufacturers to reduce production costs, increase yields and improve the quality of their products. ESI's customers include manufacturers of: wireless telecommunication products (Ericsson, Motorola and Siemens); automotive electronics (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. For example, automobile manufacturers now routinely include electronic ignition, anti-lock brakes, electronic fuel injection and other electronic systems in place of components that in the past were predominantly mechanical. In addition, markets for consumer-oriented electronic products such as 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, reduced size and improved quality. As electronic products become more powerful and portable, the devices and circuits in these products must be faster, smaller and more reliable. To achieve these attributes of higher performance, the electronic device manufacturers increase densities and tune the devices to precise electrical values. Manufacturers of 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, which 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 termination difficult. 3 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 continuously 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 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 capacitor testing and production and semiconductor memory yield improvement. ESI also serves the machine vision and 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 Delco, Ericsson, Ford, IBM, Motorola, Nippon-Denso, Siemens, and Kyocera. 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 components in the circuit 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 components 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 of different values. 4 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 4300 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 4990 Thick film functional trimming 1.27 50 3 x 3 Model 907V 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 SURFACE MOUNT CERAMIC 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 surface mount capacitor market is estimated to be approximately $4.5 billion (240 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 test and termination 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. 5 TERMINATION. MLCCs are manufactured in a lamination process, layering conductive and insulation 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. Chip Star, Inc., a subsidiary purchased on June 26, 1997, produces a fully automated product line for termination of MLCCs and capacitor arrays. These products, the CS 325A and CS 750, are capable of processing the smallest sized (.04 x .02) parts available on the commercial market. 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. 6 The following chart summarizes the models, typical applications and key features of ESI's current miniature capacitor test and production products: 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 voltage capability for small (Model 18) throughput of up to 50,000 parts/hour. and medium (Model 16A) size MLCCs Models 3002 and 3001 IR Tests insulation resistance (IR) High speed parallel tester with of MLCCs throughput of up to 50,000 parts/hour. Model 3001 IR includes automatic bulk loading. Model 3300 Tests capacitance dissipation factor and High speed rotary tester with voltage capability for small and medium throughput of up to 180,000 parts/hour. size MLCCs; tests insulation resistance TERMINATION SYSTEMS Models 2001 and 2020 Electrical contact attachment Microprocessor controlled surface on MLCCs mount termination system with throughput up to 130,000 parts/hour. Model 2020 includes an integrated kiln. Model 2007 Electrical contact attachment High productivity microprocessor on MLCCs controlled surface mount termination system with throughput up to 470,000 parts/hour. CS 325A Electrical contact attachment Automated termination of smallest size on MLCCs capacitors with throughput up to 100,000 parts/hour. CS 750 Electrical contact attachment Automated termination of smallest size on MLCC arrays capacitor arrays with throughput up to 50,000 parts/hour. HANDLING TOOLING Carrier Plates Plates to batch handle MLCCs for Patented composite carriers to handle test and termination the full range of MLCC sizes and up to 8,000 pieces per batch. Test Tooling Test fixtures for use with Permits precise location and positioning ESI systems of MLCCs during the test operation.
7 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, LG Semiconductor, Hitachi, Hyundai, IBM, NEC, Samsung, Siemens, and Texas Instruments. Memory device manufacturers use a laser process that removes defective circuit elements while programming spare elements to be replacements and thereby salvaging a memory device. Cost reductions and demand for higher capacity memory devices have lead manufacturers to reduce the size of circuit elements while increasing the number of circuit elements per device. This increased density in memory devices has required leading edge semiconductor processes, resulting in lower initial manufacturing yields. The yield enhancement process begins with circuit designers adding extra or spare elements to the memory array. During the manufacturing process each device is tested to determine yield. When a defective element is identified, its location or address is recorded and given to ESI's laser system to effect a replacement or repair. The laser system positions a laser beam over connecting links to the defective element and cuts or breaks the electrical path. Replacements are added by programming the failed address into a new or spare element. Redundancy is used by every significant manufacturer of DRAMs and is increasingly being used by manufacturers of other semiconductor memory applications, such as SRAMs, DSPs, and other logic devices. ESI began shipments of the Model 9300 Laser Repair system in August 1996. This system features a patented laser system technology operating at a 1.3 micron wavelength that enables manufacturers to use metal links which are required for advanced memory devices. This system is recognized as the new industry standard for future laser repair systems. ESI also offers the Model 1225ci and Model 9250 series systems. The Model 1225ci uses patented stage plus galvanometer beam positioning to provide throughput benefits, a small footprint, and a high cost performance ratio. It is used by manufacturers requiring increased capacity of four and sixteen megabit devices. The ESI Model 9250 series provides high throughput and high reliability for those manufacturers using poly-link materials, even for advanced memory devices. VISION SYSTEMS. 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. ESI's vision systems are integrated in ESI's laser systems and are 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 and IBM. 8 ELECTRONIC PACKAGING SYSTEMS. ESI provides a cost effective method for forming vias, which are the basis for creating electrical connections in a multiple layer printed circuit board and electronic packages. Applications in this market include new generations of integrated circuit packages, multi chip modules, and high density circuit boards. The primary advantage of the technology is the ability to process very small vias in a wide variety of materials. Electronic industry materials include ceramic, traditional glass reinforced circuit boards, copper, and new organic compounds. Customers include Automata, Erricson, IBM, Johnson-Matthey/ACI, Sheldahl, Siemens and W.L. Gore. DRILLING PRODUCTS. The Model 5100, introduced in June 1996, is the current laser-based product offering, and features the capability to drill up to 10,000 micro-vias per minute. The Model 5100 includes a proprietary laser, operating in the ultraviolet region of the light spectrum, which can cleanly cut copper and glass-reinforcement without damaging or burning organic materials. The system can form blind or through holes in all of the common circuit board materials and uses a unique real-time inner layer alignment to deliver high placement accuracy. In this way, the user can achieve the smallest pad dimensions enabling the production of today's emerging high density packages. Dynamotion, a subsidiary purchased on June 9, 1997, produces computer-controlled mechanical drilling equipment which is sold to manufacturers of printed circuit boards (PCBs) and semiconductor packages. The drilling machines are used to produce thousands of very small holes, sometimes as small as .004" in diameter, which is the diameter of a human hair. Four product lines of computer-controlled drilling equipment are produced by Dynamotion: (1) DM 9400/9500 with a patented vacuum pre-load air bearing guiding design for the high-dynamic stability necessary for micro-drilling; (2) Six-PAK-TM- with its new innovative design is economical, accurate, compact and extremely productive for the commercial, high-volume PCB market; (3) Modular Systems offer the same characteristics as the DM 9400/9500 to the prototype and quick-turn market; and (4) Smart DrillTM with its patented vision optimization capability offers a fast, highly accurate method of optimizing and drilling for the most sophisticated multilayer board manufacturers. ROUTING PRODUCTS. Dynamotion produces computer-controlled routers which are sold to computer manufacturers and manufacturers of PCBs. Routers are used to cut and shape individual PCBs out of panels. Currently, the two primary machining processes required to produce a PCB are routing and drilling. In contrast to a drill, which makes thousands of tiny holes on a PCB, the router cuts the shape of the PCB, as well as the larger holes and special cavities for mounting of semiconductor die. The computer-controlled cuts made by the router can be very complex since the position of the cuts are pre-programmed in three axes. A newly emerging PCB chip carrier technology creates unusual demands on the routing process. Perfect registration of routed edges with respect to the circuitry features and the internal layers are required to successfully produce chip carriers. Very accurate depth control is necessary for cavity routing. Dynamotion produces two product lines of computer controlled routers: the SMART-TM- Driller/Router and the Six-PAK-TM- Router Drill. 9 SALES, MARKETING AND SERVICE ESI sells its products worldwide through direct sales and service offices located in or near: Boston, Massachusetts, Dallas, Texas, Portland, Oregon, San Diego and Santa Ana, California in the United States; Tokyo and Nagoya, Japan, Seoul, Korea, and Taipei, China in Asia; and Munich, Germany, London, England 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 as specified in 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 10.5%, 6.8% and 7.2% of net sales for the fiscal years 1997, 1996, and 1995. ESI maintains a presence in Korea through a wholly-owned subsidiary. Sales outside the U.S. accounted for 71.0%, 66.8% and 70.9% of ESI's net sales for fiscal years 1997, 1996 and 1995. One customer accounted for 10.5% of sales in fiscal 1997. In fiscal year 1996, no one customer exceeded 10% of sales. One customer accounted for 12.4% of ESI's sales in fiscal 1995. 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 $25 million at May 31, 1997 versus $35 million at May 31, 1996 and $26 million at May 31, 1995. ESI expects all of its existing backlog to ship within the next twelve months. 10 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 1997, 1996, and 1995 were $16.5 million (11.0% of net sales), $16.3 million (10.2% of net sales), and $13.7 million (12.7% of net sales), respectively. The foregoing figures do not include the effect of research and development expenditures funded by the Advanced Research Projects Agency (ARPA) of the U.S. Government. 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. 11 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 other vision companies and captive vendors in Japan, North America and Europe. ESI's electronic packaging systems compete with mechanical drilling manufacturers such as Hitachi-Seiko, Excellon and laser system provider, Lumonics. 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. Miniature capacitor test and production systems are manufactured by ESI's Palomar and Chip Star subsidiaries near San Diego, California. Dynamotion drilling and routing products are produced in Santa Ana, California. 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, 1997, ESI employed 649 persons, including 195 in engineering, research and development, 251 in manufacturing and 203 in marketing, sales, customer service and administration. Many of ESI's employees are highly skilled, and ESI's success will depend in part upon its ability to attract and retain such employees, who are in great demand. ESI has never had a work stoppage or strike and no employees are represented by a labor union or covered by a collective bargaining agreement. ESI considers its employee relations to be good. PATENTS AND OTHER INTELLECTUAL PROPERTY ESI has a policy of seeking patents, when appropriate, on inventions relating to new products and improvements which are discovered or developed as part of ESI's on-going research, development and manufacturing activities. ESI owns 40 United States patents and has applied for 16 patents in the United States. In addition, ESI has 35 foreign patents and has applied for 40 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. 12 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 a 64,000 square foot plant on ten acres of land, all owned by ESI, in Escondido, California. In addition, approximately 15,000 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, 8,000 square feet of office and industrial space in San Marcos, California for its Chip Star subsidiary, 30,000 square feet of office and industrial space in Santa Ana, California for its Dynamotion subsidiary, and office and service space in several additional locations in the United States, and in seven foreign countries. ITEM 3. LEGAL PROCEEDINGS On December 26, 1996, ESI filed a lawsuit against General Scanning, Inc. in the United States District Court for the Northern District of California for patent infringement. The complaint alleges that General Scanning is infringing two of ESI's patents used in the Model 9300 laser repair systems (patent numbers 5,265,114 "System and Method for Selectively Laser Processing a Target Structure of One of More Materials of a Multimaterial, Multilayer Device" and 5,473,624 "Laser System and Method for Selectively Severing Links"). ESI is seeking damages and an injunction against further infringement. General Scanning has filed counterclaims alleging that certain ESI patents are invalid and unenforceable and that ESI has interfered with General Scanning's business reputation. General Scanning is seeking damages and declaratory judgments that the ESI patents are not infringed, are invalid and are unenforceable. 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 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, 1997. 13 ITEM 4(A): EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company, and their ages and positions as of June 30, 1997, are as follows: NAME AGE POSITION ---- --- -------- Donald R. VanLuvanee 53 Chief Executive Officer, President and Director Robert E. Belter 56 Vice President Robert C. Cimino 52 Director of Human Resources Barry L. Harmon 43 Chief Financial Officer and Senior Vice President Jon R. Hopper 37 Vice President Jonathan C. Howell 43 Vice President Mark W. Klug 58 Vice President John R. Kurdock 52 Vice President Larry T. Rapp 57 Corporate Secretary and Vice President Joseph L. Reinhart 38 Vice President Joseph Z. Rivlin 62 Vice President Vernon R. Swearingen 57 Vice President Edward J. Swenson 58 Senior Vice President Mr. VanLuvanee joined the Company in 1992 as Chief Executive Officer, President 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. Belter joined ESI in May, 1997 and was elected President and General Manager of the Palomar subsidiary and a Corporate Vice President. Mr. Belter is responsible for the ceramic capacitor production equipment business unit, including the Palomar and Chip Star subsidiaries. Prior to joining ESI, Mr. Belter served as a consultant to the Company in marketing and product development for one year. Mr. Belter has extensive prior experience in the electronic component industry, including four years as President and General Manager of Johanson Dielectrics, and ten years as President and General Manager of Kyocera Northwest, North American Electronic Components. 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. 14 Mr. Harmon joined the Company in 1992 and has served the Company in various financial management positions. In January 1995, he was elected Chief Financial Officer and Senior Vice President. Mr. Harmon held various financial 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. Mr. Hopper joined ESI as a Group Vice President in the Electronic Packaging Business Unit upon Dynamotion's merger with the Company on June 9, 1997. Previously, he was Chairman, President and Chief Executive Officer of Dynamotion from April 1995. Mr. Hopper's experience includes several management positions in high technology businesses during the period from 1990 to 1994. 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. Since July 1996, Mr. Howell is responsible for the Company's technical staff and resources. Mr. Howell has extensive management experience from Citibank, Gulf and Western and Arthur Young & Co. Mr. Klug joined Palomar Systems, Inc. in August 1992 and in April 1993 was elected a Corporate Vice President. Mr. Klug is responsible for the test segment of the capacitor equipment business unit. 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. Kurdock joined ESI in February 1997 as Group Vice President and General Manager of Portland Operations. Prior to joining ESI, Mr. Kurdock served as Vice President of the Surface Mount Division for Universal Instruments. He has also held senior operating positions with the Silicon Valley Group and Perkin Elmer. 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. He was elected a Vice President in September 1996. 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 for 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. 15 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. 16 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 1997 1996 - - -------------- ---- ---- HIGH LOW CLOSING HIGH LOW CLOSING ---- --- ------- ---- --- ------- 1st Quarter. . . . . $27-1/4 $15-1/2 $18-1/4 $39-3/4 $24-5/8 $33-3/4 2nd Quarter. . . . . 26 17-1/4 24-1/4 41-1/2 24-1/2 28-1/2 3rd Quarter. . . . . 31-3/4 22-1/2 27 30-1/2 18-3/4 21-1/2 4th Quarter. . . . . 39-1/4 23-3/4 38 28-3/4 16-3/4 26-1/2 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, 1997 was 336. ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED MAY 31, -------------------------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE) 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------------- Net sales $150,159 $159,705 $108,215 $72,550 $67,851 Laser systems and service 104,535 108,577 66,045 41,985 36,742 Capacitor manufacturing equipment 40,457 47,531 39,115 23,961 20,393 Vision systems 5,167 3,597 3,055 2,562 2,736 Divested product lines(1) -- -- -- 4,042 7,980 Net income(2) 18,952 19,894 11,517 7,874 2,244 Net income per share(2) 2.19 2.31 1.53 1.23 0.37 Working capital 113,201 92,901 74,419 36,247 28,883 Net property, plant and equipment 16,185 16,662 15,616 14,592 16,696 Total assets 148,886 132,525 110,598 62,366 61,161 Long-term debt -- -- -- -- 4,809 Shareholders' equity 135,212 114,916 94,444 53,547 43,950
(1) See Management's Discussion and Analysis. (2) Fiscal 1996 excludes the $6.0 million In-Process Research and Development write off associated with the acquisition of XRL. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996 Revenue for fiscal 1997 was $150.2 million, which was 6.0% or $9.5 million lower than for fiscal 1996. The decline was due to lower shipments of capacitor production equipment during the first half of fiscal 1997, as customers absorbed capacity added in the prior year, and lower sales of circuit fine tuning systems throughout the year. These declines were partially offset by an increase from $4.8 million to $10.8 million in laser-based electronics packaging systems and smaller increases in the sales of semiconductor memory yield improvement and vision systems. Gross margin of 53.6% for the year ended May 31, 1997 was slightly below the 54.4% gross margin for fiscal 1996. The sales decline in capacitor production equipment increased manufacturing overhead cost per unit sold was the most significant factor causing the decrease in margin. Increased sales of higher margin semiconductor yield improvement systems, electronic packaging equipment and machine vision systems positively affected gross margin. Selling, service and administrative expenses were $3.3 million lower for the year ended May 31, 1997. The decrease is a result of lower selling commissions associated with decreased sales volumes and lower incentive compensation. Selling, service and administrative expenses decreased as a percentage of sales, to 24.4% from 25.0% from year to year. Research, development and engineering expenses for the year ended May 31, 1997 were $0.3 million higher than the prior year. Research, development and engineering expenses increased, as a percentage of sales, to 11.0% for 1997 from 10.2% for the prior year. The comparison between spending of the current year and the prior year does not include the acquired in-process research and development charge of $6.0 million incurred in connection with the purchase price allocation of XRL, Inc in fiscal 1996. The effective tax rate of 34.1% for the year ended May 31, 1997 decreased from 36.5% as a result of an increased benefit recognized on foreign sales. Net income for the year ended May 31, 1997 was $19.0 million or $2.19 per share compared to $16.1. million or $1.87 per share for the same period of the prior year. 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. 18 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. Selling, service and administrative expenses decreased, as a percentage of sales, 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 incentive compensation. 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. Research, development and engineering expenses declined, as a percentage of sales, to 10.2% for fiscal 1996 from 12.1% for the prior year as sales grew faster than 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 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. FINANCIAL CONDITION AND LIQUIDITY The Company's principal sources of liquidity are existing cash, cash equivalents and marketable debt securities of $43.2 million, accounts receivable of $48.9 million, and a $7.0 million line of credit, none of which was outstanding at May 31, 1997. ESI has no debt and a current ratio of 9.3:1. Working capital increased to $113.2 million at May 31, 1997, from $92.9 million at May 31, 1996. Accounts receivable increased as product payment terms are longer for the recently introduced models 9300, 5100 and 3300. Current liabilities decreased from May 31, 1996 due to acceleration of income tax payments and reduced incentive compensation accruals. In June 1997, the Company closed two mergers, Dynamotion / ATI Corp. and Chip Star, Inc. Both of these companies operate from a single location in Southern California and develop and sell capital equipment that is complementary to existing ESI markets and customers. Refer to Business Environment in the Notes to Consolidated Financial Statements for additional information. 19 The total consideration for both mergers was 1,047,000 shares of ESI stock. In addition, Dynamotion debt liabilities of approximately $11.0 million were liquidated immediately after the merger was closed with ESI's existing resources. Debt liabilities are not expected to be used to finance future Dynamotion working capital requirements. Production capacity for these acquired businesses is expected to be satisfied from existing facilities, which are leased, or their replacement. In connection with ESI's Portland based operations, the Company is undertaking renovations to improve space utilization and may consider the lease or purchase of additional facilities to satisfy growth potential. The fiscal 1998 capital expenditures are expected to increase approximately 50.0% over the level incurred during the past three years due to these renovations and will be satisfied with existing cash resources. The Company may acquire or invest in other complementary businesses, product lines or technologies. These acquisitions or investments may require additional debt or equity capital to fund such activities. A summary of cash flow activities is as follows (in thousands): 1997 1996 1995 ---- ---- ---- Cash flows provided by (used in): Operating activities................... $ 8,529 $10,888 $ 96 Investing activities (1)............... (13,621) (4,897) (21,456) Financing activities (2)............... 1,796 1,246 24,524 -------- ------- -------- Increase (decrease) in cash and cash equivalents (3).................. $ (3,296) $ 7,237 $ 3,164 -------- ------- -------- (1) Reflects the net purchase of $9.5 million, $1.1 million, and $17.0 million in marketable debt securities during fiscal 1997, 1996, and 1995, respectively. (2) Reflects net proceeds from stock offering in fiscal 1995. (3) Total cash and securities increased from $37.0 million on May 31, 1996 to $43.2 million on May 31, 1997. OPERATING ACTIVITIES: Operating activities provided $8.5 million in cash. The increase in trade receivables of $10.2 million is due to longer product payment terms for the recently introduced models 9300, 5100 and 3300. Collection of receivables in June 1997 reduced this balance by approximately $10.0 million. The decrease in accrued liabilities of $4.8 million is a function of lower incentive compensation and an acceleration of income tax payments. INVESTING ACTIVITIES: Net cash of $13.6 million was used in investing activities. The Company made purchases in the amount of $3.4 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 $9.5 million. FINANCING ACTIVITIES: Net cash of $1.8 million was generated from financing activities in the form of stock option exercises and the related tax benefit. 20 FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business depends in large part upon the capital expenditures of manufacturers of electronic devices, including miniature capacitors, semiconductor memory devices, and circuits used in wireless telecommunications equipment, including pagers and 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 47.1% of the Company's fiscal 1997 sales and therefore, 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 may cause customers to defer or forego ordering products from the Company's existing product lines. International shipments accounted for 71.0% of sales for fiscal 1997 compared to 66.8% of sales for fiscal 1996. The Company expects that international shipments will continue to represent a majority of net sales in the future. As a result, a significant portion of the Company's net sales will be subject to certain risks, including changes in demand resulting from fluctuations in interest and currency exchange rates, as well as factors such as government financed competition, changes in trade policies, tariff regulations, difficulties in obtaining US export licenses and the difficulties of staffing and managing foreign operations. Most of the Company's sales are transacted in dollars and the Company's products are made in the United States. Many Japanese customers pay 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 15.6% of fiscal 1997 consolidated operating expenses and are equally split between Europe and Asia. Changes in the value of the local currency, as measured in US dollars, will commensurably increase or decrease operating expenses. ESI believes that it has the product offerings and resources needed for continuing success; however, future revenue and margin trends cannot be reliably predicted and may cause the Company to adjust its operations. Factors external to the Company can result in volatility of the Company's common stock price. Because of the foregoing factors, recent trends should not be considered reliable indicators of future stock prices or financial results. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS MAY 31, ------- 1997 1996 ---- ---- (IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents.................... $ 15,326 $ 18,622 Securities available for sale................ 27,860 18,363 --------- --------- Total cash and securities................ 43,186 36,985 Trade receivables, less allowance for doubtful accounts of $230 and $314 at May 31, 1997 and 1996................................... 48,870 39,792 Inventories - Finished goods............................. 4,322 2,979 Work-in-process............................ 6,757 6,188 Raw materials and purchased parts.......... 20,794 21,000 --------- --------- Total inventories........................ 31,873 30,167 Deferred income taxes........................ 2,366 2,747 Other current assets......................... 580 819 --------- --------- Total current assets....................... 126,875 110,510 PROPERTY AND EQUIPMENT, AT COST 40,631 38,853 Less-Accumulated depreciation................ (24,446) (22,191) --------- --------- Net property and equipment.................. 16,185 16,662 DEFERRED INCOME TAXES.......................... 1,042 1,137 OTHER ASSETS................................... 4,784 4,216 --------- --------- $148,886 $132,525 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................. $ 6,219 $ 5,142 Accrued liabilities - Payroll related............................ 3,457 3,433 Commissions................................ 1,933 1,890 Income taxes............................... 245 2,463 Other...................................... 1,742 4,405 --------- --------- Total accrued liabilities.................. 7,377 12,191 Deferred revenue............................. 78 276 --------- --------- Total current liabilities.................. 13,674 17,609 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, without par value; 1,000 shares authorized; no shares issued................. -- -- Common stock, without par value; 40,000 shares authorized; 8,768 and 8,655 shares issued and outstanding at May 31, 1997 and 1996......... 57,586 55,790 Retained earnings............................. 77,626 59,126 --------- --------- Total shareholders' equity.................. 135,212 114,916 --------- --------- $148,886 $132,525 --------- --------- --------- --------- The accompanying notes are an integral part of these statements. 22 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED MAY 31, 1997 1996 1995 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales................................ $150,159 $159,705 $108,215 Cost of sales............................ 69,676 72,754 51,413 -------- -------- -------- Gross margin........................... 80,483 86,951 56,802 Operating expenses: Selling, service and administrative.... 36,593 39,858 27,635 Research, development and engineering.. 16,538 16,243 13,108 Acquired in-process research and development........................... -- 6,000 -- -------- -------- -------- Total operating expenses.............. 53,131 62,101 40,743 Operating income......................... 27,352 24,850 16,059 Interest income.......................... 1,460 1,185 565 Other expense, net....................... (75) (719) (167) -------- -------- -------- Income before income taxes............... 28,737 25,316 16,457 Provision for income taxes............... 9,785 9,234 4,940 -------- -------- -------- Net income............................... $ 18,952 $ 16,082 $ 11,517 -------- -------- -------- Net income per share.................... $ 2.19 $ 1.87 $ 1.53 -------- -------- -------- Weighted average number of shares used in computing per share amounts.... 8,673 8,606 7,510 The accompanying notes are an integral part of these statements. 23 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
COMMON STOCK ------------ NUMBER OF RETAINED SHARES AMOUNT EARNINGS TOTAL --------- ------ -------- ----- (IN THOUSANDS) 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 plans................................ 241 2,104 -- 2,104 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 Unrealized gain on securities........................... -- -- 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 plans................................ 85 706 -- 706 Tax benefit of stock options exercised.............. -- 540 -- 540 Shares issued for acquisitions.......................... 196 4,782 -- 4,782 Unrealized loss on securities........................... -- -- (42) (42) Cumulative translation adjustment....................... -- -- (1,596) (1,596) ----- ------- ------- -------- BALANCE AT MAY 31, 1996.................................... 8,655 55,790 59,126 114,916 Net income.............................................. -- -- 18,952 18,952 Stock plans: Employee stock plans................................ 113 1,235 -- 1,235 Tax benefit of stock options exercised.............. -- 561 -- 561 Unrealized loss on securities........................... -- -- (19) (19) Cumulative translation adjustment....................... -- -- (433) (433) ----- ------- ------- -------- BALANCE AT MAY 31, 1997.................................... 8,768 $57,586 $77,626 $135,212 ----- ------- ------- --------
The accompanying notes are an integral part of these statements. 24 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, ------------------ 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................ $18,952 $16,082 $11,517 Adjustments to reconcile net income to cash provided by (used in) operating activities: Acquired in-process research and development...................... -- 6,000 -- Depreciation and amortization..................................... 3,070 2,759 2,618 Other non-cash charges (credits).................................. -- -- (414) Deferred income taxes............................................. 476 (770) (1,626) Changes in operating accounts: Increase in trade receivables................................... (10,219) (6,680) (13,913) Increase in inventories......................................... (940) (3,138) (2,795) Decrease (increase) in other current assets..................... 239 15 (347) (Decrease) increase in current liabilities...................... (3,049) (3,380) 5,056 ------- ------- ------- Net cash provided by operating activities......................... 8,529 10,888 96 ------- ------- ------- 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................................ (3,370) (3,635) (2,989) Proceeds from the sale of property and equipment.................. -- -- 648 Purchase of securities............................................ (42,316) (30,986) (20,950) Proceeds from sales of securities and maturing securities......... 32,800 29,850 4,000 (Increase) decrease in other assets............................... (735) 366 (1,458) ------- ------- ------- Net cash used in investing activities............................. (13,621) (4,897) (21,456) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Payments to retire debt........................................... -- -- (1,183) Proceeds from secondary stock offering............................ -- -- 22,535 Proceeds from exercise of stock options and stock plans and related tax benefits........................................... 1,796 1,246 3,172 ------- ------- ------- Net cash provided by financing activities......................... 1,796 1,246 24,524 ------- ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS.............................. (3,296) 7,237 3,164 CASH AND CASH EQUIVALENTS AT JUNE 1.................................. 18,622 11,385 8,221 ------- ------- ------- CASH AND CASH EQUIVALENTS AT MAY 31.................................. $15,326 $18,622 $11,385 ------- ------- -------
The accompanying notes are an integral part of these statements. 25 (1) Acquisition of 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 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) Cash payments for interest were not significant in 1997, 1996 or 1995. 26 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 and mechanical electronic packaging production 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: 47.1% of fiscal 1997 revenues were derived from ten customers. The Company's operating results could be adversely affected if the financial condition and operations of these key customers decline. CONCENTRATIONS OF OTHER RISKS The Company's operations involve a number of other risks and uncertainties including but not limited to the cyclicality of the electronics market, rapidly changing technology, international operations and hedging exposures. Refer to Management's Discussion and Analysis for additional commentary. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION All material intercompany accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with 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. 27 RECLASSIFICATIONS Certain reclassifications have been made in the accompanying consolidated financial statements for 1995 and 1996 to conform with the 1997 presentation. REVENUE RECOGNITION The Company generally recognizes revenue at the time of shipment. 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. 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. 28 Expenditures for maintenance, repairs and minor improvements are charged to expense. Major improvements and additions are capitalized. When property is sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other expense. 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 $(4), $429 and $2,025 at May 31, 1997, 1996 and 1995, respectively. Foreign currency transaction losses were $176 and $227 for the years ended May 31, 1997 and 1995, respectively, with a gain of $380 for the year ended May 31, 1996. These amounts are included in other expense in the accompanying Consolidated Statements of Income. PROPERTY AND EQUIPMENT Major classes of property and equipment consist of the following: MAY 31, ------- 1997 1996 ---- ---- Land...................................... $ 3,419 $ 3,419 Buildings and improvements................ 13,060 12,957 Machinery and equipment................... 23,883 22,135 Construction in progress.................. 269 342 ------- ------- $40,631 $38,853 ------- ------- 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 1997. 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 1997. EMPLOYEE BENEFIT PLANS The Company has an employee savings plan under the provisions of section 401(k) of the Internal Revenue Code. The Company contributed $406, $462 and $334 to the plan for the years ended May 31, 1997, 1996 and 1995, respectively. 29 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, 1997 and May 31, 1996 consists of the following tax effects relating to temporary differences and carryforwards: MAY 31, ------- 1997 1996 ---- ---- Deferred tax assets: Inventory valuation........................ $1,385 $1,129 Vacation pay............................... 629 560 Warranty costs............................. 440 350 Accrued compensation....................... 443 392 ------ ------ 2,897 2,431 Tax loss and credit carryforwards.......... 1,405 1,874 ------ ------ Total deferred tax assets........... 4,302 4,305 Deferred tax liabilities..................... (894) (421) ------ ------ Net deferred tax asset....................... $3,408 $3,884 ------ ------ At May 31, 1997, there was a net operating loss carryforward of $4,015 available for U.S. federal income tax purposes. These losses were acquired as part of the XRL acquisition and expire through 2008. The components of income before income taxes and the provision for income taxes are as follows: YEAR ENDED MAY 31, ------------------ 1997 1996 1995 ---- ---- ---- Income before income taxes: Domestic............................ $24,225 $23,679 $13,369 Foreign............................. 4,512 1,637 3,088 ------- ------- ------- $28,737 $25,316 $16,457 ------- ------- ------- Provision for income taxes: Current: U.S. Federal and State............ $ 6,845 $ 8,577 $ 3,762 Foreign........................... 1,903 887 1,736 ------- ------- ------- 8,748 9,464 5,498 Deferred............................ 476 (770) (1,626) Income tax effect of stock options exercised................. 561 540 1,068 ------- ------- ------- $ 9,785 $ 9,234 $ 4,940 ------- ------- ------- 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. 30 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, ------------------ 1997 1996 1995 ---- ---- ---- Provision computed at federal statutory rate..................... $10,059 $8,861 $5,595 Higher than U.S. tax rates in foreign jurisdictions.............. 323 314 753 Impact of U.S. tax loss and credit carryforwards utilization..... -- (434) (1,236) Impact of state taxes............................................ 878 711 273 Benefit of foreign sales corporation (FSC)....................... (1,468) (137) (217) Other, net....................................................... (7) (81) (228) ------- ----- ------ $ 9,785 $9,234 $4,940 ------- ----- ------
Consolidated income tax payments amounted to $11,020, $7,968 and $4,388 for the years ended May 31, 1997, 1996 and 1995, respectively. EARNINGS PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement 128, EARNINGS PER SHARE ("SFAS 128"), superseding APB Opinion 15. SFAS 128 is required to be adopted for periods ending after December 15, 1997. When adopted, all prior earnings per share ("EPS") calculations will be restated to conform to SFAS 128. The pro forma effects of applying SFAS 128 to EPS are as follows: YEAR ENDED MAY 31, ------------------ 1997 1996 1995 ------- ------- ------- Primary EPS as reported $2.19 $1.87 $1.53 Effect of SFAS 128 0.00 0.00 0.00 ----- ----- ----- Basic EPS as restated $2.19 $1.87 $1.53 ----- ----- ----- Fully diluted EPS as reported $2.19 $1.87 $1.53 Effect of SFAS 128 (0.06) (0.04) (0.03) ----- ----- ----- Diluted EPS as restated $2.13 $1.83 $1.50 ----- ----- ----- 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, 1997 and 1996, the Company had forward exchange contracts totaling $5,470 and $7,460, 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. 31 The Company leases equipment and office space under operating leases which are non-cancelable and expire on various dates through 2002. The aggregate minimum commitment for rentals under operating leases beyond May 31, 1997 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 The Company accounts for securities in accordance with 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, 1997 and 1996 is $27,860 and $18,363, 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 approximates fair market value. During fiscal 1997 and 1996, proceeds of $32,800 and $29,850, respectively, resulted from the sales or maturities of securities; there were no realized gains or losses associated with these sales or maturities. SHAREHOLDER RIGHTS PLAN In 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. 32 STOCK PLANS The Company has stock option and restricted stock grant plans for officers and employees. During fiscal 1997, ESI recorded $475 of compensation expense related to stock grants earned in April 1997. Awards under these 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 Company has an employee stock purchase plan which allows qualified employees to direct up to 15% of base pay for purchases of stock. The purchase price for shares purchased under the Plan is 85% of the fair market value of stock. The Company accounts for its stock option plans and its employee stock purchase plan in accordance with the provisions of the Accounting Principles Board's Opinion No. 25 (APB 25), "Accounting For Stock Issued to Employees." In 1995, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting For Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and was effective beginning with the Company's 1996 fiscal year. The Company will continue to account for its employee stock plans in accordance with the provisions of APB 25. Accordingly, the Company has elected to provide pro forma disclosures as required by SFAS 123. The Company has computed, for pro forma disclosure purposes, the value of all options granted under the stock option plan to be $16.04 and $13.26 for 1997 and 1996. The pro forma value of options granted under the employee stock purchase plan is immaterial for both 1997 and 1996. These computations were made using the Black-Scholes option-pricing model, as prescribed by SFAS 123, with the following weighted average assumptions for grants in 1997 and 1996: Risk-free interest rate 7.5% Expected dividend yield 0% Expected life stock option plan 7 years Expected volatility 48.5% The total value of options granted would be amortized on a pro rata basis over the vesting period of the options. Options generally vest equally over four years. If the Company had accounted for these plans in accordance with SFAS 123, the Company's net income and net income per share would have decreased as reflected in the following pro forma amounts: YEAR ENDED MAY 31, ----------------------- 1997 1996 ---- ---- NET INCOME: As reported................ $18,952 $16,082 Pro forma.................. $18,216 $15,831 NET INCOME PER SHARE: As reported................ $ 2.19 $ 1.87 Pro forma.................. $ 2.13 $ 1.86 33 The following table summarizes activity in the stock plans for the years ended May 31, 1997 and 1996: YEAR ENDED MAY 31, ------------------ 1997 1996 ---------------------- ---------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------ -------------- ------ -------------- Options outstanding at beginning of year............................ 835 $20.60 675 $17.61 Granted........................... 230 25.95 277 22.20 Exercised......................... 93 16.47 73 9.05 Canceled.......................... 55 20.93 44 20.35 --- ------ --- ------ Options outstanding at end of year... 917 22.83 835 20.60 --- ------ --- ------ Exercisable at end of year........... 355 $18.27 260 $15.03 --- ------ --- ------
The following table sets forth the exercise price range, number of shares outstanding at May 31, 1997, weighted average remaining contractual life, weighted average exercise price, number of exercisable shares and weighted average exercise price of exercisable options by groups of similar price and grant date:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - - --------------------------------------------- -------------------------------------------- WEIGHTED- AVERAGE OUTSTANDING REMAINING WEIGHTED- EXERCISABLE WEIGHTED- RANGE OF EXERCISE AS OF CONTRACTUAL AVERAGE AS OF AVERAGE PRICES MAY 31, 1997 LIFE (YEARS) EXERCISE PRICE MAY 31, 1997 EXERCISE PRICE - - ----------------- ------------ ------------ -------------- ------------ -------------- $ 2.63-$ 9.88 267 5.76 $ 8.86 217 $ 8.53 $ 9.88-$18.00 210 8.60 17.46 51 16.58 $18.01-$24.00 183 7.96 23.62 75 23.75 $24.01-$33.00 243 9.59 28.22 9 32.80 $33.01-$39.38 14 8.25 38.36 3 38.36 --- ---- ------ --- ------ 917 8.18 $22.83 355 $18.27
34 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, other 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, 1997, 1996 and 1995 were as follows: EUROPE ASIA TOTAL ------ ---- ----- May 31, 1997........... $2,595 $54,250 $56,845 May 31, 1996........... 1,532 64,446 65,978 May 31, 1995........... 3,741 33,890 37,631 In fiscal year 1997, one customer accounted for 10.5% of consolidated net sales. In fiscal 1996, there were no sales to any one customer in excess of 10% of consolidated net sales. During fiscal 1995, one customer accounted for 12.4% of consolidated net sales. 35 The following data represents segment information for the years ending May 31:
ADJUSTMENTS UNITED AND 1997 STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED - - ---- ------ ------ ---- ------------ ------------ Sales to unaffiliated customers......... $100,328 $28,872 $20,959 $ -- $150,159 Transfers between geographic areas...... 35,986 -- 427 (36,413) -- -------- ------- ------- -------- -------- Total revenue........................... $136,314 $28,872 $21,386 $(36,413) $150,159 -------- ------- ------- -------- -------- Operating income........................ $ 22,968 $ 2,899 $ 1,623 $ (138) $ 27,352 -------- ------- ------- -------- -------- Identifiable assets at May 31, 1997..... $ 92,847 $11,374 $ 9,480 $ (8,001) $105,700 -------- ------- ------- -------- Corporate assets........................ 43,186 -------- Total assets at May 31, 1997............ $148,886 -------- -------- 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 -------- --------
(1) Includes the $6,000 in-process research and development charge associated with the acquisition of XRL, Inc. ACQUISITIONS XRL, INC. 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 purchase consideration consisted of 179 shares of ESI stock. The transaction was accounted for as a purchase. 36 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 $6,000 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. SUBSEQUENT EVENT - CHIP STAR, INC. In June 1997, ESI merged with Chip Star, Inc. (Chip Star), a privately-held company based in San Marcos, California. Chip Star provides capital equipment for producers of surface mount ceramic capacitors. Consideration paid to Chip Star was 700 shares of ESI stock. The merger will be accounted for as a pooling-of-interests. On May 31, 1997, Chip Star's total assets were $5,927 and shareholders' equity was $3,902. PRO FORMA QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH PRO FORMA YEAR ENDED MAY 31, 1997 QUARTER QUARTER QUARTER QUARTER TOTAL - - --------------------------------- ------- ------- ------- ------- ----- Net sales........................ $36,199 $37,415 $40,347 $46,188 $160,149 Gross margin..................... 20,690 20,932 22,160 23,270 87,052 Net income....................... 4,603 5,103 5,758 5,786 21,250 Net income per share............. $ 0.49 $ 0.54 $ 0.61 $ 0.62 $ 2.27
SUBSEQUENT EVENT - DYNAMOTION CORP. In June 1997, ESI acquired all of the equity of Dynamotion/ATI Corp. (Dynamotion), a publicly-held company based in Santa Ana, California. Dynamotion provides mechanical drilling equipment for printed circuit board manufacturers. The preliminary purchase consideration was $11,950 (347 shares of ESI stock) and assumption of $14,352 of liabilities. The purchase consideration includes the fair market value of all Dynamotion stock options. The purchase price allocation includes $2,361 of goodwill which will be amortized over seven years. The Company is still obtaining certain data related to the acquisition, and accordingly, the purchase price allocation remains open. The transaction was accounted for as a purchase. 37 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 $9,000 will be charged to expense during the quarter ended August 31, 1997. The Company currently believes that the research and development efforts will result in commercially feasible products in the next 24 months at an estimated additional cost of $2,000. Pro forma combined income statement data, excluding any impact of the previously discussed pooling-of-interests merger with Chip Star, Inc. for the years ended May 31, 1997 and 1996 are as follows: 1997 1996 -------- -------- Sales..................................... $162,797 $173,208 Income from continuing operations......... $ 12,958 $ 12,696 Net income per share...................... $ 1.44 $ 1.42 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH YEAR ENDED MAY 31, 1997 QUARTER QUARTER QUARTER QUARTER TOTAL - - ----------------------- ------- ------- ------- ------- -------- Net sales..................... $34,856 $35,101 $37,202 $43,000 $150,159 Gross margin.................. 19,812 19,395 20,072 21,204 80,483 Net income.................... 4,379 4,587 4,862 5,124 18,952 Net income per share.......... $ 0.51 $ 0.53 $ 0.56 $ 0.59 $ 2.19 1ST 2ND 3RD 4TH YEAR ENDED MAY 31, 1996 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
(1) Includes the $6,000 in-process research and development charge associated with the acquisition of XRL, Inc. 38 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended May 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Electro Scientific Industries, Inc. and subsidiaries as of May 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon July 3, 1997 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is included under "Election of Directors" in the Company's Proxy Statement for its 1997 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. No information is required to be included for Item 405 of Regulation S-K for 1997. 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 1997 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 1997 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 40 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, 1997 and 1996 22 Consolidated Statements of Income for the Years Ended May 31, 1997, 1996, and 1995 23 Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1997, 1996, and 1995 24 Consolidated Statements of Cash Flows for the Years Ended May 31, 1997, 1996, and 1995 25 Notes to Consolidated Financial Statements 27-38 Report of Independent Public Accountants 39 All schedules are omitted as the required information is inapplicable or not significant. 41 (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) 10-E. ESI 1996 Stock Incentive Plan. 11. Statement of Calculation of Earnings Per Share. 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 1997. However, a Form 8-K was filed on July 7, 1997. - - ------------------- (1) Management contract or compensatory plan or arrangement. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 1, 1997 ELECTRO SCIENTIFIC INDUSTRIES, INC. By /s/ Donald R. VanLuvanee ---------------------------------- Donald R. VanLuvanee President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on August 1, 1997. 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 43 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. 10-E. ESI 1996 Stock Incentive Plan. 11. Statement of Calculation of Earnings Per Share. 21. Subsidiaries of the Company. 23. Consent of Independent Public Accountants. 27. Financial Data Schedule. 44 EX-10.B 2 EXH 10-B EXHIBIT 1O-B ELECTRO SCIENTIFIC INDUSTRIES, INC. 1989 STOCK OPTION PLAN (as amended as of September 20, 1996) 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 1,700,000 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. 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. 1. OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. (a) ANNUAL GRANTS. Each Non-Employee Director shall be automatically granted an option to purchase 3,000 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. The increase in the number of shares covered by options automatically granted under this paragraph 16 as of July 31, 1996 from 1,000 to 3,000 shares shall be subject to and conditioned upon approval by the shareholders at the 1996 annual meeting of shareholders of the amendment to 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-10.E 3 EXH 10-E EXHIBIT 10-E ELECTRO SCIENTIFIC INDUSTRIES, INC. 1996 STOCK INCENTIVE PLAN 1. PURPOSE. The purpose of this Stock Incentive Plan (the "Plan") is to enable Electro Scientific Industries, Inc. (the "Company") to attract and retain the services of selected employees, officers and directors of the Company or of any subsidiary of the Company. 2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided below and in paragraph 9, the shares to be offered under the Plan shall consist of Common Stock of the Company, and the total number of shares of Common Stock that may be issued under the Plan shall not exceed 150,000 shares. The shares issued under the Plan may be authorized and unissued shares or reacquired shares. If a Performance-based Award granted under the Plan expires, terminates or is cancelled, the unissued shares subject to such Performance-based Award shall again be available under the Plan. If shares sold or issued as a bonus or Performance-based Award under the Plan are forfeited to the Company or repurchased by the Company, the number of shares forfeited or repurchased shall again be available under the Plan. 3. EFFECTIVE DATE AND DURATION OF PLAN. (a) EFFECTIVE DATE. The Plan shall become effective as of April 12, 1996. However, all awards under the Plan shall be conditioned on and subject to approval of the Plan by the shareholders of the Company. Subject to this limitation, Performance-based Awards may be granted and shares may be awarded as bonuses or sold under the Plan at any time after the effective date and before termination of the Plan. (b) DURATION. The Plan shall continue in effect until all shares available for issuance under the Plan have been issued and all restrictions on such shares have lapsed. The Board of Directors may suspend or terminate the Plan at any time except with respect to Performance-based Awards and shares subject to restrictions then outstanding under the Plan. Termination shall not affect any right of the Company to repurchase shares or the forfeitability of shares issued under the Plan. 4. ADMINISTRATION. (a) BOARD OF DIRECTORS. The Plan shall be administered by the Board of Directors of the Company, which shall determine and designate from time to time the individuals to whom awards shall be made, the amount of the awards and the other terms and conditions of the awards. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt and amend rules and regulations relating to administration of the Plan, advance the lapse of any waiting period, accelerate any exercise date, waive or modify any restriction applicable to shares (except those restrictions imposed by law) and make all other determinations in the judgment of the Board of Directors necessary or desirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan and related agreements by the Board of Directors shall be final and conclusive. The Board of Directors may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect, and it shall be the sole and final judge of such expediency. (b) COMMITTEE. The Board of Directors 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 amend or terminate the Plan as provided in paragraphs 3 and 10. 5. TYPES OF AWARDS; ELIGIBILITY. The Board of Directors may, from time to time, take the following action, separately or in combination, under the Plan: (i) award stock bonuses as provided in paragraph 6; (ii) sell shares subject to restrictions as provided in paragraph 7; and (iii) grant Performance-based Awards as provided in paragraph 8. An award may be made to any employee, officer or director of the Company or any subsidiary of the Company. The Board of Directors shall select the individuals to whom awards shall be made and shall specify the action taken with respect to each individual to whom an award is made. At the discretion of the Board of Directors, an individual may be given an election to surrender an award in exchange for the grant of a new award. 6. STOCK BONUSES. The Board of Directors may award shares under the Plan as stock bonuses. Shares awarded as a bonus shall be subject to the terms, conditions, and restrictions determined by the Board of Directors. The restrictions may include restrictions concerning transferability and forfeiture of the shares awarded, together with such other restrictions as may be determined by the Board of Directors. The Board of Directors may require the recipient to sign an agreement as a condition of the award, but may not require the recipient to pay any monetary consideration other than amounts necessary to satisfy tax withholding requirements. The agreement may contain any terms, conditions, restrictions, representations and warranties required by the Board of Directors. The certificates representing the shares awarded shall bear any legends required by the Board of Directors. The Company may require any recipient of a stock bonus to pay to the Company in cash upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the recipient fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the recipient, including salary or fees for services, subject to applicable law. With the consent of the Board of Directors, a recipient may deliver Common Stock to the Company to satisfy this withholding obligation. The number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued as a stock bonus, less the number of shares surrendered or withheld to satisfy withholding obligations. 7. RESTRICTED STOCK. The Board of Directors may issue shares under the Plan for such consideration (including promissory notes and services) as determined by the Board of Directors. Shares issued under the Plan shall be subject to the terms, conditions and restrictions determined by the Board of Directors. The restrictions may include restrictions concerning transferability, repurchase by the Company and forfeiture of the shares issued, together with such other restrictions as may be determined by the Board of Directors. All Common Stock issued pursuant to this paragraph 7 shall be subject to a purchase agreement, which shall be executed by the Company and the prospective recipient of the shares prior to the delivery of certificates representing such shares to the recipient. The purchase agreement may contain any terms, conditions, restrictions, representations and warranties required by the Board of Directors. The certificates representing the shares shall bear any legends required by the Board of Directors. The Company may require any purchaser of restricted stock to pay to the Company in cash upon demand amounts necessary to satisfy any applicable federal, state or local tax withholding requirements. If the purchaser fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the purchaser, including salary, subject to applicable law. With the consent of the Board of Directors, a purchaser may deliver Common Stock to the Company to satisfy this withholding obligation. The number of shares reserved for issuance under the Plan shall be reduced by the number of shares issued as restricted stock, less the number of shares surrendered or withheld to satisfy withholding obligations. 8. PERFORMANCE-BASED AWARDS. The Board of Directors may grant awards intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder ("Performance-based Awards"). Performance-based Awards shall be denominated at the time of grant either in Common Stock ("Stock Performance Awards") or in dollar amounts ("Dollar Performance Awards"). Payment under a Stock Performance Award or a Dollar Performance Award shall be made, at the discretion of the Board of Directors, in Common Stock ("Performance Shares"), or in cash or in any combination thereof. Performance-based Awards shall be subject to the following terms and conditions: (a) AWARD PERIOD. The Board of Directors shall determine the period of time for which a Performance-based Award is made (the "Award Period"). (b) PERFORMANCE GOALS AND PAYMENT. The Board of Directors shall establish in writing objectives ("Performance Goals") that must be met by the Company or any subsidiary, division or other unit of the Company ("Business Unit") during the Award Period as a condition to payment being made under the Performance-based Award. The Performance Goals for each award shall be one or more targeted levels of performance with respect to one or more of the following objective measures with respect to the Company or any Business Unit: earnings, earnings per share, stock price increase, total shareholder return (stock price increase plus dividends), return on equity, return on assets, return on capital, economic value added, revenues, operating income, inventories, inventory turns, cash flows or any of the foregoing before the effect of acquisitions, divestitures, accounting changes, and restructuring and special charges (determined according to criteria established by the Board of Directors). The Board of Directors shall also establish the number of Performance Shares or the amount of cash payment to be made under a Performance-based Award if the Performance Goals are met or exceeded, including the fixing of a maximum payment (subject to paragraph 8(d)). The Board of Directors may establish other restrictions to payment under a Performance-based Award, such as a continued employment requirement, in addition to satisfaction of the Performance Goals. Some or all of the Performance Shares may be issued at the time of the award as restricted shares subject to forfeiture in whole or in part if Performance Goals or, if applicable, other restrictions are not satisfied. (c) COMPUTATION OF PAYMENT. During or after an Award Period, the performance of the Company or Business Unit, as applicable, during the period shall be measured against the Performance Goals. If the Performance Goals are not met, no payment shall be made under a Performance-based Award. If the Performance Goals are met or exceeded, the Board of Directors shall certify that fact in writing and certify the number of Performance Shares earned or the amount of cash payment to be made under the terms of the Performance-based Award. (d) MAXIMUM AWARDS. No participant may receive Stock Performance Awards in any fiscal year under which the maximum number of shares of Common Stock issuable under the award exceeds 100,000 shares or Dollar Performance Awards in any fiscal year under which the maximum amount of cash payable under the award exceeds $750,000. (e) TAX WITHHOLDING. Each participant who has received Performance Shares shall, upon notification of the amount due, pay to the Company in cash amounts necessary to satisfy any applicable federal, state and local tax withholding requirements. If the participant fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the participant, including salary, subject to applicable law. With the consent of the Board of Directors, a participant may satisfy this obligation, in whole or in part, by having the Company withhold from any shares to be issued that number of shares that would satisfy the withholding amount due or by delivering shares of Common Stock to the Company to satisfy the withholding amount. (f) EFFECT ON SHARES AVAILABLE. The payment of a Performance-based Award in cash shall not reduce the number of shares of Common Stock reserved for issuance under the Plan. The number of shares of Common Stock reserved for issuance under the Plan shall be reduced by the number of shares issued upon payment of an award, less the number of shares surrendered or withheld to satisfy withholding obligations. 9. CHANGES IN CAPITAL STRUCTURE. If the outstanding Common Stock of the Company is hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of any stock split, combination of shares or dividend payable in shares, recapitalization or reclassification, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares available for grants under the Plan. In addition, the Board of Directors shall make appropriate adjustment in the number and kind of shares subject to outstanding Performance-based Awards so that the recipient's proportionate interest before and after the occurrence of the event is maintained. Notwithstanding the foregoing, the Board of Directors shall have no obligation to effect any adjustment that would or might result in the issuance of fractional shares, and any fractional shares resulting from any adjustment may be disregarded or provided for in any manner determined by the Board of Directors. Any such adjustments made by the Board of Directors shall be conclusive. 10. 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 9, however, no change in an award already granted shall be made without the written consent of the holder of such award. 11. APPROVALS. The obligations of the Company under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company's shares may then be listed, in connection with the grants under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver Common Stock under the Plan if such issuance or delivery would violate applicable state or federal securities laws. 12. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award pursuant to the Plan shall (i) confer upon any employee any right to be continued in the employment of the Company or any subsidiary or interfere in any way with the right of the Company or any subsidiary by whom such employee is employed to terminate such employee's employment at any time, for any reason, with or without cause, or to decrease such employee's compensation or benefits, or (ii) confer upon any person engaged by the Company any right to be retained or employed by the Company or to the continuation, extension, renewal, or modification of any compensation, contract, or arrangement with or by the Company. 13. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall have no rights as a shareholder with respect to any Common Stock until the date of issue to the recipient of a stock certificate for such shares. Except as otherwise expressly provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date occurs prior to the date such stock certificate is issued. EX-11 4 EXH 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, ------------------- 1997 1996 1995 ---- ---- ---- Weighted average number of shares of common stock outstanding 8,673,287 8,605,782 7,510,191 --------- --------- --------- Common stock equivalents: Application of the treasury stock method to the stock option plan -- -- -- --------- --------- --------- Weighted average number of shares used in net income per share 8,673,287 8,605,782 7,510,191 --------- --------- --------- Net income $ 18,952 $ 16,082 $ 11,517 --------- --------- --------- Net income per share (primary and fully diluted) 1 : $ 2.19 $ 1.87 $ 1.53 --------- --------- ---------
1. No additional shares related to outstanding options are included in the primary and fully diluted calculations for the years ended May 31, 1997, 1996 and 1995, as the differences were not significant. 45 EX-21 5 EXH 21 EXHIBIT 21 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AS OF MAY 31, 1997 Percentage of State and Country Voting Securities Subsidiaries Of Incorporation Owned (1) - - ------------ ----------------- ----------------- Chicago Laser Systems, Inc. Oregon 100% CHINT, Ltd. U.S. Virgin Islands 100% CLS GmbH Germany 100% CLS Ltd England 100% Dynamotion Merger Corp. New York 100% ESI BV The Netherlands 100% ESI Foreign Sales Corporation Guam 100% ESI GmbH Germany 100% ESI International (DISC) Oregon 100% ESI KK Japan 100% ESI Korea Korea 100% ESI Ltd England 100% ESI SARL France 100% ESI SRL Italy 100% Palomar Systems, Inc. Oregon 100% XRL Corporation Oregon 100% (1) Other than qualifying shares, where applicable. 46 EX-23 6 EXH 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 and Form S-3 Registration Statements File Nos., 2-91731, 33-2623, 33-2624, 33-34098, 33-37148, 33-46970, 33-58292, 33-70584, 33-63705, 33-65477, 333-16485, 333-16487 and 333-29513. ARTHUR ANDERSEN LLP Portland, Oregon August 1, 1997 47 EX-27 7 FINANICAL DATA SCHEDULE
5 YEAR MAY-31-1997 MAY-31-1997 15,326 27,860 49,100 230 31,873 126,875 40,631 24,446 148,886 13,674 0 0 0 57,586 77,626 148,886 150,159 150,159 69,676 69,676 53,131 0 0 28,737 9,785 0 0 0 0 18,952 2.19 2.19
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