Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
(Mark One)
(X) Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended May 31, 1995 or
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_______________
Commission File Number: 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0370304
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13900 NW Science Park Drive
Portland, Oregon 97229
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 641-4141
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __X__
The aggregate market value of Common Stock held by nonaffiliates of the
Registrant at June 16, 1995: $230,868,461.
The number of shares of Common Stock outstanding at June 16, 1995: 8,376,180.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document which is incorporated
-------- ----------------------
1995 Annual Report Part II
Proxy Statement for 1995 Annual Meeting Part III
of Shareholders
Page 1 of 48
TABLE OF CONTENTS
Item of Form 10-K Page
----------------- ----
PART I
Item 1 - Business . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 - Properties . . . . . . . . . . . . . . . . . . . . . . 13
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . 13
Item 4 - Submission of Matters to a Vote of Security Holders. . 13
Item 4(a) - Executive Officers of the Registrant . . . . . . . . . 14
PART II
Item 5 - Market for the Registrant's Common Equity and
Related Shareholder Matters . . . . . . . . . . . . . 16
Item 6 - Selected Financial Data. . . . . . . . . . . . . . . . 16
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 16
Item 8 - Financial Statements and Supplementary Data . . . . . 21
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . 38
PART III
Item 10 - Directors and Executive Officers of the Registrant . . 38
Item 11 - Executive Compensation . . . . . . . . . . . . . . . . 39
Item 12 - Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 39
Item 13 - Certain Relationships and Related Transactions . . . . 39
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . 40
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Page 2 of 48
PART I
ITEM 1. BUSINESS
ESI provides electronics manufacturers with equipment necessary to produce
key components used in wireless telecommunications, computers, automotive
electronics, and many other electronic products. ESI is the leading supplier of
advanced laser systems used to adjust (trim) electronic circuitry and to improve
the yield of semiconductor memory devices. The Company believes it is the
leading producer of high-speed test and handling equipment used in the
high-volume production of miniature capacitors. Additionally, the Company
designs and manufactures machine vision products and laser micromachining
systems for manufacturers of electronics and other products. The Company's
products enable these manufacturers to reduce production costs, increase yields
and improve the quality of their products. ESI's customers include manufacturers
of: wireless telecommunication products (Ericsson, Motorola and Siemens);
automotive electronics (Bosch, Delco, Ford, Nippon-Denso and Siemens); miniature
capacitors (Kemet, Kyocera/AVX, Murata, Philips, Samsung and TDK) and DRAMs
(Fujitsu, Hitachi, Hyundai, IBM, Micron Semiconductor, Samsung and Texas
Instruments).
ELECTRONICS INDUSTRY OVERVIEW
In recent years, the electronic content of telecommunications products,
automobiles and personal computers has increased substantially. For example,
automobile manufacturers now routinely include electronic ignition, anti-lock
brakes, electronic fuel injection and other electronic systems in place of
components that until recently were predominantly mechanical. In addition, new
markets for consumer-oriented electronic products such as cellular telephones,
facsimile machines, pagers, camcorders and personal computers have developed
rapidly as increasingly affordable products have been introduced.
Demand for electronics manufacturing equipment is driven by the demand for
electronic devices and circuits. Electronic devices are used in virtually all
electronic products, from inexpensive consumer electronics to the most
sophisticated computers. These devices are produced in very large unit volumes.
The demands upon manufacturers to supply increasing quantities of
electronic devices have been accompanied by increased complexity and reduced
size. As electronic products become more powerful and portable, the devices in
these products must be faster, smaller and more reliable. To achieve these
attributes of higher performance, the electronic device manufacturers use finer
device geometries, increase densities, and tune the devices to precise
electrical values. Manufacturers of cellular telephones, for example, must use
miniaturized circuits to accommodate the size limitations of the finished
product. These circuits must also operate within precise frequency
specifications, typically requiring component values with less than 0.5 percent
tolerance, in order for the existing cellular frequency bands to accommodate the
expanding number of cellular users without interchannel interference.
As electronic device densities and performance demands have increased, the
manufacturers of capacitors and resistors that are basic components of assembled
electronic devices have been compelled to reduce size and to improve performance
of these individual components. The increasing miniaturization of these
components makes production, testing and handling difficult.
Page 3 of 48
In addition to quantity, size and performance demands, a trend throughout
the electronics industry is cost reduction. The highly competitive markets for
electronic products create cost limitations at the consumer level, and result in
cost pressure on component manufacturers. The manufacturers seek to reduce
device costs by improving throughput, yield and quality in device production.
OVERVIEW OF MARKETS, PRODUCTS AND STRATEGY
Pagers, cellular telephones, personal computers and automotive engine
control circuits represent the largest end-market applications for electronic
devices and circuits that are produced using ESI's systems. The Company's
customers also serve a wide range of other electronic applications.
The Company believes that it is critical that each of its products provide
the customer with measurable production benefits, such as improved yield,
increased throughput, greater reliability, or increased flexibility, resulting
in the lowest cost of ownership and a high return on investment. The Company
also designs its production systems with a migration path for system upgrade,
thereby providing its customers flexibility to add capacity or improve product
performance at a reasonable incremental cost.
ESI believes it is the leading merchant equipment supplier to three
specialized markets: laser trimming, miniature capacitors test and production
and memory repair. ESI's systems also serve the machine vision and laser
micromachining markets.
LASER TRIMMING SYSTEMS. The Company's laser trimming systems are used to tune
the precise frequency of electronic circuits that receive and transmit signals
in pagers, cellular telephones and other wireless devices. The Company's laser
trimming systems are also used to tune automotive electronic assemblies such as
engine control circuits.
The Company's laser trimming systems remove precise amounts of material to
tune devices such as resistors, resistor networks, hybrid circuits and linear
integrated circuits. An on-line electronic measurement subsystem and a machine
vision subsystem guide the laser positioning and power control to perform
precisely calibrated removal of material.
TEST AND PRODUCTION SYSTEMS FOR MINIATURE CAPACITORS. The Company's Palomar
product offering consists of automated test, production and handling equipment
for manufacture of miniature multi-layer ceramic capacitors ("MLCCs") which are
used in very large numbers in nearly all types of electronic circuits. For
example, consumer electronic products such as camcorders, VCRs, cellular phones
and personal computers can contain hundreds of MLCCs. The largest uses of MLCCs
have been in consumer electronics, automotive electronics and computers. Major
growth is occurring in markets for telecommunication products, particularly
wireless telecommunications products, and personal computers.
MEMORY REPAIR SYSTEMS. Memory repair systems are used by nearly all
manufacturers of DRAMs to increase production yields. Personal computers are the
largest application for DRAMs. DRAMs also are used in a broad range of other
types of digital electronic products.
Page 4 of 48
The Company's memory repair systems can significantly increase production
yields of DRAMs, particularly in the initial production of a new generation of
device. DRAMs are built with redundant arrays of memory elements. The Company's
memory repair systems receive test data from memory test systems and, with a
laser, cut connection points ("links") to deactivate defective memory cells and
activate spare cells.
PRODUCTS A. LASER TRIMMING SYSTEMS
The Company's laser systems are used by manufacturers supplying the
telecommunications, automotive, and consumer markets. Customers include Bosch,
Delco, Ericsson, Ford, IBM, Motorola, Nippon-Denso, Philips, Siemens and
Sumitomo.
Laser trimming is used to adjust the electrical performance of an
electrical product or assembly containing many circuits. The laser trimming
system removes a precise amount of material from one or more circuits to achieve
the desired electrical specification for the entire product. This process is
called "functional trimming," and is performed while the product or assembly is
under power. For example, in pagers, laser trimming of a few selected circuits
in the product is used to tune the electrical performance of the entire product
to the desired frequency specification.
The Company's laser trimming systems also adjust the electrical performance
of individual devices such as film resistors, resistor networks, capacitors and
hybrid circuits. Laser trimming is required because the screening process used
to manufacture resistors cannot cost effectively deposit material precisely
enough to provide consistent electrical values. The trimming system can also be
rapidly reprogrammed to trim devices to different values, enabling the
manufacturer to efficiently convert volume-produced devices of a single value
into devices with a variety of values.
The following chart summarizes the models, typical applications, key
features and price ranges of the Company's current laser trimming products.
ESI LASER TRIMMING PRODUCTS
PRODUCT TYPICAL APPLICATION ACCURACY THROUGHPUT WORK AREA PRICE RANGE
------- ------------------- -------- ---------- --------- -----------
(MICRONS) (TRIMS PER SECOND) (INCHES)
--------- ------------------ --------
Model 37E Plus Thick film resistor trimming 2.5 50 3 x 3 $150,000-$370,000
Model 4210 Surface mount capacitor 2.5 50 3.5 x 3.5 $180,000-$280,000
trimming
Model 977 Test intensive, thick film, 1.55 50 3 x 3 $175,000-$400,000
functional trimming
Model 960 Thick film functional 1.27 50 3 x 3 $150,000-$370,000
trimming
Model 907 Chip resistor trimming 1.27 100 3 x 3 $170,000-$230,000
Model 4410 Thick/thin film functional 1.0 15 4 x 4 $250,000-$400,000
trimming
Page 5 of 48
B. TESTING AND PRODUCTION SYSTEMS FOR MINIATURE CAPACITORS
The Company's Palomar Systems subsidiary manufactures and sells a broad
line of automatic test, production and handling equipment used to manufacture
MLCCs. Capacitors are used to filter or smooth electrical signals and are found
in virtually all electronic applications and products. Large numbers of MLCCs
are used in circuits that process analog signals or operate at high frequencies
such as in video products (VCRs and camcorders), voice communication products,
wireless telecommunication products and computers. Principal customers for ESI's
MLCC test and production equipment are Kemet, Kyocera/AVX, Murata, Philips,
Samsung and TDK.
The worldwide miniature capacitor market is estimated to be $4.1 billion
(205 billion units) in 1995. Most of the leading producers are in Japan, led by
Kyocera, Murata and TDK. The Company believes it is the leading merchant
supplier of equipment to the MLCC industry for production of miniature
capacitors. Production demands imposed by miniaturization are leading capacitor
manufacturers to increasingly consider merchant equipment suppliers as an
alternative to internal development of manufacturing equipment.
As circuit sizes have shrunk, the size of commonly used miniature
capacitors has also shrunk to as small as .04" x .02" x .01". These minute sizes
and the high unit volumes place extraordinary demands on manufacturers. ESI's
products combine high-speed, small parts handling technology with
microprocessor-based systems to provide highly automated solutions for MLCC
manufacturers. The Company's test and termination equipment and specialty
handling tools perform a broad range of functions in the manufacturing process.
TEST. Virtually all capacitors are tested and sorted by capacitance (electrical
energy storage) and dissipation (electrical energy leakage). The Company's
equipment employs high-speed handling and positioning techniques to precisely
load, test and sort capacitors based upon these electrical values.
TERMINATION. MLCCs are manufactured in a lamination process, layering
conducting and insulating materials. The Company's microprocessor-based
termination systems apply conductive material to the ends of surface mountable
MLCCs, permitting connection of the device in a circuit.
HANDLING TOOLING. The Company offers a wide range of specialized production
fixtures and tools for various stages of the manufacturing process, including a
series of patented carrier plates capable of handling up to 8,000 devices per
plate for termination application. The decreasing size and growing volumes of
MLCCs produced cause manufacturers to continuously seek new tools and fixtures
to improve throughput and handling efficiency.
TURNKEY FACTORIES. The Company's breadth of product offerings for MLCC
production permit it to provide the equipment necessary to install an entire
factory on a turnkey basis. The Company provides training and support for
start-up factories throughout the world. Over the past several years, the
Company has provided equipment for over 20 turnkey MLCC factories at prices
ranging from $1 million to $4 million.
Page 6 of 48
The following chart summarizes certain of ESI's current products,
applications, key features and price ranges:
ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS
PRODUCT APPLICATION KEY FEATURES PRICE RANGE
------- ----------- ------------ -----------
TEST SYSTEMS
Models 16A and 18 Tests capacitance, dissipation factor and High speed rotary tester. Throughput up $85,000-$100,000
voltage capability for small (Model 18) to 50,000 parts/hour.
and medium (Model 16A) size MLCCs
Models 12-4 and 3001 IR Tests insulation resistance (IR) of MLCCs High speed parallel tester with $100,000-$225,000
throughput rates of up to 50,000
parts/hour. Model 3001 IR includes
automatic bulk loading.
TERMINATION SYSTEMS
Models 2001 and 2020 Electrical contact attachment on MLCCs Microprocessor controlled surface mount $40,000-$80,000
termination system. Throughput up to
130,000 parts/hour. Model 2020 includes
an integrated kiln.
Model 2007 Electrical contact attachment on MLCCs High productivity microprocessor $100,000-$110,000
controlled surface mount termination
system. Throughput up to 470,000
parts/hour.
HANDLING TOOLING
Carrier Plates Plates to batch handle MLCCs for test Patented composite carriers to handle $200-$500
and termination the full range of MLCC sizes and up to
8,000 pieces per batch.
Test Tooling Test fixtures for use with ESI systems Permits precise location and positioning $300-$600
of MLCCs during the test operation.
Page 7 of 48
C. LASER MEMORY REPAIR SYSTEMS
Personal computers and high performance workstations are the largest market
for semiconductor memory, although photocopiers, facsimile machines and
telecommunications equipment represent products requiring increasing amounts of
memory. Customers of the Company's memory repair systems include Fujitsu,
Hitachi, Hyundai, IBM, Micron Semiconductor, Motorola, Samsung, Siemens, and
Texas Instruments.
Laser memory repair is a process used by memory device manufacturers to
replace defective circuit elements with spare elements, and thereby salvage a
memory device. Lower cost, higher capacity memory devices have been achieved by
reducing the size of circuit elements and increasing the number of circuit
elements per device, thereby requiring leading edge semiconductor processes.
These processes generally result in lower manufacturing yields, especially in
the early stages of producing a new generation of memory devices. Yield
improvement is thus critical in the early stages of producing a new generation
device.
The primary method used by memory manufacturers to maintain and increase
yield is to include extra circuit elements on each device. These "redundant"
elements can then be used to replace defective elements found by test after
fabrication. The Company's laser systems perform this repair by determining the
optimum number and location of connections and disconnections necessary to
repair the device, rapidly positioning links under the laser, and directing a
laser energy pulse to cut those links to deactivate defective memory cells and
activate spare cells. Redundancy is used by virtually every manufacturer of
DRAMs and is increasingly being used by manufacturers of other semiconductor
memory devices such as static random access memories, (SRAMS).
The Company currently offers the Model 9200HT PLUS laser processing system
for memory repair. The Model 9200HT PLUS, introduced in 1994, is designed to
process increasingly dense memory devices, including 16 and 64 megabit DRAMs. To
accommodate the range of memory sizes, the Model 9200HT PLUS includes a
programmable laser spot size feature. The Company's Model 9200HT PLUS has a
guaranteed mean time between failure of better than 1,500 hours and has a raw
throughput rate of 1,200 links per second. The price of the Model 9200HT PLUS
ranges up to $1.1 million depending on configuration.
Subsequent to May 31, 1995, the Company acquired XRL, Inc. XRL's Model
1225HP laser memory repair system utilizes patented stage plus galvanometer beam
positioning to achieve 0.35 micron positioning accuracy. XRL holds the patent
for the ScribeView 2 illuminator, used for optical character recognition (OCR),
a vital step in the memory repair process. The price of the Model 1225HP ranges
up to $895,000 depending on configuration. See notes to Consolidated Financial
Statements for further discussion.
The combination of XRL and ESI has produced numerous innovations in the
memory repair field.
Page 8 of 48
D. VISION SYSTEMS
The Company's Vision Products Division (formerly Intelledex Vision
Products) designs and manufactures high performance machine vision products.
ESI's vision systems combine advanced computer technology, proprietary software
and optical equipment to reduce application development time and provide machine
vision inspection that facilitates quality products and fast throughput. The
TurboHR+ vision system is integrated in the Company's laser memory repair
systems and is also marketed independently to electronic and semiconductor
industry customers for general purpose inspection, part position verification
for manufacturing processes, wafer identification using optical character
recognition (OCR), measurement, machine guidance and assembly verification.
Vision Products Division systems range in price from approximately $10,000 to
$30,000 depending upon configuration and purchase quantities. Customers for the
Company's vision products include Hewlett-Packard, Motorola and Seagate.
E. ELECTRONIC PACKAGING AND MICROMACHINING SYSTEMS
ESI has expanded its product offering in the micromachining systems
business, which focused on surface contouring, cutting, and scribing for
electronic applications, into the electronic packaging industry. The initial
product, the Model 5000, announced in May, 1995, is targeted for use in small
geometry substrate production. This emerging market includes new generations of
IC packages, multi chip modules, and high density circuit boards. ESI's
advanced laser technology provides a cost effective method for forming
electrical connections between layers, called vias, in a multiple layer
substrate. The primary advantage of the ESI technology is the ability to
process the wide variety of materials used in this industry, including ceramic,
traditional glass reinforced circuit boards, copper, and new organic compounds.
The price of these systems approximates $350,000, and first units were installed
in May, 1995. The initial customers include Sheldahl and Litronic Industries.
ESI's laser micromachining systems use laser technology to perform micron-
level drilling and contouring of a variety of materials. The micromachining
system focuses a laser on the subject material according to a location pattern
programmed for the application. ESI's micromachining system, the Model 4420,
employs a solid state laser for micron level accuracy. Prices of micromachining
systems range from $200,000 to $400,000, depending on configuration. Customers
include Digital Equipment, Read Rite and W. L. Gore.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service offices
located in or near: Chicago, Dallas, Portland and San Diego in the United
States; Tokyo, Nagoya, Seoul and Taipei in Asia; and Munich, London, Paris and
Leiderdorp, Netherlands in Europe. The Company serves customers in approximately
30 additional countries through manufacturers representatives.
The Company has a substantial base of installed products in use by leading
worldwide electronics manufacturers. The Company emphasizes strong working
relationships with these leading manufacturers in order to meet their needs for
additional systems and to facilitate the successful development and sale of new
products to these customers.
Page 9 of 48
The Company maintains service personnel wherever it has a significant
installed base and provides service anywhere its equipment is installed. New
systems are tested to ensure they meet requirements and acceptance criteria
incorporated into customer orders. The Company also offers a variety of
warranties (which vary from 90 days to three years), maintenance contracts, and
parts replacement programs.
The Company has an OEM contract with Advantest Ltd. to supply memory repair
systems in Japan. Sales to Advantest amounted to 7.2%, 7.0% and 4.0% for the
fiscal years 1995, 1994, 1993. The Company maintains a presence in Korea through
a majority-owned joint venture.
International sales accounted for 70.9%, 54.7%, and 57.3% of the Company's
net sales for fiscal years 1995, 1994, and 1993. See "Notes to Consolidated
Financial Statements."
Kyocera/AVX accounted for 12.4% and 10.8% of the Company's sales in fiscal
1995 and 1994, respectively. In fiscal year 1993, no one customer exceeded 10%
of sales: the loss of certain customers could have a material adverse effect
upon the Company's sales or earnings.
BACKLOG
Backlog consists of written purchase orders for products for which the
Company has assigned shipment dates within the following twelve months. Backlog
also includes written purchase orders for spare parts and service to be
delivered or performed within the next twelve months. Backlog was $26 million at
May 31, 1995 versus $8 million at May 31, 1994. The Company experienced
increases to backlog in all product areas and expects all of its existing
backlog to ship in fiscal 1996.
RESEARCH, DEVELOPMENT AND TECHNOLOGY
ESI believes that its ability to compete effectively depends, in part, on
whether it can maintain and expand its expertise in core technologies and
product applications. The primary emphasis of ESI's research and development is
to advance the Company's capabilities in:
- Lasers and laser/ material interaction
- High speed, sub-micron motion control systems
- Precision optics
- High speed, small parts handling
- Image processing and optical character recognition
- Real-time production line electronic measurement
- Real-time software
- Systems integration
Page 10 of 48
The Company's research and development expenditures for fiscal years
1995, 1994, and 1993 were $13.7 million (12.7% of net sales), $8.9 million
(12.3% of net sales) and $9.0 million (13.3% of net sales), respectively. The
foregoing figures do not include research and development expenditures funded
by Advanced Research Projects Agency (ARPA) of the U.S. Government. In
September 1993, the Company was awarded a cost-shared contract from ARPA.
Under the initial terms of the contract, ARPA provided $1 million of funding
towards the development of a flat panel display laser interconnect and repair
system. In March 1995, the contract scope of work was expanded and an
additional $100,000 of funding was awarded; work will be performed by the
Company through the third quarter of fiscal 1996. This project is consistent
with the Company's technology strategy. In fiscal 1995 and 1994, the Company
received $600,000 and $700,000, respectively, of funding from ARPA which
offset research and development expenses.
COMPETITION
ESI's markets are competitive. The principal competitive factors in the
industry are product performance, reliability, service and technical support,
product improvements, price, established relationships with customers and
product familiarity. The Company believes that its products compete favorably
with respect to these factors. Some of the Company's competitors have greater
financial, engineering and manufacturing resources than the Company and larger
service organizations. In addition, certain of the Company's customers develop,
or have the ability to develop, similar manufacturing equipment. There can be no
assurance that competition in the Company's markets will not intensify or that
the Company's technological advantages may not be reduced or lost as a result of
technological advances by competitors or customers or changes in electronic
device processing technology.
For laser trimming systems, major competitors are NEC and General Scanning.
In miniature capacitor test and production equipment, the Company's competition
comes mainly from manufacturers that develop systems for internal use, and in
Japan, from test equipment manufactured by Tokyo Weld and Humo, among others.
ESI's major competitors for memory repair systems are Nikon and General
Scanning. The Intelledex Vision Products Division competes with stand alone
vision suppliers such as Cognex and Imaging Technology, and with robotics and
factory automation companies, such as Adept and Allen Bradley. There are also
numerous small vision companies and captive vendors in Japan, North America and
Europe.
MANUFACTURING AND SUPPLY
ESI's laser system manufacturing operations consist of electronic
subassembly, laser production and system final assembly. Principal production
facilities are headquartered in Portland, Oregon. Miniature capacitor test and
production systems are manufactured by ESI's Palomar subsidiary near San Diego.
The Company also uses qualified manufacturers to supply many components of its
products.
Page 11 of 48
ESI's laser systems use high performance computers, peripherals, lasers and
other components from various vendors, all obtained under purchase agreements.
Some components used by the Company are obtained from a single source or a
limited group of suppliers. An interruption in the supply of a particular
component could require substitutions which would have a temporary adverse
impact on the Company. ESI believes it has excellent relationships with its
suppliers; it has not experienced any material shortages from its contractors.
EMPLOYEES
As of May 31, 1995, the Company employed 738 persons, including 168 in
engineering and research and development, 314 in manufacturing and 137 in
marketing, sales and customer service and support. Many of the Company's
employees are highly skilled, and the Company's success will depend in part upon
its ability to attract and retain such employees, who are in great demand. The
Company has never had a work stoppage or strike and no employees are represented
by a labor union or covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company has a policy of seeking patents when appropriate on inventions
relating to new products and improvements which are discovered or developed as
part of the Company's on-going research, development and manufacturing
activities. The Company owns 34 United States patents and has applied for ten
patents in the United States. In addition, the Company has 36 foreign patents
and has applied for 25 additional foreign patents, 14 of which are pending in
Japan. Although the Company's patents are important, the Company believes that
the success of its business depends to a greater degree on the technical
competence and innovation of its employees.
The Company relies on copyright protection for its proprietary software.
The Company also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques, or that the Company can meaningfully protect its trade secrets.
Some customers using certain products of the Company have received a notice
of infringement from Jerome H. Lemelson, alleging that equipment used in the
manufacture of semiconductor products infringes patents issued to Mr. Lemelson
relating to "machine vision" or "barcode reader" technologies. Certain of these
customers have notified the Company that they may be seeking indemnification
from the Company for any damages and expenses resulting from this matter. One of
the Company's customers recently settled litigation with Mr. Lemelson, and
several other customers are currently engaged in litigation involving
Mr. Lemelson's patents. While the Company cannot predict the outcome of this or
similar litigation or its effect upon the Company, the Company believes that it
will not have a material adverse effect on its financial condition or results of
operations.
Page 12 of 48
ITEM 2. PROPERTIES
The Company's executive and administrative offices, and principal laser
system manufacturing facilities are located in a two-building complex on 16
acres in Sunset Science Park, in Portland, Oregon. The buildings are owned by
ESI, and contain approximately 134,000 square feet of floor space. Chicago
Laser leases 45,000 square feet of manufacturing and office space in Des
Plaines, Illinois. XRL, Inc., acquired in July 1995, leases approximately
14,000 square feet of industrial space in Canton, Massachusetts.
Palomar is located in an owned 64,000 square foot plant on ten acres of land in
Escondido, California.
The Company leases 7,000 square feet of office space in Portland, Oregon for its
Vision Products Division. In addition, the Company also leases office and
service space in several additional locations in the United States, and in seven
foreign countries.
The Company believes its facilities are adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter ended May 31, 1995.
Page 13 of 48
ITEM 4(A): EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, and their ages and positions as of May
31, 1995, are as follows:
NAME AGE POSITION
---- --- --------
Donald R. VanLuvanee 51 President, Chief Executive Officer and Director
Robert C. Cimino 50 Director of Human Resources
Barry L. Harmon 41 Senior Vice President, Finance and Chief Financial Officer
Jonathan C. Howell 41 Managing Director, Intelledex Vision Products
Mark W. Klug 56 Vice President and President of Palomar Systems, Inc.
David B. Moser 48 Vice President, Business Development
Larry T. Rapp 55 Corporate Secretary and Legal Manager
Joseph L. Reinhart 36 Director of Business Development
Joseph Z. Rivlin 60 Vice President, Trim Products
E. Frederick Schiele 43 Director of Manufacturing
Vernon R. Swearingen 55 Vice President, Portland Business Unit
Edward J. Swenson 56 Senior Vice President, Advanced Research and Development
Richard M. Walker 54 Vice President, Semiconductor Systems Business Unit
Mr. VanLuvanee joined the Company in July 1992 as President, Chief
Executive Officer and a Director. From July 1991 to July 1992, Mr. VanLuvanee
was President, Chief Executive Officer and a director at Mechanical Technology
Incorporated, a supplier of contract research and development services and a
manufacturer of technologically advanced equipment. From 1990 to 1991, he was
President and Chief Executive Officer of BCT Spectrum, Inc., a supplier of
vacuum deposition systems. From 1984 to 1990, he was President, Chief Operating
Officer and a Director of Kulicke and Soffa Industries, Inc., a supplier of
capital equipment and consumables to the microelectronics industry.
Mr. Cimino joined ESI in 1993 as Director of Human Resources. Mr. Cimino
was employed by Eastman Kodak prior to joining ESI. He held management
positions at Kodak in human resources, customer service, sales, and real estate
asset management.
Mr. Harmon joined the Company in September 1992 and has served the Company
in various financial management positions. In January 1995, he was elected
Senior Vice President of Finance and Chief Financial Officer. Mr. Harmon served
as a consultant to the Company in 1992 before joining the Company, and held
various management positions with the Global Private Banking Group of Citibank
from 1985 to 1991. He was employed by Arthur Andersen LLP from 1976 until 1983.
Mr. Harmon is a licensed CPA.
Mr. Howell joined ESI in April 1993 as Director of MIS. In June 1995, he
was appointed Managing Director of the Vision Products Business Unit. Mr.
Howell has extensive management experience from Citibank, Gulf and Western and
Arthur Young & Co.
Page 14 of 48
Mr. Klug was appointed President and General Manager of Palomar
Systems, Inc. in August 1992 and in April 1993 was elected Corporate Vice
President of the Company. From 1988 to 1992, Mr. Klug was Vice President of
Engineering for Symtek Systems, Inc., and between 1983 and 1988 he held senior
management positions with Kulicke and Soffa Industries, Inc., including Senior
Vice President of U.S. Operations and Vice President of Engineering.
Mr. Moser joined the Company in October 1991 as the General Manager of the
Intelledex Vision Products Division. In January 1993 Mr. Moser was appointed
director of Portland Manufacturing. In January 1994 he became Vice President of
Business Development. From 1977 to 1990, Mr. Moser held various general and
engineering management positions with Tektronix, Inc.
Mr. Rapp joined the Company in 1966 and has served in various capacities in
engineering. In 1982 he became the Government Relations and Patent Manager. He
served as Assistant Secretary from 1988 to 1991, and in January 1992 was elected
Corporate Secretary and Legal Manager.
Mr. Reinhart joined ESI in 1993 as Communications and Contracts Manager and
was promoted to Director of Business Development in April 1995. His experience
includes finance, venture funding, mergers and acquisitions and administration
in high-technology businesses.
Mr. Rivlin, who joined the Company in 1994, was elected Vice President of
ESI's Laser Trimming Products Business Unit in February 1995. Prior to joining
ESI, Mr. Rivlin was Vice President of Sales and Service of Solbourne Computer,
and President and CEO of XRL, Inc. He has held other management positions at
GenRad, Fairchild Camera and Instrument Corp., and Veeco Instruments, Inc.
Mr. Schiele joined ESI in 1993 as Materials Manager and assumed Portland
Manufacturing responsibilities in February 1994. Previously, Mr. Schiele held
senior and general management positions at Xerox, INMOS, and RTE Corporation.
Mr. Swearingen joined the Company in November 1992 as Director of Laser
Systems Business Unit and was elected Vice President of the Portland Business
Unit in April 1993. Previously Mr. Swearingen was President of Quantum
Engineering, Inc., a project engineering firm, from 1990 to 1991, and he held a
management position with Kulicke and Soffa Industries, Inc. from 1988 to 1990.
Mr. Swenson joined the Company in 1961 as a project and applications
engineer. In 1970, he initiated the manufacture of computer-controlled laser
systems for trimming and scribing microcircuits. He became Manager of the
Systems Business Unit in 1978, Vice President, Advanced Development in 1979,
Vice President, Advanced Technology Division in 1985 and Senior Vice President,
Advanced Technology Group in 1987.
Mr. Walker joined ESI in 1994 and was elected to Vice President of
Semiconductor Systems Business Unit in April 1995. Previously, Mr. Walker was
Senior Vice President of Customer Operations at ATEC Corporation, a manufacturer
of laser-based mask making equipment for the semiconductor industry. He has
also held various management positions at Applied Materials and General Electric
Corporation.
Page 15 of 48
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
------- -----------------------------------------------------------------
MATTERS
-------
COMMON STOCK PRICES/DIVIDENDS
The Company's Common Stock trades on the Nasdaq National Market under the symbol
ESIO. The following table sets forth, for the fiscal quarters indicated, the
high and low sale price for the Common Stock as reported on the Nasdaq National
Market.
FISCAL QUARTER 1995 1994
-------------- ---- ----
HIGH LOW CLOSING HIGH LOW CLOSING
---- --- ------- ---- --- -------
1st Quarter....... $13-3/4 $ 8-5/8 $12-3/8 $14-3/4 $ 9-1/8 $14-5/8
2nd Quarter....... 20-1/4 12-1/4 19-3/8 17 10-3/4 13-3/4
3rd Quarter....... 23-1/4 17-1/2 18-7/8 15-1/2 12-1/2 13-3/4
4th Quarter....... 29-5/8 18-3/4 24-3/8 16 9-1/4 10-1/2
The Company has not paid any cash dividends on its Common Stock during the last
five fiscal years. The Company currently intends to retain its earnings for its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
The approximate number of shareholders of record at May 31, 1995 was 387.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included under "Selected Financial
Data" on page 1 of the Company's Annual Report and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MAY 31, 1995 COMPARED TO FISCAL YEAR ENDED MAY 31, 1994
Consolidated net sales increased $35.7 million or 49.2% to $108.2 million
for fiscal 1995. Excluding the effect of revenue changes related to product
lines sold in fiscal 1994, net sales would have increased $39.7 million or
57.9%. The increasing electronics content in everyday products such as cellular
telephones, personal computers and automobiles is directly related to the
increased demand for ESI's products. Laser system sales increased $24.4 million
or 71.5% primarily as a result of increased unit sales of both laser trimming
systems and memory repair systems. The addition of Chicago Laser Systems, Inc.
(Chicago Laser) in August 1994 contributed $11.8 million to the increased sales
of laser trimming systems. Palomar sales increased $14.1 million or 56.5% as a
result of increased volume of miniature capacitor test and production systems.
Laser service and vision system revenues did not change significantly from the
prior year.
Page 16 of 48
The Company's gross margin percentage improved to 52.5% for fiscal 1995
from 50.6% for fiscal year 1994. The primary factors contributing to this
improvement were increased unit sales of higher gross margin laser systems and
higher sales volume of miniature capacitor test and production systems. In
addition, higher production volumes resulted in reduced per unit manufacturing
costs.
Total operating expenses increased $12.5 million or 44.0% over the prior
year. However, as a percentage of sales, operating expenses declined from 39.0%
for fiscal 1994 to 37.7% for fiscal 1995. Selling, service and administrative
expenses increased $7.6 million or 37.8% as a result of $2.4 million of
increased selling commissions associated with the higher level of sales, $1.3
million in discretionary compensation awards and salary increases, and $2.1
million of salaries and rents associated with the Chicago Laser business.
Research, development and engineering expenses increased $4.9 million or 59.2%
over the prior year as a result of $1.4 million of engineering costs associated
with Chicago Laser, $2.0 million related to compensation increases and salaries
associated with new hires and $0.8 million of increased project material costs
associated with product enhancements and new product development.
Interest income (expense) changed from $0.6 million in net interest expense
in fiscal 1994 to $0.6 million in net interest income in fiscal 1995 as a result
of interest earned on $22.5 million in proceeds from a stock offering and
repaying all debt in November 1994.
Other income (expense) changed from $2.1 million in income in fiscal 1994
to $0.2 million in expense in fiscal 1995; the prior year amount includes a one-
time gain of $2.6 million associated with the disposition of product lines.
The consolidated tax rate of 30.0% for fiscal 1995 is higher than the prior
year rate of 20.9% because higher U.S. earnings were only partially offset by
remaining tax credit carryforwards; the prior year rate reflects higher usage of
both net operating loss and tax credit carryforwards. In addition, higher
taxable earnings for fiscal 1995 by the Company's European and Japanese
subsidiaries and the relatively higher European and Japanese tax rates also
contributed to the increased consolidated tax rate.
ESI reported net income of $11.5 million or $1.53 per share for the year
ended May 31, 1995 compared to net income of $7.9 million or $1.23 per share for
the year ended May 31, 1994. Net income in fiscal 1994 includes an after tax
gain of $1.6 million or $0.24 per share associated with the sale of product
lines.
FISCAL YEAR ENDED MAY 31, 1994 COMPARED TO FISCAL YEAR ENDED MAY 31, 1993
Consolidated net sales increased $4.7 million to $72.6 million for
fiscal 1994. Excluding the effect of revenue changes related to two product
lines sold in fiscal 1994, sales would have increased $8.6 million, or 14.4%.
Laser system sales increased 17.0% or $4.8 million over the prior period,
due primarily to increased unit sales. The laser micromachining product line,
introduced in fiscal 1993, experienced significant growth in fiscal 1994.
Product enhancements providing greater throughput resulted in increased
sales of memory repair systems. Palomar system sales increased 21.0% due
largely to an increase in volume of miniature capacitor test and production
systems sold.
Page 17 of 48
The miniature capacitor materials product line ("materials") was divested
in October, 1993. The materials product line generated approximately $1.0
million in net sales in fiscal 1994 versus $4.4 million for fiscal 1993. In
April, 1994, the instrument product line ("instruments") was divested. Fiscal
1994 net sales for this product line, prior to its divestiture, approximated
$3.0 million, which represents a decrease of approximately $0.6 million from
fiscal 1993.
The Company's gross margin percentage improved to 50.6% for fiscal 1994
from 46.7% for fiscal 1993. The primary factors contributing to this improvement
were increased unit sales of higher gross margin laser systems and higher sales
volume of miniature capacitor test and production systems. In addition, the
continued focus on developing key vendor arrangements has resulted in reduced
per unit direct material costs for both laser systems and miniature capacitor
test and production systems.
Total operating expenses remained flat from the prior year. Selling,
service and administrative expenses increased by approximately $0.9 million from
the prior year as a result of higher selling commissions, employee bonuses and
increased legal costs related to corporate activities. These increases were
offset by reduced research and development expenses in the form of
reimbursements of approximately $0.7 million from ARPA for the development of a
laser interconnect and repair system for flat panel display manufacturing.
Other income increased $2.2 million over fiscal 1993 primarily as a result
of the $2.1 million gain on the sale of the materials product line and an
approximately $0.5 million gain on the sale of the instruments product line.
The consolidated tax rate of 20.9% for fiscal 1994 is higher than the prior
year's rate of 14.2% because higher U.S. earnings were only partially offset by
remaining net operating loss and tax credit carryforwards in fiscal 1994,
compared to fiscal 1993, for which no U.S. federal taxes were accrued. In
addition, higher taxable earnings for fiscal 1994 by the Company's Japanese
subsidiary and the relatively higher Japanese tax rate also contributed to the
increased consolidated tax rate.
ESI reported net income of $7.9 million, or $1.23 per share, for fiscal
1994, which represents a significant increase when compared to net income of
$2.2 million or $0.37 per share, for fiscal 1993. Net income in fiscal 1994
includes an after-tax gain of $1.6 million or $0.24 per share associated with
certain transactions, primarily the divestiture of the materials and instruments
product lines.
Page 18 of 48
LIQUIDITY AND CAPITAL RESOURCES
The Company's current sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $28.4 million, accounts receivable
of $33.3 million and a $7.0 million line of credit which has no outstanding
borrowings. ESI has no long-term or bank debt and a current ratio of 6.1:1;
working capital increased to $76.1 million at May 31, 1995 from $36.2 at May 31,
1994. The capital requirements for the Company's current businesses are
satisfied by existing sources. The Company may, from time to time, as market
and business conditions warrant, invest in or acquire complimentary businesses,
products or technologies. The Company may require additional equity or debt
financings to fund such activities, which could result in additional dilution to
the Company's shareholders. Subsequent to May 31, 1995, the Company acquired
all of the outstanding stock of XRL, Inc. in exchange for $1.1 million in cash
and 206,867 shares of restricted common stock. In connection with the purchase,
the Company will record a one-time acquired research and development charge
against pre-tax earnings of approximately $6.0 million during the first quarter
of fiscal 1996.
The Company's business depends in large part upon the capital expenditures
of manufacturers of electronic devices, including miniature capacitors and
DRAMs, and circuits used in wireless telecommunications equipment, including
pagers and cellular phones, automotive engine controls, and computers. The
markets for products manufactured by the Company's customers are cyclical and
have historically experienced periodic downturns, which often have had a
negative effect on the demand for capital equipment such as that sold by the
Company. There is no assurance that these markets will not experience downturns
in the future or that such downturns would not have a material adverse effect on
the Company's operating results. In addition, several large, multinational
electronics companies constituted 47.7% of the Company's fiscal 1995 sales; the
loss of any of these customers would be significant.
The market for the Company's products is characterized by rapidly changing
technology and evolving industry standards. The Company believes that its
future success will depend on its ability to develop and manufacture new
products and product enhancements and to introduce them successfully into the
market. Failure to do so in a timely fashion could harm the Company's
competitive position. The announcements or introductions of new products by the
Company or its competitors may adversely affect the Company's operating results,
since these announcements or introductions may cause customers to defer or
forego ordering products from the Company's existing product lines.
International sales accounted for 70.9% of the Company's net sales for
fiscal 1995. The Company expects that international sales will continue to
represent a significant percentage of net sales in the future. As a result, a
significant portion of the Company's net sales will be subject to certain risks,
including changes in demand resulting from fluctuations in interest and currency
exchange rates, as well as factors such as government financed competition,
changes in trade policies, tariff regulations, difficulties in obtaining U.S.
export licenses and the difficulties of staffing and managing foreign
operations.
Page 19 of 48
Most of the Company's sales transactions are based in dollars and the
Company's products are made in the United States. Many Japanese customers pay
in yen; therefore, ESI hedges these sales transactions to mitigate currency
risks. The European and Asian sales subsidiaries' operating expenses
are denominated in their respective local currencies. These transactions
represent approximately 20.2% of total consolidated operating expenses, equally
split between Europe and Asia. Changes in the value of the local currency, as
measured in U.S. dollars, will commensurably increase or decrease operating
expenses.
A SUMMARY OF CASH FLOW ACTIVITIES IS AS FOLLOWS:
1995 1994 1993
---- ---- ----
CASH FLOWS (USED IN) PROVIDED BY:
OPERATING ACTIVITIES.................... $ (1,559) $ 5,883 $ 2,434
INVESTING ACTIVITIES(1)................. (21,455) 4,666 (749)
FINANCING ACTIVITIES.................... 24,524 (4,706) (2,097)
EFFECT OF EXCHANGE RATES................ 1,654 (413) (169)
-------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. $ 3,164 $ 5,430 $ (581)
-------- ------- -------
-------- ------- -------
(1) Reflects the net purchase of $17.0 million in marketable debt securities
during fiscal 1995.
OPERATING ACTIVITIES: Operating activities used $1.6 million in cash. The
increase in accounts receivable of $15.6 million is attributable to the overall
increase in sales of 49.2% over the prior year as well as the increase in sales
to Japan, Korea and Taiwan; the Company experiences lengthier collection cycles
in these countries. The increase in inventory of $2.9 million results from the
substantial increase in business activity at the Palomar subsidiary and the
relocation of the Chicago Laser manufacturing facility from Des Plaines,
Illinois to Portland, Oregon in the first quarter of fiscal 1996. With the
relocation, most vendors for Chicago Laser products will be changed; the Company
made a competitive decision to have inventory on hand for prompt shipment during
the transition period. Deferred income taxes also increased $1.6 million; the
deferred tax valuation allowance of prior years was reversed in fiscal 1995
reflecting the Company's continued profitability. As a result of the increased
level of business, liabilities, primarily in the form of accounts and income
taxes payable, increased $5.1 million.
INVESTING ACTIVITIES: Net cash of $21.5 million was used in investing
activities; proceeds from the Company's stock offering were used to make net
purchases of $17.0 million in highly liquid marketable debt securities. In
addition, the Company used $3.0 million to (1) purchase fully integrated
manufacturing and distribution software, (2) upgrade computing resources and (3)
improve its operational capabilities by investing in equipment that will
decrease costs and improve quality.
FINANCING ACTIVITIES: Net cash of $24.5 million was generated from financing
activities. In November 1994, the Company completed a stock offering of 1.38
million shares at $17.50 per share, which generated $22.5 million in proceeds
after consideration of broker commissions and offering expenses. Stock option
exercises provided $2.1 million in cash proceeds and $1.1 million in related
tax benefits. This activity increased significantly due to the increased value
of the Company's stock and the exercise of options scheduled to expire during
fiscal 1995. Approximately $1.2 million was used to retire debt related to the
Company's executive and administrative office building and short term notes
assumed with the Chicago Laser acquisition.
Page 20 of 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31,
-------
1995 1994
-------- --------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents........................ $ 11,385 $ 8,221
Securities available for sale.................... 17,011 --
Trade receivables, less allowance for doubtful
accounts of $299 and $171 at May 31, 1995 and
1994........................................... 33,331 16,062
Inventories --
Finished goods................................. 2,687 2,086
Work-in-process................................ 7,225 5,852
Raw materials and purchased parts.............. 15,566 11,727
-------- --------
Total inventories............................ 25,478 19,665
Deferred income taxes............................ 2,946 --
Other current assets............................. 1,018 373
-------- --------
Total current assets........................... 91,169 44,321
PROPERTY AND EQUIPMENT, AT COST.................... 36,003 32,976
Less--Accumulated depreciation................... (20,387) (18,384)
-------- --------
Net property and equipment..................... 15,616 14,592
OTHER ASSETS....................................... 3,813 3,453
-------- --------
$110,598 $ 62,366
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 7,002 $ 3,149
Accrued liabilities --
Payroll related................................ 2,324 2,326
Income taxes................................... 1,258 --
Other.......................................... 3,464 1,632
-------- --------
Total accrued liabilities...................... 7,046 3,958
Deferred revenue................................. 1,032 199
Long-term debt due within one year............... -- 768
-------- --------
Total current liabilities...................... 15,080 8,074
OTHER LONG-TERM LIABILITIES........................ 1,074 745
-------- --------
Total liabilities.............................. 16,154 8,819
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000 shares
authorized; no shares issued.................... -- --
Common stock, without par value; 40,000 shares
authorized; 8,374 and 6,420 shares issued and
outstanding at May 31, 1995 and May 31, 1994.... 49,762 22,097
Retained earnings................................ 44,682 31,450
-------- --------
Total shareholders' equity..................... 94,444 53,547
-------- --------
$110,598 $62,366
-------- --------
-------- --------
The accompanying notes are an integral part of these statements.
Page 21 of 48
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MAY 31,
------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................... $108,215 $72,550 $67,851
Cost of sales................................ 51,413 35,838 36,141
-------- ------- -------
Gross margin............................... 56,802 36,712 31,710
Operating expenses:
Selling, service and administrative........ 27,635 20,049 19,189
Research, development and engineering...... 13,108 8,235 9,027
-------- ------- -------
Total operating expenses................. 40,743 28,284 28,216
-------- ------- -------
Operating income............................. 16,059 8,428 3,494
Interest income (expense).................... 608 (557) (771)
Other income (expense)....................... (210) 2,081 (108)
Income before income taxes................... 16,457 9,952 2,615
Provision for income taxes................... 4,940 2,078 371
-------- ------- -------
Net income................................... $ 11,517 $ 7,874 $ 2,244
-------- ------- -------
-------- ------- -------
Net income per share......................... $ 1.53 $ 1.23 $ 0.37
-------- ------- -------
-------- ------- -------
Weighted average number of shares used in
computing per share amounts................. 7,510 6,414 6,146
The accompanying notes are an integral part of these statements.
Page 22 of 48
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1993, 1994 AND 1995
COMMON STOCK
------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ------- -------- -------
(IN THOUSANDS)
BALANCE AT MAY 31, 1992........................... 6,117 $19,619 $21,914 $41,533
Net income...................................... -- -- 2,244 2,244
Stock compensation agreements:
Chairman compensation........................... 15 72 -- 72
Non-employee directors stock incentive plan..... 7 13 -- 13
Stock plans:
Employee stock purchase plan.................. 13 58 -- 58
Exercise of stock options..................... 30 199 -- 199
Cumulative translation adjustment............... -- -- (169) (169)
----- ------- ------- -------
BALANCE AT MAY 31, 1993........................... 6,182 19,961 23,989 43,950
Net income...................................... -- -- 7,874 7,874
Non-employee directors stock incentive plan..... -- 25 -- 25
Stock plans:
Employee stock purchase plan.................. 7 80 -- 80
Reduction of loans to employees............... -- 30 -- 30
Exercise of stock options..................... 231 1,479 -- 1,479
Tax benefit of stock options exercised........ -- 522 -- 522
Cumulative translation adjustment............... -- -- (413) (413)
----- ------- ------- -------
BALANCE AT MAY 31, 1994........................... 6,420 22,097 31,450 53,547
Net income...................................... -- -- 11,517 11,517
Non-employee directors stock incentive plan..... -- 19 -- 19
Stock plans:
Employee stock purchase plan.................. 7 141 -- 141
Exercise of stock options..................... 234 1,963 -- 1,963
Tax benefit of stock options exercised........ -- 1,068 -- 1,068
Shares issued for acquisition of Chicago Laser.. 333 1,939 -- 1,939
Shares issued in secondary stock offering....... 1,380 22,535 -- 22,535
Unrealized gain on investments.................. -- -- 61 61
Cumulative translation adjustment............... -- -- 1,654 1,654
----- ------- ------- -------
BALANCE AT MAY 31, 1995........................... 8,374 $49,762 $44,682 $94,444
----- ------- ------- -------
----- ------- ------- -------
The accompanying notes are an integral part of these statements.
Page 23 of 48
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31
-----------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 11,517 $ 7,874 $ 2,244
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization.................... 2,618 2,261 3,223
(Gain) loss on sale of property and equipment.... (433) 142 118
Gain on sale of product lines.................... -- (2,623) --
Deferred income taxes............................ (1,626) -- --
Stock compensation agreement..................... 19 25 85
Changes in operating accounts:
(Increase) decrease in trade receivables......... (15,575) 3,920 (6,393)
Increase in inventories.......................... (2,858) (3,670) (1,155)
(Increase) decrease in other current assets...... (347) 24 (31)
Increase (decrease) in accounts payable,
accrued liabilities, deferred revenue and
other long-term liabilities..................... 3,906 (2,070) 2,562
Increase in income taxes......................... 1,220 -- 1,781
-------- ------- -------
Net cash (used in) provided by operating
activities...................................... (1,559) 5,883 2,434
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Chicago Laser subsidiary, net of
cash acquired (1)................................. (707) -- --
Purchases of property and equipment................ (2,989) (2,149) (800)
Proceeds from sale of property and equipment....... 648 2,077 60
Purchase of marketable debt securities............. (20,949) -- --
Proceeds from sales and maturities of marketable
debt securities................................... 4,000 -- --
Proceeds from sale of product lines................ -- 4,843 --
Increase in other assets........................... (1,458) (105) (9)
-------- ------- -------
Net cash (used in) provided by investing
activities...................................... (21,455) 4,666 (749)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to retire long-term debt.................. (768) (6,358) (370)
Reduction of notes payable to banks (2)............ (415) (459) (1,984)
Proceeds from stock offering....................... 22,535 -- --
Proceeds from exercise of stock options and stock
plans and related tax benefit..................... 3,172 2,111 257
-------- ------- -------
Net cash provided by (used in) financing
activities...................................... 24,524 (4,706) (2,097)
-------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH & CASH
EQUIVALENTS....................................... 1,654 (413) (169)
-------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS............ 3,164 5,430 (581)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 8,221 2,791 3,372
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 11,385 $ 8,221 $ 2,791
-------- ------- -------
-------- ------- -------
Cash payments for interest were $69, $654, and $802 in 1995, 1994, and 1993,
respectively.
Page 24 of 48
(1) Acquisition of Chicago Laser:
Assets less liabilities assumed, net of cash acquired........... $(2,646)
Issuance of common stock........................................ 1,939
-------
Net cash used to acquire Chicago Laser.......................... $ (707)
(2) For the year ended May 31, 1995, this includes debt assumed related to the
Chicago Laser acquisition which was subsequently paid off in the same year.
The accompanying notes are an integral part of these statements.
Page 25 of 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Electro Scientific Industries, Inc., and its subsidiaries (the Company), all of
which are wholly owned except Oyang ESI, an 80% owned joint venture. All
material intercompany accounts and transactions have been eliminated.
BUSINESS ENVIRONMENT
ESI sells production equipment to companies in the highly cyclical
electronics industry. The customer base primarily consists of a small number of
large multinational electronics companies. The purchase of the Company's
product has a significant impact on most customer's capital budgets. The
combination of these factors can result in large swings in working capital and
results of operations from year to year for the Company.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency translation in accordance with
Statement of Financial Accounting Standards No. 52. The total cumulative
translation adjustment included in retained earnings is $2,022, $368, and $781
at May 31, 1995, 1994 and 1993, respectively. Foreign currency transaction
losses were $227, $22, and $277 for the years ended May 31, 1995, 1994 and 1993,
respectively. These amounts are included in other income (expense) in the
accompanying Consolidated Statements of Income.
STATEMENTS OF CASH FLOWS
For the purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments with a maturity of three months or less at date of
purchase to be cash equivalents.
Page 26 of 48
INVENTORIES
Inventories are principally valued at standard costs which approximate the
lower of cost (first-in, first-out) or market. Costs utilized for inventory
valuation purposes include material, labor and manufacturing overhead.
DEPRECIATION AND CAPITALIZATION POLICIES
Depreciation is determined on the declining balance and straight-line
methods based on the following useful lives: buildings: 25 to 40 years; building
improvements: 5 to 15 years; and machinery and equipment: 3 to 10 years.
Expenditures for maintenance, repairs and minor improvements are charged to
expense. Major improvements and additions are capitalized. When property is sold
or retired, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in other income (expense).
PRODUCT WARRANTY
The Company provides for estimated future costs related to warranty expense
on products sold.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common shares and common stock equivalents (stock options) outstanding.
TAXES ON INCOME
Deferred income taxes have not been provided on unremitted earnings of
foreign subsidiaries as the Company believes any U.S. tax on such earnings would
be substantially offset by associated foreign tax credits. The amount of any
unrecognized deferred tax liability associated with these unremitted foreign
earnings cannot practically be estimated.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment except for large
scale production contracts for complex equipment built to a buyer's
specifications. Revenue from these large scale production contracts is
recognized on the percentage-of-completion method.
Page 27 of 48
SALES OF PRODUCT LINES
During the second quarter of fiscal year 1994, the Company sold the product
lines and certain assets of the MSI Material Division of its wholly owned
subsidiary Palomar Systems, Inc., to Ferro Corporation of Cleveland, Ohio. The
proceeds of $4,000 were received in cash and the funds were used to reduce the
current portion of long-term debt and other short-term debt. A gain of $2,100
from the sale of these product lines was reflected in other income (expense) in
the accompanying Consolidated Statements of Income.
During the fourth quarter of the year ended May 31, 1994, the Company sold
its electronic calibration standards and measurement instrument product lines to
Tegam, Inc. of Geneva, Ohio. The proceeds include cash and notes of $800 and
potential royalties on future sales of the products. The agreement also provides
for future sales of consigned inventory. A gain of $500 from the sale of these
product lines is included in other income (expense) in the accompanying
Consolidated Statements of Income.
PROPERTY AND EQUIPMENT
Major classes of property and equipment consists of the following:
MAY 31,
-------
1995 1994
------- -------
Land.................................. $ 3,419 $ 3,420
Buildings and improvements............ 12,588 12,487
Machinery and equipment............... 19,493 16,467
Construction in progress.............. 503 602
------- -------
$36,003 $32,976
------- -------
------- -------
NOTES PAYABLE
The Company has a short-term revolving line of credit with a foreign bank
totaling $7,000. This line expires in September, 1995. Management expects to
renew the revolver under similar terms or secure alternate financing. At the
Company's option, the interest rate is either prime or LIBOR plus 1.25 percent.
There were no borrowings outstanding under the line at May 31, 1995 or during
fiscal 1995.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities represent a termination reserve for the
employees of the Company's Japanese subsidiary as mandated by Japanese law.
EMPLOYEE BENEFIT PLANS
The Company has an employee savings plan under the provisions of section
401(k) of the Internal Revenue Code. The Company contributed $334, $255, and
$245 to the plan for the years ended May 31, 1995, 1994 and 1993, respectively.
Page 28 of 48
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the liability method specified by SFAS 109, the deferred tax assets
and liabilities are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates for the years in which the taxes are expected to be paid.
The net deferred tax asset as of May 31, 1995 and May 31, 1994 consists of
the following tax effects relating to temporary differences and carryforwards:
MAY 31,
-------
1995 1994
------ -------
Deferred tax liabilities:
Tax in excess of book depreciation....................... $ 395 $ 352
Import promotion reserve on foreign earnings............. 67 172
Other.................................................... -- 25
------ -------
Total deferred tax liabilities......................... 462 549
------ -------
Deferred tax assets:
Inventory reserves....................................... 1,617 1,652
Vacation pay............................................. 426 359
Warranty costs........................................... 314 242
Accrued compensation..................................... 202 230
Deferred revenue......................................... 275 78
Other.................................................... 389 333
------ -------
3,223 2,894
Tax loss carryforwards................................... 185 68
------ -------
Total deferred tax assets.............................. 3,408 2,962
------ -------
Net deferred tax asset..................................... 2,946 2,413
Valuation allowance........................................ -- (2,413)
------ -------
Net deferred tax........................................... $2,946 $ --
------ -------
------ -------
During fiscal 1995 and 1994 the net change in the valuation allowance was a
reduction of $2,413 and $2,146, respectively, and primarily results from
continued profitability and a realization in fiscal 1995 and 1994 of significant
tax loss and credit carryforwards.
Page 29 of 48
The components of income before income taxes and the provision for income
taxes are as follows:
MAY 31,
-------
1995 1994 1993
---- ---- ----
Income before income taxes:
Domestic............................................. $13,369 $9,788 $2,050
Foreign.............................................. 3,088 164 565
------- ------ ------
$16,457 $9,952 $2,615
------- ------ ------
------- ------ ------
Provision for income taxes:
Current:
Federal and State.................................. $ 3,762 $1,119 $ --
Foreign............................................ 1,736 437 371
------- ------ ------
5,498 1,556 371
Deferred............................................. (1,626) -- --
Income tax effect of stock options exercised......... 1,068 522 --
------- ------ ------
Total provision for income taxes................... $ 4,940 $2,078 $ 371
------- ------ ------
------- ------ ------
In fiscal years 1995, 1994, and 1993 certain foreign jurisdictions
experienced losses for which the related tax benefit did not meet the
recognition criteria under SFAS 109. In accordance with SFAS 109, the tax
benefit related to stock option exercises has been recorded as an increase to
Common Stock rather than a reduction to the provision for income taxes.
A reconciliation of the provision for income taxes at the federal statutory
income tax rate to the provision for income taxes as reported is as follows:
MAY 31,
-------
1995 1994 1993
---- ---- ----
Provision computed at federal statutory rate............ $ 5,595 $ 3,384 $ 889
Higher than U.S. tax rates in foreign jurisdictions..... 687 256 179
Foreign operating losses with no tax benefits........... 66 307 --
Impact of U.S. tax loss and credit carryforwards........ (1,236) (2,232) (697)
Revision of prior year estimates........................ -- 274 --
Impact of state taxes................................... 273 101 --
Benefit of foreign sales corporation (FSC).............. (217) -- --
Other, net.............................................. (228) (12) --
------- ------- -----
$ 4,940 $ 2,078 $ 371
------- ------- -----
------- ------- -----
Consolidated income tax payments (refunds) amounted to $4,388, $1,663, and
$(1,394), for the year ended May 31, 1995, 1994 and 1993, respectively.
Page 30 of 48
COMMITMENTS AND CONTINGENCIES
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Derivatives are used
to manage well defined foreign currency risks: the Company enters into
forward exchange contracts to hedge the value of accounts receivable
denominated in a foreign currency. Foreign exchange contracts have gains and
losses that are recognized at the settlement date. At May 31, 1995 and 1994,
the company had forward exchange contracts totaling $6,863 and $5,054,
respectively. These contracts generally mature in less than one year and the
counterparty is a major, widely recognized international bank; therefore,
risk of credit loss as a result of non performance by the bank is minimal.
The use of derivatives does not have a significant effect on the Company's
results of operations or its financial position.
The Company leases equipment and office space under operating leases
which are non-cancelable and expire on various dates through 2002. Rental
expense was $1,402, $1,050, and $1,112, for the years ended May 31, 1995,
1994 and 1993, respectively. The aggregate minimum commitment for rentals
under operating leases beyond May 31, 1995 is not significant.
The Company is a party to various legal proceedings. Management believes
that the outcome of such proceedings will not have a material effect on the
business, financial position or results of operations of the Company.
SECURITIES AVAILABLE FOR SALE
In fiscal 1995, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). The Company classifies its marketable debt securities
as Securities Available for Sale in the accompanying Consolidated Balance
Sheet. The fair market value of these securities at May 31, 1995 is $17,011.
All of ESI's marketable debt securities are invested in local government
securities with maturities of less than one year from the date of purchase;
the amortized cost of these securities is $16,950 at May 31, 1995. Interest
receivable of $300 is reflected in Other Current Assets in the accompanying
Consolidated Balance Sheet.
During fiscal 1995, proceeds of $2,000 resulted from the sale of
securities; there was no realized gain or loss associated with the sale.
There was no effect on prior year retained earnings of initially applying
this statement.
Page 31 of 48
SHAREHOLDER RIGHTS PLAN
In May, 1989, the Company adopted a Shareholder Rights Plan and declared
a dividend distribution of one Right for each outstanding share of Common
Stock, payable to holders of record on June 23, 1989. Under certain
conditions, each Right may be exercised to purchase 1/100 of a share of
Series A No Par Preferred Stock at a purchase price of $55, subject to
adjustment. The Rights are not presently exercisable and will only become
exercisable following the occurrence of certain specified events. If these
specified events occur, each Right will be adjusted to entitle its holder to
receive, upon exercise, Common Stock (or, in certain circumstances, other
assets of the Company) having a value equal to two times the exercise price
of the Right or each Right will be adjusted to entitle its holder to receive,
upon exercise, common stock of the acquiring company having a value equal to
two times the exercise price of the Right, depending on the circumstances.
The Rights expire on May 12, 1999 and may be redeemed by the Company for
$0.01 per Right. The Rights do not have voting or dividend rights, and until
they become exercisable, have no dilutive effect on the earnings of the
Company.
STOCK PLANS
The Company has stock option plans for officers and employees. Awards
under the stock option plans are determined by the Compensation Committee of
the Board of Directors. Stock appreciation rights may be granted in
connection with options, although no options have been granted that include
stock appreciation rights. Option prices are at fair market value at the date
of the grant and all expire ten years from date of grant.
The following table summarizes activity in plans for the years ended May
31, 1993, 1994 and 1995:
OPTIONS OUTSTANDING
------------------------------
SHARES PRICE PER SHARE
--------- -----------------
BALANCE AT MAY 31, 1992 ...................... 751,808 $ 3.50 - $14.50
Granted .................................... 191,520 2.63 - 8.50
Exercised .................................. (30,029) 4.88 - 9.88
Canceled or expired ........................ (175,478) 3.50 - 13.38
-------- ------ ------
BALANCE AT MAY 31, 1993 ...................... 737,821 $ 2.63 - $14.50
Granted .................................... 257,660 9.88 - 10.50
Exercised .................................. (231,395) 3.50 - 16.13
Canceled or expired ........................ (44,503) 3.50 - 13.88
-------- ------ ------
BALANCE AT MAY 31, 1994 ...................... 719,583 $ 2.63 - $14.50
Granted .................................... 220,367 10.50 - 24.00
Exercised .................................. (233,780) 2.63 - 14.25
Canceled or expired ........................ (30,862) 3.50 - 14.25
-------- ------ ------
BALANCE AT MAY 31, 1995 ...................... 675,308 $ 2.63 - $24.00
-------- ------ ------
-------- ------ ------
Options exercisable at May 31, 1995 .......... 167,598 $ 2.63 - $16.75
Options available for grant at May 31, 1995 .. 267,693
Page 32 of 48
The Company has an employee stock purchase plan which allows qualified
employees to direct up to 15 percent of monthly base pay for purchases of
stock. The purchase price for shares purchased under the Plan is 85% of the
fair market value of stock on the purchase date.
The Company had a non-employee director stock incentive plan which was
terminated in fiscal year 1994.
GEOGRAPHIC REPORTING
The Company operates in the capital equipment segment of the electronic
industry with geographic operations in the United States, Europe and the
Pacific Rim. Transfers between geographic areas are made at prevailing market
prices. Operating income is total revenue less operating expenses. In
computing operating income, none of the following items have been added or
deducted: interest income (expense), other income (expense) or provision for
income taxes. Identifiable assets are those assets of the Company that are
identified with the operations in each geographic location. Corporate assets
are primarily cash and cash equivalents and securities available for sale.
Export sales included in United States sales to unaffiliated customers
for the years ended May 31, 1995, 1994 and 1993 were as follows:
EUROPE PACIFIC RIM TOTAL
------ ----------- -------
May 31, 1995 ................... $3,741 $33,890 $37,631
May 31, 1994 ................... 853 15,234 16,087
May 31, 1993 ................... 3,620 10,618 14,238
During fiscal 1995 and 1994, one customer accounted for 12.4% and 10.8%,
respectively, of consolidated net sales. In fiscal year 1993, there were no
sales to any one customer in excess of 10% of consolidated net sales.
Page 33 of 48
The following data represents segment information for the years ending
May 31:
ADJUSTMENTS
UNITED PACIFIC AND
1995 STATES EUROPE RIM ELIMINATIONS CONSOLIDATED
---- ------- ------- -------- ------------ ------------
Sales to unaffiliated customers ..... $69,168 $15,869 $23,178 $ -- $108,215
Transfers between geographic areas .. 24,631 9 434 (25,074) --
------- ------- ------- --------- --------
Total revenue ....................... $93,799 $15,878 $23,612 $ (25,074) $108,215
Operating income .................... $12,415 $ 791 $ 2,605 $ 248 $ 16,059
------- ------- ------ --------- --------
Identifiable assets at May 31, 1995 . $83,032 $ 7,994 $10,922 $ (19,746) $ 82,202
------- ------- ------- ---------
Corporate assets .................... 28,396
--------
Total assets at May 31, 1995 ........ $110,598
--------
1994
----
Sales to unaffiliated customers ..... $48,947 $ 7,910 $15,693 $ -- $ 72,550
Transfers between geographic areas .. 14,817 -- 189 (15,006) --
------- ------- ------- --------- --------
Total revenue ....................... $63,764 $ 7,910 $15,882 $ (15,006) $ 72,550
------- ------- ------- --------- --------
Operating income (loss) ............. $ 8,130 $ (825) $ 1,055 $ 68 $ 8,428
------- ------- ------- --------- --------
Identifiable assets at May 31, 1994 . $53,650 $2,620 $ 6,390 $ (8,515) $ 54,145
------- ------- ------- ---------
Corporate assets .................... 8,221
--------
Total assets at May 31, 1994 ........ $ 62,366
--------
1993
----
Sales to unaffiliated customers ..... $43,191 $12,596 $12,064 $ -- $ 67,851
Transfers between geographic areas .. 15,374 -- 205 (15,579) --
------- ------- ------- --------- --------
Total revenue ....................... $58,565 $12,596 $12,269 $ (15,579) 67,851
------- ------- ------- --------- --------
Operating income .................... $ 2,715 $ 465 $ 293 $ 21 $ 3,494
------- ------- ------- --------- --------
Identifiable assets at May 31, 1993 . $56,530 $ 3,921 $ 5,472 $ (7,553) $ 58,370
------- ------- ------- ---------
Corporate assets .................... 2,791
--------
Total assets at May 31, 1993 ........ $ 61,161
--------
Page 34 of 48
ACQUISITION
On August 12, 1994, the Company acquired the stock of Chicago Laser
Systems, Inc. ("Chicago Laser"), a privately held company based in Des
Plaines, Illinois. The transaction was completed on August 12, 1994. The
purchase consideration consists of approximately $1,280 in cash and 333,000
shares of ESI stock. The shares are restricted, subject to Securities and
Exchange Commission Rule 144. The transaction was accounted for as a purchase.
The Company has recorded the acquisition at the estimated fair value of
the assets acquired and liabilities assumed including the recognition of
deferred tax assets of $1,320. The following pro forma combined income
statement data for the year ended May 31, 1994 was prepared as if the
acquisition had occurred at the beginning of the period. The impact of
combining the proforma information from June 1 through August 12, 1994 with
the historical results of operations of the Company for the year ended May
31, 1995 was not significant.
PRO FORMA COMBINED
STATEMENT OF INCOME
-------------------
(UNAUDITED)
YEAR ENDED MAY 31, 1994
-----------------------
Net sales ......................... $82,372
Net income ........................ 7,493
Net income per share .............. 1.11
Chicago Laser's fiscal year end was October 31. The above proforma data has
been prepared by adjusting Chicago Laser's income statement data so that it
is within one month of ESI reported amounts.
SUBSEQUENT EVENT
In July 1995, the Company acquired all of the outstanding stock of XRL,
Inc., a privately held company based in Canton, Massachusetts. XRL provides
capital equipment for semiconductor memory yield improvement. The purchase
consideration consists of 206,867 shares of ESI stock and cash of $1,120.
The shares are restricted, subject to Securities and Exchange Rule 144. The
transaction will be accounted for as a purchase. In conjunction with the
acquisition, the Company will record a one-time acquired research and
development charge against pre-tax earnings of approximately $6,000 during
the first quarter of fiscal 1996.
Page 35 of 48
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
YEAR ENDED MAY 31, 1995 1ST 2ND 3RD 4TH
----------------------- QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Net sales.............................. $21,006 $24,803 $29,398 $33,008 $108,215
Gross margin........................... 10,832 13,357 15,606 17,007 56,802
Net income............................. 2,200 2,583 3,176 3,558 11,517
Net income per share................... $ 0.33 $ 0.36 $ 0.39 $ 0.43 $ 1.53(3)
YEAR ENDED MAY 31, 1994 1ST 2ND 3RD 4TH
----------------------- QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Net sales.............................. $20,286 $17,677 $16,951 $17,636 $72,550
Gross margin........................... 9,544 9,407 8,881 8,880 36,712
Net income............................. 1,418 3,061(1) 1,672 1,723(2) 7,874
Net income per share................... $ 0.22 $ 0.48 $ 0.26 $ 0.27 $ 1.23
(1) Second quarter net income in fiscal 1994 includes an after-tax gain of
$1,600 or $0.24 per share related to the sale of the materials product line.
(2) In the fourth quarter of fiscal 1994, the Company adjusted its effective tax
rate which resulted in an increase to net income of $500. The Company was able
to utilize U.S. tax benefits to a larger extent than was previously estimated.
(3) For fiscal year 1995, the quarterly net income per share amounts do not
add up to $1.53 because of changes in average shares outstanding due to the
acquisition of Chicago Laser Systems, Inc. in the first quarter and a stock
offering in the second quarter.
Page 36 of 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Electro Scientific Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Electro
Scientific Industries, Inc. (an Oregon corporation) and subsidiaries as of
May 31, 1995 and 1994, and the related consolidated statements of income,
shareholders' equity, and cash flows for the three years in the period ended
May 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electro
Scientific Industries, Inc. and subsidiaries as of May 31, 1995 and 1994, and
the results of their operations and their cash flows for the three years in
the period ended May 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 11, 1995
Page 37 of 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------- ---------------------------------------------------
The directors of the Company, and their ages and positions as of May 31, 1995
are as follows:
Donald R. VanLuvanee 51 President, Chief Executive Officer and Director
David F. Bolender 63 Chairman of the Board
Douglas C. Strain 75 Vice Chairman of the Board
Larry L. Hansen 67 Director
W. Arthur Porter 54 Director
Vernon B. Ryles, Jr. 57 Director
Keith L. Thomson 55 Director
Mr. VanLuvanee joined the Company in July 1992 as President, Chief
Executive Officer and a Director. From July 1991 to July 1992, Mr. VanLuvanee
was President, Chief Executive Officer and a director at Mechanical
Technology Incorporated, a supplier of contract research and development
services and a manufacturer of technologically advanced equipment. From 1990
to 1991, he was President and Chief Executive Officer of BCT Spectrum, Inc.,
a supplier of vacuum deposition systems. From 1984 to 1990, he was President,
Chief Operating Officer and a Director of Kulicke and Soffa Industries, Inc.,
a supplier of capital equipment and consumables to the microelectronics
industry.
Mr. Bolender has served as a director of the Company since 1988 and was
elected Chairman of the Board of Directors in January 1992. He was President
of the Electric Operations Group of PacifiCorp, Inc., a diversified public
utility, until his retirement in December 1991. He is also a director of
United States National Bank of Oregon and Benson Industries, Incorporated.
Mr. Strain became Vice Chairman of the Board of Directors in October
1985 following his retirement from the Company. He has been a director of the
Company since its incorporation, and he previously served as Chairman of the
Board. Mr. Strain co-founded the Company with his father in 1953 and served
as its President until 1980. Mr. Strain is also a director of Lattice
Semiconductor Corporation.
Mr. Hansen has been a director of the Company since 1986. He retired in
1992 from the position of Executive Vice President of Tylan General Inc., a
manufacturer of high technology components for industrial processes. Prior to
December 1988 he was Executive Vice President and a director of Varian
Associates, Inc., an electronics manufacturer. Mr. Hansen is also a director
of Signal Technology Corporation.
Page 38 of 48
Dr. Porter has been a director of the Company since 1980. He has been
President of the Houston Advanced Research Center since 1985 and an Adjunct
Professor of Electrical Engineering at Rice University since 1985. From 1987
until 1992 Dr. Porter served as Chairman of the Board of Directors of the
Company. Dr. Porter is also a director of Stewart Information Services Corp.
Mr. Ryles became a director in April 1995. Mr. Ryles is President and
CEO of Poppers Supply Co., a manufacturer of popcorn snacks and
jobber/distributor of recreational food and equipment. He is also a managing
partner of Multnomah Land and Equipment and on the Board of Director's of
Northwest Pipe and Casing.
Mr. Thomson became a director in July 1994. Mr. Thomson is a Vice
President of Intel Corporation and is its Oregon Site Manager. He joined
Intel in 1969.
Information with respect to executive officers of the Company is included
under Item 4(a) of Part I of this Report. No information is required to be
included for Item 405 of Regulation S-K for 1995.
ITEM 11. EXECUTIVE COMPENSATION.
-------- -----------------------
The information required by this item is included under "Board Compensation",
"Executive Compensation" (excluding the performance graph) and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy
Statement for its 1995 Annual Meeting of Shareholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------- ---------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners
and management is included under "Voting Securities and Principal
Shareholders" in the Company's Proxy Statement for its 1995 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------- -----------------------------------------------
None.
Page 39 of 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-------- -----------------------------------------------------------------
(a) Financial Statements and Schedules.
The following documents are included in the Company's 1995 Annual Report to
Shareholders on Form 10K on the pages indicated.
Electro Scientific Industries, Inc.
and Subsidiaries: PAGE
----
Consolidated Balance Sheets as of
May 31, 1995 and 1994 21
Consolidated Statements of
Income for the Years Ended
May 31, 1995, 1994, and 1993 22
Consolidated Statements of
Shareholders' Equity for the Years Ended
May 31, 1995, 1994, and 1993 23
Consolidated Statements of
Cash Flows for the Years Ended
May 31, 1995, 1994, and 1993 24
Notes to Consolidated Financial Statements 26-36
Report of Independent Public Accountants 37
The following schedule and report of independent public accountants are filed
herewith:
Schedule II - Valuation and Qualifying Accounts
Report of Independent Public Accountants on Financial Statement Schedule
All other schedules are omitted as the required information is inapplicable.
Page 40 of 48
(a)(3) Exhibits.
3-A. Restated Articles of Incorporation of the Company. Incorporated
by reference to Exhibit 3-A of the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1991.
3-B. Bylaws of the Company.
4-A The Company agrees to furnish copies of long-term debt agreements
to the Commission upon request.
4-B. Rights Agreement, dated as of May 12, 1989, between the Company
and United States National Bank of Oregon relating to rights issued
to all holders of Company Common Stock. Incorporated by reference to
Exhibit 1 to the Company's Report on Form 8-K dated May 12, 1989.
10-A. ESI 1983 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10-E of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1986.
10-B. ESI 1989 Stock Option Plan. Incorporated by reference to
Appendix A to the Company's definitive Proxy Statement for its
1993 Annual Meeting of Shareholders.
10-C. Form of Indemnity Agreement between the Company and each of its
Directors. Incorporated by reference to Appendix C to the Company's
definitive Proxy Statement for its 1986 Annual Meeting of
Shareholders.
10-D. Form of Severance Agreement between the Company and each of its
executive officers. Incorporated by reference to Exhibit 10-H of
the Company's Annual Report on Form 10K for the fiscal year ended
May 31, 1992.
11. Statement of Calculation of Earnings Per Share.
13. 1995 Annual Report
22. Subsidiaries of Registrant.
23. Consent of Independent Public Accountants.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of fiscal year 1995.
Page 41 of 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 3, 1995 ELECTRO SCIENTIFIC INDUSTRIES, INC.
By /s/ Donald R. VanLuvanee
---------------------------------
Donald R. VanLuvanee
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on August 3, 1995.
Signature Title
(1) Principal Executive, Financial and
Accounting Officers
/s/ Donald R. VanLuvanee President and Chief Executive Officer
----------------------------
Donald R. VanLuvanee
/s/ Barry L. Harmon Senior Vice President of Finance and
-----------------------------
Barry L. Harmon Chief Financial Officer
(2) Directors
/s/ David F. Bolender Chairman of the Board
-----------------------------
David F. Bolender
/s/ Douglas C. Strain Vice Chairman of the Board
-----------------------------
Douglas C. Strain
/s/ Larry L. Hansen Director
-----------------------------
Larry L. Hansen
/s/ W. Arthur Porter Director
-----------------------------
W. Arthur Porter
/s/ Vernon B. Ryles Director
-----------------------------
Vernon B. Ryles
/s/ Keith L. Thomson Director
-----------------------------
Keith L. Thomson
Page 42 of 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Electro Scientific Industries,
Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Electro Scientific Industries, Inc. and
subsidiaries included in this Form 10-K, and have issued our report thereon
dated July 11, 1995. Our audits were made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the
index of financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 11, 1995
Page 43 of 48
SCHEDULE II
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Consolidated)
For the Years Ended May 31, 1993, 1994 and 1995
(thousands of dollars)
ADDITIONS
CHARGED TO
BEGINNING COST AND ENDING
DESCRIPTION BALANCE EXPENSES DEDUCTIONS BALANCE
------------------------------------------------------------------------------------------------
1993
Deducted from asset accounts:
Allowance for doubtful accounts............ $ 282 $ 81 $ 87(1) $ 276
Allowance for excess and obsolete inventory $2,279 $ 233 $ 215(2) $2,297
1994
Deducted from asset accounts:
Allowance for doubtful accounts $ 276 $ 106 $ 211(1) $ 171
Allowance for excess and obsolete inventory $2,297 $1,073 $ 675(2) $2,695
1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 171 $ 319 $ 191(1) $ 299
Allowance for excess and obsolete inventory $2,695 $1,985 $2,309(2) $2,371
(1) Deductions primarily represent accounts written off during the period.
(2) Deductions primarily represent inventory scrapped during the period.
Page 44 of 48
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. EXHIBIT DESCRIPTION PAGE NO.
----------- ------------------- ----------
3-A. Restated Articles of Incorporation of the Company.
Incorporated by reference to Exhibit 3-A of the
Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1991.
3-B. Bylaws of the Company.
4-A. The Company agrees to furnish copies of long-term
debt agreements to the Commission upon request.
4-B. Rights Agreement, dated as of May 12, 1989, between
the Company and United States National Bank of
Oregon relating to rights issued to all holders of
Company Common Stock. Incorporated by reference to
Exhibit 1 to the Company's Report on Form 8-K dated
May 12, 1989.
10-A. ESI 1983 Stock Option Plan, as amended. Incorporated
by reference to Exhibit 10-E of the Company's Annual
Report on Form 10-K for the fiscal year ended May 31,
1986.
10-B. ESI 1989 Stock Option Plan. Incorporated by reference to
Appendix A to the Company's definitive Proxy Statement
for its 1993 Annual Meeting of Shareholders.
10-C. Form of Indemnity Agreement between the Company and
each of its Directors. Incorporated by reference to
Appendix C to the Company's definitive Proxy Statement
for its 1986 Annual Meeting of Shareholders.
10-D. Form of Severance Agreement between the Company and
each of its executive officers. Incorporated by reference
to Exhibit 10-H of the Company's Annual Report on Form 10K
for the fiscal year ended May 31, 1992.
11. Statement of Calculation of Earnings Per Share.
13. 1995 Annual Report
22. Subsidiaries of Registrant.
23. Consent of Independent Public Accountants.
Page 45 of 48