-----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, Aod9sHdIlE+dvPAzTTRHp4YNB01r8VkvFxmAUWji6eE0bIx8biCMi8tPWHwzQ9pc 4opT7fQD1kPMgcxf4LLOCg== 0001157523-03-004033.txt : 20030811 0001157523-03-004033.hdr.sgml : 20030811 20030811160554 ACCESSION NUMBER: 0001157523-03-004033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20030301 FILED AS OF DATE: 20030811 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: 1934 Act SEC FILE NUMBER: 000-12853 FILM NUMBER: 03834673 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 a4451391.txt ELECTRO SCIENTIFIC INDUSTRIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 1, 2003 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. (an Oregon corporation) 93-0370304 (I.R.S. Employer Identification No.) 13900 N.W. Science Park Drive, Portland, Oregon 97229 Registrant's telephone number: (503) 641-4141 Registrant's web address: www.esi.com 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- The number of shares outstanding of the Registrant's Common Stock at August 1, 2003 was 27,837,914 shares. ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Consolidated Condensed Financial Statements (Unaudited) Consolidated Condensed Balance Sheets - March 1, 2003 and June 1, 2002 (restated) 2 Consolidated Condensed Statements of Operations - Three and Nine Months Ended March 1, 2003 and March 2, 2002 (restated) 3 Consolidated Condensed Statements of Cash Flows - Nine Months Ended March 1, 2003 and March 2, 2002 (restated) 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 Item 4. Controls and Procedures 28 PART II - OTHER INFORMATION Item 1. Legal Proceedings 31 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 33 Signatures 34 1

4 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) Note 1 - Basis of Presentation General We have prepared the consolidated condensed financial statements included herein 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 accounting principles generally accepted in the United States of America have been condensed or omitted in these interim statements. We believe that the interim statements include all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of results for the interim periods. These consolidated condensed financial statements are to be read in conjunction with the financial statements and notes thereto included in our 2002 Annual Report on Form 10-K/A. Certain prior year amounts have been reclassified to conform to current year presentation. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Investigation and Restatements of Financial Statements In March 2003, our Audit Committee commenced an internal investigation of the circumstances surrounding the reversal of an employee benefits accrual that occurred in the first quarter of 2003. The investigation also identified and addressed: (1) unsupported accounting adjustments and clerical errors primarily relating to inventory and cost of goods sold, and (2) certain other areas where potential accounting errors could have occurred, including revenue recognition. Restatement of 2002 Financial Statements We have restated our financial statements for the fiscal year ended June 1, 2002 (and the quarters contained therein) principally related to the deferral of revenue for certain transactions where customer specified acceptance criteria existed but were not properly considered in determining whether our criteria for revenue recognition had been met as of year-end. We also corrected our financial statements for other matters we identified, including: the failure to write-off fixed assets that were sold prior to year-end, but had not been removed from our books, the write-off of inventory due to a change in our accounting for defective parts being returned by customers, an unauthorized change in depreciation methods and the correction of a bank error related to amortization of bond premiums/discounts. Restatement of Fiscal 2003 First and Second Quarters We have also restated the financial statements for the quarters ended August 31, 2002 and November 30, 2002 related to the deferral of revenue, an unauthorized change in depreciation method and the amortization of bond premiums/discounts as described above. 5 For the first quarter of fiscal 2003, the financial statements have also been restated to reflect the reinstatement of an inappropriately reversed accrual for employee benefits. Other matters corrected for that quarter primarily include the following: the write-down of inventory that was double counted, the write-down of inventory due to an error in the computation of overhead, an increase in operating expenses due to improper capitalization of a period expense and an increase in warranty expense due to an unauthorized change in accounting method. For the second quarter of fiscal 2003, the financial statements have also been restated for other matters primarily including: the write-down of inventory due to an unauthorized change in our accounting for parts inventory at customer locations, the write-down of inventory that was double counted, an increase in accrued liabilities related to purchase commitments for excess and obsolete inventory and an increase in warranty expense due to an unsupported accounting entry. These restated financial statements are included in our amended quarterly reports on Form 10-Q/A for the fiscal quarters ended August 31, 2002 and November 30, 2002 and our amended annual report on Form 10-K/A for the fiscal year ended June 1, 2002, each of which was filed on August 11, 2003. Note 2 - Accounts Receivable, Net We entered into an agreement that allows us to sell accounts receivable from selected customers at a discount to a financial institution. Receivables sold under these provisions have terms and credit risk characteristics similar to our overall receivables portfolio. Receivable sales have the effect of increasing cash and reducing accounts receivable and days sales outstanding. Accounts receivable sales under these agreements were $12.0 million for the nine months ended March 1, 2003. There were no accounts receivable sales for the nine months ended March 2, 2002. Discounting fees were recorded as interest expense and were not material for the nine months ended March 1, 2003 and March 2, 2002. At March 1, 2003, none of the receivables sold under these agreements remained outstanding. Note 3 - Inventory Inventory is principally valued at standard cost, which approximates the lower of cost (first-in, first-out) or market. Components of inventory were as follows (in thousands): March 1, 2003 June 1, 2002 ---------------------- ---------------- (restated) Raw materials and purchased parts $25,121 $ 41,013 Work-in-process 1,184 1,942 Finished goods 16,016 20,961 ---------------------- ---------------- Total inventories $42,321 $ 63,916 ====================== ================ 6 Note 4 - Assets Held for Sale In order to better align operating expenses with anticipated revenues, we implemented a restructuring plan during June 2001. This restructuring plan included vacating several buildings. During the third quarter of fiscal 2003, we sold our 29,000 square foot building on 3 acres of land near Minneapolis, Minnesota for $1.0 million, which resulted in a gain of $0.6 million that is included as a component of selling, service and administration expense on our consolidated condensed statements of operations for the three and nine month periods ended March 1, 2003. On October 2, 2002, we announced a plan to relocate the manufacturing of our Electronic Component Systems product line from Escondido, California to our headquarters in Portland, Oregon. The consolidation of the facilities was completed on December 31, 2002. We own a 60,000 square foot plant on 10 acres of land near Escondido, California. We have contracted with a real estate agent to find a buyer and anticipate that we will sell the assets within one year. We account for long-lived assets to be disposed of in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which we adopted effective June 1, 2002. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Based on current market information provided by our real estate agent on the California property, we determined that the market values of the property, less selling costs, exceeds our book value for the property. Accordingly, we have reflected the property on our consolidated condensed balance sheet as assets held for sale at book value and have ceased depreciation. Components of net assets held for sale were as follows (in thousands): March 1, 2003 ---------------------- Land $2,626 Buildings 3,931 Automobiles 19 ---------------------- $6,576 ====================== Note 5 - Earnings Per Share Following is a reconciliation of basic earnings (loss) per share ("EPS") and diluted EPS (in thousands, except per share amounts):

The following common stock equivalents were excluded from the diluted EPS calculations because inclusion would have had an antidilutive effect (in thousands): Three and Nine Months Ended ---------------------------------- March 1, 2003 March 2, 2002 --------------- --------------- Employee stock options 4,465 3,766 4 1/4% convertible subordinated notes 3,816 3,947 --------------- --------------- 8,281 7,713 =============== =============== Note 6 - Comprehensive Income (Loss) The components of comprehensive income (loss), net of tax, are as follows (in thousands):

Note 7 - 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. The income tax rate for the three months ended March 1, 2003 and March 2, 2002 was 40.1% and 124.6%, respectively. The tax rate for the three months ended March 2, 2002 included a benefit for the effect of the research and development tax credit recognized during this quarter totaling 87.4%. Note 8 - Recent Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 addresses certain accounting issues related to hedging activity and derivative instruments embedded in other contracts. In general, the amendments require contracts with comparable characteristics to be accounted for similarly. In addition, SFAS No. 149 provides guidance as to when a financing component of a derivative must be given special reporting treatment in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. We are currently evaluating the effects of SFAS No. 149, but do not expect that the adoption of SFAS No. 149 will have a material effect on our financial position or results of operations. 8 In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51." FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights, known as "variable interest entities" (VIEs); and 2) which business enterprise is the primary beneficiary and when it should consolidate the VIE. This new model for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial interest; or 2) whose equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provision of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Certain disclosures are effective immediately. We are in the process of assessing the effects of FIN 46, but do not expect its implementation to have a material effect on our financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide two additional alternative transition methods if a company voluntarily decides to change its method of accounting for stock-based employee compensation to the fair-value method. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 by requiring that companies make quarterly disclosures regarding pro forma effects of using the fair-value method of accounting for stock-based compensation, effective for interim periods beginning after December 15, 2002. We will adopt the disclosure provisions of SFAS No. 148 during the fourth quarter of fiscal 2003. In December 2002, the EITF published the Consensus on Issue 00-21, "Revenue Arrangements with Multiple Deliverables." The Consensus provides guidance on when and how to allocate revenue from bundled sales transactions. The Consensus is applicable for fiscal years beginning after June 15, 2003. We are currently evaluating the impact of the Consensus on Issue 00-21. On December 31 2002, we adopted FASB Interpretation No. 45 (FIN 45), "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements. The adoption of FIN 45 did not have a material effect on our financial position or the results of our operations. 9 In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." Under SFAS No. 146, liabilities for exit or disposal activities are recognized and measured initially at fair value only when the liability is incurred. This statement is effective for exit costs initiated after December 31, 2002, and will be applied on prospective transactions only. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and normal operation of a long-lived asset, except for certain lease obligations. We are evaluating the impact of SFAS No. 143, but do not expect the adoption of SFAS No. 143 to have a significant effect on our financial position or the results of our operations. On June 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria for classifying an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period in which the losses are incurred, rather than as of the measurement date as presently required. The adoption of SFAS No. 144 did not have a material effect on our financial position or the results of our operations. Note 9 - Restructuring and Special Charges In order to better align our operating expenses with anticipated revenues, we implemented a restructuring plan during June 2001. Pursuant to this plan, we reduced our work force by a total of 419 employees in June and August 2001. An additional 97 employees were terminated in October 2001. This reduction impacted all employee groups. The restructuring plan also included vacating buildings located in California, Massachusetts, Michigan, Minnesota, and Texas. We also recorded a $3.5 million inventory write-down related to discontinuing the manufacturing of certain products, which is reflected in costs of sales. The following table displays the amounts included as restructuring and/or special charges for the three and nine month periods ended March 2, 2002 (in thousands).

10 On October 2, 2002, we announced a plan to relocate the manufacturing of our Electronic Component Systems product line from Escondido, California to our headquarters in Portland, Oregon. The consolidation of these facilities was completed on December 31, 2002. 37 employees from our Escondido facility accepted relocation offers to our headquarters. The remaining employees were offered a severance package following a sixty-day required notice period. As a result of the closure of the California facility, the discontinuance of certain electronic component manufacturing product lines and other cost reduction steps, headcount declined to approximately 700 employees at the end of the third quarter of fiscal 2003. Included in cost of sales and operating expenses for the three and nine months ended March 1, 2003 is $4.9 million and $22.6 million, respectively, of restructuring and special charges related to these activities and inventory write-downs related to the discontinuance of certain electronic component manufacturing product lines. In both the current and prior year, all restructuring costs have been included in the line items to which they functionally relate. Note 10 - Restructuring Accrual At March 1, 2003, we had $0.7 million remaining in accrued liabilities relating to our restructuring plans implemented in fiscal 2002 and 2003, compared to $1.0 million at June 1, 2002. The following table displays rollforwards of the accruals from June 1, 2002 to March 1, 2003 (in thousands):

Accrued lease termination fees and other facility consolidation costs will be paid through fiscal 2006 and accrued employee severance will be paid through the first quarter of fiscal 2004. Note 11 - Repurchase of Convertible Subordinated Notes In December 2001 and January 2002, we sold $150 million aggregate principal amount of 4 1/4% convertible subordinated notes due 2006 in a private offering. In January 2003, our Board of Directors approved the repurchase of up to $50.0 million aggregate principal amount of these notes during calendar 2003. In February 2003, we repurchased $5.0 million principal amount of our outstanding convertible subordinated notes. For the three and nine month periods ended March 1, 2003, we recorded a gain of $0.2 million related to this repurchase, which is reflected as other income on our consolidated condensed statements of operations. 11 Note 12 - Legal Matters Between March 26, 2003 and May 20, 2003, three putative class action lawsuits were filed in the United States District Court for the District of Oregon against ESI and David F. Bolender, James T. Dooley, and Joseph L. Reinhart, who are current and/or former officers and directors of ESI. Lead plaintiffs and lead counsel for plaintiffs have been appointed. Plaintiffs' consolidated class action complaint is due to be filed 45 days following the filing of our restated financial statements referred to below. In March 2003, our Audit Committee commenced an investigation into certain accounting matters. As a result of the investigation, which was completed on July 11, 2003, we have restated our financial statements for the fiscal year ended June 1, 2002 and for the quarters ended August 31, 2002 and November 30, 2002. The restated financial statements are set forth in our annual report on Form 10-K/A and quarterly reports on Form 10-Q/A for the corresponding periods, filed August 11, 2003. The consolidated class action complaint had not been filed and discovery had not yet commenced when this report was filed, and we were in the early stages of our assessment of the possible outcomes of this litigation. We expect, however, that the litigation will be costly and will to some degree divert management's attention from daily operations. On March 31, 2003 and April 28, 2003, two separate purported shareholder derivative complaints were filed in the Circuit Court of Oregon in Washington County. The named defendants include certain current and/or former officers and directors of ESI. ESI is named as a "nominal defendant." Lead plaintiffs and lead counsel for plaintiffs have been appointed. The parties have stipulated that the plaintiffs will file a consolidated complaint within 45 days of the filing of our restated financial statements referred to above. The existing complaints allege that certain defendants breached fiduciary duties to ESI and were unjustly enriched. The complaint seeks an unspecified amount of monetary damages and seeks various equitable remedies, including a constructive trust on the proceeds received by the defendants from trading ESI common stock. As filed, the complaints are derivative in nature and do not seek monetary damages from, or the imposition of equitable remedies on, ESI. We have entered into indemnification agreements in the ordinary course of business with our officers and directors and may be obligated throughout this action to advance payment of legal fees and costs incurred by the defendant current and former officers and directors pursuant to the indemnification agreements and applicable Oregon law. The special litigation committee of our board of directors, with the assistance of independent legal counsel, is conducting an investigation relating to the allegations asserted in the complaints. On February 14, 2001, Cognex Corporation (Cognex) filed a lawsuit in the United States District Court for the District of Massachusetts (Cognex Corporation v. Electro Scientific Industries, Inc., No. 01-10287 RCL). The lawsuit alleges that our CorrectPlace ver. 5.0 product infringes United States Patent 5,371,690, which is owned by Cognex. The patent concerns the inspection of surface mount devices that are attached to the surface of an electronic circuit board. Cognex seeks injunctive relief, damages, costs and attorneys' fees. We filed a motion for summary judgment of non-infringement on October 8, 2002, which remains pending. Cognex filed motions for summary judgment on the issues of unenforceability and mismarking on October 8, 2002. The court denied Cognex's motion on the issue of unenforceability on April 25, 2003. 12 The motion on the issue of mismarking remains pending. We believe we have meritorious defenses to the action and intend to pursue them vigorously. Fact discovery is completed in the lawsuit. Additionally, certain of our customers have notified us that, in the event it is subsequently determined that their use of CorrectPlace ver. 5.0 infringes any patent, they may seek indemnification from us for damages or expenses resulting from this matter. In addition to the legal matters previously discussed, in the ordinary course of business, we are involved in various other legal matters and investigations. Total amounts included in accrued expenses related to all of our legal activities, which represent estimated awards and assessments as well as unpaid legal services incurred through March 1, 2003, was approximately $1.2 million. In the opinion of management, amounts accrued for awards or assessments in connection with these matters, which specifically excludes the class action lawsuits and related derivative complaints noted above, are management's best estimate and ultimate resolution of these matters will not have a material effect on our consolidated financial position, results of operations or cash flow. We can not reliably estimate the costs related to the class action lawsuits and related derivative complaints at this time. Note 13 - Subsequent Event - Legal Matters See Note 12 for a discussion of changes to our legal matters subsequent to March 1, 2003. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Electro Scientific Industries, Inc. and its subsidiaries (ESI) provide high technology manufacturing equipment to the global electronics market. Our customers are primarily manufacturers of semiconductors, passive electronic components and electronic interconnect devices. Our equipment enables these manufacturers to reduce production costs, increase yields and improve the quality of their products. The components and devices manufactured by our customers are used in a wide variety of end-use products in the computer, communications and automotive industries. We believe we are the leading supplier of advanced laser systems used to improve the production yield of semiconductor devices, high-speed test and termination equipment used in the high-volume production of multi-layer ceramic capacitors (MLCCs) and other passive electronic components, and advanced laser systems used to fine tune electronic components and circuitry. Additionally, we produce a family of laser drilling systems for production of high-density interconnect (HDI) circuit boards and advanced electronic packaging, as well as inspection systems and original equipment manufacturer (OEM) machine vision products. 13 Fiscal 2003 Results For certain information about our results of operations for the three months and fiscal year ended May 31, 2003 and our financial condition at that date, please see our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 11, 2003. Results of Operations Net sales decreased $4.6 million to $31.6 million for the quarter ended March 1, 2003 (the third quarter of fiscal 2003) from $36.2 million for the quarter ended March 2, 2002 (the third quarter of fiscal 2002). Net sales decreased $8.1 million to $114.4 million for the nine months ended March 1, 2003 from $122.5 million for the nine months ended March 2, 2002. The decrease in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002 is a result of decreases in sales in all of our product lines with the exception of the Advanced Electronic Packaging Systems product group. While this market continues to be very competitive, we were successful in winning sales at key customers. The largest sales decrease was in our Electronic Component Systems product group. This market remains over-sold with significant unused capacity. Semiconductor yield improvement systems comprised the largest percentage of sales for the quarter at 37.9% of total sales versus 37.5% in the third quarter of the prior year. In addition to the above factors, the decrease in the nine months ended March 1, 2003 compared to the nine months ended March 2, 2002 is due to continued pricing pressure in all of our markets, which resulted from continued softness in overall electronics demand and pressure on our customers' earnings. Certain information regarding our net sales by product line is as follows (net sales in thousands):

On October 2, 2002, we announced a plan to relocate the manufacturing of our Electronic Component Systems product line from Escondido, California to our headquarters in Portland, Oregon. The consolidation of these facilities was completed on December 31, 2002. Thirty-seven employees from our Escondido facility accepted relocation offers to our headquarters. The remaining employees were offered a severance package following a sixty-day required notice period. As a result of the closure of the California facility, the discontinuance of certain electronic component manufacturing product lines and other cost reduction steps, headcount declined to approximately 700 employees at the end of the third quarter of fiscal 2003. Included in cost of sales and operating expenses for the three and nine months ended March 1, 2003 is $4.9 million and $22.6 million, respectively, of restructuring and special charges related to these activities and inventory write-downs related to the discontinuance of certain electronic component manufacturing product lines. The amount of restructuring and special charges included in costs of sales for the three and nine months ended March 1, 2003 was $2.0 million and $15.9 million, respectively. For the nine month period, these charges included $6.8 million in inventory write-downs for excess and obsolete inventory, $2.5 million of write-offs related to open purchase order commitments, $4.1 million in inventory write-downs related to the discontinuance of certain electronic component manufacturing product lines, $1.8 million in inventory write-downs and long term asset impairments related to the discontinuance of certain other product lines, $0.6 million in employee severance and other employee related expenses and $0.3 million in other facilities consolidation costs, offset by a $0.2 million gain on the disposal of equipment. Gross margin decreased $17.3 million to $(0.5) million for the third quarter of fiscal 2003 from $16.7 million (46.1% of net sales) for the third quarter of fiscal 2002. Gross margin decreased $37.9 million to $18.3 million (16.0% of net sales) for the nine month period ended March 1, 2003 from $56.2 million (45.9% of net sales) for the comparable period of the prior fiscal year. As discussed above, included in costs of sales for the three and nine month periods ended March 1, 2003 were restructuring and special charges totaling $2.0 million and $15.9 million, respectively. In comparison, the gross margin for three and nine month periods ended March 2, 2002 included a gain of $0.4 million and a charge of $3.1 million, respectively, for such charges, net. In addition to these charges, the primary reasons for the decreases in our gross margins are low utilization of our factory capacity, changes in our product mix and downward pricing pressures. 15 Selling, service and administrative expenses were $16.1 million (51.0% of net sales) and $47.3 million (41.3% of net sales), respectively, for the three and nine month periods ended March 1, 2003 compared to $14.5 million (39.9% of net sales) and $51.7 million (42.2% of net sales), respectively, for the comparable periods of fiscal 2002. As a result of the Escondido consolidation and other restructuring steps discussed above, included in selling, service and administrative expenses for the three and nine month periods ended March 1, 2003 were $2.6 million and $5.6 million, respectively, of restructuring and/or special charges. As a result of the restructuring plan we implemented in June 2001 as discussed in Note 9, included in selling, service and administrative expenses for the three and nine month periods ended March 2, 2002, were restructuring and special charges totaling $0.5 million and $5.3 million, respectively. Increases in selling, service and administrative expenses in the fiscal 2003 periods due to these charges were offset in part by a reduction in force and other cost reduction efforts compared to prior year levels. Selling, service and administrative expense is expected to increase significantly in the fourth quarter of fiscal 2003 as a result of professional fees incurred in connection with the internal investigation of certain accounting matters, defending the shareholder and derivative suits described in Part II, Item 1, "Legal Proceedings," and complying with the Sarbanes-Oxley Act of 2002. We expect to continue to incur additional expenses in fiscal 2004 in connection with defending the shareholder and derivative suits and complying with the Sarbanes-Oxley Act. We also expect to pay increased premiums for our directors' and officers' liability insurance in fiscal 2004. Future operating results are highly dependent on our ability to maintain a competitive advantage in the products and services we provide. To protect this advantage we continue to make investments in our research and development efforts. Research, development and engineering expenses were $5.7 million (18.0% of net sales) and $20.6 million (18.0% of net sales), respectively, for the three and nine month periods ended March 1, 2003 compared to $7.8 million (21.4% of net sales) and $29.3 million (23.9% of net sales) for the comparable periods in the prior fiscal year. As a result of the Escondido consolidation and other restructuring steps discussed above, included in research, development and engineering expenses for the three and nine month periods ended March 1, 2003 were restructuring and special charges totaling $0.3 million and $1.2 million, respectively. As a result of the restructuring plan we implemented in June 2001 as discussed in Note 9, included in research, development and engineering expenses for the three and nine month periods ended March 2, 2002, were restructuring and special charges totaling $0.1 million and $1.3 million, respectively. Increases in research, development and engineering expenses due to these charges were more than offset by reductions due to the relocation of our Electronic Component Systems group to our headquarters in Portland, Oregon from Escondido, California. Research and development spending often fluctuates from quarter to quarter as engineering projects move through their life cycles. We continue to invest in a significant number of development and engineering projects that we see as important to our future. Interest income was $2.7 million and $8.5 million, respectively, for the three and nine month periods ended March 2, 2003 compared to $2.1 million and $5.7 million, respectively, for the comparable periods of fiscal 2002. The increases in the fiscal 2003 periods compared to the fiscal 2002 periods are due to an increase in our investment balances as a result of our sale of $150 million aggregate principal amount of 4 1/4% convertible subordinated notes due 2006 (the "Convertible Notes") in December 2001 and January 2002. 16 Interest expense was $1.8 million and $5.6 million, respectively, for the three and nine month periods ended March 1, 2003 compared to $1.6 million for both of the comparable periods of the prior fiscal year. These increases are primarily due to the sale in December 2001 and January 2002 of $150 million aggregate principal amount of Convertible Notes. Quarterly interest related to the Convertible Notes, after the $5.0 million principal amount repurchase in the third quarter of fiscal 2003, totals $1.5 million plus $0.2 million for the accretion of underwriting discounts. Net other loss of $0.2 million in the three months ended March 1, 2003 includes a $0.4 million loss on securities, offset in part by a $0.2 million gain related to the repurchase of $5.0 million principal amount of Convertible Notes described above. The $41,000 of other income in the nine month period ended March 1, 2003 includes a gain of $0.6 million related to legal settlements and a $0.2 million gain related to the repurchase of $5.0 million principal amount of Convertible Notes, offset by a net $0.5 million loss on the sale of securities and $0.2 million of bank charges. The income tax rate for the nine months ended March 1, 2003 was 37.2% compared to 55.5% for the comparable period of fiscal 2002. The rate in fiscal 2002 includes the effects of a $4.6 million tax credit due to a re-evaluation of our application of the research and development tax credit for the years 1996 through 2001. Net loss was $13.0 million, or $0.47 per diluted share, and $29.3 million, or $1.06 per diluted share, respectively, for the three and nine month periods ended March 1, 2003 compared to net income of $1.2 million, or $0.04 per diluted share, and a net loss of $9.3 million, or $0.34 per diluted share, in the comparable periods of fiscal 2002. Liquidity and Capital Resources At March 1, 2003, our principal sources of liquidity consisted of existing cash, cash equivalents and marketable securities of $285.5 million and accounts receivable of $50.4 million. At March 1, 2003, we had a current ratio of 11.4:1 and with a long-term debt carrying value of $141.7 million. Working capital increased to $361.7 million at March 1, 2003 compared to $341.5 million at June 1, 2002. Trade receivables decreased $5.4 million to $50.4 million at March 1, 2003 from $55.8 million at June 1, 2002 due lower sales and fewer sales with extended terms. Income tax refunds receivable increased $12.6 million to $27.0 million at March 1, 2003 from $14.4 million at June 1, 2002 due to the availability of tax benefits related to the carry-back of our fiscal 2003 net losses. Inventory decreased $21.6 million to $42.3 million at March 1, 2003 from $63.9 million at June 1, 2002. Inventories were written down by a total of $11.9 million in the nine months ended March 1, 2003 for excess, obsolescence and discontinued product lines. In addition, we transferred $5.2 million of inventory to shipped systems pending acceptance during the nine months ended March 1, 2003. 17 Purchases of property, plant and equipment of $8.0 million in the first nine months of fiscal 2003 were primarily for the continued construction and completion of our new corporate headquarters in Portland, Oregon. At March 1, 2003 we had $141.7 million recorded on our balance sheet related to the Convertible Notes. During the third quarter of fiscal 2003, we repurchased $5.0 million principal amount of the Convertible Notes. The difference between the remaining $145.0 million face value and the $141.7 million balance at March 1, 2003 relates to underwriting discounts, which originally totaled $4.5 million and are being amortized as additional interest expense over the life of the Convertible Notes at a rate of $0.2 million per quarter. Critical Accounting Policies and Estimates We reaffirm the critical accounting policies and our use of estimates as reported in our annual report on Form 10-K/A for the year-ended June 1, 2002, as filed with the Securities and Exchange Commission on August 11, 2003. Factors That May Affect Future Results The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words "believes," "expects," and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may issue other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ. The following information highlights some of the factors that could cause actual results to differ materially from the results expressed or implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors. Factors that may result in such variances include, but are not limited to the following: The industries that comprise our primary markets are volatile and unpredictable. Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications, computers, automotive electronics and other electronic products. In the past, the markets for electronic devices have experienced sharp downturns. During these downturns, electronics manufacturers, including our customers, have delayed or canceled capital expenditures, which has had a negative impact on our financial results. The current economic downturn has resulted in a reduction in demand for our products and significant reductions in our profitability and net sales. We had a net loss of $29.3 million during the nine months ended March 1, 2003 on net sales of $114.4 million and a net loss of $17.8 million for the year ended June 1, 2002. We cannot assure you that demand for our products will increase. If demand for our product does increase, there may be significant fluctuations in our profitability and net sales. 18 During any downturn, including the current downturn, it will be difficult for us to maintain our sales levels. As a consequence, in order to maintain profitability we will need to reduce our operating expenses. However, much of our operating expenses are fixed and our ability to reduce such expenses is limited. Moreover, we may be unable to defer capital expenditures, and we will need to continue investment in certain areas such as research and development. We may incur charges related to impairment of assets and inventory write-offs. We also may experience delays in payments from our customers. The combined effect of these will have a negative effect on our financial results. If the markets for our products improve, we must attract, hire and train a sufficient number of employees, including technical personnel, to meet increased customer demand. Our inability to achieve these objectives in a timely and cost-effective manner could have a negative impact on our business. Pending or future litigation could have a material adverse impact on our operating results and financial condition. In addition to intellectual property litigation, we have been, from time to time, subject to legal proceedings and claims, including a putative securities class action lawsuit and other securities-related litigation. See Part II, Item 1, "Legal Proceedings." Where we can make a reasonable estimate of the liability relating to pending litigation, we record a liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. Because of uncertainties relating to litigation, however, the amount of our estimates could be wrong. Moreover, plaintiffs may not specify an amount of damages sought. In addition to the direct costs of litigation and the use of cash, pending or future litigation could divert management's attention and resources from the operation of our business. Accordingly, our operating results and financial condition could suffer. We face risks relating to a pending SEC inquiry and the results of our internal investigation of accounting matters. On March 20, 2003, we contacted the SEC in connection with our issuance of a press release announcing the need to restate our financial results for the quarters ended August 31, 2002 and November 30, 2002. In March 2003, the audit committee of our board of directors, with the assistance of outside legal counsel and independent forensic accountants, commenced an internal investigation of certain accounting matters. The investigation involved the review of (1) the circumstances surrounding the reversal of an accrual for employee benefits, (2) unsupported accounting adjustments and clerical errors primarily relating to inventory and cost of goods sold, and (3) certain other areas where potential accounting errors could have occurred, including revenue recognition. As a result of the investigation, we determined that our unaudited consolidated condensed financial statements for the three months ended August 31, 2002 and November 30, 2002, and our audited consolidated financial statements for the year ended June 1, 2002 required restatement. We will continue to cooperate with any government investigation into the matters addressed by the internal investigation. Depending on the scope, timing and result of any governmental investigation, management's attention and our resources could be diverted from operations, which could adversely affect our operating results and contribute to future stock price volatility. Governmental investigations also could lead to further restatement of our prior period financial statements or require that we take other actions not currently contemplated. 19 Our management is implementing what it believes to be improvements in our internal and disclosure controls and procedures. See Item 4. Controls and Procedures. Nonetheless, future accounting restatements could occur because these controls and procedures prove to be ineffective or for other reasons. During the pendency of its internal investigation, our audit committee was in contact with attorneys in the SEC's Enforcement Division and kept them informed of the progress of the investigation. Our audit committee completed its investigation and delivered a final report to the SEC on August 1, 2003. After its review of the final report, the SEC could commence a formal investigation into the accounting matters. Such an investigation would result in a diversion of management's attention and resources which could negatively impact our operating results and may contribute to current and future stock price volatility. Moreover, an SEC investigation could lead to further restatement of our prior period financial statements or require that we take other actions not currently contemplated. Our management is implementing a more effective system of internal controls, however, there can be no assurance that these efforts will be adequate to prevent future restatements. In addition to a potential SEC investigation, the restatement of our previously issued financial statements may lead to new litigation, may expand the claims and the class periods in pending litigation, and may increase the cost of defending or resolving current litigation. Our operating results could suffer as we have recently experienced significant changes in our senior management and plan to add new members to our management team. Several members of our senior management have only joined ESI as employees in the last few months and we intend to continue to add new members to our senior management team. Changes in management may be disruptive to our business and negatively impact our operating results and may result in the departure of existing employees or customers. Further, it could take an extended period of time to locate, retain and integrate qualified management personnel. Our recent capacity expansion may not be utilized successfully or effectively, which could negatively affect our business. In November 2002, we completed construction of a 62,000 square foot corporate headquarters building in Portland, Oregon. The project was funded with existing capital resources and internally generated funds. Our capacity expansion involves risks. For example, the electronics industry has historically been cyclical and subject to significant economic downturns characterized by over-capacity and diminished demand for products of the type manufactured by us. In fiscal 2002 and 2003 we adopted restructuring plans that involved the closure of several of our manufacturing facilities in response to the current economic downturn. Unfavorable economic conditions affecting the electronics industry in general, or any of our major customers, may affect our ability to successfully utilize our additional manufacturing capacity in an effective manner, which could adversely affect our operating results. 20 Our ability to reduce costs is limited by our need to invest in research and development. Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase further in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales. We depend on a few significant customers and we do not have long-term contracts with any of our customers. Twelve large, multinational electronics companies represented 50.0% of our fiscal 2002 net sales, and the loss of any of these customers could significantly harm our business. In addition, none of our customers have any long-term obligation to continue to buy our products or services, and any customer could delay, reduce or cease ordering our products or services at any time. Delays in shipment or manufacturing of our products could substantially decrease our sales for a period. We will continue to derive a substantial portion of our revenues from the sale of a relatively small number of products with high average selling prices, some with prices as high as $2.0 million per unit. We generally recognize revenue upon shipment of our products. As a result, the timing of revenue recognition from a small number of orders could have a significant impact on our net sales and operating results for a reporting period. Shipment delays could significantly impact our recognition of revenue and could be further magnified by announcements from us or our competitors of new products and technologies, which announcements could cause our customers to defer purchases of our existing systems or purchase products from our competitors. Any of these delays could result in a material adverse change in our results of operations for any particular period. We depend on manufacturing flexibility to meet the changing demands of our customers. Any significant delay or interruption of manufacturing operations as a result of software deficiencies, natural disasters, or other causes could result in ineffective manufacturing capabilities or delayed product deliveries, any or all of which could materially and adversely affect our results of operations. 21 Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business. We use a wide range of materials in the production of our products, including custom electronic and mechanical components, and we use numerous suppliers to supply materials. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service interruptions and shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, key parts may be available only from a single supplier or a limited group of suppliers. Operations at our suppliers' facilities are subject to disruption for a variety of reasons, including work stoppages, fire, earthquake, flooding or other natural disasters. Such disruption could interrupt our manufacturing. Our business may be harmed if we do not receive sufficient parts to meet our production requirements in a timely and cost-effective manner. We may make additional acquisitions in the future, and these acquisitions may subject us to risks associated with integrating these businesses into our current business. Although we have no commitments or agreements for any acquisitions, we have made, and plan in the future to make, acquisitions of, or significant investments in, businesses with complementary products, services or technologies. Acquisitions involve numerous risks, many of which are unpredictable and beyond our control, including: - -- Difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies; - -- Diversion of management's attention from other operational matters; - -- The potential loss of key employees of acquired companies; - -- Lack of synergy, or inability to realize expected synergies, resulting from the acquisition; - -- The risk that the issuance of our common stock in a transaction could be dilutive to our shareholders if anticipated synergies are not realized; and - -- Acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company. Our inability to effectively manage these acquisition risks could materially and adversely affect our business, financial condition and results of operations. In addition, if we issue equity securities to pay for an acquisition the ownership percentage of our existing shareholders would be reduced and the value of the shares held by our existing shareholders could be diluted. If we use cash to pay for an acquisition the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. In addition, the Financial Accounting Standards Board has disallowed the pooling-of-interests method of acquisition accounting. This could result is significant charges resulting from amortization of intangible assets recorded in connection with future acquisitions. 22 Our markets are subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance. The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and potential customer requirements. The introduction by us or by our competitors of new and enhanced products may cause our customers to defer or cancel orders for our existing products, which may harm our operating results. We have in the past experienced a slowdown in demand for our existing products and delays in new product development, and similar delays may occur in the future. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements or, where necessary, to license these technologies from others. Product development delays may result from numerous factors, including: - -- Changing product specifications and customer requirements; - -- Difficulties in hiring and retaining necessary technical personnel; - -- Difficulties in reallocating engineering resources and overcoming resource limitations; - -- Difficulties with contract manufacturers; - -- Changing market or competitive product requirements; and - -- Unanticipated engineering complexities. The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business. We are exposed to the risks that others may violate our proprietary rights, and our intellectual property rights may not be well protected in foreign countries. Our success is dependent upon the protection of our proprietary rights. In the high technology industry, intellectual property is an important asset that is always at risk of infringement. We incur substantial costs to obtain and maintain patents and defend our intellectual property. For example, we have initiated litigation alleging that certain parties have violated various of our patents. We rely upon the laws of the United States and of foreign countries in which we develop, manufacture or sell our products to protect our proprietary rights. These proprietary rights may not provide the competitive advantages that we expect, however, or other parties may challenge, invalidate or circumvent these rights. 23 Further, our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products in foreign countries. We may be subject to claims of intellectual property infringement. Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. From time to time, we and our customers have received correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. For example, in February 2001, Cognex Corporation filed a lawsuit against us claiming we infringed a patent owned by it. Competitors or others may assert infringement claims against our customers or us in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur. Total amounts included in accrued expenses related to all of our legal activities, which represent estimated awards and assessments as well as unpaid legal services incurred through March 1, 2003, was approximately $1.2 million. If we become subject to infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected. We are exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations and legal and regulatory changes. International shipments accounted for 74.8% of net sales for fiscal 2002, with 46.8% of our net sales to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following: - -- Periodic local or geographic economic downturns and unstable political conditions; - -- Price and currency exchange controls; - -- Fluctuation in the relative values of currencies; - -- Difficulties protecting intellectual property; - -- Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and - -- Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing distributors and representatives and repatriation of earnings. 24 In addition, our ability to address normal business transaction issues internationally is at risk due to outbreaks of serious contagious diseases. For example, in response to the recent Severe Acute Respiratory Syndrome outbreak in Asia, management limited travel to Asia in accordance with the World Health Organization's recommendations. In addition, as a result of our significant reliance on international sales, we may also be adversely affected by challenges to U.S. tax laws that benefit companies with certain foreign sales. In February 2000, the World Trade Organization (WTO) ruled that foreign sales corporations (FSCs), which provide an overall reduction in effective tax rates for companies with FSCs, violate U.S. obligations under the General Agreement on Tariffs and Trade (GATT). Responding to the WTO's decision that FSCs constitute an illegal export subsidy, the U.S. government repealed the FSC rules effective October 1, 2000, subject to certain transition rules, and created a new income tax benefit that permanently excludes "foreign extraterritorial income" from taxable income. The extraterritorial income (ETI) regime, which applies to transactions after September 30, 2000, provides a similar tax benefit for export sales as the FSC regime did. Following a European Union (EU) complaint, the WTO concluded in August 2001 that the ETI provisions are also not WTO-compliant because provisions violate the GATT agreements. The United States appealed the decision, but in January 2002, an appellate body denied the appeal. On August 30, 2002, a WTO arbitration panel issued a report approving the retaliatory tariffs requested by the EU. The EU now has the authority to begin imposing trade sanctions on U.S. exports up to the level approved by the arbitrators and the authority for such sanctions will continue until the United States rectifies the WTO violation. We believe the U.S. government will choose to rectify the violation to avoid retaliatory trade sanctions and it is considering several options to do so. The U.S. government may repeal the ETI regime and if the government does not replace it with an equivalent form of tax relief for foreign income, our future results of operations may be adversely affected. Our establishment of direct sales in Asia exposes us to the risks related to having employees in foreign countries. We have established direct sales and service organizations in China, Taiwan, Korea and Singapore. Previously, we sold our products through a network of commission-based sales representatives in these countries. Our shift to a direct sales model in these regions involves risks. For example, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell and market our products. We also are subject to compliance with the labor laws and other laws governing employers in these countries and we will incur additional costs to comply with these regulatory schemes. Additionally we will incur new fixed operating expenses associated with the direct sales organizations, particularly payroll related costs and lease expenses. If amounts saved on commission payments formerly paid to our sales representatives do not offset these expenses, our operating results may be adversely affected. 25 Our business is highly competitive, and if we fail to compete our business will be harmed. The industries in which we operate are highly competitive. We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products. Furthermore, our technological advantages may be reduced or lost as a result of technological advances by our competitors. Their greater resources in these areas may enable them to: - -- Better withstand periodic downturns; - -- Compete more effectively on the basis of price and technology; - -- More quickly develop enhancements to and new generations of products; and - -- More effectively retain existing customers and obtain new customers. In addition, new companies may in the future enter the markets in which we compete, further increasing competition in those markets. We believe that our ability to compete successfully depends on a number of factors, including: - -- Performance of our products; - -- Quality of our products; - -- Reliability of our products; - -- Cost of using our products; - -- Our ability to ship products on the schedule required; - -- Quality of the technical service we provide; - -- Timeliness of the services we provide; - -- Our success in developing new products and enhancements; - -- Existing market and economic conditions; and - -- Price of our products as compared to our competitors' products. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, and loss of market share. Possibilities of terrorist attacks have increased uncertainties for our business. Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the possibility of terrorist attacks on the United States, including the potential worsening or extension of the current global economic slowdown, the economic consequences of military action or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. 26 In particular, due to these uncertainties we are subject to: - -- The risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities; - -- The risk of more frequent instances of shipping delays. - -- The risk that demand for our products may not increase or may decrease. Our inability to attract and retain sufficient numbers of managerial, financial, engineering and other technical personnel could have a material adverse effect upon our results of operations. Our continued success depends, in part, upon key managerial, financial, engineering and technical personnel as well as our ability to continue to attract and retain additional personnel. The loss of key personnel could have a material adverse effect on our business or results of operations. In April 2003, Barry L. Harmon became President and Chief Executive Officer of ESI with the understanding that he will serve in that capacity until a permanent successor is hired. Recently, The Board of Directors decided to commence a search in the fall for a new Chief Executive Officer to succeed Mr. Harmon. In addition, there are several key positions open in our finance department. We are in the process of recruiting highly skilled accounting and financial reporting personnel to fill these finance positions. It could take longer than anticipated, however, to hire and train the appropriately qualified professionals. Moreover, we cannot be certain that the employees hired to fulfill these duties will perform at the level necessary to ensure that our internal controls are not compromised. It may also take longer than anticipated to hire a new Chief Executive Officer. In addition, we may not be able to retain our key managerial, financial, engineering and technical employees. Our growth may be affected by our ability to hire new managerial personnel, highly skilled and qualified technical personnel, and personnel that can implement and monitor our financial controls and reporting systems. Attracting and retaining qualified personnel is difficult, and our recruiting efforts to attract and retain these personnel may not be successful. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk As of March 1, 2003, our investment portfolio included marketable debt securities of $271.3 million. These securities are subject to interest rate risk, and will decline in value if interest rates increase. These securities are classified as Securities Available for Sale; therefore, the impact of interest rate changes is reflected as a separate component of shareholders' equity. Due to the short duration of our investment portfolio, generally less than one year, an immediate 10% increase in interest rates would not have a material effect on our financial condition or the results of our operations. Our $145 million aggregate principal amount of 4 1/4% convertible subordinated notes due 2006 is at a fixed interest rate. Therefore, there is no associated volatility. 27 Foreign Currency Exchange Rate Risk We have limited involvement with derivative financial instruments and do not use them for trading purposes. Hedging derivatives are used to manage well-defined foreign currency risks. We enter into forward exchange contracts to hedge the value of accounts receivable denominated in Japanese yen. The impact of exchange rates on the forward contracts will be substantially offset by the impact of such changes on the underlying transactions. The effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions, denominated in Japanese yen, would not be material to our financial position or results of operations. Item. 4. Controls and Procedures Immediately following the signature page of this quarterly report are certifications of our President and Chief Executive Officer and our Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certification"). This portion of our quarterly report on Form 10-Q is our disclosure of the results of our controls evaluation conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, and within 90 days prior to the filing of this quarterly report referred to in paragraphs (4), (5) and (6) of the Section 302 Certification and should be read in conjunction with the Section 302 Certification for a more complete understanding of the topics presented. In March 2003 the Audit Committee of our Board of Directors, with the assistance of outside legal counsel and forensic accountants, commenced an internal investigation of certain accounting matters. The investigation involved the review of (1) the circumstances surrounding the reversal of an accrual for employee benefits, (2) unsupported accounting adjustments and clerical errors primarily relating to inventory and cost of goods sold, and (3) certain other areas where potential accounting errors could have occurred, including revenue recognition. On July 15, 2003, we announced that the Audit Committee had completed its review of these matters. As a result of the review, we determined that the unaudited consolidated condensed financial statements for the three months ended August 31, 2002 and November 30, 2002 and the audited consolidated financial statements for the year ended June 1, 2002 required restatement. 28 Management has advised the Audit Committee that upon reviewing the restatement adjustments and performing an evaluation of our controls and disclosure procedures, management noted deficiencies in internal controls relating to: 1. Lack of complete sales documentation, particularly as it relates to customer specified acceptance criteria; 2. Lack of adequate job transition/cross training and poorly documented "desk" processes and procedures in the finance/accounting area; 3. Changes to accounting methodologies without notification to, or proper authorization by, accounting oversight parties (i.e., the audit committee and independent auditors); and 4. Lack of adequate tracking and monitoring of finished goods inventory that was transferred out of the inventory management information system. The independent auditors advised the Audit Committee that these internal control deficiencies constitute reportable conditions and, collectively, a material weakness as defined in Statement of Auditing Standards No. 60. Certain of these internal control weaknesses may also constitute deficiencies in our disclosure controls. While we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, are in the process of implementing a more effective system of disclosure controls and procedures, we have instituted controls, procedures and other changes to ensure that information required to be disclosed in this quarterly report on Form 10-Q has been recorded, processed, summarized and reported. The steps that we have taken to ensure that all material information about our company is accurately disclosed in this report include: 1. The appointment of an independent director to be Chairman of the Board in April 2003, who was previously the Chief Executive Officer and Chairman of the Board of KLA-Tencor Corporation; 2. The appointment of a previously independent director to be President and Chief Executive Officer in April 2003, who was previously Chief Financial Officer of Apex, Inc. and was the former Senior Vice President and Chief Financial Officer of ESI for seven years until 1998; 3. The appointment of a new Chief Financial Officer in May 2003, who was previously Chief Financial Officer of SpeedFam-IPEC, Inc. and Vice President and Corporate Controller of Novellus Systems, Inc.; 4. The engagement of outside professionals specializing in accounting and finance to assist our management in the collection, substantiation and analysis of the information contained in this report; and 5. The performance of additional procedures by us designed to ensure that these internal control deficiencies did not lead to material misstatements in our consolidated financial statements. 29 We have also increased by two the number of independent directors on our board by electing Richard J. Faubert, who previously served as President and Chief Executive Officer of SpeedFam-IPEC, Inc. and held senior management positions at Tektronix, Inc. and Genrad, Inc., and Frederick A. Ball, who previously served as Senior Vice President and Chief Financial Officer of Borland Software Corporation and as Vice President of Finance of KLA-Tencor Corporation. Based in part on the steps listed above, our President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, in order to address further the deficiencies described above and to improve our internal disclosure and control procedures for future periods, we will: 1. Review and revise our processes and procedures for applying revenue recognition policies, including more formalized training of finance, sales, order management and other staffs; 2. Enhance accounting/finance training programs and desk processes and procedures documentation as well as retain additional full-time experienced accounting/finance personnel; 3. Provide additional management oversight and perform detailed reviews of disclosures and reporting with the assistance of outside legal counsel; 4. Account for all completed systems in the inventory management information system; and 5. Use outside resources, as necessary, to supplement our employees in the preparation of the consolidated financial statements and other reports filed or submitted under the Securities Exchange Act of 1934. These steps will constitute significant changes in internal controls. We will continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, and will take further action as appropriate. 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings Between March 26, 2003 and May 20, 2003, three putative class action lawsuits were filed in the United States District Court for the District of Oregon against the Company and David F. Bolender, James T. Dooley, and Joseph L. Reinhart, who are current and/or former officers and directors of ESI. The complaints were filed on behalf of a purported class of persons who purchased ESI's common stock between September 17, 2002 and at the latest April 15, 2003. The complaints assert causes of action (and seek unspecified damages) for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Act. In particular, the complaints allege that the defendants were involved in making false and misleading statements during the putative class period about ESI's business, prospects, and operations, all of which resulted in artificially inflating ESI's stock price. The complaints have been consolidated under the name In re Electro Scientific Industries, Inc. Securities Litigation, Case No. CV 03-404-HA. Lead plaintiffs and lead counsel for plaintiffs have been appointed. Plaintiffs' consolidated class action complaint is due to be filed 45 days following the filing of our restated financial statements referred to below. In March 2003, our Audit Committee commenced an investigation into certain accounting matters. As a result of the investigation, which was completed on July 11, 2003, we have restated our financial statements for the fiscal year ended June 1, 2002 and for the quarters ended August 31, 2002 and November 30, 2002. The restated financial statements are set forth in our annual report on Form 10-K/A and quarterly reports on Form 10-Q/A for the corresponding periods, filed August 11, 2003. The consolidated class action complaint had not been filed and discovery had not yet commenced when this report was filed, and we were in the early stages of our assessment of the possible outcomes of this litigation. We expect, however, that the litigation will be costly and will to some degree divert management's attention from daily operations. On March 31, 2003 and April 28, 2003, two separate purported shareholder derivative complaints were filed in the Circuit Court of Oregon in Washington County. The named defendants include certain current and/or former officers and directors of ESI. ESI is named as a "nominal defendant." The complaints have been consolidated under the name In Re Electro Scientific Industries, Inc. Derivative Litigation, Lead Case No. C 031067 CV. Lead plaintiffs and lead counsel for plaintiffs have been appointed. The parties have stipulated that the plaintiffs will file a consolidated complaint within 45 days of the filing of our restated financial statements referred to above. The existing complaints allege that certain defendants breached fiduciary duties to ESI and were unjustly enriched. The complaint seeks an unspecified amount of monetary damages and seeks various equitable remedies, including a constructive trust on the proceeds received by the defendants from trading ESI common stock. As filed, the complaints are derivative in nature and do not seek monetary damages from, or the imposition of equitable remedies on, ESI. We have entered into indemnification agreements in the ordinary course of business with our officers and directors and may be obligated throughout this action to advance payment of legal fees and costs incurred by the defendant current and former officers and directors pursuant to the indemnification agreements and applicable Oregon law. The special litigation committee of our board of directors, with the assistance of independent legal counsel, is conducting an investigation relating to the allegations asserted in the complaints. 31 On February 14, 2001, Cognex Corporation (Cognex) filed a lawsuit in the United States District Court for the District of Massachusetts (Cognex Corporation v. Electro Scientific Industries, Inc., No. 01-10287 RCL). The lawsuit alleges that our CorrectPlace ver. 5.0 product infringes United States Patent 5,371,690, which is owned by Cognex. The patent concerns the inspection of surface mount devices that are attached to the surface of an electronic circuit board. Cognex seeks injunctive relief, damages, costs and attorneys' fees. We filed a motion for summary judgment of non-infringement on October 8, 2002, which remains pending. Cognex filed motions for summary judgment on the issues of unenforceability and mismarking on October 8, 2002. The court denied Cognex's motion on the issue of unenforceability on April 25, 2003. The motion on the issue of mismarking remains pending. We believe we have meritorious defenses to the action and intend to pursue them vigorously. Fact discovery is completed in the lawsuit. Additionally, certain of our customers have notified us that, in the event it is subsequently determined that their use of CorrectPlace ver. 5.0 infringes any patent, they may seek indemnification from us for damages or expenses resulting from this matter. Item 5. Other Information Changes in Management and Board of Directors On April 15, 2003, James T. Dooley, our President and Chief Executive Officer, was placed on administrative leave of absence pending the results of a review of our financial statements for the first two quarters of fiscal 2003. Mr. Dooley remained on our Board of Directors at this time. During Mr. Dooley's leave of absence, Mr. Barry L. Harmon, who was, at the time of Mr. Dooley's being placed on leave, a member of our Board of Directors and our Audit Committee, served as our President and Chief Executive Officer. On June 9, 2003, Mr. Dooley was terminated and resigned from our board of directors. Mr. Harmon continues to serve as our Chief Executive Officer. In addition, also on April 15, 2003, Mr. Larry L. Hansen, a member of our Board of Directors and our Compensation and Governance and Nominating Committees, became a member of our Audit Committee and Mr. Jon D. Tompkins was named Chairman of the Board of Directors, succeeding Mr. David F. Bolender, who remains a director of ESI. On May 5, 2003, we hired J. Michael Dodson to be our Vice President of Administration and Chief Financial Officer. Mr. Dodson replaced Richard Okumoto who resigned. Mr. Okumoto was hired by ESI in February 2003. Mr. Richard J. Faubert and Mr. Frederick Ball were elected to our Board of Directors on June 3, 2003 and July 17, 2003, respectively. Restatements In March 2003 our Audit Committee commenced an internal investigation of certain accounting matters. The investigation involved the review of (1) the circumstances surrounding the reversal of an accrual for employee benefits, (2) unsupported accounting adjustments and clerical errors primarily relating to inventory and cost of goods sold, and (3) certain other areas where potential accounting errors could have occurred, including revenue recognition. As a result of the investigation, we determined that the unaudited consolidated condensed financial statements for the three months ended August 31, 2002 and November 30, 2002, and the audited consolidated financial statements for the year ended June 1, 2002 (and the quarters contained therein) required restatement. 32 These restated financial statements are included in our amended quarterly reports on Form 10-Q/A for the fiscal quarters ended August 31, 2002 and November 30, 2002 and our amended annual report on Form 10-K/A for the fiscal year ended June 1, 2002, each of which was filed on August 11, 2003. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits This list is intended to constitute the exhibit index. 10.1 Agreement and Release of All Claims by and between Electro Scientific Industries, Inc. and Mr. Robert E. Belter dated September 19, 2001. 10.2 Separation Agreement by and between Electro Scientific Industries, Inc. and Mr. Kevin Longe dated September 12, 2002. 10.3 Separation Agreement by and between Electro Scientific Industries, Inc. and Mr. Brad Cooley dated February 24, 2003. 10.4 Separation Agreement by and between Electro Scientific Industries, Inc. and Mr. Gary Kapral dated June 11, 2003. 10.5 Change in Control Agreement by and between Electro Scientific Industries, Inc. and Mr. Bob Chamberlain dated January 16, 2003. 10.6 Change in Control Agreement by and between Electro Scientific Industries, Inc. and Mr. Jack Isselmann dated January 16, 2003. 10.7 Change in Control Agreement by and between Electro Scientific Industries, Inc. and Mr. Joe Reinhart dated January 16, 2003. 10.8 Change in Control Agreement by and between Electro Scientific Industries, Inc. and Mr. Ed Swenson dated January 16, 2003. 10.9 Change in Control Agreement by and between Electro Scientific Industries, Inc. and Mr. Keith Taft dated January 16, 2003. 10.10 Employment Agreement by and between Electro Scientific Industries, Inc. and Mr. Mike Dodson dated May 5, 2003. 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the quarter ended March 1, 2003: -- Dated and filed December 16, 2002 pursuant to Item 5., "Other Events," regarding the appointment of James T. Dooley as President and Chief Executive Officer of the Company; -- Dated January 16, 2003 and filed January 22, 2003 pursuant to Item 5., "Other Events," regarding the approval by the Board of Directors for the Company to repurchase up to $50.0 million aggregate principal amount of the Company's 4 1/4% Convertible Subordinated Notes during 2003; -- Dated and filed February 18, 2003 pursuant to Item 5., "Other Events," regarding the Company's revenue expectations for its third fiscal quarter ending March 1, 2003; and -- Dated and filed February 18, 2003 pursuant to Item 5., "Other Events," regarding the appointment of Richard Okumoto as Vice President of Administration and Chief Financial Officer of the Company. 33 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. Dated: August 11, 2003 ELECTRO SCIENTIFIC INDUSTRIES, INC. By /s/ Barry L. Harmon Barry L. Harmon President and Chief Executive Officer (Principal Executive Officer) By /s/ J. Michael Dodson J. Michael Dodson Vice President of Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 34 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Barry L. Harmon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 11, 2003 /s/ Barry L. Harmon - ----------------------- Barry L. Harmon President and Chief Executive Officer 35 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, J. Michael Dodson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Electro Scientific Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 11, 2003 /s/ J. Michael Dodson - --------------------------- J. Michael Dodson Vice President of Administration and Chief Financial Officer 36 EX-10 3 a4451391_ex10-1.htm EXHIBIT 10.1 EX-10.1

EXHIBIT 10.1

AGREEMENT AND
RELEASE OF ALL CLAIMS

This Agreement is made and entered into by and between Electro Scientific Industries, Inc. (“the Company”) and Robert E. Belter (“Employee”). This Agreement will confirm that it has been mutually agreed to alter the employment relationship between the Company and Employee.

In consideration of the mutual covenants and promises below and valuable consideration, receipt of which is hereby acknowledged, the parties hereby agree as follows:

1. Employee’s full-time employment as Vice President/General Manager-Electronic Component Systems with the Company will terminate effective the close of business September 4, 2001.

2. Employee represents that he has not filed any complaint, claim or action against the Company, its officers, agents or representatives, or against any affiliated companies, with any local, state, or federal court and that he will not do so at any time hereafter.

3. Employee understands and agrees that he has not executed this Agreement without first having had the opportunity to consider it for twenty-one (21) days from receipt of this Agreement. Between seven (7) days and fourteen (14) days after he delivers to the Company an executed copy of this Agreement and so long as he has not exercised his right of revocation as described in paragraph 12(g) below, the Company will cause to be delivered the monetary payment provided in Paragraph 4 below.

4. The Company hereby agrees that Employee will remain on the Company’s payroll and the Company will pay Employee compensation of $12,222.23 per month minus any applicable taxes, contributions, or withholdings, for nine (9) months following his last day of employment as Vice President/General Manager-Electronic Component Systems until June 4, 2002. Employee will remain on the payroll for nine (9) months until June 4, 2002 as an employee performing consulting services to the Company as required from time to time. Employee will continue to be entitled to medical benefits to the same extent and under the same terms and conditions as if Employee had remained in his previous position.

5. Employee agrees that the foregoing payments shall constitute the entire amount of monetary consideration provided to him under this Agreement and that he will not seek any further compensation for any other claimed damage, costs, or attorneys’ fees in connection with the matters encompassed in this Agreement.

6. Employee agrees that to the extent requested by the Company or its Board of Directors, he will cooperate and assist the Company in the orderly transition of his duties to his successors and will consult and advise the Company’s officers and management as they reasonably request. Employee agrees that if during the nine (9) month period he is employed to perform consulting services he will remain in the exclusive employment of the Company and will not accept employment elsewhere.

7. Employee will not disclose during the period described above, or thereafter, any trade secrets or confidential or proprietary business plans, marketing plans, new product development, advertising plans, customers, suppliers, labor relations, trade or industrial practices or secrets or know-how. Employee represents and warrants that he has not and will not hereafter remove from the Company’s premises or retain without the Company’s express written consent, any figures, calculations, letters, papers, drawings, plans, documents or copies thereof, or any confidential information of any type, whether written, digital, magnetic or in any other form, pertaining to the Company.

8. In the event that Employee fails to fully comply with the terms of this agreement then the Company may, at its election terminate the benefits, payments and assistance, set forth in paragraph 4 above, and may in addition pursue all rights and remedies that it may have.

9. Employee hereby waives all rights under Section 1542 of the Civil Code of State of California. Section 1542 provides as follows:

A general release does not extend to claims which the creditor does not know of or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.

10. Notwithstanding the provisions of Section 1542 of the Civil Code of the State of California, Employee hereby irrevocably and unconditionally releases and forever discharges the Company, its affiliated companies, and each and all of its officers, agents, directors, supervisors, employees, representatives, and their successors and assigns, and all persons acting by, through, under, or in concert with them, or any of them, from any and all charges, complaints, claims and liabilities of an kind or nature whatsoever, known or unknown, suspected or unsuspected (hereinafter referred to as “claim” or “claims”) which Employee at any time heretofore had or claimed to have or which Employee may have or claim to have regarding events that have occurred as of the date of this Agreement, including, without limitation, any and all claims related or in any manner incidental to Employee’s employment with the Company or the separation therefrom. It is expressly understood by Employee that among the various rights and claims being waived in this release are those arising under Title VII of the Civil Rights Act of 1964 (42 USC § 2000e et seq.), the Age Discrimination in Employment Act of 1967 (29 USC § 621, et seq.); and the Americans With Disabilities Act (29 USC § 706).

11. The parties understand the word “claims” to include all actions, claims and grievances, whether actual or potential, known or unknown, and specifically, but not exclusively, all claims arising out of Employee’s employment with the Company. All such claims (including attorneys’ fees and costs) are forever barred by this Agreement regardless of the forum in which they might be brought.

12. Employee understands and agrees that he:

(a)

Has had the opportunity to consider this Agreement for a full twenty-one (21) days before executing it.

(b)

Has carefully read and fully understands all of the provisions of this Agreement.

(c)

Is, through this Agreement, releasing the Company from any and all claims he may have against the Company.

(d)

Knowingly and voluntarily agrees to all of the terms set forth in this Agreement.

(e)

Knowingly and voluntarily intends to be legally bound by the same.

(f)

Was advised and hereby is advised in writing to consider the terms of this Agreement and consult with an attorney of his choice prior to executing this Agreement.

(g)

Has seven (7) days following the execution of this Agreement to revoke this Agreement and has been and hereby is advised in writing that this Agreement shall not become effective or enforceable until the revocation period has expired.

(h)

Understands that rights or claims under the Age Discrimination in Employment Act of 1967 (29 USC § 621, et seq.) that may arise after the date this Agreement is executed are not waived.

13. Employee promises not to discuss or disclose the terms of his separation from the Company or the amount or nature of the benefits paid to his under this Agreement and Release to any person other than his family members and his attorney and/or financial advisor, should one be consulted, provided that those to whom he may make such disclosure agree to keep said information confidential and not disclose it to others.

14. The parties represent and acknowledge that in executing this Agreement they do not rely and have not relied upon any representation or statement made by any of the parties or by any of the parties’ agents, attorneys, or representatives with regard to the subject matter, basis, or effect of this Agreement or otherwise, other than those specifically stated in this written Agreement.

15. This Agreement shall be binding upon the parties and upon their heirs, administrators, executors, successors, and assigns, and shall inure to the benefit of said parties, and each of them, and to their heirs, administrators, representatives, executors, successors, and assigns. Employee expressly warrants that he has not transferred to any person or entity any rights, causes of action, or claims related in this Agreement.

16. Should any provision of this Agreement be declared or be determined by any court of competent jurisdiction to be illegal, invalid, or unenforceable, the legality, validity, and enforceability of the remaining parts, terms, or provisions shall not be affected and any illegal, invalid, or unenforceable provision shall be deemed not to be part of this Agreement.

17. This Agreement sets forth the entire agreement between the parties hereto and fully supersedes any and all prior agreements or understandings, written or oral, between the parties pertaining to the subject matter hereof.

18. This Agreement shall be interpreted in accordance with the plain meaning of its terms and not strictly for or against any of the parties hereto.

19. It is further understood and agreed that if, at any time, a violation of any term of this Agreement is asserted by any party hereto, that party shall have the right to seek specific performance of that term and/or any other necessary and proper relief, including, but not limited to, damages from any court of competent jurisdiction, and the prevailing party shall be entitled to recover its reasonable costs and attorneys’ fees.

20. This Agreement shall in all respects be interpreted, enforced and governed under the laws of the state of Oregon.

Dated: 9/19/01 ——————		ELECTRO SCIENTIFIC INDUSTRIES, INC. By: /s/ MICHAEL J. MURPHY —————————————— Michael J. Murphy Vice President
Dated: 9/14/01 ——————		By: /s/ ROBERT E. BELTER —————————————— Robert E. Belter

EX-10 4 a4451391_ex10-2.htm EXHIBIT 10.2 EX-10.2

EXHIBIT 10.2

September 12, 2002

CONFIDENTIAL

Mr. Kevin T. Longe
15451 Village Drive
Lake Oswego, OR 97034

Re:

Separation Agreement

Dear Kevin:

As we have discussed, your employment with Electro Scientific Industries, Inc. (“ESI” or the “Company”) has terminated effective at the close of business on Septemebr 9, 2002 (the “Separation Date”). On the Separation Date you were provided your final paycheck including pay for all accrued, unused or otherwise unpaid vacation along with an earlier draft of this letter. This letter supecedes the letter delivered to you on the Separation Date in its entirety.

In order to help you to transition to your next opportunity, the terms of a Separation Agreement (the “Agreement”) are described below. Under this Agreement, if you choose to accept it, you would receive severance compensation of $125,000 (subject to applicable withholding) over the next 4 months as set out below; and you would agree to the terms described below which include a general release of claims.

A.	Separation Agreement

Resignation

By executing this Agreement, you resign your position as Vice President-Sales, Marketing and Service and as an officer of ESI or any affiliated company of ESI effective September 9, 2002.

Severance Pay

If you accept the terms of this Agreement, you will receive severance pay equivalent to $125,000 subject to taxes and other applicable withholding. Payments will be made on regular Company paydays during this period (the “Severance Period”) and end on the last Company payroll date prior to December 31, 2002

Benefits

3.1

Health and Dental Benefits

Your regular health and dental coverage will continue through September 30, 2002. As you may know, pursuant to COBRA, a federal law, you may, if eligible, continue your group health benefits for a period of eighteen (18) months from termination of your employment at your sole expense. Subject to the terms of this Agreement, the Company will pay your COBRA premiums for coverage through February 28, 2003, or until you find other employment through which you are eligible receiving group medical health insurance coverage, which happens first.

Mr. Kevin T. Longe
September 12, 2002
Page – 2

You agree to immediately notify the Company in writing upon obtaining such other employment during the Severance Period. You will receive additional information explaining rates and your options under COBRA in separate correspondence.

3.2

Other Qualified and Non-Qualified Plans and Programs

Except for health and dental benefits described above, effective upon your execution of this Agreement, you will cease participation in all benefit plans and programs of the Company, including, but not limited to, vacation and sick leave programs and all employee stock programs.

3.3

Stock Options and Grants

Your rights under the Company’s Stock Incentive Plans with respect to stock options and stock grants shall be as stated in the plan documents or related agreements. For purposes of stock option vesting and exercise your termination date will be the Separation Date. Please refer to the stock option agreements and stock option plans previously provided to you for details on your right to exercise currently vested stock options.

3.3

Deferred Compensation

You will receive all amounts owed to you under the Company’s Deferred Compensation Plan (subject to applicable taxes and withholding) in accordance with the terms of the plan documents.

3.4

No Other Benefits

You will not receive any other employee benefits except those specified herein. You acknowledge that you have no vested retirement benefits under any retirement plan or agreement based on your service to the Company. You agree to waive the right to participate in any Company employee benefit plan and to receive other fringe benefits or separation benefits from ESI.

Release of Claims

In consideration for these separation benefits you agree to fully release the Company and its subsidiaries, related corporations, affiliates and joint ventures, partnerships, predecessor and successor organizations and all current and former partners, members, joint venturers, officers, directors, employees, agents, insurers, shareholders, representatives and assigns from any and all liability, damages or causes of action, direct or indirect, known or unknown including, without limitation, all claims relating in any way to your employment with the Company or the termination of that employment. This release includes, but is not limited to, any claims for additional compensation, benefits or wages in any form, damages, reemployment or reinstatement. This release also includes, but is not limited to, all claims for relief or remedy under any state or federal laws, including ERISA, 29 USC § 1001 et seq., Title VII of the Civil Rights Act of 1964, 42 USC § 2000e as amended, the Post Civil War Civil Rights Acts, 42 USC §§ 1981-88, the Civil Rights Act of 1991, the Equal Pay Act, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Older Workers’ Benefit Protection Act, the Federal Family and Medical Leave Act, the Worker Adjustment and Retraining Notification Act, the Rehabilitation Act of 1973, the Uniformed Services Employment and Reemployment Rights Act, the Fair Labor Standards Act, Executive Order 11246, and all other laws and contract, tort or other common or statutory law theories and all labor, employment or wage laws of Oregon or any other state.

Mr. Kevin T. Longe
September 12, 2002
Page – 3

Voluntary Release

You acknowledge that you have read the Agreement and understand that you are releasing legal rights, including those identified in the release of claims set forth above. You also acknowledge that, as consideration for executing this Agreement, including the release of claims, you are receiving additional benefits and compensation to which you would not otherwise be entitled. You are advised that you may choose to seek review and advice regarding this Agreement from an attorney.

Confidentiality and Non-Competition

6.1

Preservation and Non-Use of Confidential Information

You agree not to discuss this Agreement except with your financial, tax, and legal advisors and with members of your family, and not to discuss Confidential Information obtained during your employment with the Company. For purposes of this Agreement, “Confidential Information” means any and all confidential or proprietary information concerning the Company or its affiliates, joint venturers or other related entities, the disclosure of which could disadvantage ESI or which derives value from the fact that it is not publicly known. Confidential Information includes trades secrets as defined under the Uniform Trades Secrets Act.

You agree not to use Confidential Information, during the term of this Agreement or after its termination, for any personal or business purpose, either for your own benefit or that of any other person, corporation, government or other entity.

You also agree that you will not disclose or disseminate any Confidential Information, directly or indirectly, at any time during the term of this Agreement or after its termination, to any person, agency, or court unless compelled to do so pursuant to legal process (e.g., a summons or subpoena) or otherwise required by law and then only after providing the Company with prior notice and a copy of the legal process.

6.2

Non-Competition

You agree that you will not for a period through September 9, 2003, directly or indirectly, accept employment or enter into any business relationship of any sort whatsoever (including, but not limited to, as a consultant, vendor, partner, officer or director, but excluding passive stock investments) with any customer or competitor of the Company or any entity with which the Company has done business or with whom you know the Company intends to do business within the twelve (12) months following the Separation Date. You specifically acknowledge and agree that the terms of this provision are reasonable in every respect and, in particular, because of the competitive and specialized nature of the Company’s business, that it is reasonable not to include any geographic limitation in this provision.

Dispute Resolution

This Agreement shall be construed in accordance with and governed by the statutes and common law of the state of Oregon. Any disputes arising in connection with the terms or enforcement of this Agreement shall be resolved by confidential mediation or binding arbitration in accordance with the procedures of the American Arbitration Association or other procedures agreed upon by you and the Company. The costs of mediation and arbitration shall be borne equally by you and the Company.

Mr. Kevin T. Longe
September 12, 2002
Page – 4

Acknowledgement

You acknowledge that this Agreement contains the entire agreement and understanding between you and the Company and supersedes and replaces all prior negotiations and agreements concerning the subjects of this Agreement. You acknowledge that (a) you have read the Agreement and understand the effect of your release and that you are releasing legal rights; (b) you have had adequate time to consider this Agreement (as set out below); (c) as consideration for executing this Agreement, you have received additional benefits and compensation of value to which you would not otherwise be entitled; and (d) you have been, and hereby are, advised in writing to review this Agreement with legal counsel of your choice.

Time for Consideration of Offer and Agreement

You acknowledge that the Company provided you this Agreement on September 13, 2002 and that this offer provided you with a period of twenty-one (21) days from the date of receipt for your consideration of the offer (the “consideration period”). In the event you have not executed this Agreement by the expiration of the offer period on October 4, 2002, the offer shall expire. You may execute this Agreement at any time during this consideration period. This Agreement shall be effective on the date it is signed.

Sincerely,

ELECTRO SCIENTIFIC INDUSTRIES, INC.

By: GARY M. KAPRAL
        ——————————————
        Gary M. Kapral
        Vice President

I have read and understand the foregoing Agreement and, by signing below, I voluntarily enter into this Agreement and understand that I am waiving and releasing legal claims that I may have against the Company.

Accepted: September 18, 2002

Kevin T. Longe

/s/ KEVIN T. LONGE
———————————
Signature

EX-10 5 a4451391_ex10-3.htm EXHIBIT 10.3 EX-10.3

EXHIBIT 10.3

February 24, 2003

CONFIDENTIAL

Mr. Bradford S. Cooley
905 N Harbour Dr #26
Portland, OR 97217

Re:

Separation Agreement

Dear Brad:

This letter (the “Agreement”) sets forth the terms of your agreement with Electro Scientific Industries, Inc. (“ESI”) concerning your employment, separation from employment and resignation as an officer. Under this Agreement, if you choose to accept it, you would receive severance compensation at the rate set out below; and you would agree to the terms described below which include a general release of claims.

Resignation

By executing this Agreement, you resign your position as Vice President-Chief Technology Officer and as an officer of ESI or any affiliated company of ESI effective February 18, 2003.

Severance Pay

ESI hereby agrees that ESI will pay your base salary of $235,000 at regular company pay periods subject to any applicable taxes, contributions, or withholdings, until August 31, 2003. Pursuant to our discussions ESI will also continue the payroll deductions in connection with your loan against your 401(k) account. However, effective February 18, 2003 you are no longer eligible to make 401(k) contributions. Your employment will continue through August 31, 2003 (the “Separation Date”) with you performing consulting services to ESI as required from time to time. Notwithstanding the designation of this term of employment, your employment with ESI will be on an “at will” basis with both you and ESI retaining the right to terminate the employment relationship at any time and for any reason, without liability on the part of ESI for the termination except that ESI’s obligation to pay the salary and benefits identified herein may not be terminated and except as otherwise expressly provided in this Agreement.

Benefits

3.1

Health and Dental Benefits

Until the Separation Date, you will continue to be entitled to medical and dental benefits to the same extent provided under the terms and conditions of ESI’s benefit plans. As you may know, pursuant to COBRA, a federal law, you may, if eligible, continue your group health benefits for a period of eighteen (18) months from the Separation Date at your sole expense. You will receive additional information explaining rates and your options under COBRA in separate correspondence.

3.2

Other Qualified and Non-Qualified Plans and Programs

Except for health and dental benefits described above, effective upon your execution of this Agreement, you will cease participation in all benefit plans and programs of ESI, including, but not limited to, vacation and sick leave programs and all you stock programs. You acknowledge that on February 18, 2003 your received compensation from ESI for all service rendered by you throught hat date and for for all accrued, unused or otherwise unpaid vacation.

3.3

Stock Options and Grants

Your rights under ESI’s Stock Incentive Plans with respect to stock options and stock grants shall be as stated in the plan documents or related agreements. For purposes of stock option vesting and exercise your termination date will be February 18, 2003. Please refer to the stock option agreements and stock option plans previously provided to you for details on your right to exercise currently vested stock options.

3.3

Deferred Compensation

You will receive all amounts owed to you under ESI’s Deferred Compensation Plan (subject to applicable taxes and withholding) in accordance with the terms of the plan documents.

3.4

Outplacement Services

ESI will provide certain outplacement services to you at its expense in an aggregate amount not to exceed $15,000. You will receive more information on the outplacement services available to you in separate correspondence.

3.5

No Other Benefits

You will not receive any other you benefits except those specified herein. You acknowledge that you have no vested retirement benefits under any retirement plan or agreement based on your service to ESI. You agree to waive the right to participate in any Company you benefit plan and to receive other fringe benefits or separation benefits from ESI.

Responsibilities.

4.1

Consultation

From the date hereof through the Separation Date, you will be available to meet and consult, as reasonably requested, with the President and CEO and board of directors regarding the affairs of ESI.

4.2

Litigation Defense

Mr. Gary Kapral
June 11, 2003
Page – 13

In the event ESI requests assistance, you agree to assist for a period through the Separation Date in defense of ongoing or future litigation or claims about which you have knowledge, at ESI’s expense for out of pocket costs.

4.3

No Other Services.

Except as specified in paragraphs 4.1 and 4.2 above, you will no longer perform services for ESI and, except as provided above, you will not take actions on ESI’s behalf or interfere in any way with the operations of ESI. It is acknowledged and understood that you will not actively participate in the day-to-day operations of ESI. Accordingly, ESI will not continue to afford you office space.

Return of Property.

Except as provided in the penultimate sentence in this paragraph 5, on or before the date you sign this Agreement with ESI, you will return all property belonging to ESI, including, but not limited to, all documents, business machines, computers, computer hardware and software programs, computer data, telephones (cellular, mobile or otherwise), pagers, keys, card keys, credit cards and other Company-owned property. ESI agrees that you may retain your laptop computer. You hereby certify that you have removed all confidential information as defined at paragraph 8.1 from the laptop computer as of the date of this Agreement. ESI will maintain your email address with ESI and your voicemail on ESI’s system for your convenience until the Separation Date.

Release of Claims

In consideration for these separation benefits you agree to fully release ESI and its subsidiaries, related corporations, affiliates and joint ventures, partnerships, predecessor and successor organizations and all current and former partners, members, joint venturers, officers, directors, employees, agents, insurers, shareholders, representatives and assigns from any and all liability, damages or causes of action, direct or indirect, known or unknown including, without limitation, all claims relating in any way to your employment with ESI or the termination of that employment. This release includes, but is not limited to, any claims for additional compensation, benefits or wages in any form, damages, reemployment or reinstatement. This release also includes, but is not limited to, all claims for relief or remedy under any state or federal laws, including ERISA, 29 USC § 1001 et seq., Title VII of the Civil Rights Act of 1964, 42 USC § 2000e as amended, the Post Civil War Civil Rights Acts, 42 USC §§ 1981-88, the Civil Rights Act of 1991, the Equal Pay Act, the Age Discrimination in Employment Act, the Americans With Disabilities Act, the Older Workers’ Benefit Protection Act, the Federal Family and Medical Leave Act, the Worker Adjustment and Retraining Notification Act, the Rehabilitation Act of 1973, the Uniformed Services Employment and Reemployment Rights Act, the Fair Labor Standards Act, Executive Order 11246, and all other laws and contract, tort or other common or statutory law theories and all labor, employment or wage laws of Oregon or any other state.

Mr. Gary Kapral
June 11, 2003
Page – 14

Voluntary Release

Confidentiality and Non-Competition

8.1

Preservation and Non-Use of Confidential Information

You agree not to discuss this Agreement except with your financial, tax, and legal advisors and with members of your family, and not to discuss Confidential Information obtained during your employment with ESI. For purposes of this Agreement, “Confidential Information” means any and all confidential or proprietary information concerning ESI or its affiliates, joint venturers or other related entities, the disclosure of which could disadvantage ESI or which derives value from the fact that it is not publicly known. Confidential Information includes trades secrets as defined under the Uniform Trades Secrets Act.

You also agree that you will not disclose or disseminate any Confidential Information, directly or indirectly, at any time during the term of this Agreement or after its termination, to any person, agency, or court unless compelled to do so pursuant to legal process (e.g., a summons or subpoena) or otherwise required by law and then only after providing ESI with prior notice and a copy of the legal process.

8.2

Non-Competition

You agree that you will not for a period through February 18, 2004 directly or indirectly, accept employment or enter into any business relationship of any sort whatsoever (including, but not limited to, as a consultant, vendor, partner, officer or director, but excluding passive stock investments) with any customer or competitor of ESI or any entity with which ESI has done business or with whom you know ESI intends to do business within the twelve (12) months following the Separation Date. You specifically acknowledge and agree that the terms of this provision are reasonable in every respect and, in particular, because of the competitive and specialized nature of ESI’s business, that it is reasonable not to include any geographic limitation in this provision.

Mr. Gary Kapral
June 11, 2003
Page – 15

Dispute Resolution

This Agreement shall be construed in accordance with and governed by the statutes and common law of the state of Oregon. Any disputes arising in connection with the terms or enforcement of this Agreement shall be resolved by confidential mediation or binding arbitration in accordance with the procedures of the American Arbitration Association or other procedures agreed upon by you and ESI. The costs of mediation and arbitration shall be borne equally by you and ESI.

10.

Acknowledgement

You acknowledge that this Agreement contains the entire agreement and understanding between you and ESI and supersedes and replaces all prior negotiations and agreements concerning the subjects of this Agreement. You acknowledge that (a) you have read the Agreement and understand the effect of your release and that you are releasing legal rights; (b) you have had adequate time to consider this Agreement (as set out below); (c) as consideration for executing this Agreement, you have received additional benefits and compensation of value to which you would not otherwise be entitled; and (d) you have been, and hereby are, advised in writing to review this Agreement with legal counsel of your choice.

11.

Time for Consideration of Offer and Agreement

You acknowledge that ESI provided you this Agreement on February 24, 2003 and that this offer provided you with a period of twenty-one (21) days from the date of receipt for your consideration of the offer (the “consideration period”). In the event you have not executed this Agreement by the expiration of the offer period on March 17, 2003, the offer shall expire. You may execute this Agreement at any time during this consideration period. This Agreement shall be effective on the date it is signed.

Sincerely,

ELECTRO SCIENTIFIC INDUSTRIES, INC.

By: /s/ JOHN E. ISSELMANN, JR.
        ——————————————
        John E. Isselmann, Jr.
        General Counsel

Accepted February 27, 2003

Bradford S. Cooley

/s/ BRADFORD S. COOLEY
————————————————
Signature

EX-10 6 a4451391_ex10-4.htm EXHIBIT 10.4 EX-10.4

Mr. Gary Kapral
June 11, 2003
Page – 17

EXHIBIT 10.4

June 11, 2003

CONFIDENTIAL

Mr. Gary Kapral
01304 SW Military Road
Portland OR 97219

Re:

Separation Agreement

Dear Gary:

As we have discussed, your employment with Electro Scientific Industries, Inc. (“ESI” or the “Company”) will terminate effective at the close of business on June 11, 2003 (the “Separation Date”). Enclosed with this Agreement you will find your final paycheck including pay for all accrued, unused or otherwise unpaid vacation.

In order to help you to transition to your next opportunity, the terms of a Separation Agreement (the “Agreement”) are described below. Under this Agreement, if you choose to accept it, you would receive severance compensation at the $245,000 annual rate over the next 6 months as set out below; and you would agree to the terms described below which include a general release of claims.

A.	Separation Agreement

Resignation

By executing this Agreement, you resign your position as Vice President and as an officer of ESI or any affiliated company of ESI effective June 11, 2003.

Severance Pay

If you accept the terms of this Agreement, you will receive severance pay equivalent to 6 months of wages at the $245,000 per annum rate. Payments will be made on regular Company paydays during this period (the “Severance Period”) and end on the last Company payroll date including December 15, 2003.

Benefits

3.1

Health and Dental Benefits

Your regular health and dental coverage will continue through June 30, 2003. As you may know, pursuant to COBRA, a federal law, you may, if eligible, continue your group health benefits for a period of eighteen (18) months from termination of your employment at your sole expense. Subject to the terms of this Agreement, the Company will pay your COBRA premiums for coverage through December 31, 2003, or until you find other employment through which you are eligible to receive group medical health insurance coverage, whichever happens first. You agree to immediately notify the Company in writing upon obtaining such other employment during the Severance Period. You will receive additional information explaining rates and your options under COBRA in separate correspondence.

Mr. Gary Kapral
June 11, 2003
Page – 18

3.2

Other Qualified and Non-Qualified Plans and Programs

3.3

Stock Options and Grants

3.3

Deferred Compensation

You will receive all amounts owed to you under the Company’s Deferred Compensation Plan (subject to applicable taxes and withholding) in accordance with the terms of the plan documents.

3.4

Outplacement Services

3.5

No Other Benefits

Release of Claims

Mr. Gary Kapral
June 11, 2003
Page – 2

Voluntary Release

Confidentiality and Non-Competition

6.3

Preservation and Non-Use of Confidential Information

6.4

Non-Competition

Mr. Gary Kapral
June 11, 2003
Page – 3

You agree that you will not for a period through June 11, 2004 directly or indirectly, accept employment or enter into any business relationship of any sort whatsoever (including, but not limited to, as a consultant, vendor, partner, officer or director, but excluding passive stock investments) with any customer or competitor of the Company or any entity with which the Company has done business or with whom you know the Company intends to do business within the twelve (12) months following the Separation Date. You specifically acknowledge and agree that the terms of this provision are reasonable in every respect and, in particular, because of the competitive and specialized nature of the Company’s business, that it is reasonable not to include any geographic limitation in this provision.

Dispute Resolution

Acknowledgement

Time for Consideration of Offer and Agreement

You acknowledge that the Company provided you this Agreement on June 11, 2003 and that this offer provided you with a period of twenty-one (21) days from the date of receipt for your consideration of the offer (the “consideration period”). In the event you have not executed this Agreement by the expiration of the offer period on July 2, 2003, the offer shall expire. You may execute this Agreement at any time during this consideration period. This Agreement shall be effective on the date it is signed.

Sincerely,

ELECTRO SCIENTIFIC INDUSTRIES, INC.

By: /s/ J. MICHAEL DODSON
        ——————————————
        J. Michael Dodson
        Vice President Administration and
        Chief Financial Officer

Accepted July 1, 2003

Gary Kapral

/s/ GARY KAPRAL
———————————
Signature

EX-10 7 a4451391_ex10-5.htm EXHIBIT 10.5 EX-10.5

Mr. Gary Kapral
June 11, 2003
Page – 5

EXHIBIT 10.5

CHANGE IN CONTROL AGREEMENT

Electro Scientific Industries, Inc., an Oregon corporation (the “Company”), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interest of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the “Board”) has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management to their assigned duties without distraction in circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company, this agreement, the form of which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a “change in control” of the Company under the circumstances described below.

Agreement to Provide Services; Right to Terminate.

Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time, subject to the provisions of any employment agreement between you and the Company’s providing the benefits hereinafter specified in accordance with the terms hereof.

In the event of a potential change in control of the Company as defined in Section 4 hereof, you agree that you will not leave the employ of the Company (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until the earliest of (a) a date which is 270 days from the occurrence of such potential change in control of the Company, or (b), a termination of your employment pursuant to which you become entitled under this Agreement to receive the benefits provided in Section 6(iii) below.

Effective Date. The Effective Date of this agreement is January 16, 2003.

Term of Agreement. This Agreement shall commence on the Effective Date and shall continue in effect until December 31, 2003; provided, however, that commencing on the first day of the new year following the Effective Date and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless at least 90 days prior to such January 1 date, the Company or you shall have given notice that this Agreement shall not be extended (provided that no such notice may be given by the Company during the pendency of a potential change in control); and provided, further, that this Agreement shall continue in effect for a period of twenty-four (24) months beyond the term provided herein if a change in control of the Company, as defined in Section 4 hereof, shall have occurred during such term. Notwithstanding anything in this Section 3 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a change in control of the Company as defined in Section 4 hereof. In addition, the Company may terminate this Agreement during your employment if, prior to a change in control of the Company as defined in Section 4 hereof, you cease to hold your current position with the Company, except by reason of a promotion.

Mr. Gary Kapral
June 11, 2003
Page – 6

Change in Control; Potential Change in Control; Person.

For purposes of this Agreement, a “change in control” of the Company shall mean the occurrence of any of the following events:

(A) The approval by the shareholders of the Company of:

(1) any consolidation, merger or plan of share exchange involving the Company (a “Merger”) in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock of the Company (“Company Shares”) would be converted into cash, securities or other property, other than a Merger involving Company Shares in which the holders of Company Shares immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger;

(2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or

(3) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(B) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

(C) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.

Mr. Gary Kapral
June 11, 2003
Page – 7

Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the board, no change in control shall be deemed to have occurred for purposes of this Agreement if (1) you acquire (other than on the same basis as all other holders of the Company Shares) an equity interest in an entity that acquires the Company in a change in control otherwise described under subparagraph (A) above, or (2) you are part of group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a change in control under subparagraph (C) above.

For purposes of this Agreement, a “potential change in control” of the Company shall be deemed to have occurred if:

(D) the Company enters into an agreement, the approval of which by the shareholders would result in the occurrence of a change in control of the Company;

(E) any Person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; or

(F) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred.

For purposes of this Agreement, the term “Person” shall mean and include any individual, corporation, partnership, group, association or other “person”, as such term is used in Section 14 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”), other than the Company or any employee benefit plan(s) sponsored by the Company.

Termination Following Change in Control. If any of the events described in Section 4 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 6(iii) hereof upon the termination of your employment within twenty-four (24) months after such event, unless such termination is (a) because of your death or Retirement, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason based on an event occurring concurrent with or subsequent to a change in control (as all such capitalized terms are hereinafter defined).

Disability. Termination by the Company of your employment based on “Disability” shall mean termination because of your absence from you duties with the Company on a full-time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full-time performance of your duties.

Mr. Gary Kapral
June 11, 2003
Page – 8

Retirement. Termination by you or by the Company of your employment based on “Retirement” shall mean termination on or after your 65th birthday.

Cause. Termination by the Company of your employment for “Cause” shall mean termination upon (a) the willful and continued failure by you to perform substantially your reasonably assigned duties with the Company consistent with those duties assigned to you prior to the change in control (other than any such failure resulting from your incapacity due to physical or mental illness) after a demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (iii), no act, or failure to act, on your part shall be considered “willful” unless done, or omitted to be done, by you in knowing bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advise of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the corporation. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph (iii) and specifying the particulars thereof in detail.

Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on:

(G) a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your reasonable judgment, does not represent a promotion from your status, title, position(s) and responsibilities as in effect immediately prior to the change in control, or the assignment to you of any duties or responsibilities which, in your reasonable judgment, are inconsistent with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

(H) a reduction by the Company in your base salary as in effect immediately prior to the change in control;

(I) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as in the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control;

Mr. Gary Kapral
June 11, 2003
Page – 9

(J) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company’s normal vacation policy as in effect immediately prior to the change in control;

(K) the Company’s requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control;

(L) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 7 hereof; or

(M) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective.

For purpose of this Agreement, “Plan” shall mean any compensation plan such as an incentive, stock option or restricted stock plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance, or relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees.

Notice of Termination. Any purported termination by the Company or by you following a change in control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated.

Mr. Gary Kapral
June 11, 2003
Page – 10

Date of Termination. “Date of Termination” following a change in control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause, the date on which a Notice of Termination is given, and (c) if your employment is to be terminated by you or by the Company for any other reason, the date specified in the Notice of Termination, which shall be a date no earlier than ninety (90) days after the date on which a Notice of Termination is given (provided that if the termination is by you for Good Reason the circumstances giving rise to the Good Reason have not been fully corrected by the specified date), unless an earlier date has been agreed to by the party receiving the Notice of Termination either in advance of, or after, receiving such Notice of Termination. Notwithstanding anything in the foregoing to the contrary, if the party receiving the Notice of Termination has not previously agreed to the termination, then within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination may notify the other party that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 13 hereof.

Compensation Upon Termination or During Disability.

During any period following a change in control that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 5(i) and 5(vi) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect.

If your employment shall be terminated for Cause or as a result of Retirement or Death following a change in control of the Company, the Company shall pay you your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement.

If, within twenty-four (24) months after a change in control of the Company shall have occurred, as defined in Section 4 above, your employment by the Company shall be terminated (a) by the Company other than for Cause, Disability or Retirement or (b) by you for Good Reason based on an event occurring concurrent with or subsequent to a change in control, then, by no later than the fifth day following the Date of Termination (except as otherwise provided), you shall be entitled, without regard to any contrary provisions of any Plan, to a severance benefit (the “Severance Benefit”) equal to the lesser of (x) the Specified Benefits (as defined in subsection (A) below), or (y) the Capped Benefit (as defined in subsection (B) below).

(N) The “Specified Benefits” are as follows:

Mr. Gary Kapral
June 11, 2003
Page – 11

(1) the company shall pay your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request);

(2) as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you in a single payment an amount in cash equal to two times the higher of (a) your annual base salary at the rate in effect just prior to the time a Notice of Termination is given or (b) your annual base salary in effect immediately prior to the change in control of the Company;

(3) for a twenty-four (24) month period after the Date of Termination, the Company shall arrange to provide you and your dependents with life, accident, medical and dental insurance benefits substantially similar to those which you were receiving immediately prior to the change in control of the Company. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by you pursuant to this paragraph (3) to the extent that a similar benefit is actually received by you from a subsequent employer during such twenty-four (24) month period, and any such benefit actually received by you shall be reported to the Company; and

(4) the Company shall pay you for any vacation time earned but not taken at the Date of Termination, at an hourly rate equal to your annual base salary as in effect immediately prior to the time a Notice of Termination is given divided by 2080.

(O) The “Capped Benefit” equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a “parachute payment” as defined in Section 280G (b)(2) of the Internal Revenue Code of 1986, as amended (“IRC”), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the “base amount” as defined in IRC, § 280G (b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a change in control of the Company within the meaning of IRC § 280G (b)(2)(A)(i), including accelerated vesting of options and other awards under the Company’s stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a change in control within the meaning of IRC § 280G (b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC § 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.

Mr. Gary Kapral
June 11, 2003
Page – 12

Except as specifically provided above, the amount of any payment provided for in this Section 6 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. Your entitlements under Section (6)(iii) are in addition to, and not in lieu of, any rights, benefits or entitlements you may have under the terms or provisions of any Plan.

Successors; Binding Agreement.

Upon your written request, the Company will seek to have any Successor (as hereinafter defined), by agreement in form and substance satisfactory to you, assent to the fulfillment by the Company of its obligations under this Agreement. Failure of the Company to obtain such assent prior to or at the time a Person becomes a Successor shall constitute Good Reason for termination by you of your employment and, if a change in control of the Company has occurred, shall entitle you immediately to the benefits provided in Section 6(iii) hereof upon delivery by you of a Notice of Termination which the Company, by executing this Agreement, hereby assents to. For purposes of this Agreement, “Successor” shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company’s business directly, by merger, consolidation or purchase of assets, or indirectly, by purchase of the Company’s Voting Securities or otherwise.

This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate.

Fees and Expenses. The Company shall pay all legal fees and related expenses incurred by you as a result of (i) your termination following a change in control of the Company (including all such fees and expenses, if any, incurred in contesting or disputing any such termination) or (ii) your seeking to obtain or enforce any right or benefit provided by this Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 13

Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 6, 7(ii), 8 and 13 of this Agreement shall survive termination of this Agreement.

Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed to the address of the respective party set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Oregon.

Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Portland, Oregon by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators’ award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 13.

Related Agreements. To the extent that any provision of any other agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose.

Mr. Gary Kapral
June 11, 2003
Page – 14

Counterparts. Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.

If this correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.

[Signature page follows.]

Mr. Gary Kapral
June 11, 2003
Page – 15

Agreed to this 27th day of January, 2003

ROBERT G. CHAMBERLAIN
—————————————
Robert G. Chamberlain

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

EX-10 8 a4451391_ex10-6.htm EXHIBIT 10.6 EX-10.6

Mr. Gary Kapral
June 11, 2003
Page – 16

EXHIBIT 10.6

CHANGE IN CONTROL AGREEMENT

Agreement to Provide Services; Right to Terminate.

Effective Date. The Effective Date of this agreement is January 16, 2003.

Mr. Gary Kapral
June 11, 2003
Page – 17

Change in Control; Potential Change in Control; Person.

For purposes of this Agreement, a “change in control” of the Company shall mean the occurrence of any of the following events:

(P) The approval by the shareholders of the Company of:

(2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or

(3) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(Q) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

(R) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.

Mr. Gary Kapral
June 11, 2003
Page – 18

For purposes of this Agreement, a “potential change in control” of the Company shall be deemed to have occurred if:

(S) the Company enters into an agreement, the approval of which by the shareholders would result in the occurrence of a change in control of the Company;

(T) any Person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; or

(U) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred.

Mr. Gary Kapral
June 11, 2003
Page – 19

Retirement. Termination by you or by the Company of your employment based on “Retirement” shall mean termination on or after your 65th birthday.

Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on:

(V) a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your reasonable judgment, does not represent a promotion from your status, title, position(s) and responsibilities as in effect immediately prior to the change in control, or the assignment to you of any duties or responsibilities which, in your reasonable judgment, are inconsistent with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

(W) a reduction by the Company in your base salary as in effect immediately prior to the change in control;

(X) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as in the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control;

Mr. Gary Kapral
June 11, 2003
Page – 20

(Y) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company’s normal vacation policy as in effect immediately prior to the change in control;

(Z) the Company’s requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control;

(AA) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 7 hereof; or

(BB) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective.

Mr. Gary Kapral
June 11, 2003
Page – 21

Compensation Upon Termination or During Disability.

Mr. Gary Kapral
June 11, 2003
Page – 22

(CC) The “Specified Benefits” are as follows:

(DD) The “Capped Benefit” equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a “parachute payment” as defined in Section 280G (b)(2) of the Internal Revenue Code of 1986, as amended (“IRC”), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the “base amount” as defined in IRC, § 280G (b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a change in control of the Company within the meaning of IRC § 280G (b)(2)(A)(i), including accelerated vesting of options and other awards under the Company’s stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a change in control within the meaning of IRC § 280G (b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC § 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.

Mr. Gary Kapral
June 11, 2003
Page – 23

Successors; Binding Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 24

Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 6, 7(ii), 8 and 13 of this Agreement shall survive termination of this Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 25

Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.

[Signature page follows.]

Mr. Gary Kapral
June 11, 2003
Page – 26

Agreed to this 28th day of January, 2003

JOHN E. ISSELMANN, JR.
———————————————
John E. Isselmann, Jr.

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

Mr. Gary Kapral
June 11, 2003
Page – 27

ADDENDUM A TO CHANGE IN CONTROL AGREEMENT

Notwithstanding Section 6 hereof, in the event a change of control in the Company occurs as a result of a transaction with Newport Corporation on or before December 31, 2003, you shall be entitled to receive the benefits described in Section 6 of the Change In Control Agreement dated August 14, 1991, which Agreement was otherwise terminated on December 31, 2002 and superceded in all other respects by the attached Agreement.

This Addendum expires and is of no further force and effect as of January 1, 2004.

Agreed to this 28th day of January, 2003

JOHN E. ISSELMANN, JR.
———————————————
John E. Isselmann, Jr.

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY

——————————————
Name: James T. Dooley
Title: President & CEO

EX-10 9 a4451391_ex10-7.htm EXHIBIT 10.7 EX-10.7

Mr. Gary Kapral
June 11, 2003
Page – 28

EXHIBIT 10.7

CHANGE IN CONTROL AGREEMENT

Agreement to Provide Services; Right to Terminate.

Effective Date. The Effective Date of this agreement is January 16, 2003.

Mr. Gary Kapral
June 11, 2003
Page – 29

Change in Control; Potential Change in Control; Person.

For purposes of this Agreement, a “change in control” of the Company shall mean the occurrence of any of the following events:

(EE) The approval by the shareholders of the Company of:

(2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or

(3) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(FF) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

(GG) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.

Mr. Gary Kapral
June 11, 2003
Page – 30

For purposes of this Agreement, a “potential change in control” of the Company shall be deemed to have occurred if:

(HH) the Company enters into an agreement, the approval of which by the shareholders would result in the occurrence of a change in control of the Company;

(II) any Person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; or

(JJ) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred.

Mr. Gary Kapral
June 11, 2003
Page – 31

Retirement. Termination by you or by the Company of your employment based on “Retirement” shall mean termination on or after your 65th birthday.

Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on:

(KK) a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your reasonable judgment, does not represent a promotion from your status, title, position(s) and responsibilities as in effect immediately prior to the change in control, or the assignment to you of any duties or responsibilities which, in your reasonable judgment, are inconsistent with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

(LL) a reduction by the Company in your base salary as in effect immediately prior to the change in control;

Mr. Gary Kapral
June 11, 2003
Page – 32

(MM) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as in the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control;

(NN) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company’s normal vacation policy as in effect immediately prior to the change in control;

(OO) the Company’s requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control;

(PP) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 7 hereof; or

(QQ) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective.

Mr. Gary Kapral
June 11, 2003
Page – 33

Compensation Upon Termination or During Disability.

Mr. Gary Kapral
June 11, 2003
Page – 34

(RR) The “Specified Benefits” are as follows:

(SS) The “Capped Benefit” equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a “parachute payment” as defined in Section 280G (b)(2) of the Internal Revenue Code of 1986, as amended (“IRC”), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the “base amount” as defined in IRC, § 280G (b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a change in control of the Company within the meaning of IRC § 280G (b)(2)(A)(i), including accelerated vesting of options and other awards under the Company’s stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a change in control within the meaning of IRC § 280G (b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC § 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.

Mr. Gary Kapral
June 11, 2003
Page – 35

Successors; Binding Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 36

Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 6, 7(ii), 8 and 13 of this Agreement shall survive termination of this Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 37

Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.

[Signature page follows.]

Mr. Gary Kapral
June 11, 2003
Page – 38

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

Agreed to this 29th day of January, 2003

JOSEPH L. REINHART
———————————————
Joseph L. Reinhart

Mr. Gary Kapral
June 11, 2003
Page – 39

ADDENDUM A TO CHANGE IN CONTROL AGREEMENT

This Addendum expires and is of no further force and effect as of January 1, 2004.

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

JOSEPH L. REINHART
———————————————
Joseph L. Reinhart

EX-10 10 a4451391_ex10-8.htm EXHIBIT 10.8 EX-10.8

Mr. Gary Kapral
June 11, 2003
Page – 40

EXHIBIT 10.8

CHANGE IN CONTROL AGREEMENT

In order to induce you to remain in the employ of the Company, this agreement, the form of which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a “change in control” of the Company under the circumstances described below.

Agreement to Provide Services; Right to Terminate.

Effective Date. The Effective Date of this agreement is January 16, 2003.

Mr. Gary Kapral
June 11, 2003
Page – 41

Change in Control; Potential Change in Control; Person.

For purposes of this Agreement, a “change in control” of the Company shall mean the occurrence of any of the following events:

(TT) The approval by the shareholders of the Company of:

(2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or

(3) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(UU) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

(VV) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.

Mr. Gary Kapral
June 11, 2003
Page – 42

For purposes of this Agreement, a “potential change in control” of the Company shall be deemed to have occurred if:

(WW) the Company enters into an agreement, the approval of which by the shareholders would result in the occurrence of a change in control of the Company;

(XX) any Person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; or

(YY) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred.

Mr. Gary Kapral
June 11, 2003
Page – 43

Retirement. Termination by you or by the Company of your employment based on “Retirement” shall mean termination on or after your 65th birthday.

Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on:

(ZZ) a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your reasonable judgment, does not represent a promotion from your status, title, position(s) and responsibilities as in effect immediately prior to the change in control, or the assignment to you of any duties or responsibilities which, in your reasonable judgment, are inconsistent with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

(AAA) a reduction by the Company in your base salary as in effect immediately prior to the change in control;

Mr. Gary Kapral
June 11, 2003
Page – 44

(BBB) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as in the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control;

(CCC) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company’s normal vacation policy as in effect immediately prior to the change in control;

(DDD) the Company’s requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control;

(EEE) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 7 hereof; or

(FFF) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective.

Mr. Gary Kapral
June 11, 2003
Page – 45

Compensation Upon Termination or During Disability.

Mr. Gary Kapral
June 11, 2003
Page – 45

(GGG) The “Specified Benefits” are as follows:

(HHH) The “Capped Benefit” equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a “parachute payment” as defined in Section 280G (b)(2) of the Internal Revenue Code of 1986, as amended (“IRC”), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the “base amount” as defined in IRC, § 280G (b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a change in control of the Company within the meaning of IRC § 280G (b)(2)(A)(i), including accelerated vesting of options and other awards under the Company’s stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a change in control within the meaning of IRC § 280G (b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC § 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.

Mr. Gary Kapral
June 11, 2003
Page – 47

Successors; Binding Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 48

Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 6, 7(ii), 8 and 13 of this Agreement shall survive termination of this Agreement.

Mr. Gary Kapral
June 11, 2003
Page – 49

Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.

[Signature page follows.]

Mr. Gary Kapral
June 11, 2003
Page – 50

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

Agreed to this 28th day of January, 2003

EDWARD J. SWENSON
———————————————
Edward J. Swenson

Mr. Gary Kapral
June 11, 2003
Page – 51

ADDENDUM A TO CHANGE IN CONTROL AGREEMENT

This Addendum expires and is of no further force and effect as of January 1, 2004.

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

EDWARD J. SWENSON
———————————————
Edward J. Swenson

EX-10 11 a4451391_ex10-9.htm EXHIBIT 10.9 EX-10.8

Mr. Gary Kapral
June 11, 2003
Page – 52

EXHIBIT 10.9

CHANGE IN CONTROL AGREEMENT

Agreement to Provide Services; Right to Terminate.

Effective Date. The Effective Date of this agreement is January 16, 2003.

Mr. Gary Kapral
June 11, 2003
Page – 53

Change in Control; Potential Change in Control; Person.

For purposes of this Agreement, a “change in control” of the Company shall mean the occurrence of any of the following events:

(III) The approval by the shareholders of the Company of:

(2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or

(3) the adoption of any plan or proposal for the liquidation or dissolution of the Company;

(JJJ) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

(KKK) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.

Mr. Gary Kapral
June 11, 2003
Page – 54

For purposes of this Agreement, a “potential change in control” of the Company shall be deemed to have occurred if:

(LLL) the Company enters into an agreement, the approval of which by the shareholders would result in the occurrence of a change in control of the Company;

(MMM) any Person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; or

(NNN the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred.

Mr. Gary Kapral
June 11, 2003
Page – 55

Retirement. Termination by you or by the Company of your employment based on “Retirement” shall mean termination on or after your 65th birthday.

Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on:

(OOO) a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your reasonable judgment, does not represent a promotion from your status, title, position(s) and responsibilities as in effect immediately prior to the change in control, or the assignment to you of any duties or responsibilities which, in your reasonable judgment, are inconsistent with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason;

(PPP) a reduction by the Company in your base salary as in effect immediately prior to the change in control;

Mr. Gary Kapral
June 11, 2003
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(QQQ) the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as in the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control;

(RRR) the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company’s normal vacation policy as in effect immediately prior to the change in control;

(SSS) the Company’s requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control;

(TTT) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 7 hereof; or

(UUU) any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective.

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June 11, 2003
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Compensation Upon Termination or During Disability.

(VVV) The “Specified Benefits” are as follows:

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June 11, 2003
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(WWW) The “Capped Benefit” equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a “parachute payment” as defined in Section 280G (b)(2) of the Internal Revenue Code of 1986, as amended (“IRC”), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the “base amount” as defined in IRC, § 280G (b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a change in control of the Company within the meaning of IRC § 280G (b)(2)(A)(i), including accelerated vesting of options and other awards under the Company’s stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a change in control within the meaning of IRC § 280G (b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC § 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.

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June 11, 2003
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Successors; Binding Agreement.

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June 11, 2003
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Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 6, 7(ii), 8 and 13 of this Agreement shall survive termination of this Agreement.

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June 11, 2003
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Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.

[Signature page follows.]

Mr. Gary Kapral
June 11, 2003
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Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

Agreed to this 29th day of January, 2003

HOWARD K. TAFT, JR.
———————————————
Howard K. Taft, Jr.

Mr. Gary Kapral
June 11, 2003
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ADDENDUM A TO CHANGE IN CONTROL AGREEMENT

This Addendum expires and is of no further force and effect as of January 1, 2004.

Electro Scientific Industries, Inc.

By: JAMES T. DOOLEY
——————————————
Name: James T. Dooley
Title: President & CEO

HOWARD K. TAFT, JR.
———————————————
Howard K. Taft, Jr.

EX-10 12 a4451391_ex10-10.htm EXHIBIT 10.10 EX-10.10

Mr. Gary Kapral
June 11, 2003
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EXHIBIT 10.10

ELECTRO SCIENTIFIC INDUSTRIES, INC.
EMPLOYMENT AGREEMENT

Executive
Mr. J. Michael Dodson
11691 E. Charter Oak Drive
Scottsdale, AZ 85259

Electro Scientific Industries, Inc.,ESI
an Oregon corporation
13900 NW Science Park Dr.
Portland, OR 97229

In consideration of the mutual covenants contained herein, and other good and valuable consideration, the parties hereto agree as follows.

Employment. Effective as of May 5, 2003 (the “Effective Date”), Electro Scientific Industries, Inc. (“ESI”) hereby employs J. Michael Dodson (“Executive”) as the Vice President – Administration and Chief Financial Officer of ESI and Executive accepts such employment with ESI, on the terms and conditions set forth in this Employment Agreement (this “Agreement”).

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June 11, 2003
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At-Will Employment. The parties agree that Executive’s employment with ESI will be “at-will” employment and may be terminated at any time with or without cause and, except as expressly set forth in this Agreement, with or without notice. Executive understands and agrees that neither his job performance nor promotions, commendations, bonuses or the like from ESI give rise to or in any way serve as the basis for modification, amendment, or extension, by implication or otherwise, of his employment with ESI.

Executive’s Duties. Executive shall, during the term of this Agreement, faithfully and diligently perform all such acts and duties, and furnish such services, as ESI’s Chief Executive Officer and President shall reasonably direct and are consistent with the position of Vice-President – Administration and Chief Financial Officer, including but not limited to management of ESI’s accounting and financial reporting functions, human resources group, facilities operations, information systems and technology department and other administrative functions as requested by the President and CEO from time to time. During the term of this Agreement, Executive shall devote his full business efforts and time to ESI.

Annual Salary and Bonus.

Base Salary. Beginning with the Effective Date, ESI shall pay Executive a base salary of $250,000 per fiscal year (prorated for any portion of a year), payable in equal periodic installments in accordance with ESI’s customary practices (the “Base Salary”). The amount of the Base Salary shall be reviewed annually and may be increased from time to time in the sole discretion of ESI’s Board of Directors (the “Board”).

Stock Options. ESI shall grant Executive an option to purchase 70,000 shares of ESI Common Stock (the “Option”). The Option will be, to the extent possible under the $100,000 rule of Section 422(d) of the Internal Revenue Code of 1986, as amended (the “Code”), an “incentive stock option” (as defined in Section 422 of the Code). The date of the Option grant shall be the Effective Date. The Option will vest as to 25% of the shares subject to the Option one year after the date of grant, and as to an additional 25% of the shares subject to the Option on each annual anniversary thereafter, so that the Option will be fully vested and exercisable four (4) years from the date of grant, subject to Executive’s continued service to ESI on the relevant vesting dates. The Option will be subject to the terms, definitions and provisions of ESI’s 2000 Stock Option Incentive Plan (the “Option Plan”) and the stock option agreement by and between Executive and ESI (the “Option Agreement”), both of which documents are incorporated herein by reference. Additional stock options may be granted to Executive from time to time in the sole discretion of the Board.

Annual Performance Bonus. Executive shall be eligible to receive an annual bonus calculated in accordance with Exhibit A hereto upon his achievement of performance goals to be established by the Board in its sole discretion (the “Annual Bonus”). Such performance goals shall be reviewed annually by the Board and adjusted in a manner consistent with performance goals for other ESI executives.

Sign-On Bonus. Executive shall be entitled to receive a sign-on bonus (the “Sign-On Bonus”) of $100,000, payable sixty (60) days after the Effective Date, subject to Executive’s continued employment with ESI as of such date.

Benefits and Reimbursement.

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June 11, 2003
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Vacation and Sick Leave. Executive shall be entitled to paid annual vacation, all paid ESI holidays and reasonable sick leave each in accordance with ESI’s standard policies applicable to other employees.

Benefit Plans. Executive shall be entitled to participate in all employee benefit plans and incentive compensation plans of ESI, to the extent such plans are available to other similarly situated executives or employees of ESI.

Reimbursed Business Expenses. ESI shall reimburse Executive for all expenses and disbursements reasonably incurred at ESI’s request or in accordance with ESI’s policies, and substantiated by Executive, in the performance of Executive’s duties hereunder.

Relocation and Temporary Living Reimbursement. ESI will pay all reasonable and ordinary costs of Executive’s relocation from Scottsdale, Arizona to the Portland, Oregon area, so long as Executive remains employed with ESI as of the date of such relocation. This includes costs associated with house-hunting trips, normal selling costs for the home in Scottsdale, normal buying costs of the home in the Portland area, and a payment of the equivalent of one (1) month’s salary for miscellaneous relocation expenses. ESI agrees to pay either rent or a house payment (PITI) in the Portland area until such time as Executive’s house in Scottsdale is sold or nine months from the Effective Date, whichever occurs sooner, so long as Executive continues to remain employed by ESI during such period. To the extent that any relocation/commuting benefits are taxable to Executive, ESI will pay a full gross-up (except to the extent that such expenditures may be deducted on Executive’s personal income tax) so that the amounts paid by ESI, net of Executive’s taxes, fully cover the relevant expenses. Executive agrees that the sale of Executive’s current home in Scottsdale, Arizona and the purchase of Executive’s new home in the Portland, Oregon area will be conducted in accordance with the “Home Sale Assistance/Market Value Purchase” and “Home Purchase Assistance” provisions contained in ESI’s Officer Relocation Program Guide (the “Relocation Guide”), the terms of which are incorporated herein by reference.

Change in Control Agreement. Concurrently with the execution of this Agreement, the parties hereto shall enter into a Change in Control Agreement in the form attached hereto as Exhibit B (the “Change in Control Agreement”).

Definitions. The following terms shall have the following meanings for purposes of this Agreement:

“Cause” shall mean (i) the willful and continued failure by Executive substantially to perform his reasonably assigned duties with ESI (consistent with those duties assigned to Executive prior to any Change in Control), other than a failure resulting from Executive’s incapacity due to physical or mental illness or impairment, (ii) the willful engaging by Executive in illegal conduct which was or is materially and demonstrably injurious to ESI, (iii) Executive’s violation of a federal or state law or regulation applicable to ESI’s business, (iv) Executive’s material breach of the terms of any confidentiality agreement or invention assignment agreement between Executive and ESI, or (v) Executive being convicted of, or entering a plea of nolo contendere to, a felony or committing any act of moral turpitude, dishonesty or fraud against, or the misappropriation of material property belonging to, ESI or its affiliates. For purposes of this subsection (a), no act, or failure to act, on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive in knowing bad faith and without reasonable belief that his action or omission was in, or not opposed to, the best interests of ESI.

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June 11, 2003
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“Change in Control” shall have the meaning given to it in the Change in Control Agreement.

“Disability” shall mean the absence of Executive from his duties with ESI on a full-time basis for 180 consecutive days as a result of Executive’s incapacity due to physical or mental illness, unless within 30 days after a Notice of Termination (as defined below) is given to Executive following such absence, Executive shall have returned to the full performance of Executive’s duties.

Termination. This Agreement and Executive’s employment hereunder may be terminated by either party at any time, with or without Cause, by providing the other party with written notice that indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated (a “Notice of Termination”). The effective date of any such termination of this Agreement shall be: (i) if Executive’s employment is terminated for Disability, 30 days after a Notice of Termination is given (provided that Executive shall not have returned to the performance of Executive’s duties on a full-time basis during such 30-day period), (ii) if Executive’s employment is terminated by ESI for Cause, the date on which the Notice of Termination is given, and (iii) if Executive’s employment is terminated by Executive or by ESI for any other reason, the date specified in the Notice of Termination, which shall be a date no earlier than 90 days after the date on which the Notice of Termination is given, unless an earlier date has been agreed to by the party receiving the Notice of Termination either in advance of, or after, receiving such Notice of Termination. Notwithstanding anything in the foregoing to the contrary, if the party receiving a Notice of Termination has not previously agreed to the termination, then within 30 days after the Notice of Termination is given, the party receiving the Notice of Termination may notify the other party that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 12(e) Effect of Termination.

Termination by ESI. If, within two years following a Change in Control Executive’s employment by ESI is terminated based on an event occurring concurrent with or subsequent to a Change in Control, Executive shall be entitled to severance pay and benefits as provided in the Change in Control Agreement.

Termination by Executive or by ESI for Cause. If ESI terminates Executive’s employment for Cause or Executive terminates his employment, Executive shall be entitled to receive only the Base Salary and Annual Bonus earned and payable through the effective date of Executive’s termination, together with any other compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Executive. Notwithstanding the foregoing, if Executive voluntarily terminates his employment with ESI during the period commencing on the first day of employment of the ESI Chief Executive Officer hired to succeed Barry L. Harmon (the “Successor Hire Date”) and ending twelve (12) months following the Successor Hire Date, Executive shall be entitled to receive continuing payments of severance (subject to applicable taxes and withholding), at a rate equal to Executive’s Base Salary at the time of termination, for a period of twelve (12) months from the date of such termination, to be paid in equal installments in accordance with ESI’s normal pay practices; provided that payments made pursuant to this Section 9(b) shall be repaid by Executive in the event Executive violates in any material respect the provisions of Section 11 hereof.

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Termination by ESI Without Cause. Except as provided in Section 9(a), if ESI terminates Executive’s employment without Cause during the period commencing on the Effective Date and ending on the third anniversary thereof:

Executive shall be entitled to receive the Base Salary and Annual Bonus earned and payable through the effective date of Executive’s termination, together with any other compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Executive; Executive shall be entitled to receive continuing payments of severance pay (subject to applicable taxes and withholding), at a rate equal to Executive’s Base Salary at the time of termination, for a period of twelve (12) months from the date of such termination, to be paid in equal installments in accordance with ESI’s normal pay practices; provided that payments made pursuant to this subsection (ii) shall be repaid by Executive in the event Executive violates in any material respect the provisions of Section 11 hereof; that portion of any unvested stock options that Executive holds as of the date of termination of Executive’s employment that would otherwise vest through the end of twelve (12) months after the date of such termination shall be immediately accelerated as of the date of termination and, together with any other shares vested as of such date, shall remain exercisable for a period of twelve (12) months after the date of termination

Death. If Executive’s employment is terminated as a result of Executive’s death, Executive shall be entitled to receive the Base Salary and Annual Bonus earned and payable through the date on which Executive’s employment is terminated, together with any other compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Executive; and

Disability. If Executive’s employment is terminated as a result of Executive’s Disability, Executive shall be entitled to receive the Base Salary and Annual Bonus payable through the date on which Executive’s employment is terminated, together with any other compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Executive.

Date of Payment. Except as otherwise provided herein, all cash payments and lump-sum awards required to be made pursuant to the provisions of this Section 9 shall be made no later than the 30th day following the effective date of Executive’s termination.

Release of Claims. ESI shall have the right to require Executive to execute a standard release with respect to claims that could be brought by Executive hereunder as a condition to Executive’s receipt of any payments pursuant to Section 9(b) or 9(c).

Resignation of Corporate Offices. Executive shall resign as a director of ESI and as a director and/or officer of any affiliate of ESI, if applicable, effective as of the date of termination of Executive’s employment with ESI. Executive agrees to provide ESI such written resignation(s) upon request and that no amounts will be paid under this Agreement until such resignation(s) are provided.

Non-Competition and Non-Disclosure; Executive Cooperation.

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June 11, 2003
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Without the consent in writing of the Board, upon termination of Executive’s employment for any reason, Executive shall not for a period of one year thereafter, acting alone or in conjunction with others, directly or indirectly (i) engage (either as owner, partner, stockholder, employer, employee, director, consultant or agent) in any business which is directly in competition with a business conducted by ESI or any of its subsidiaries; (ii) induce any customers of ESI or any of its subsidiaries with whom Executive has had contacts or relationships, directly or indirectly, during and within the scope of his employment with ESI or any of its subsidiaries, to curtail or cancel their business with such companies or any of them; (iii) solicit or canvas business from any person who was a customer of ESI or any of its subsidiaries at or during the two-year period immediately preceding termination of Executive’s employment; or (iv) induce, or attempt to influence, any employee of ESI or any of its subsidiaries to terminate his employment. The provisions of subsections (i), (ii), (iii) and (iv) above are separate and distinct commitments independent of each of the other subsections. It is agreed that the ownership of not more than 1/2 of 1% of the equity securities of any company having securities listed on an exchange or regularly traded in the over-the-counter market shall not, of itself, be deemed inconsistent with clause (i) of this subsection (a).

Executive shall not, at any time during the term of his employment with ESI or following Executive’s termination of employment with ESI for any reason whatsoever, disclose, use, transfer or sell, except in the course of employment with ESI, any confidential or proprietary information of ESI and its subsidiaries so long as such information has not otherwise been publicly disclosed by ESI or is not otherwise in the public domain, except as required by law or pursuant to legal process.

Executive agrees to cooperate with ESI, by making himself available to testify on behalf of ESI or any subsidiary or affiliate of ESI, in any action, suit or proceeding, whether civil, criminal, administrative or investigative, and to assist ESI, or any subsidiary or affiliate of ESI in any such action, suit or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel of ESI, or any subsidiary or affiliate of ESI, as requested by the Board, representatives or counsel. ESI agrees to reimburse Executive, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or assistance.

Miscellaneous.

Withholding. Payment of all compensation under this Agreement, including but not limited to the Base Salary, Annual Bonus and Sign-On Bonus, shall be subject to all applicable federal, state and local tax withholding.

Successors. Upon Executive’s written request, ESI will seek to have any Successor (as hereinafter defined), by agreement, assent to the fulfillment by ESI of its obligations under this Agreement. For purposes of this Agreement, “Successor” shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), ESI’s business directly, by merger, consolidation or purchase of assets, or indirectly, by purchase of ESI’s voting securities or otherwise.

Assignment; Binding Agreement. Neither party may assign or transfer this Agreement or any rights or obligations under this Agreement without the prior written consent of the other party, provided, however, that ESI may, without Executive’s consent, assign its rights and obligations under this Agreement to any Successor, and the provisions hereof shall inure to the benefit of and be binding upon each Successor. This Agreement shall inure to the benefit of and be enforceable by Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

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Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Oregon (with the exception of its conflict of law provisions).

Dispute Resolution. Executive agrees that, to the fullest extent permitted by applicable law and with the exception of disputes arising out of Section 11, any dispute concerning Executive’s employment or this Agreement shall first be submitted to confidential mediation before a mediator selected by the parties. Should any dispute not be resolved through mediation, it shall be submitted and settled exclusively by confidential binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association or such comparable rules as may be agreed upon by the parties. Disputes which Executive agrees to arbitrate, and thereby agrees to waive any right to a trial by jury, include any statutory claims under state or federal law, including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, claims of harassment, discrimination or wrongful termination and any statutory claims.

Executive understands that this Agreement does not prohibit Executive from pursuing an administrative claim with a local, state or federal administrative body such as the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission or the workers’ compensation board. This Agreement does, however, preclude Executive from pursuing court action regarding any such claim.

Notwithstanding anything to the contrary in this Section 12(e), Executive acknowledges that ESI has a compelling business interest in preventing unfair competition stemming from the intentional or inadvertent use or disclosure of ESI’s confidential information or the solicitation of ESI’s customers or suppliers. Executive further acknowledges and agrees that damages for a breach or threatened breach of any of the covenants set forth in Section 11 of this Agreement will be difficult to determine and will not afford a full and adequate remedy, and therefore agrees that ESI, in addition to seeking all other damages in connection therewith, may seek specific enforcement of any such covenant in any court of competent jurisdiction, including without limitation, by the issuance of a temporary or permanent injunction without the necessity of showing any actual damages or posting any bond or furnishing any other security, and that the specific enforcement of the provisions of this Agreement will not diminish Executive’s ability to earn a livelihood or create or impose upon Executive any undue hardship. Executive also agrees that any request for such relief by ESI shall be in addition to, and without prejudice to, any claim for monetary or other damages that ESI may elect to assert.

Attorneys’ Fees. Each party shall bear his or its own costs and attorneys’ fees which have been or may be incurred in connection with any matter herein or in connection with the negotiation and consummation of this Agreement or any attachment or exhibit hereto or in any action to enforce the provisions of this Agreement or any attachment or exhibit hereto.

Notices. All notices, requests, demands, consents, approvals, declarations and other communications required by this Agreement shall be in writing and shall be deemed delivered (i) if given by facsimile, when transmitted and the appropriate telephonic confirmation is received; (ii) if given by first-class air mail (certified and return receipt requested), when delivered; and (iii) when given by a nationally recognized overnight courier, when received or personally delivered, in each case, with all charges prepaid and addressed to the respective party set forth on the first page of this Agreement, or to such other address as any party shall specify in a notice delivered to all other parties in accordance with this Section 12(g).

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Entire Agreement. This Agreement, including the attachments and exhibits hereto, the Option Plan, the Option Agreement, the Relocation Guide, the Relocation Agreement, the Employee Confidentiality and Assignment Agreement and the Change in Control Agreement contain the entire agreement between Executive and ESI concerning the subject matters discussed herein. This Agreement supersedes all prior negotiations, agreements and understandings of the parties with respect to Executive’s employment relationship with ESI and the other subject matter herein.

Modification. Modification of this Agreement shall be effective only if in writing and signed by each party or its duly authorized representative

No Waiver. The waiver of any breach of this Agreement by one party shall not constitute waiver by the non-breaching party of any other breach of the Agreement.

Severability. If any of the provisions or terms of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other terms of this Agreement, and this Agreement shall be construed as if such unenforceable term had never been contained in this Agreement.

Surviving Provisions. Not withstanding anything in this Agreement to the contrary, Sections 9, 10, 11 and this Section 12 shall survive the termination of Executive’s employment and this Agreement.

Interpretation. Unless specifically identified as a reference to another document, any reference to a “section” or “subsection” herein shall be deemed to be a reference to a section or subsection of this Agreement. Whenever the terms hereof call for any notice, payment or other action on a day which is not a business day, such payment or action may be taken, or such notice given, as the case may be, on the next succeeding business day.

Counterparts and Facsimile Signatures. This Agreement may be executed in two or more counterparts, each of which shall constitute one and the same instrument. Facsimile signatures may be used in place of original signatures on this Agreement.

Voluntary Nature of Agreement. Executive acknowledges and agrees that Executive is executing this Agreement voluntarily and without any duress or undue influence by ESI or anyone else. Executive further acknowledges and agrees that Executive has carefully read this Agreement and that Executive has asked any questions needed for Executive to understand the terms, consequences and binding effect of this Agreement and fully understand it, including that Executive is waiving Executive’s right to a jury trial. Finally, Executive agrees that Executive has been provided an opportunity to seek the advice of an attorney of Executive’s choice before signing this Agreement.

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June 11, 2003
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2. [SIGNATURE PAGE FOLLOWS]

Mr. Gary Kapral
June 11, 2003
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the 5th day of May, 2003.

ELECTRO SCIENTIFIC INDUSTRIES, INC. EXECUTIVE

BY: BARRY L. HARMON
———————————————————
BY: J. MICHAEL DODSON
———————————————————
Barry L. Harmon
J. Michael Dodson
President and Chief Executive Officer

Exhibit A: Calculation of Annual Bonus

Exhibit B: Change in Control Agreement

3. EXHIBIT A

4. CALCULATION OF ANNUAL BONUS

Executive shall be eligible to receive an annual cash bonus that is targeted at payment of 60 percent (60%) of Executive’s Base Salary (the “Annual Bonus”). The Annual Bonus will be earned and deemed payable in a manner consistent with the terms of the Annual Bonus Program approved by the Compensation Committee of ESI’s Board of Directors. The terms of the Annual Bonus Program for ESI’s fiscal year 2003 are further described below.

Goal vs. Target Bonus:

Payment Structure

•	Measurement Period: 06/02/02 to 05/31/03

•	Payout Date: August 2003

•	Total corporate payout will not exceed 20% of operating profits

•	Maximum bonus payout will not exceed 200% of target

•	Operating profit margin of less than 5% will result in zero payout

•	Bonus target is split between 70% corporate results and 30% individual objectives to equal 100% of targeted bonus

•

Individual objectives must be agreed and approved by the Board of Directors each year

•	Unless the operating profit margin threshold is achieved, no funding is available for corporate or individual bonuses

*Operating profit margin is operating profit divided by revenue. Operating profit is the profit after deducting operating costs from gross profit. Generally Accepted Accounting Principles (GAAP) will be used to determine operating profit.

5. EXHIBIT B

6. CHANGE IN CONTROL AGREEMENT

•

Agreement to Provide Services; Right to Terminate.

•

Except as otherwise provided in paragraph (ii) below, the Company or you may terminate your employment at any time, subject to the provisions of any employment agreement between you and the Company and the Company’s providing the benefits hereinafter specified in accordance with the terms hereof.

•

Effective Date. The Effective Date of this agreement is May 5, 2003.

•

Mr. Gary Kapral
June 11, 2003
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•

Change in Control; Potential Change in Control; Person.

•

For purposes of this Agreement, a “change in control” of the Company shall mean the occurrence of any of the following events:

•

The approval by the shareholders of the Company of:

•

any consolidation, merger or plan of share exchange involving the Company (a “Merger”) in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock of the Company (“Company Shares”) would be converted into cash, securities or other property, other than a Merger involving Company Shares in which the holders of Company Shares immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger;

•

any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or

•

the adoption of any plan or proposal for the liquidation or dissolution of the Company;

•

At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (“Incumbent Directors”) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or

•

Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (“Voting Securities”) representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities.

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June 11, 2003
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•

For purposes of this Agreement, a “potential change in control” of the Company shall be deemed to have occurred if:

•

the Company enters into an agreement, the approval of which by the shareholders would result in the occurrence of a change in control of the Company;

•

any Person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; or

•

the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred.

•

Mr. Gary Kapral
June 11, 2003
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Disability. Termination by the Company of your employment based on “Disability”shall mean termination because of your absence from you duties with the Company on a full-time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full-time performance of your duties.

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Retirement. Termination by you or by the Company of your employment based on “Retirement” shall mean termination on or after your 65th birthday.

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Cause. Termination by the Company of your employment for “Cause” shall mean termination upon (a) the willful and continued failure by you to perform substantially your reasonably assigned duties with the Company consistent with those duties assigned to you prior to the change in control (other than any such failure resulting from your incapacity due to physical or mental illness) after a demand for substantial performance is delivered to you by the Chairman of the Board of the Company which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph (iii), no act, or failure to act, on your part shall be considered “willful”unless done, or omitted to be done, by you in knowing bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advise of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the corporation. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph (iii) and specifying the particulars thereof in detail.

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Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on:

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a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your reasonable judgment, does not represent a promotion from your status, title, position(s) and responsibilities as in effect immediately prior to the change in control, or the assignment to you of any duties or responsibilities which, in your reasonable judgment, are inconsistent with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason; provided, however, that a position equivalent to that of chief operating officer or chief financial officer of a business substantially the same as that operated by the Company on the Effective Date shall not be deemed grounds for termination for Good Reason;

Mr. Gary Kapral
June 11, 2003
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a reduction by the Company in your base salary as in effect immediately prior to the change in control;

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the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as in the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control;

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the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Company’s normal vacation policy as in effect immediately prior to the change in control;

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the Company’s requiring you to be based anywhere other than where your office is located immediately prior to the change in control except for required travel on the Company’s business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the change in control;

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the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 7 hereof; or

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any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective.

Mr. Gary Kapral
June 11, 2003
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Severance Benefit.

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Mr. Gary Kapral
June 11, 2003
Page – 81

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The "Specified Benefits" are as follows:

•

the Company shall pay your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request);

•

as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you in a single payment an amount in cash equal to three times the higher of (a) your annual base salary at the rate in effect just prior to the time a Notice of Termination is given or (b) your annual base salary in effect immediately prior to the change in control of the Company;

•

for a twenty-four (24) month period after the Date of Termination, the Company shall arrange to provide you and your dependents with life, accident, medical and dental insurance benefits substantially similar to those which you were receiving immediately prior to the change in control of the Company. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by you pursuant to this paragraph (3) to the extent that a similar benefit is actually received by you from a subsequent employer during such twenty-four (24) month period, and any such benefit actually received by you shall be reported to the Company; and

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the Company shall pay you for any vacation time earned but not taken at the Date of Termination, at an hourly rate equal to your annual base salary as in effect immediately prior to the time a Notice of Termination is given divided by 2080.

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The “Capped Benefit” equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a “parachute payment” as defined in Section 280G (b)(2) of the Internal Revenue Code of 1986, as amended (“IRC”), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the “base amount” as defined in IRC, § 280G (b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a change in control of the Company within the meaning of IRC § 280G (b)(2)(A)(i), including accelerated vesting of options and other awards under the Company’s stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a change in control within the meaning of IRC § 280G (b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC § 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.

Mr. Gary Kapral
June 11, 2003
Page – 82

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Successors; Binding Agreement.

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Mr. Gary Kapral
June 11, 2003
Page – 83

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Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 6, 7(ii), 8 and 13 of this Agreement shall survive termination of this Agreement.

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Mr. Gary Kapral
June 11, 2003
Page – 84

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Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.

7. [Signature page follows.]

Mr. Gary Kapral
June 11, 2003
Page – 85

Agreed to this 5th day of May, 2003

J. MICHAEL DODSON
—————————————
J. Michael Dodson

Electro Scientific Industries, Inc.

By: BARRY L. HARMON
——————————————
Name: Barry L. Harmon
Title: President and CEO

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SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the "Company") for the quarterly period ended March 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry L. Harmon, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Barry L. Harmon - ------------------------------ Barry L. Harmon President and Chief Executive Officer August 11, 2003 This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 15 a4451391ex992.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this quarterly report on Form 10-Q of Electro Scientific Industries, Inc. (the "Company") for the quarterly period ended March 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Michael Dodson, Vice President of Administration and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ J. Michael Dodson - ------------------------------ J. Michael Dodson Vice President of Administration and Chief Financial Officer August 11, 2003 This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----