-----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, LEQQ+7HKx5j4SNj07LEc0YXI8GIrUf+5y0loCF1BVVhG3CslInmFnPELtDju2IT4 WHes97aRrLeuKEvGBf/aWA== 0001157523-03-004037.txt : 20030811 0001157523-03-004037.hdr.sgml : 20030811 20030811160811 ACCESSION NUMBER: 0001157523-03-004037 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020831 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-12853 FILM NUMBER: 03834690 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/A 1 a4452170.txt ELECTRO SCIENTIFIC INDUSTRIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment No. 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2002 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 31, 2002 was 27,712,357 shares. This Amendment No. 1 on Form 10-Q/A amends our quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2002 which was filed on October 15, 2002. The amendment is a result of the restatement of our audited consolidated financial statements for the fiscal year ended June 1, 2002 (and the quarters contained therein) and our unaudited consolidated condensed financial statements for the quarterly period ended August 31, 2002. We have also restated our consolidated condensed financial statements for the quarterly period ended November 30, 2002 and have filed an amendment on Form 10-Q/A for that period. The restatement reflects adjustments to net sales, cost of sales and certain operating expenses, and the related balance sheet accounts. We have amended each item of our quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2002 that has been affected by the restatement. This Amendment No. 1 does not reflect events occurring after the October 15, 2002 filing of our Form 10-Q or modify or update the disclosures set forth therein in any way, except as required to reflect the effects of the restatement. The items of our quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2002 that are amended and restated herein are Items 1, 2 and 4 of Part I and Item 6 of Part II. The remaining items originally contained in our Form 10-Q for the fiscal quarter ended August 31, 2002 as filed with the Securities and Exchange Commission on October 15, 2002 are unchanged. This Amendment No. 1 on Form 10-Q/A should be read in conjunction with our quarterly report on Form 10-Q for the fiscal quarter ended March 1, 2003 as filed on August 11, 2003, including the materials under the subheading "Factors That May Affect Future Results" in Part I, Item 2. ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Item 1. Consolidated Condensed Financial Statements (unaudited and restated) Consolidated Condensed Balance Sheets - August 31, 2002 (restated) and June 1, 2002 (restated) 2 Consolidated Condensed Statements of Operations - Three Months Ended August 31, 2002 (restated) and September 1, 2001 (restated) 3 Consolidated Condensed Statements of Cash Flows - Three Months Ended August 31, 2002 (restated) and September 1, 2001 (restated) 4 Notes to Consolidated Condensed Financial Statements (restated) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (restated) 11 Item 4. Controls and Procedures 21 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 1
PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) (Restated) (Unaudited) August 31, June 1, 2002 2002 ------------------- ------------------ Assets Current Assets: Cash and cash equivalents $ 38,321 $ 29,435 Marketable securities 190,865 181,019 Restricted securities 6,308 6,353 ------------------- ------------------ Total cash and securities 235,494 216,807 Trade receivables, net of allowances of $1,366 at August 31 and $1,437 at June 1 58,776 55,810 Income tax refund receivable 10,984 14,402 Inventories, net 61,683 63,916 Shipped systems pending acceptance 4,358 2,007 Deferred income taxes 8,243 8,243 Other current assets 5,218 4,960 ------------------- ------------------ Total Current Assets 384,756 366,145 Long-term marketable securities 59,750 73,445 Long-term restricted securities 9,019 12,047 Property, plant and equipment, at cost 96,625 95,656 Less - accumulated depreciation (39,450) (37,610) ------------------- ------------------ Net property, plant and equipment 57,175 58,046 Deferred income taxes - 80 Other assets 17,621 16,509 ------------------- ------------------ Total Assets $ 528,321 $ 526,272 =================== ================== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 4,554 $ 3,246 Accrued liabilities 14,677 16,062 Deferred revenue 9,132 5,308 ------------------- ------------------ Total Current Liabilities 28,363 24,616 Convertible subordinated notes 146,122 145,897 ------------------- ------------------ Total Liabilities 174,485 170,513 Shareholders' Equity: Preferred stock, without par value; 1,000 shares authorized; no shares issued - - Common stock, without par value; 100,000 authorized; 27,712 and 27,619 shares issued and outstanding at August 31, 2002 and June 1, 2002, respectively 137,291 136,370 Retained earnings 216,167 219,561 Accumulated other comprehensive income (loss) 378 (172) ------------------- ------------------ Total Shareholders' Equity 353,836 355,759 ------------------- ------------------ Total Liabilities and Shareholders' Equity $ 528,321 $ 526,272 =================== ================== The accompanying notes are an integral part of these statements
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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) (Restated) For the Three Months Ended ------------------------------------------------------ August 31, 2002 September 1, 2001 ----------------------- ----------------------- Net sales $ 39,360 $ 48,688 Cost of sales 23,503 27,705 ----------------------- ----------------------- Gross margin 15,857 20,983 Operating expenses: Selling, service and administration 14,570 22,542 Research, development and engineering 7,645 12,790 ----------------------- ----------------------- 22,215 35,332 ----------------------- ----------------------- Operating loss (6,358) (14,349) Interest income 2,943 1,937 Interest expense (2,007) (27) Other income (expense), net (436) 186 ----------------------- ----------------------- 500 2,096 ----------------------- ----------------------- Loss before income taxes (5,858) (12,253) Benefit for income taxes (2,464) (4,055) ----------------------- ----------------------- Net loss $ (3,394) $ (8,198) ======================= ======================= Net loss per share - basic and diluted $ (0.12) $ (0.30) ======================= ======================= Weighted average number of shares - basic and diluted 27,650 27,172 ======================= ======================= The accompanying notes are an integral part of these statements
3
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) (Restated) For the Three Months Ended -------------------------------------------------- August 31, 2002 September 1, 2001 -------------------- -------------------- Cash flows from operating activities: Net loss $ (3,394) $ (8,198) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 2,463 2,743 Tax benefit of stock options exercised 57 548 Provision for doubtful accounts 129 213 Loss on disposal and impairment of property and equipment - 2,231 Deferred income taxes 344 4,859 Changes in operating accounts: (Increase) decrease in trade receivables, net (1,582) 12,934 (Increase) decrease in inventories, net 2,674 (2,955) Decrease in income taxes receivable 3,418 - (Increase) decrease in other current assets (229) (892) Increase (decrease) in deferred revenue 3,824 (324) Decrease in current liabilities (1,735) (26,114) -------------------- -------------------- Net cash provided by (used in) operating activities 5,969 (14,955) Cash flows from investing activities: Purchase of property, plant and equipment (2,738) (8,641) Maturity of restricted securities 3,073 - Purchase of securities (36,312) (48,517) Proceeds from sales of securities and maturing securities 40,613 36,365 Increase in other assets (2,585) (218) -------------------- -------------------- Net cash provided by (used in) investing activities 2,051 (21,011) Cash flows from financing activities: Proceeds from exercise of stock options and stock plans 866 1,532 -------------------- -------------------- Net cash provided by financing activities 866 1,532 Net change in cash and cash equivalents 8,886 (34,434) Cash and cash equivalents: Beginning of period 29,435 68,522 -------------------- -------------------- End of period $ 38,321 $ 34,088 ==================== ==================== Supplemental cash flow information: Cash paid for interest $ 3,330 $ 10 Income tax refunds received 5,863 - Cash paid for income taxes - 2,330 The accompanying notes are an integral part of these statements
4 ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation 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 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. Note 2 - 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. 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. 5 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. We have restated our net sales, cost of sales, operating expense, other income, tax benefit and earnings for the three month period ended August 31, 2002 and our related balance sheet accounts at August 31, 2002 as follows (in thousands):
Tax Cost of Operating Other (Benefit)/ Net Income Net Sales Sales Expense Income Expense (Loss) ------------ ----------- ------------ ------------ --------------- ------------- ------------ ----------- ------------ ------------ --------------- ------------- As previously reported - three $ 42,961 $22,985 $20,848 $1,105 $ 75 $ 158 months ended August 31, 2002 Revenue deferrals (3,601) (2,351) - - - (1,250) Write-down of inventory and other assets, net - 1,639 - - - (1,639) Increase to warranty expense - 1,115 - - - (1,115) Changes to depreciation expense - 115 (32) - - (83) Increase to employee benefits accrual - - 977 - - (977) Adjustments due to timing of operating expenses - - 293 - - (293) Increase in bad debt expense - - 129 - - (129) Adjustment to amortization of bond premium - - - (173) - (173) Reclass of interest on tax refund - - - (432) (432) - Tax effect of adjustments - - - - (2,107) 2,107 ------------ ----------- ------------ ------------ --------------- ------------- Total impact of adjustments (3,601) 518 1,367 (605) (2,539) (3,552) ------------ ----------- ------------ ------------ --------------- ------------- As restated - three months ended $39,360 $23,503 $22,215 $ 500 $(2,464) $(3,394) August 31, 2002 ============ =========== ============ ============ =============== =============
With the recognition of the above adjustments, our net loss per share was restated to $0.12 for the quarter ended August 31, 2002 compared to the previously reported net income per share of $0.01. 6
Adjustments to our balance sheet as a result of the restatements were as follows (in thousands): Shipped Inventory Other Long-term Total Systems Pending Current Acceptance Assets Assets Assets ------------- ------------- ------------- -------------- --------------- ------------- ------------- ------------- -------------- --------------- Total assets as previously reported - $ - $ 63,018 $316,263 $146,187 $525,468 August 31, 2002 Revenue deferrals, current period 2,351 - - - 2,351 Revenue deferrals, prior periods 2,007 - - - 2,007 Adjustments to inventory, other assets and long-term assets - (1,335) - (2,449) (3,784) Increase to allowance for doubtful accounts - - (129) - (129) Increase to sales discounts - - (300) - (300) Change to prepaid expenses - - (293) - (293) Adjustment to amortization of bond premium - - - (173) (173) Tax effect of adjustments - - 3,174 - 3,174 ------------- ------------- ------------- -------------- --------------- Total impact of adjustments 4,358 (1,335) 2,452 (2,622) 2,853 ------------- ------------- ------------- -------------- --------------- Total assets as restated - August 31, $ 4,358 $ 61,683 $318,715 $143,565 $528,321 2002 ============= ============= ============= ============== =============== Total Other Liabilities and Deferred Current Long-Term Shareholders' Shareholders' Revenue Liabilities Liabilities Equity Equity ------------- ------------- ------------- -------------- --------------- Total liabilities and equity as $ 2,171 $ 18,254 $146,122 $358,921 $525,468 previously reported - August 31, 2002 Revenue deferrals, current period 3,601 - - - 3,601 Revenue deferrals, prior periods 3,360 - - - 3,360 Increase to employee benefits accrual - 977 - - 977 Adjustment to amortization of bond premium - - - 283 283 Net loss effect of adjustments - current period - - - (3,552) (3,552) Net loss effect of adjustments - prior period - - - (1,816) (1,816) ------------- ------------- ------------- -------------- --------------- Total Impact of adjustments 6,961 977 - (5,085) 2,853 ------------- ------------- ------------- -------------- --------------- Total liabilities and equity as $ 9,132 $ 19,231 $146,122 $353,836 $528,321 restated - August 31, 2002 ============= ============= ============= ============== ===============
Information in the following notes and in the Management's Discussion and Analysis of Financial Condition and Results of Operations has been restated, as appropriate, to reflect the restatements. Note 3 - 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 this agreement were $7.1 million for the period ended August 31, 2002 and $9.0 million for the twelve-month period ended June 1, 2002. Discounting fees were recorded as interest expense and were not material for the three months ended August 31, 2002 and September 1, 2001. At August 31, 2002, $7.8 million of receivables sold under these agreements remained outstanding, compared to $9.0 million outstanding at June 1, 2002. 7 Note 4 - Inventories Inventories are principally valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Components of inventories were as follows (in thousands): August 31, 2002 June 1, 2002 -------------------- ----------------- (restated) Raw materials and purchased parts $ 42,639 $ 41,013 Work-in-process 1,430 1,942 Finished goods 17,614 20,961 -------------------- ----------------- Total inventories $ 61,683 $ 63,916 ==================== ================= Note 5 - Earnings Per Share Because we incurred a loss in the three months ended August 31, 2002 and September 1, 2001, the number of shares outstanding for the calculation of earnings (loss) per share ("EPS") was the same for both the basic and diluted calculations. The following common stock equivalents were excluded from the diluted EPS calculations because inclusion would have had an antidilutive effect (in thousands): Three Months Ended ------------------------------------ August 31, 2002 September 1, 2001 ----------------- ---------------- Employee stock options 3,777 4,237 4 1/4% convertible subordinated notes 3,947 - ----------------- ---------------- 7,724 4,237 ================= ================ Note 6 - Comprehensive Loss The components of comprehensive loss, net of tax, are as follows (in thousands): Three Months Ended ---------------------------------- August 31, 2002 September 1, 2001 ---------------- ---------------- (restated) Net loss $(3,394) $(8,198) Net unrealized gain on derivative instruments 14 88 Foreign currency translation adjustment 84 2 Net unrealized gain (loss) on securities 452 (184) -------------- ---------------- Total comprehensive loss $(2,844) $(8,292) ============== ================ 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 August 31, 2002 and September 1, 2001 was 42.1% and 33.1%, respectively. The higher tax benefit in the three months ended August 31, 2002 as compared to the statutory federal tax rate is largely a result of the tax benefit related to research and development tax credits. 8 Note 8 - Recent Accounting Pronouncements In August 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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 impact 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 less selling costs 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 previously required. The adoption of SFAS No. 144 did not have a material impact on our financial position or the results of our operations. Note 9 -First Quarter Fiscal 2002 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. This reduction impacted all employee groups. In connection with this plan, we recorded a charge of $2.4 million for employee severance and $0.2 million for other employee expenses in the three months ended September 1, 2001. The restructuring plan also included vacating buildings located in California, Massachusetts, Michigan, Minnesota and Texas. As a result, we recorded a charge of approximately $1.5 million for the three months ended September 1, 2001, which consisted of $1.1 million for lease termination fees and $0.4 million for the write-off of certain leasehold improvements. We also recorded a $3.5 million inventory write-down related to discontinuing the manufacturing of certain products for the three months ended September 1, 2001. This inventory write-down was reflected in costs of sales. 9 The following table displays the components of the restructuring and special charges for the three months ended September 1, 2001 (in thousands):
Three Months Ended September 1, 2001 ------------------------- Employee severance and other employee expenses $ 2,579 Lease termination and other facility consolidation costs 1,482 Net asset write-downs 76 Other expenses 214 ------------------------- Total operating expense restructuring charge 4,351 Inventory write-downs (reflected in cost of sales) 3,497 ------------------------- Total restructuring and special charges $ 7,848 =========================
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 Accruals At August 31, 2002, we had $0.7 million remaining in accrued liabilities, compared to $1.0 million at June 1, 2002. The majority of the remaining accrued liabilities were related to lease termination fees and other facility consolidation costs expected to be incurred through 2006. The following table displays the rollforward of the restructuring accruals from June 1, 2002 to August 31, 2002, which were established in the quarter ended September 1, 2001 (in thousands):
Accruals at Charges to Amounts Accruals at June 1, 2002 Accruals Used August 31, 2002 -------------- ---------------- ---------------- ----------------- Lease termination fees and other facility consolidation costs $ 664 $ - $(151) $ 513 Purchase order obligations $ 334 $ - $(136) $ 198
Note 11 - Subsequent Event 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 facility in Portland, Oregon. We plan on completing this move by December 31, 2002. Approximately 45 employees at our Escondido facility have been offered relocation to our headquarters. The remaining employees have been offered a severance package following a sixty-day notice period. As a result of the closure of the California facility and other cost reduction steps, we expect that total employment will be reduced by approximately 100 people by the end of December 2002, from the current level of approximately 800 people. Beginning in the third quarter of fiscal 2003, which starts on December 1, 2002, we expect to save at least $8.0 million annually as a result of facilities consolidation, employment reductions and other cost reduction steps as related to this restructuring plan. In the second quarter of fiscal 2003, we expect to record a one-time charge of approximately $9.0 million for severance and other costs related to the plant closure. Additional relocation costs of approximately $2.0 million will be charged in future quarters as they occur, and are expected to be offset by a gain on the sale of the building and land. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (restated) --------------------------------------------------------------- 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. Restatement 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. For the three-month period ended August 31, 2002, we restated our financial statements to correct improper accounting entries, including entries for revenue recognition, inventory write-downs, warranty expense and employee benefits expense. The aggregate impact of these adjustments, and related tax effects, was to reduce our net income for the three months ended August 31, 2002 from $158,000 to a net loss of $3.4 million and to decrease our basic and diluted net income per share from $0.01 to $(0.12). A summary of the impact of the adjustments on our previously issued unaudited consolidated condensed statement of operations for the three months ended August 31, 2002 and unaudited consolidated condensed balance sheet as of August 31, 2002 is presented in Note 2 to our notes to consolidated condensed financial statements contained elsewhere in this amended report. 11 Results of Operations Net sales of $39.4 million for the quarter ended August 31, 2002 (the first quarter of fiscal 2003) were $9.3 million, or 19.2%, lower than net sales of $48.7 million for the quarter ended September 1, 2001 (the first quarter of fiscal 2002), and were $1.1 million, or 2.6%, lower than the net sales of $40.4 million for the immediately preceding quarter, which ended June 1, 2002. The decrease in net sales in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002 resulted primarily from decreases in sales of our semiconductor yield improvement systems and electronic component manufacturing systems. These decreases were offset in part by increases in sales of our advanced electronic packaging systems, circuit fine tuning systems and vision inspection systems. Certain information regarding our net sales by product line is as follows (net sales in thousands):
Three Months Ended August 31, Three Months Ended September 2002 (restated) 1, 2001 (restated) ------------------------------- ------------------------------ Net Sales Percent of Net Sales Percent of Total Net Total Net Sales Sales Semiconductor Yield Improvement Systems $17,109 43.5% $22,987 47.2% Electronic Component Manufacturing Systems 7,834 19.9 13,448 27.6 Advanced Electronic Packaging Systems 3,731 9.5 3,695 7.6 Vision and Inspection Systems 3,844 9.7 2,678 5.5 Circuit Fine Tuning Systems 6,842 17.4 5,880 12.1 ------- ------- ------- ------ $39,360 100.0% $48,688 100.0% ------- ------- ======= ======
Gross margin decreased to $15.9 million (40.3% of net sales) for the first quarter of fiscal 2003 from $21.0 million (43.1% of net sales) for the first quarter of fiscal 2002. Included in cost of goods sold in the first quarter of fiscal 2002 is $3.5 million for the write-down of inventory related to discontinuing the manufacturing of certain products. Lower margins were due to a change in product mix and lower utilization of factory capacity. We also continue to see normal pricing pressure in all of our markets due to the continued softness in overall electronics demand and pressure on our customers' earnings. Selling, service and administrative expenses decreased $8.0 million to $14.6 million (37.0% of net sales) in the first quarter of fiscal 2003 compared to $22.5 million (46.3% of net sales) in the first quarter of fiscal 2002. Included in selling, service and administrative expenses in the first quarter of fiscal 2003 was severance expense of $0.2 million. 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 month period ended September 1, 2001, was employee severance expense of $1.9 million, lease termination and other facility consolidation costs of $1.5 million and net asset write-downs of $0.8 million. Lower sales volume and a reduction of force resulted in decreased commission and payroll expense in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. 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. Expenses associated with research, development and engineering decreased $5.1 million to $7.6 million (19.4% of net sales) in the first quarter of fiscal 2003 compared to $12.8 million (26.3% of net sales) in the first quarter of fiscal 2002. The decrease was primarily due to decreases in research, development and engineering headcount and lower project costs. 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 month period ended September 1, 2001, was employee severance and related expenses of $0.6 million. We continue to invest in a significant number of development and engineering projects that we see as important to our future. 12 In order to better align our operating expenses with anticipated revenues, we implemented a restructuring plan in the first quarter of fiscal 2002. The restructuring plan consisted of reducing our work force and vacating several buildings. This reorganization resulted in restructuring charges of $4.4 million in the first quarter of fiscal 2002, which are included in our statement of operations in the line items to which they functionally relate. We also recorded a $3.5 million inventory write-down related to discontinuing the manufacturing of certain products in the first quarter of fiscal 2002. This inventory write-down was reflected in our statement of operations as costs of sales. At August 31, 2002, we had $0.7 million of accrued liabilities related to these charges, which are expected to be incurred through 2006 (see also Notes 9 and 10 above). Interest income for the first quarter of fiscal 2003 increased $1.0 million to $2.9 million from $1.9 million in the first quarter of fiscal 2002. This increase is mainly due to an increase in investment balances generated from our sale of $150 million aggregate principal amount of 4 1/4% convertible subordinated notes in December 2001 and January 2002. Interest expense increased to $2.0 million in the first quarter of fiscal 2003 compared to $27,000 in the first quarter of fiscal 2002 due to our sale of $150.0 million 4 1/4% convertible subordinated notes in December 2001 and January 2002, which are due in 2006. Quarterly interest expense related to these notes totals $1.6 million plus $0.2 million for the accretion of underwriting discounts. The income tax rate for the first quarter of fiscal 2003 was 42.1% compared to 33.1% for the first quarter of fiscal 2002. The higher tax benefit for the three months ended August 31, 2002 as compared to the statutory federal tax rate is largely a result of tax interest refunds and the tax benefit related to research and development tax credits. Net loss for the first quarter of fiscal 2003 was $3.4 million, or $(0.12) per diluted share, compared to a net loss of $8.2 million, or $(0.30) per diluted share, in the first quarter of fiscal 2002. Ending backlog on August 31, 2002 was $10.9 million compared to $22.6 million on June 1, 2002. Liquidity and Capital Resources At August 31, 2002, our principal sources of liquidity consisted of existing cash, cash equivalents and marketable securities of $288.9 million and accounts receivable of $58.8 million. At August 31, 2002, we had a current ratio of 13.6:1 and long-term debt of $146.1 million. Working capital increased to $356.4 million at August 31, 2002 compared to $341.5 million at June 1, 2002. 13 Purchases of property, plant and equipment of $2.7 million in the first quarter of fiscal 2003 were primarily for the continued construction of a new corporate headquarters in Portland, Oregon. At August 31, 2002 we had capital commitments of approximately $4.4 million for completion of the construction of our 62,000 square foot corporate headquarters building located on the Portland, Oregon campus. Current liabilities increased $3.7 million from June 1, 2002 primarily due to an increase in deferred revenue generated from shipments of new products pending acceptance, offset in part by the decrease in accrued interest expense generated from our 4 1/4% convertible subordinated notes due 2006. We pay approximately $3.2 million of interest on the subordinated notes semiannually on each June 21 and December 21. At August 31, 2002 we had $146.1 million recorded on our balance sheet related to our 4 1/4% convertible subordinated notes. The difference between the $150.0 million face value and the $146.1 million balance at August 31, 2002 relates to underwriting discounts, which originally totaled $4.5 million and are being amortized as additional interest expense over the life of the subordinated 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 our fiscal 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. 14 The current economic downturn has resulted in a reduction in demand for our products and significant fluctuations in our profitability and net sales. We had a net loss of $3.4 million during the three months ended August 31, 2002 on net sales of $39.4 million and a net loss of $8.2 million for the three months ended September 1, 2001 on net sales of $48.7 million. We cannot assure you that demand for our products will increase. 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. Our recent capacity expansion may not be utilized successfully or effectively, which could negatively affect our business. We have completed a 53,000 square-foot manufacturing facility on a 31-acre parcel in Klamath Falls, Oregon. In June 2001 we began construction of a 62,000 square foot corporate headquarters building in Portland, Oregon. Both projects have been 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 we adopted a restructuring plan 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. 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. 15 We depend on a few significant customers and we do not have long-term contracts with these or any of our other customers. Twelve large, multinational electronics companies constituted 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. 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. 16 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. 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. 17 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. 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. We are not able to reliably estimate the loss, if any, related to this matter at this time. 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. 18 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. 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. The U.S. government will likely choose to rectify the violation to avoid retaliatory trade sanctions and is considering several options to do so. It is possible that the U.S. government will 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. 19 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. 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 capabilities 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. 20 Recent 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 recent 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. 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; and - -- The risk of more frequent instances of shipping delays. The loss of key management or our inability to attract and retain sufficient numbers of managerial, 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, 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. We may not be able to retain our key managerial, engineering and technical employees. Our growth may be affected by our ability to hire a new chief executive officer, new highly skilled and qualified technical personnel, and personnel that can implement and monitor our financial and managerial controls and reporting systems. Attracting qualified personnel is difficult, and our recruiting efforts to attract and retain these personnel may not be successful. Item 4. Controls and Procedures Immediately following the signature page of this amended 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 amended quarterly report on Form 10-Q/A 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 amended 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. 21 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 amended quarterly report on Form 10-Q/A 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. 22 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. 23 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits This list is intended to constitute the exhibit index. 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 A report on Form 8-K was filed on August 27, 2002, reporting that the Amended and Restated Rights Agreement, dated as of March 1, 2002, between us and Mellon Investor Services, LLC to permit EQSF Advisors, Inc. to beneficially own up to, but not including, an aggregate of 19.99% of the outstanding shares of our common stock. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment 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) 25 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Barry L. Harmon, certify that: 1. I have reviewed this amended quarterly report on Form 10-Q/A of Electro Scientific Industries, Inc.; 2. Based on my knowledge, this amended 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 amended 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 amended 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 amended 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 amended 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 26 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, J. Michael Dodson, certify that: 1. I have reviewed this amended quarterly report on Form 10-Q/A of Electro Scientific Industries, Inc.; 2. Based on my knowledge, this amended 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 amended 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 amended 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 amended 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 amended 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 26 EX-99 3 a4452170ex991.txt EXHIBIT 99.1 EXHIBIT 99.1 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 amended quarterly report on Form 10-Q/A of Electro Scientific Industries, Inc. (the "Company") for the quarterly period ended August 31, 2002 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 4 a4452170ex992.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 amended quarterly report on Form 10-Q/A of Electro Scientific Industries, Inc. (the "Company") for the quarterly period ended August 31, 2002 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-----