-----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, K5OPaBVyL3DiggJnV9nSk7IbYI1fdAzbboh0fMzDy8t1U3BY+CvbIsd6Wp54LlBa 4g1i/4Uarw3XoN271vSbZQ== 0001047469-99-015045.txt : 19990416 0001047469-99-015045.hdr.sgml : 19990416 ACCESSION NUMBER: 0001047469-99-015045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO SCIENTIFIC INDUSTRIES INC CENTRAL INDEX KEY: 0000726514 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 930370304 STATE OF INCORPORATION: OR FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12853 FILM NUMBER: 99594798 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-Q 1 10-Q Page 1/20 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999 OR ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ---------------------- ---------------------- COMMISSION FILE NUMBER 0-12853 ELECTRO SCIENTIFIC INDUSTRIES, INC. OREGON 93-0370304 13900 N.W. SCIENCE PARK DRIVE, PORTLAND, OREGON 97229 (503) 641-4141 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF FEBRUARY 28, 1999 THERE WERE 12,991,237 SHARES OF COMMON STOCK OF ELECTRO SCIENTIFIC INDUSTRIES, INC. OUTSTANDING. Page 2/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT INDEX Part I. Financial Information
Page No. -------- Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets 3-4 February 28, 1999 and May 31, 1998 Consolidated Statements of Income 5 Three Months and Nine Months ended February 28, 1999 and February 28, 1998 Consolidated Statements of Cash Flows 6-7 Nine Months ended February 28, 1999 and February 28, 1998 Notes to Consolidated Financial Statements 8-13 Item 2. Management's Discussion and Analysis of Financial 14-18 Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings 19 Signature 20
Page 3/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
ASSETS February 28, 1999 May 31, 1998 - ------ ----------------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 2,856 $ 10,034 Securities available for sale 26,698 29,113 ------ ------ Total cash and securities 29,554 39,147 Trade receivables, net 79,413 65,605 Inventories 55,484 52,721 Deferred income taxes 4,788 4,788 Other current assets 2,305 3,616 ----- ------- Total current assets 171,544 165,877 ------- ------- PROPERTY AND EQUIPMENT, AT COST 67,988 62,735 Less - Accumulated depreciation (35,516) (32,362) -------- -------- Net property and equipment 32,472 30,373 ------ ------ DEFERRED INCOME TAXES 2,692 2,692 OTHER ASSETS 9,656 10,189 ----- ------ Total Assets $216,364 $209,131 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. Page 4/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY February 28, 1999 May 31, 1998 - -------------------- ------------------ ------------ CURRENT LIABILITIES: Accounts payable $ 6,952 $ 5,857 Accrued liabilities: Payroll related 4,763 6,595 Commissions 5,673 4,289 Warranty 2,199 2,010 Other 487 1,939 -------- -------- Total accrued liabilities 13,122 14,833 Deferred revenue 334 347 -------- -------- Total current liabilities 20,408 21,037 ------ ------ SHAREHOLDERS' EQUITY: Common stock, without par value; Authorized: 40,000 shares; Outstanding: 12,991, and 12,848 respectively 104,750 101,838 Retained earnings 91,206 86,256 ------ ------ Total shareholders' equity 195,956 188,094 ------- ------- Total liabilities and shareholders' equity $216,364 $209,131 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. Page 5/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share) (unaudited)
Three Months Ended Nine Months Ended ------------------ ----------------- Feb. 28, 1999 Feb. 28, 1998 Feb. 28, 1999 Feb. 28, 1998 ------------- ------------- ------------- ------------- Net Sales $ 51,506 $ 68,152 $148,965 $197,805 Cost of sales 25,415 29,765 74,118 86,289 ------ ------ ------ ------ Gross margin 26,091 38,387 74,847 111,516 Operating expenses: Selling, service and administrative 14,331 15,910 42,964 47,297 Research, development and engineering 7,340 9,039 22,908 26,510 Merger related expenses 2,773 3,510 2,773 14,634 ------ ----- ----- ------ Total operating expenses 24,444 28,459 68,645 88,441 ------ ------ ------ ------ Operating income 1,647 9,928 6,202 23,075 Interest income 304 365 907 1,155 Other income, net 84 298 190 610 --------- --------- --------- ------- Income before income taxes 2,035 10,591 7,299 24,840 Provision for income taxes 1,115 3,165 2,707 9,969 ----- ----- ----- ----- Net income $ 920 $ 7,426 $ 4,592 $ 14,871 -------- ------- ------- -------- -------- ------- ------- -------- Net income per share: Basic $ 0.07 $ 0.60 $ 0.36 $ 1.19 -------- ------- ------- -------- -------- ------- ------- -------- Diluted $ 0.07 $ 0.58 $ 0.35 $ 1.16 -------- ------- ------- -------- -------- ------- ------- -------- Weighted average number of shares: Basic 12,943 12,452 12,895 12,485 Diluted 13,344 12,798 13,180 12,826
The accompanying notes are an integral part of these statements. Page 6/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine Months Ended Feb. 28 1999 1998 ---- ---- Cash Flows From Operating Activities: Net income $ 4,592 $ 14,871 Adjustment to align AISI with the period ended February 28, 1998 -- (565) Adjustments to reconcile net income to cash provided by (used in) operating activities: Merger-related expenses (1) 2,773 14,634 Depreciation and amortization 4,907 4,440 Changes in operating accounts: Increase in trade receivables (12,806) (10,230) Increase in inventories (1,610) (12,114) Increase (decrease) in other current assets 1,313 (2,089) Decrease in current liabilities (3,890) (5,224) ----- ------- Net cash provided by (used in) operating activities (4,721) 3,723 ------- ----- Cash Flows From Investing Activities: Purchases of property and equipment (5,998) (9,001) Purchase of securities (16,330) (18,659) Proceeds from sales of securities and maturing securities 18,745 17,415 (Increase) decrease in other assets (1,213) (773) ------- --------- Net cash used in investing activities: (4,796) (11,018) ------- -------- Cash Flows From Financing Activities: Repayment of Dynamotion subsidiary debt (2) -- (6,979) Distributions to shareholders (573) (849) Repurchase of shares -- (625) Proceeds from exercise of stock options and stock plans 2,912 4,182 ------ ------- Net cash (used in) provided by financing activities: 2,339 (4,271) ------ -------- Net Change in Cash and Cash Equivalents (7,178) (11,566) Cash and Cash Equivalents at Beginning of Period 10,034 20,412 ------ ------ Cash and Cash Equivalents at End of Period $ 2,856 $ 8,846 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements. Page 7/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) (Unaudited) Cash payments for interest were not significant for the nine months ended February 28, 1999 and February 28, 1998. Cash payments for income taxes were $2,839 and $9,270 for the nine months ended February 28, 1999 and February 28, 1998, respectively. Notes: (1) See Note 5 in Notes to Consolidated Financial Statements.
(2) Acquisition of Dynamotion subsidiary: Assets less liabilities acquired, net of cash $(11,950) Issuance of common stock and common stock options 11,950 ------ Net cash used to acquire Dynamotion: $ 0
Page 8/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands except share data) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in these interim statements. Management believes that the interim statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of results for the interim periods. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1998 Annual Report filed on Form 10-K. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable are net of an allowance for doubtful accounts of $667 at February 28, 1999 and $519 at May 31, 1998. NOTE 3 - INVENTORIES Inventories consist of the following:
February 28, 1999 May 31, 1998 ----------------- ------------ Raw materials and purchased parts $ 24,626 $33,519 Work-in-process 17,692 9,193 Finished goods 13,166 10,009 ------ -------- Total inventories $55,484 $52,721 ------- ------- ------- -------
Page 9/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except share data) (Unaudited) NOTE 4 - NET INCOME PER SHARE The Company adopted the Financial Accounting Standards Board's Statement 128, "Earnings Per Share" (SFAS 128), in the third fiscal quarter of 1998. All earnings per share amounts in the following table are presented and, where necessary, restated to conform to the SFAS 128 requirements.
Three Months Ended Feb. 28 Nine Months Ended Feb. 28 1999 1998 1999 1998 ---- ---- ---- ---- Net income $920 $7,426 $4,592 $14,871 Weighted average number of shares of common stock and common stock equivalents outstanding: Weighted average number of shares outstanding for computing basic net income per share 12,943 12,452 12,895 12,485 Dilutive effect of employee stock options after application of the treasury stock method 401 346 285 341 --- --- --- --- Weighted average number of shares outstanding for computing diluted net income per share 13,344 12,798 13,180 12,826 ------ ------ ------ ------ ------ ------ ------ ------ Net income per share - basic $ 0.07 $ 0.60 $ 0.36 $ 1.19 ------ ------ ------ ------ ------ ------ ------ ------ Net income per share - diluted $ 0.07 $ 0.58 $ 0.35 $ 1.16 ------ ------ ------ ------ ------ ------ ------ ------
Page 10/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except share data) (Unaudited) NOTE 4 - CONT. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include the following stock options because inclusion would have an anti-dilutive effect on the earnings per share calculation.
Three Months Ended February 28 Nine Months Ended February 28 1999 1998 1999 1998 ---- ---- ---- ---- Number of Employee Stock Options 126 3 262 10
NOTE 5 - ACQUISITIONS MICROVISION, INC. On January 29, 1999, the Company completed the acquisition of MicroVision, a provider of integrated, vision-based inspection and automation solutions for use in semiconductor front-end and back-end applications, located in Chanhassen, Minnesota. The acquisition consideration consisted of 1,018,500 shares of ESI stock, of which 979,025 shares were issued and outstanding, and 39,475 shares were reserved for stock options. The transaction has been accounted for as a pooling-of-interests and, accordingly, all data included in the Consolidated Financial Statements has been restated. TESTEC, INC. On December 21, 1998, the Company completed the acquisition of Testec, a provider of electrical test systems for the passive component marketplace, located in Phoenix, Arizona. The acquisition consideration consisted of 500,000 shares of ESI common stock. The transaction has been accounted for as a pooling-of-interests and, accordingly, all data included in the Consolidated Financial Statements has been restated. APPLIED INTELLIGENT SYSTEMS, INC. (AISI) On December 1, 1997, the Company completed the acquisition of AISI, a provider of machine vision solutions for the semiconductor and electronics industries, located in Ann Arbor, Michigan. The acquisition consideration consisted of 1,399,515 shares of ESI common stock. The transaction has been accounted for as a pooling-of-interests and, accordingly, all data included in the Consolidated Financial Statements has been restated. CHIP STAR, INC. On June 26, 1997, the Company completed the acquisition of Chip Star Inc., a provider of ceramic capacitor termination systems located in San Marcos, California, through the issuance of 700,000 shares of ESI stock. The transaction has been accounted for as a pooling of interests, and accordingly, all data included in the consolidated financial statements has been restated. Disclosure of ESI and Chip Star's revenue and net income, on an individual company basis from June 1 to June 25, 1997 is not deemed to be significant. DYNAMOTION, INC. On June 9, 1997, the Company acquired all of the outstanding stock of Dynamotion Corp., a producer of high performance mechanical drilling and routing systems based in Santa Ana, California. The purchase consideration consisted of 347,200 shares of ESI stock. The transaction was accounted for as a purchase. In connection with the purchase price allocation, the Company obtained an appraisal of the intangible assets that indicated that substantially all of the acquired intangible assets consisted of research and development projects in process. At that time, the development of these projects had not reached technological feasibility and the technology was believed to have no alternative future use. In accordance with generally accepted accounting principles, the acquired in-process research and development was charged to merger related expense during the quarter ended August 31, 1997 and is reflected in the accompanying Consolidated Statements of Operations. Page 11/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except share data) (Unaudited) NOTE 5 - CONT. A reconciliation of amounts prior to these acquisitions to amounts included in the financial statements is as follows:
Three Months Ended Feb. 28 Nine Months Ended Feb. 28 -------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenue: ESI $ 48,917 $ 57,594 $ 139,458 $ 157,340 AISI - - - 17,245 Testec 817 2,501 2,587 5,466 MicroVision 1,772 8,057 6,920 17,754 ----- ----- ----- ------ As Restated $ 51,506 $ 68,152 $ 148,965 $197,805 Net Income: ESI $ 827 $ 4,534 $ 3,917 $ 6,843 AISI - - - 3,748 Testec 215 639 340 1,447 MicroVision (122) 2,253 335 2,833 ---- ----- --- ----- As Restated $ 920 $ 7,426 $ 4,592 $ 14,871
NOTE 6 - INCOME TAXES The effective income tax rate for the interim period is based on estimates of annual amounts of taxable income, tax credits and other factors. Page 12/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands except share data) (Unaudited) NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The Company has adopted SFAS 130 in the first fiscal quarter of 1999. The statement establishes presentation and disclosure requirements for reporting comprehensive income. Comprehensive income includes charges or credits to equity that are not the result of transactions with shareholders. Components of the Company's comprehensive income consist of cumulative foreign currency translation adjustments and unrealized gains/losses of securities available for sale, none of which are material to the Company's consolidated financial position or results of operations. HEDGING ACTIVITIES The Financial Accounting Standards Board issued "Accounting for Derivative Instruments and Hedging Activities"(SFAS 133), in June 1998. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The change in the derivative's fair value related to the ineffective portion of a hedge, if any, will be immediately recognized in earnings. The Company expects to adopt this Standard as of the beginning of its fiscal year 2001. The effect of adopting this standard is currently being evaluated, but is not expected to have a material effect on the Company's financial position or its results of operations. NOTE 8 - SUBSEQUENT EVENTS On April 8, 1999 a federal court jury awarded ESI a $13.1 million damage judgment in its patent infringement suit against General Scanning, Inc. ESI initiated litigation against General Scanning in December 1996 in the U.S. District Court for the Northern District of California. On April 2, 1999 the same federal court jury issued a verdict upholding the validity of ESI's semiconductor link blowing patent - U.S. patent 5,265,114 entitled "System and Method for Selectively Laser Processing a Target Structure of One or More Materials of a Multimaterial Multilayer Device". The jury also concluded that General Scanning's infringement was willful and gives the court the authority to increase the damages up to three times. General Scanning has announced that it intends to appeal the verdict. Page 13/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS Results of Operations Revenue of $51.5 million for the quarter ended February 28, 1999 was $16.7 million or 24.5% lower than in the third quarter of fiscal 1998, and $2.5 million or 5.1% higher than in the quarter ended November 30, 1998. Revenue of $149.0 million for the year to date ended February 28, 1999 was $48.8 million or 24.7% lower as compared to the year to date ended February 28, 1998. Demand for electronic component test and termination equipment and vision products was down from prior year levels, but was up as compared to the prior quarter. Sales of memory yield improvement systems increased, and again, represented the largest percentage of sales for the quarter at 33% of total revenues. Advanced Packaging and Circuit Fine Tuning equipment sales were both down slightly from both prior quarter and prior year levels. Gross margin for the three months ended February 28, 1999 decreased to 50.7% from 56.3% for the third quarter of the prior fiscal year. Gross margin was up about 0.2% compared to the quarter ended November 30, 1998. Gross margin for the year to date ended February 28, 1999 decreased to 50.2% from 56.3% for the year to date ended February 28, 1998. The decrease in margin from the prior fiscal year is driven by changes in product mix, a slight decrease in average selling prices, and lower levels of overhead absorption due to lower unit volumes. Selling, service and administrative expenses for the three months ended February 28, 1999 were $1.6 million lower in the current quarter as compared to the third quarter of fiscal 1998. Expenses for sales, services and administration increased about $0.1 million compared to the quarter ended November 30, 1998. Selling, service and administrative expenses for the year to date ended February 28, 1999 were $4.3 million lower as compared to the year to date ended February 28, 1998. The decrease is due mainly to general spending reductions associated with the continued consolidation of selling and administrative functions for the Chip Star and AISI acquisitions. Expenses associated with research, development and engineering decreased by $1.7 million as compared to the third quarter of fiscal l998. R&D expenses decreased $0.1 million from the prior quarter level. Research, development and engineering expenses for the year to date ended February 28, 1999 decreased $3.6 million as compared to the year to date ended February 28, 1998. The decrease is attributable to reduced R&D spending at MicroVision and a general decrease in spending from prior year levels in conjunction with lower levels of revenue in fiscal 1999. R&D spending typically fluctuates from quarter to quarter as engineering projects move through their life cycles. Merger related expenses for fiscal 1999 and 1998 principally include one-time transaction costs associated with the acquisitions referred to in Note 5 to the financial statements. Such costs include investment banking, legal, and accounting costs as well as certain one-time costs Page 14/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (Continued) Results of Operations incurred to consolidate the operations of these acquisition entities. Fiscal 1998 merger related expenses also include a $9.0 million charge for acquired in-process research and development incurred in connection with the Dynamotion Corporation acquisition. Net income for the quarter ended February 28, 1999 was $0.9 million or $0.07 per basic share. Excluding $2.8 million of merger related expenses, net income was $3.2 million or $0.25 per basic share. This represents a decrease of $6.1 million or 65.6% from the third quarter of fiscal 1998, when earnings, excluding merger related expenses, were $9.3 million or $0.75 per basic share. Net income for the year to date ended February 28, 1999 was $4.6 million or $0.36 per basic share. Excluding $2.8 million of merger related expenses, net income was $6.6 million or $0.52 per basic share. This represents a decrease of $19.8 million or 75% from the year to date ended February 28, 1998, when earnings, excluding merger related expenses, were $26.4 million or $2.12 per basic share. Ending backlog on February 28, 1999 was $24 million as compared to $18 million for November 30, 1998. Page 15/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (continued) Liquidity, Capital Resources and Business Environment The Company's principal sources of liquidity are existing cash and cash equivalents and marketable debt securities of $29.6 million, accounts receivable of $79.4 million, and a $7.0 million line of credit, none of which was outstanding at February 28, 1999. ESI has a current ratio of 8.4:1 and no long-term debt. Working capital increased to $151.1 million at February 28, 1999 versus $145.0 million at May 31, 1998. Accounts receivable was significantly higher than on May 31, 1998, but the increase is a function of increased flexibility with regard to customer payment terms, and does not include a significant increase in past due receivables. Inventory increased by $2.8 million over May 31, 1998 due mainly to this Company's investment in finished goods in preparation for an increased level of business associated with the acceptance of new products in the Company's markets. The Company's business depends in large part upon the capital expenditures of manufacturers of electronic devices, including miniature capacitors and semiconductor memory devices, and circuits used in wireless telecommunications equipment, such as pagers and cellular phones, automotive electronics and computers. The markets for products manufactured by the Company's customers are cyclical and have historically experienced periodic downturns, which often have had a negative effect on the demand for capital equipment such as that sold by the Company. Several large, multinational electronics companies constituted 41% of the Company's fiscal 1998 sales and are expected to comprise a similar ratio in fiscal 1999. The loss of any of these customers would have a significant effect on the Company's financial statements. The market for the Company's products is characterized by rapidly changing technology and evolving industry standards. The Company believes that its future success will depend on its ability to develop and manufacture new products and product enhancements, to introduce them successfully into the market and to create and sustain intellectual property protection for these new products. Failure to do so in a timely fashion could harm the Company's competitive position. The announcements or introductions of new products by the Company or its competitors may adversely affect the Company's operating results, as these announcements may cause customers to defer or forego ordering products from the Company's existing product lines. Page 16/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (continued) Liquidity, Capital Resources and Business Environment International shipments have accounted for 64% of year-to-date sales for fiscal 1999 as compared to 57% for the fiscal year 1998. About 39% of the company's year-to-date product sales are to Asian customers versus 26% for fiscal year 1998. Several countries in this region, notably South Korea, Japan and Taiwan, have experienced currency devaluation and/or difficulties in financing short-term obligations. The Company's customers in these countries continued to purchase and pay for products within agreed upon terms. In addition, substantially all Asian end customer receivables are secured by letter of credit. There can be no assurance that difficulties in Asian economies will not adversely affect the demand for the Company's products in that region or elsewhere. The Company expects that international shipments will continue to represent a significant percentage of net sales in the future. 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 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 us in yen, and the Company hedges these sales transactions to mitigate currency risks. The European and Asian sales subsidiaries' operating expenses are denominated in their respective local currencies. These transactions represent approximately 9% of total consolidated operating expenses with about 60% attributable to Europe and 40% to Asia. Changes in the value of the local currency, as measured in US dollars, will commensurably increase or decrease operating expenses. The Company has a task force to prepare for Year 2000 (Y2K) issues. The Director of Corporate Technology serves as the Y2K coordinator and has overall responsibility for organizing and managing the Company's Y2K program. The coordinator reports to the Chief Technical Officer and Vice President. The Company has evaluated its technology and data used in the creation and delivery of its products and services and in its internal operations, and has identified Y2K issues related to its customers and suppliers. Page 17/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) Each of the Company's product lines have technical and communication resources assigned for Y2K readiness. ESI uses Sematech Tests to determine equipment product readiness. All of the Company's current standard products are now Y2K ready. Past products have been evaluated and readiness upgrade kits are being developed and offered where practical. The overall Y2K coordinator is working with each product line group to develop and implement their product plans. Y2K readiness is viewed as a necessary capability for doing business. The Company has completed the inventory and evaluation of its business systems. Assessment includes facilities, engineering, manufacturing, laboratory, banking, accounting, procurement, product test, customer order, receiving, warehousing, and communications. The Company is greater than 90% complete with ready business systems. The Company's core business systems are now Y2K ready. A number of non-critical business systems are not ready and remediation plans are in place that include an upgrade of systems as well as orderly end of life. For each deficiency identified, a responsible party has been identified to ensure compliance. This activity is expected to be completed by June 30, 1999. The Company has a corporate officer assigned the responsibility for ESI's supplier Y2K readiness evaluation. The plan includes automatic assessment of the top 80% of the suppliers and key supplier identification of the remaining 20%. Additionally, in each business area, engineering and purchasing teams have been formed to identify material that meet certain criteria for inclusion as strategic material. Vendors supplying this strategic material will be subject to in depth assessment of their ability to continue to supply to the Company. Remediation actions for at risk vendors include working with the vendors to ensure continued delivery of material and inventory of some materials within the Company. Contingency plans include switching from suppliers that are not Y2K compliant, to vendors that are able to demonstrate Y2K readiness. This activity is expected to be complete by June 30, 1999. The Company has incurred costs associated with assessing the Y2K issue and implementing its Y2K plan. These costs have included consultants, software upgrades, and security system upgrades. The Company estimates it has incurred approximately two-thirds of its total expected Y2K costs. Total costs of assessing and implementing the Company's Y2K plan are not expected to have a material effect on the Company's consolidated financial position or the results of its operations. Consequences of not successfully implementing the Company's Y2K plan include inability to ship product, delay or loss of sales, and delays in factory operations. The Company believes that it will substantially complete the implementation of its Y2K plan before the year 2000, and provided that third parties mitigate their own risks successfully, the Company believes it will have no material business risk from such Y2K issues. However, there can be no assurances that third parties, over which the company has no control, will successfully address their own Y2K issues. Page 18/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) Information in the Management Discussion and Analysis regarding expectations for future product demand, customers, international shipments and future product offerings and resources constitute forward-looking statements that involve a number of risks and uncertainties. In addition, the Company may from time to time issue other forward-looking statements. The following factors could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the electronics industry, including the cyclical nature of the market for the Company's products; rapidly changing technology and evolving industry standards; availability and continued validity of intellectual property protection; competitive factors, including increased competition, new product offerings by competitors and price pressures; availability of supplies from third party suppliers on a timely basis and at reasonable prices; and international business conditions, including fluctuations in interest and currency exchange rates, government financed competition, changes in trade policies, tariff regulations, and the difficulties of staffing and managing foreign operations. The forward-looking statements should be considered in light of these factors. Page 19/20 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (CONT.) On April 8, 1999 a federal court jury awarded ESI a $13.1 million damage judgment in its patent infringement suit against General Sanning, Inc. ESI initiated litigation against General Scanning in December 1996 in the U.S. District Court for the Northern District of California. On April 2, 1999 the same federal court jury issued a verdict upholding the validity of ESI's semiconductor link blowing patent-U.S. patent 5,265,144 entitled "System and Method for Selectively Laser Processing a Target Structure of One or More Materials or a Multimaterial, Multilayer Device". The jury also concluded that General Scanning's infringement was willful and gives the court the authority to increase the damages up to three times. General Scanning has announced that it intends to appeal the verdict. On October 20, 1998 the Company filed a second action against General Scanning, Inc. in the United States District Court for the Northern District of California for patent infringement. The complaint alleges General Scanning is violating ESI's patents: 5,569,398 entitled "Laser System and Method for Selectively Trimming Films" issued on October 29, 1996; 5,685,995 entitled "Method for Laser Functional Trimming of Films and Devices" issued on November 11,1997, and 5,808,272 entitled "Laser System for Functional Trimming of Films and Devices issued on September 15, 1998. This Lawsuit is still pending. Numerous users of the Company's products have received notice of patent infringement form the Lemelson Medical, Educational & Research Foundation Limited Partnership ("Partnership") alleging that their use of the Company's products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of the Company's products infringes any of the Partnership's patents, they make seek indemnification form the Company for damages or expenses resulting from this matter. Page 20/20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. ELECTRO SCIENTIFIC INDUSTRIES, INC. Dated: April 15, 1999 /s/ Donald R. VanLuvanee ----------------------------------- Donald R. VanLuvanee, President and Chief Executive Officer EX-27 2 EX-27
5 1,000 3-MOS MAY-31-1999 MAY-31-1998 FEB-28-1999 2,856 26,698 80,080 667 55,484 171,544 67,988 35,516 216,364 20,408 0 0 0 104,750 91,206 216,364 51,506 51,506 25,415 25,415 24,444 0 0 2,035 1,115 920 0 0 0 920 0.07 0.07
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