-----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, NTyvZ0SoKnbqwXH+mtN9dayKMPhge5anZ6G/zllkfJw95cEuyDuq7s8OdkplUUFo QNv2HYy0FvvV5aK1dCabpA== 0001047469-99-001285.txt : 19990118 0001047469-99-001285.hdr.sgml : 19990118 ACCESSION NUMBER: 0001047469-99-001285 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990115 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: 99506889 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 FORM 10-Q Page 1 of 19 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________ COMMISSION FILE NUMBER 0-12853 ELECTRO SCIENTIFIC INDUSTRIES, INC. OREGON 93-0370304 13900 N.W. SCIENCE PARK DRIVE, PORTLAND, OREGON 97229 (503) 641-4141 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- AS OF NOVEMBER 30, 1998 THERE WERE 11,404,077 SHARES OF COMMON STOCK OF ELECTRO SCIENTIFIC INDUSTRIES, INC. OUTSTANDING. Page 2 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT INDEX
Page No. -------- Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets 3-4 November 30, 1998 and May 31, 1998* Consolidated Statements of Income 5 Three Months and Six Months ended November 30, 1998 and November 30, 1997 Consolidated Statements of Cash Flows 6-7 Six Months ended November 30, 1998 and November 30, 1997 Notes to Consolidated Financial Statements 8-12 Item 2. Management's Discussion and Analysis of Financial 13-17 Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings 18 Signature 19 *Audited
Page 3 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
ASSETS November 30, May 31, 1998* 1998 ------------ -------- CURRENT ASSETS: Cash and cash equivalents $ 6,382 $ 9,803 Securities available for sale 26,803 29,113 -------- -------- Total cash and securities 33,185 38,916 Trade receivables, net 70,762 61,890 Inventories 50,600 49,805 Deferred income taxes 4,788 4,788 Other current assets 4,733 3,558 -------- -------- Total current assets 164,068 158,957 -------- -------- PROPERTY AND EQUIPMENT, AT COST 62,054 57,550 Less - Accumulated depreciation (31,733) (29,912) -------- -------- Net property and equipment 30,321 27,638 -------- -------- DEFERRED INCOME TAXES 2,692 2,692 OTHER ASSETS 9,934 10,156 -------- -------- $207,015 $199,443 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. * Unaudited Page 4 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY November 30, May 31, 1998* 1998 ------------ -------- CURRENT LIABILITIES: Accounts payable $ 5,255 $ 5,184 Accrued liabilities: Payroll related 5,683 5,138 Commissions 5,448 4,025 Warranty 1,752 1,948 Other 1,201 578 -------- -------- Total accrued liabilities 14,084 11,689 Deferred revenue 352 289 -------- -------- Total current liabilities 19,691 17,162 -------- -------- SHAREHOLDERS' EQUITY: Common stock,without par value; Authorized: 40,000 shares; Outstanding: 11,404, and 11,368 respectively 102,399 101,831 Retained earnings 84,925 80,450 -------- -------- Total shareholders' equity 187,324 182,281 -------- -------- $207,015 $199,443 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. * Unaudited Page 5 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share)
Three Months Six Months Ended Nov. 30* Ended Nov. 30* ---------------------- -------------------- 1998 1997 1998 1997 ------- ------- ------- -------- Net sales $45,349 $59,872 $90,541 $116,991 Cost of sales 22,811 27,266 45,603 52,150 ------- ------- ------- -------- Gross margin 22,538 32,606 44,938 64,841 Operating expenses: Selling, service and administrative 13,306 14,703 26,771 28,272 Research, development and engineering 6,743 7,032 14,217 13,818 Acquiredin-process research and development And merger related expenses -- -- -- 11,124 ------- ------- ------- -------- Total operating expenses 20,049 21,735 40,988 53,214 ------- ------- ------- -------- Operating income 2,489 10,871 3,950 11,627 Interest income 273 420 641 910 Other income, net 47 267 91 324 ------- ------- ------- -------- Income before income taxes 2,809 11,558 4,682 12,861 Provision for income taxes 960 3,583 1,592 6,804 ------- ------- ------- -------- Net income $ 1,849 $ 7,975 $ 3,090 $ 6,057 ------- ------- ------- -------- ------- ------- ------- -------- Net income per share: Basic $ 0.16 $ 0.72 $ 0.27 $ 0.55 Diluted $ 0.16 $ 0.70 $ 0.27 $ 0.53 ------- ------- ------- -------- ------- ------- ------- -------- Weighted average number of shares: Basic 11,400 11,075 11,392 11,022 Diluted 11,584 11,417 11,619 11,363
The accompanying notes are an integral part of these statements. * Unaudited Page 6 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Six Months Ended Nov. 30 ------------------- 1998* 1997* ------- -------- Cash Flows From Operating Activities: Net income $ 3,090 $ 6,057 Adjustment to align AISI with the period ended November 30, 1997 Adjustments to reconcile net income to cash provided by -- (565) (used in) operating activities: Acquired in-process research and development and Merger-related expenses (1) -- 11,124 Depreciation and amortization 2,670 2,803 Changes in operating accounts: (Increase) decrease in trade receivables (7,473) (640) Decrease (increase) in inventories 461 (5,453) (Increase) decrease in other current assets (1,175) (1,348) Increase (decrease) in current liabilities 2,156 (4,661) ------- -------- Net cash (used in) provided by operating activities: (271) 7,317 ------- -------- Cash Flows From Investing Activities: Purchases of property and equipment (5,456) (6,766) Purchase of securities (8,740) (12,871) Proceeds from sales of securities and maturing securities 11,050 11,500 Increase in other assets (572) (37) ------- -------- Net cash used in investing activities: (3,718) (8,174) ------- -------- Cash Flows From Financing Activities: Repayment of Dynamotion subsidiary debt (2) -- (6,979) Net repayment of AISI subsidiary debt -- (74) Proceeds from exercise of stock options and stock plans 568 3,280 ------- -------- Net cash, provided by (used in) financing activities: 568 (3,773) ------- -------- Net Change in Cash and Cash Equivalents (3,421) (4,630) Cash and Cash Equivalents at Beginning of Period 9,803 20,315 ------- -------- Cash and Cash Equivalents at End of Period $ 6,382 $ 15,685 ------- -------- ------- --------
The accompanying notes are an integral part of these statements. *Unaudited Page 7 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) (Unaudited) Cash payments for interest were not significant for the six months ended November 30, 1998 and November 30, 1997. Cash payments for income taxes were $ 1,117 and $9,014 for the six months ended November 30, 1998 and November 30, 1997, 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 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in these interim statements. Management believes that the interim statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of results for the interim periods. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 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 $288 at November 30, 1998 and $419 at May 31, 1998*. NOTE 3 - INVENTORIES Inventories consist of the following:
November 30, 1998 May 31, 1998* ----------------- ------------- Raw materials and purchased parts $33,165 $31,491 Work-in-process 7,338 8,975 Finished goods 10,097 9,339 ------- ------- $50,600 $49,805 ------- ------- ------- -------
*Audited Page 9 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) (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 Six Months Ended Nov. 30 Ended Nov. 30 ----------------- ----------------- 1998 1997 1998 1997 ------- ------- ------- ------- Net income $ 1,849 $ 7,975 $ 3,090 $ 6,057 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 11,400 11,075 11,392 11,022 Dilutive effect of employee stock options after application of the treasury stock method 184 342 227 341 ------- ------- ------- ------- Weighted average number of shares outstanding for computing diluted net income per share 11,584 11,417 11,619 11,363 ------- ------- ------- ------- ------- ------- ------- ------- Net income per share - basic $0.16 $0.72 $0.27 $0.55 ------- ------- ------- ------- ------- ------- ------- ------- Net income per share - diluted $0.16 $0.70 $0.27 $0.53 ------- ------- ------- ------- ------- ------- ------- -------
Page 10 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) (Unaudited) For purposes of computing diluted earnings per share, weighted average common share equivalents do not include the following stock options because inclusion would have an anti-dilutive effect on the earnings per share calculation. The following shares have not been recalculated using the treasury stock method.
Three Months Six Months Ended November 30 Ended November 30 ----------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Number of Employee Stock Options 171 -- 329 --
NOTE 5 - ACQUISITIONS 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 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 expense during the quarter ended August 31, 1997 and is reflected in the accompanying Consolidated Statements of Operations. The statement of operations data for the three months and six months ended November 30, 1997 was prepared as if the acquisition had occurred at the beginning of the period. The pro forma effect of Dynamotion's revenue and net income for the period from June 1 to June 9, 1997 is not significant. Page 11 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) (Unaudited) NOTE 5 - CONT. 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 shares of ESI stock. The transaction has been accounted for as a pooling of interests. 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. 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 1,400 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. A reconciliation of amounts previously reported to amounts included in the financial statements is as follows:
Three Months Six Months Ended Nov. 30 Ended Nov. 30 ------------- ------------- 1997 1997 ------- -------- Revenue: ESI $51,390 $ 99,746 AISI 8,482 17,245 ------- -------- As Restated $59,872 $116,991 Net Income: ESI $ 6,170 $ 2,309 AISI 1,805 3,748 ------- -------- As Restated $ 7,975 $ 6,057
Page 12 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (in thousands) (Unaudited) 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. 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. Page 13 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS Results of Operations Revenue of $45.3 million for the quarter ended November 30, 1998 was $14.5 million or 24% lower than in the second quarter of fiscal 1998, and was $0.1 million higher than for the quarter ended August 31, 1998. Memory yield equipment represented the largest percentage of sales for the quarter at 33% of total revenues versus 28% in the second quarter of the prior year. Overall, memory yield improvement, electronic component and machine vision equipment sales were down over the same quarter in the prior year, partially offset by increased sales in circuit fine tuning and advanced packaging equipment. Capacity purchases of electronic component manufacturing equipment have been delayed as our customers have focused on achieving higher utilization rates of existing equipment in their facilities. Broad based declines in capital expenditures have also negatively impacted our vision customers and, although we have successfully expanded our customer base for vision products, our existing customers have experienced significant declines in sales volumes as compared to fiscal 1998 levels. Revenues from circuit fine tuning, advanced packaging, and vision systems were down this quarter in comparison to last quarter, offset by an increase in revenues from memory yield improvement systems and electronic component equipment over last quarter. Gross margin for the three months ended November 30, 1998 decreased to 49.7% from 54.5% for the second quarter of the prior fiscal year. Lower margins were the result of a shift in product mix, a slight decrease in average selling prices, and underabsorption of overhead costs due to lower unit volumes. Gross margin for the current period was up slightly from 49.6% for the prior quarter. Selling, service and administrative expenses for the three months ended November 30, 1998 were $1.4 million lower than for the second quarter of fiscal 1998. The decrease is due to lower professional fees and bonus accruals as well as general reductions associated with the continued consolidation of administrative functions for recent acquisitions (AISI and Chip Star). Expenses for sales, services and administration were down $0.2 million from the prior quarter due to the first full-quarter effect of expense reduction initiatives that began in the first quarter of fiscal 1999. Expenses associated with research, development and engineering decreased by $0.3 million as compared to the quarter ended November 30, 1997. Research, development and engineering expenses decreased by $0.7 million from the first quarter of fiscal 1999. The decreases are attributable to lower contract labor costs and project spending. Research, development and engineering spending typically fluctuates from quarter to quarter as engineering projects move through their life cycles. Net income for the quarter ended November 30, 1998 was $1.8 million or $0.16 per basic share. This represents a decrease of 76.8% over the second quarter of fiscal 1998, when there were earnings of $8.0 million or $0.72 per basic share. Ending backlog on November 30, 1998 was $16.4 million as compared to $12.9 million on August 31, 1998 as book to ship times increased. Page 14 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (cont.) Liquidity, Capital Resources and Business Environment The Company's principal sources of liquidity are existing cash and cash equivalents and marketable debt securities of $33.2 million, accounts receivable of $70.8 million, and a $7.0 million line of credit, none of which was outstanding at November 30, 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. ESI has a current ratio of 8.3:1 and no long-term debt. Working capital increased to $144.4 million at November 30, 1998 vs. $141.8 million at May 31, 1998. Inventory increased by $0.8 million from May 31, 1998 to November 30, 1998. Increases in raw materials and finished goods were partially offset by a decrease in work-in-process inventory. The Company's business depends in large part upon the capital expenditures of manufacturers of electronic devices, including miniature capacitors and semiconductor memory devices, and circuits used in wireless telecommunications equipment, such as pagers and cellular phones, automotive electronics and computers. The markets for products manufactured by the Company's customers are cyclical and have historically experienced periodic downturns, which often have had a negative effect on the demand for capital equipment such as that sold by the Company. Several large, multinational electronics companies constituted 41% of the Company's fiscal 1998 sales and are expected to comprise a similar percentage 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. 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 ESI products within agreed upon terms. In addition, substantially all Asian end customer receivables are secured by letter of credit. Page 15 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (cont.) There can be no assurance that difficulties in the Asian economy will not adversely affect the demand for the Company's products in that region or elsewhere. The Company expects that international shipments will continue to represent a significant percentage of net sales in the future. As a result, a significant portion of the Company's net sales will be subject to certain risks. These risks include changes in demand resulting from fluctuations in interest and currency exchange rates, as well as factors such as government financed competition, changes in trade policies, tariff regulations, difficulties in obtaining US export licenses, and the difficulties of staffing and managing foreign operations. Most of the Company's sales are transacted in dollars and the Company's products are made in the United States. Many Japanese customers pay in yen, and ESI hedges these sales transactions to mitigate currency risks. The European and Asian subsidiaries' operating expenses are denominated in their respective local currencies. These transactions represent approximately 10% of total consolidated operating expenses, with 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. 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. Page 16 of 19 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS (cont.) 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 director level manager 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 17 of 19 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 18 of 19 Part II. Other Information Item 1. Legal Proceedings On September 30, 1998 the U.S. District Court for the Northern District of California issued a series of orders regarding ESI's lawsuit against General Scanning, Inc. for patent infringement. The lawsuit alleges General Scanning is infringing certain claims of ESI's patents. The Court granted ESI's Motion for Summary Judgment of Literal Infringement by General Scanning. The Court granted ESI's Motion for Summary Judgment on the issue of no inequitable conduct by ESI in the prosecution of ESI's patent. The Court denied General Scanning's Motion for Summary Judgment of Invalidity of the asserted claims of ESI patents. ESI initiated litigation against General Scanning in December 1996. The lawsuit is still pending in the U.S. District Court for the Northern District of California. 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. The lawsuit is still pending. Page 19 of 19 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: January 14, 1999 By /s/ Barry L. Harmon --------------------------------- Barry L. Harmon, Senior Vice President and Chief Financial Officer EX-27 2 EXHIBIT 27
5 1,000 3-MOS MAY-31-1999 SEP-01-1998 NOV-30-1998 6,382 26,803 71,050 288 50,600 164,068 62,054 31,733 207,015 19,691 0 0 0 102,399 84,925 207,015 45,349 45,349 22,811 22,811 20,049 0 0 2,809 960 1,849 0 0 0 1,849 0.16 0.16
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