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THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED
PURSUANT TO
RULE 901(d) OF REGULATION S-T
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
(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, 1996 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.
------
The aggregate market value of Common Stock held by nonaffiliates of the
Registrant at June 18, 1996: $194,197,050.
The number of shares of Common Stock outstanding at June 18, 1996: 8,656,726.
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-K into
Document which is incorporated
- - -------- ---------------------
1996 Annual Report to Shareholders Part II
Proxy Statement for 1996 Annual Meeting Part III
of Shareholders
Page 1 of 44
TABLE OF CONTENTS
ITEM OF FORM 10-K PAGE
- - ----------------- ----
PART I
Item 1 - Business. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 - Properties. . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 11
Item 4 - Submission of Matters to a Vote of Security Holders . . . . 11
Item 4(a) -Executive Officers of the Registrant. . . . . . . . . . . . 12
PART II
Item 5 - Market for the Registrant's Common Equity and
Related Shareholder Matters. . . . . . . . . . . . . . 14
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . . 14
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 15
Item 8 - Financial Statements and Supplementary Data . . . . . . . . 19
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . 37
PART III
Item 10 - Directors and Executive Officers of the Registrant. . . . . 37
Item 11 - Executive Compensation. . . . . . . . . . . . . . . . . . . 37
Item 12 - Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 37
Item 13 - Certain Relationships and Related Transactions. . . . . . . 37
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . . . 38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Page 2 of 44
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 believes it is the leading
supplier of advanced laser systems used to adjust (trim) electronic circuitry
and to improve the yield of semiconductor memory devices. ESI believes it is the
leading producer of high-speed test and handling equipment used in the
high-volume production of miniature capacitors. Additionally, ESI designs and
manufactures machine vision products and laser electronic packaging systems for
manufacturers of electronics and other products. ESI'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 semiconductor memory
devices (Fujitsu, Hitachi, Hyundai, IBM, Samsung and Texas Instruments).
ELECTRONICS INDUSTRY OVERVIEW
The electronic content of telecommunications products, automobiles and
personal computers continues to increase 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 in the past 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 components are used in virtually all
electronic products, from inexpensive consumer electronics to the most
sophisticated computers. These components are produced in very large unit
volumes.
The demands upon manufacturers to supply increasing quantities of
electronic components have been accompanied by demands for 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 44
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 electronics
represent the largest end-market applications for electronic devices and
circuits that are produced using ESI's systems. ESI's customers also serve a
wide range of other electronic applications.
ESI 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 a high
return on investment. ESI 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 also serves the machine vision and laser electronic
packaging markets.
LASER TRIMMING SYSTEMS. ESI'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. ESI's laser trimming
systems are also used to tune automotive electronic assemblies such as engine
control circuits.
ESI'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, Sumitomo
and Vishay Intertechnology.
The laser adjusts the electrical performance of an electrical product or
assembly containing many circuits. The laser 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.
ESI's 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.
Page 4 of 44
The following chart summarizes the models, typical applications and key
features of ESI's current laser trimming products:
- - -------------------------------------------------------------------------------
ESI LASER TRIMMING PRODUCTS
BEAM
----
POSITIONING THROUGHPUT WORK
----------- ---------- ----
RESOLUTION (TRIMS PER AREA
---------- ---------- ----
PRODUCT TYPICAL APPLICATION (MICRONS) SECOND) (INCHES)
------- ------------------- --------- ------- --------
Model 4210 Surface mount capacitor and
resistor trimming 2.50 50 4 x 4
Model 977 Test intensive, thick film,
functional trimming 1.55 50 3 x 3
Model 960 Thick film functional trimming 1.27 50 3 x 3
Model 907 Chip resistor trimming 1.27 100 3 x 3
Model 4410 Thick/thin film functional trimming 1.01 15 3 x 3
- - -------------------------------------------------------------------------------
TEST AND PRODUCTION SYSTEMS FOR MINIATURE CAPACITORS. ESI's 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. 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 $4.5 billion
(225 billion units) in 1996. Most of the leading producers are in Japan, led by
Kyocera, Murata and TDK. ESI 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. ESI'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). ESI'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. ESI's microprocessor-based termination
systems apply conductive material to the ends of surface mountable MLCCs,
permitting connection of the device in a circuit.
Page 5 of 44
HANDLING TOOLING. ESI 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.
The following chart summarizes certain of ESI's current products,
applications and key features:
- - -------------------------------------------------------------------------------
ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS
PRODUCT APPLICATION KEY FEATURES
------- ----------- ------------
TEST SYSTEMS
Models 16A and 18 Tests capacitance, dissipation factor and High speed rotary tester with throughput
voltage capability for small (Model 18) and of up to 50,000 parts/hour.
medium (Model 16A) size MLCCs
Models 12-4 and 3001 IR Tests insulation resistance (IR) High speed parallel tester with throughput of
of MLCCs up to 50,000 parts/hour. Model 3001 IR includes
automatic bulk loading.
Model 3300 Test capacitance dissipation factor and voltage High speed rotary tester with throughput of up
capability for small and medium size MLCCs; to 180,000 parts/hour.
tests insulation resistance
TERMINATION SYSTEMS
Models 2001 and 2020 Electrical contact attachment Microprocessor controlled surface mount
on MLCCs termination system with throughput up to 130,000
parts/hour. Model 2020 includes an
integrated kiln.
Model 2007 Electrical contact attachment High productivity microprocessor controlled
on MLCCs surface mount termination system
with throughput up to 470,000 parts/hour.
HANDLING TOOLING
Carrier Plates Plates to batch handle MLCCs for test and Patented composite carriers to handle the full
termination range of MLCC sizes and up to 8,000 pieces per
batch.
Test Tooling Test fixtures for use with Permits precise location and positioning of
ESI systems MLCCs during the test operation.
- - -------------------------------------------------------------------------------
Page 6 of 44
MEMORY YIELD IMPROVEMENT SYSTEMS. Memory yield improvement systems are used
by nearly all manufacturers of dynamic random access memories (DRAMs) to
increase production yields. 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 ESI's memory
systems include Fujitsu, Lucky Goldstar, Hitachi, Hyundai, IBM, Motorola,
NEC, Samsung, Siemens, and Texas Instruments.
The laser process used by memory device manufacturers replaces defective
circuit elements with spare elements, and thereby salvages 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. ESI'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 every significant manufacturer of DRAMs and is
increasingly being used by manufacturers of other semiconductor memory devices
such as static random access memories (SRAMS).
ESI currently offers the Model 9200HT PLUS and the Model 1225HP laser
processing systems for memory repair. The Model 9200HT PLUS 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. ESI'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 Model 1225HP laser memory repair system
utilizes patented stage plus galvanometer beam positioning to achieve 0.35
micron positioning accuracy. ESI holds the patent for the ScribeView 2
illuminator, which is used in the 1225HP and is used for optical character
recognition (OCR), a vital step in the memory repair process.
In June 1996, the Company announced the release of the new Model 9300 Laser
Repair System. This system features a patented laser system technology
operating at a wavelength of 1.321 microns and offers memory manufacturers
using the latest advances in link material structure a method to increase yields
that would not exist using other products.
VISION SYSTEMS. ESI designs and manufactures 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 ESI'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 OCR, measurement, alignment, machine
guidance and assembly verification. Customers for ESI's vision products include
Hewlett Packard, Motorola and Seagate.
Page 7 of 44
ELECTRONIC PACKAGING SYSTEMS. ESI's advanced laser technology provides a cost
effective method for forming electrical connections between layers, called vias,
in a multiple layer substrate. The initial product, the Model 5000, is targeted
for use in small geometry substrate production. The Model 5100, introduced in
June 1996, represents the next generation and offers productivity improvement by
providing the capability to drill over 10,000 vias per minute. Applications in
this market include new generations of integrated circuits packages, multi chip
modules, and high density circuit boards. The primary advantage of the ESI
technology is the ability to process the wide variety of materials used in the
electronics industry, including ceramic, traditional glass reinforced circuit
boards, copper, and new organic compounds. Customers include Automata, Erricson,
Sheldahl, Siemens and W.L. Gore.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service offices
located in or near: Boston, 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. ESI serves customers in approximately 30
additional countries through manufacturers representatives.
ESI has a substantial base of installed products in use by leading
worldwide electronics manufacturers. ESI 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.
ESI 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. ESI also offers a variety of maintenance contracts and
parts replacement programs.
ESI has an OEM contract with Advantest Ltd. to supply memory yield
improvement systems in Japan. Sales to Advantest amounted to 6.8%, 7.2% and 7.0%
of net sales for the fiscal years 1996, 1995, and 1994. ESI maintains a
presence in Korea through a wholly-owned subsidiary.
International sales accounted for 66.8%, 70.9% and 54.7% of ESI's net sales
for fiscal years 1996, 1995 and 1994.
In fiscal year 1996, no one customer exceeded 10% of sales. One customer
accounted for 12.4% and 10.8% of ESI's sales in fiscal 1995 and 1994,
respectively.
BACKLOG
Backlog consists of written purchase orders for products for which ESI 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 $35 million at May 31, 1996
versus $26 million at May 31, 1995 and $8 million at May 31, 1994. ESI expects
all of its existing backlog to ship within the next twelve months.
Page 8 of 44
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 ESI'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
ESI's research and development expenditures for fiscal years 1996, 1995,
and 1994 were $16.3 million (10.2% of net sales), $13.7 million (12.7% of net
sales), and $8.9 million (12.3% of net sales), respectively. The foregoing
figures do not include research and development expenditures funded by the
Advanced Research Projects Agency (ARPA) of the U.S. Government described below.
In September 1993, ESI 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 and September 1995, the contract scope of work was expanded and an
additional $100,000 and $210,000, respectively, of funding was awarded. This
project is consistent with ESI's technology strategy. During fiscal years 1996,
1995, and 1994 ESI received $1.2 million of funding from ARPA which offset
research and development expenses.
In addition, research and development expenditures for the year ended May
31, 1996 do not include the acquired in-process research and development expense
of $6.0 million incurred in connection with the purchase price allocation of
XRL, Inc.
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. ESI believes that its products compete favorably with
respect to these factors. Some of ESI's competitors have greater financial,
engineering and manufacturing resources than ESI and larger service
organizations. In addition, certain of ESI's customers develop, or have the
ability to develop, similar manufacturing equipment. There can be no assurance
that competition in ESI's markets will not intensify or that ESI'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.
Page 9 of 44
For laser trimming systems, major competitors are NEC and General Scanning.
In miniature capacitor test and production equipment, ESI'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. ESI
also competes with stand alone vision suppliers such as Cognex and Robotic
Vision Systems, and with robotics and factory automation companies, such as
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 final system assembly. Principal production
facilities are headquartered in Portland, Oregon. In addition to the Portland,
Oregon facility, memory systems are also produced at ESI's facility in Canton,
Massachusetts. Miniature capacitor test and production systems are manufactured
by ESI's Palomar subsidiary near San Diego. ESI also uses qualified
manufacturers to supply many components of its products.
ESI's laser systems use high performance computers, peripherals, lasers and
other components from various vendors. Some components used by ESI 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 ESI. ESI believes it has good relationships with its
suppliers.
EMPLOYEES
As of May 31, 1996, ESI employed 740 persons, including 196 in engineering,
research and development, 316 in manufacturing and 138 in marketing, sales and
customer service and support. Many of ESI's employees are highly skilled, and
ESI's success will depend in part upon its ability to attract and retain such
employees, who are in great demand. ESI has never had a work stoppage or strike
and no employees are represented by a labor union or covered by a collective
bargaining agreement. ESI considers its employee relations to be good.
PATENTS AND OTHER INTELLECTUAL PROPERTY
ESI has a policy of seeking patents when appropriate on inventions relating
to new products and improvements which are discovered or developed as part of
ESI's on-going research, development and manufacturing activities. ESI owns 35
United States patents and has applied for 13 patents in the United States. In
addition, ESI has 32 foreign patents and has applied for 37 additional foreign
patents. Although ESI's patents are important, ESI believes that the success of
its business depends to a greater degree on the technical competence and
innovation of its employees.
Page 10 of 44
ESI relies on copyright protection for its proprietary software. ESI 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
ESI can meaningfully protect its trade secrets.
Some customers using certain products of ESI 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 ESI that they may be seeking indemnification from ESI
for any damages and expenses resulting from this matter. One of ESI's customers
has settled litigation with Mr. Lemelson, and several other customers are
currently engaged in litigation involving Mr. Lemelson's patents. While ESI
cannot predict the outcome of this or similar litigation or its effect upon ESI,
ESI believes that it will not have a material adverse effect on its financial
condition or results of operations.
ITEM 2. PROPERTIES
The Company's executive and administrative offices, and principal laser system
manufacturing facilities are located in a two-building complex located 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. Palomar is
located in an owned 64,000 square foot plant on ten acres of land in Escondido,
California.
In addition, approximately 14,000 square feet of industrial space is leased in
Canton, Massachusetts. The Company also leases 7,000 square feet of office
space in Portland, Oregon for its Vision Products Division and 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, 1996.
Page 11 of 44
ITEM 4(a): EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, and their ages and positions as of May
31, 1996, are as follows:
NAME AGE POSITION
- - ---- --- --------
Donald R. VanLuvanee 52 President, Chief Executive Officer and Director
Robert C. Cimino 51 Director of Human Resources
Barry L. Harmon 42 Senior Vice President and Chief Financial Officer
Jonathan C. 42 Vice President and Managing Director,
Howell Vision Products Division
Mark W. Klug 57 Vice President of ESI, President and
General Manager of Palomar Systems, Inc.
David B. Moser 49 Vice President
Larry T. Rapp 56 Vice President and Corporate Secretary
Joseph L. Reinhart 37 Director of Business Development
Joseph Z. Rivlin 61 Vice President of Sales
E. Frederick Schiele 44 Vice President of Manufacturing
Vernon R. Swearingen 56 Vice President
Edward J. Swenson 57 Senior Vice President of Technology Assessment
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
Inc., 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.
VanLuvanee is also a Director of Micro Component Technology, Inc., a leading
manufacturer of automated test handling equipment, and FEI Company, which
designs, manufactures and markets focused ion beam workstations and both ion and
electron emitter and focusing column components.
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 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.
Page 12 of 44
Mr. Howell joined ESI in April 1993 as Director of MIS. In June 1995, he
was appointed Managing Director of the Vision Products Division. In September
1995, Mr. Howell was elected Vice President. Mr. Howell has extensive
management experience from Citibank, Gulf and Western and Arthur Young & Co.
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
Vision Products Division. In January 1993 Mr. Moser was appointed Director of
Portland Manufacturing. In January 1994 he became a Vice President. 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. In September 1995, Mr. Rapp was elected
Vice President.
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
Sales 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. In September 1995, Mr. Schiele
was elected Vice President of Manufacturing. 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 in April 1993. From 1990
to 1991, Mr. Swearingen was President of Quantum Engineering, Inc., a project
engineering firm, and from 1988 to 1990 he held a management position with
Kulicke and Soffa Industries, Inc.
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.
Page 13 of 44
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, low and closing sales prices for the Common Stock as reported on the
Nasdaq National Market.
FISCAL QUARTER 1996 1995
- - -------------- ---- ----
HIGH LOW CLOSING HIGH LOW CLOSING
---- --- ------- ---- --- -------
1st Quarter... $39-3/4 $24-5/8 $33-3/4 $13-3/4 $ 8-5/8 $12-3/8
2nd Quarter... 41-1/2 24-1/2 28-1/2 20-1/4 12-1/4 19-3/8
3rd Quarter... 30-1/2 18-3/4 21-1/2 23-1/4 17-1/2 18-7/8
4th Quarter... 28-3/4 16-3/4 26-1/2 29-5/8 18-3/4 24-3/8
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, 1996 was 347.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is included under "Selected Financial
Data" opposite page 1 of the Company's 1996 Annual Report to Shareholders and is
incorporated herein by reference.
Page 14 of 44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO FISCAL YEAR ENDED MAY 31,
1995
Net sales increased 47.6% or $51.5 million. The increasing electronics
content, complexity and decreasing size of consumer communication devices,
automotive components and computers is directly related to the increased demand
for ESI's products. Sales of semiconductor yield improvement systems more than
doubled; the acquisition of XRL, Inc. in July 1995 contributed $18.9 million
toward the increase in semiconductor yield improvement sales. Increased volume
and more favorable product mix of capacitor manufacturing products and circuit
fine tuning systems also contributed significantly to the revenue growth. ESI's
emerging electronic packaging business reported modest growth.
Gross margin increased from 52.5% for fiscal 1995 to 54.4% as a result of
increased volume of semiconductor yield improvement equipment sold, increased
sales of higher margin circuit fine tuning systems, and productivity
improvements in the capacitor carrier plate manufacturing process.
As a percentage of sales, selling, service and administrative expenses
decreased to 25.0% from 25.5% for fiscal 1996 compared to the same period of the
prior year. Selling, service and administrative expenses increased $12.2
million compared to the prior year as a result of higher selling commissions and
travel associated with increased sales levels, salaries and employee profit
sharing accruals.
Research, development and engineering expenses increased $3.1 million for
the year ended May 31, 1996 compared to the prior year; increased product
development efforts resulted in additional project material costs and
compensation related to new hires. Engineering costs associated with XRL also
contributed to the increase. As a percentage of sales, research, development
and engineering expenses declined to 10.2% for fiscal 1996 from 12.1% for the
prior year as sales grew faster than the spending increases.
The acquired in-process research and development expense of $6.0 million
occurred in connection with the purchase price allocation of XRL, Inc. ESI
obtained an appraisal of the intangible assets which indicated that
substantially all of the acquired intangible assets consisted of research and
development in process. In accordance with generally accepted accounting
principles, the acquired in-process research and development was expensed
during the first quarter ended August 31, 1995. The Company currently believes
that these research and development efforts will result in a commercially viable
product in the next twelve months, at an additional cost of $0.6 million.
The effective tax rate of 36.5% for the year ended May 31, 1996 increased
from 30.0% for the prior year as a result of utilizing tax loss and credit
carryovers in fiscal 1995.
Net income for the year ended May 31, 1996 was $16.1 million or $1.87 per
share compared to $11.5 million or $1.53 per share for the prior year. Net
income per share, excluding the effect of the acquired in-process research and
development charge of $6.0 million, was $2.31 in fiscal 1996, a 51% increase
over the prior year.
Page 15 of 44
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.
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.
Page 16 of 44
FINANCIAL CONDITION AND LIQUIDITY
The Company's current sources of liquidity are existing cash and cash
equivalents and marketable debt securities of $37.0 million, trade receivables
of $40.0 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 6.3:1;
working capital increased to $94.0 million at May 31, 1996 from $74.4 million at
May 31, 1995. 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
financing to fund such activities, which could result in additional dilution to
the Company's shareholders. On May 14, 1996, ESI announced a definitive
agreement to acquire Applied Intelligent Systems, Inc. (AISI), a significant
supplier of machine vision. The transaction is subject to certain closing
conditions.
A SUMMARY OF CASH FLOW ACTIVITIES IS AS FOLLOWS (IN THOUSANDS):
1996 1995 1994
---- ---- ----
CASH FLOWS PROVIDED BY (USED IN):
OPERATING ACTIVITIES.............. $ 10,888 $ 96 $5,470
INVESTING ACTIVITIES(1)........... (4,897) (21,456) 4,666
FINANCING ACTIVITIES(2)........... 1,246 24,524 (4,706)
------- ------- ------
INCREASE IN CASH AND CASH
EQUIVALENTS.......................... $ 7,237 $ 3,164 $5,430
------- ------- ------
------- ------- ------
(1) Reflects the net purchase of $17.0 million in marketable debt securities
during fiscal 1995.
(2) Reflects net proceeds from stock offering in fiscal 1995.
OPERATING ACTIVITIES: Operating activities provided $10.9 million in cash. The
increases in trade receivables and inventories of $5.0 million and $3.2 million,
respectively, reflect the increase in sales of 47.6% during the year. In
addition, an increase in shipments near year end relative to the prior year
contributed to the increase in trade receivables. The decrease in accounts
payable of $3.9 million is a function of an unusually high prior year balance as
a result of a competitive decision to have added inventory on hand and hence
higher accounts payable during the transition of the Chicago Laser
manufacturing facility from Illinois to Oregon. The increase in income taxes
payable of $1.2 million is a function of the increased income tax provision.
INVESTING ACTIVITIES: Net cash of $4.9 million was used in investing activities
primarily as a result of purchases in the amount of $3.6 million to upgrade
computing resources and improve manufacturing capabilities by investing in
equipment that will decrease costs and improve quality. In addition, net
purchases of highly liquid marketable debt securities utilized $1.1 million.
FINANCING ACTIVITIES: Net cash of $1.2 million was generated from financing
activities in the form of stock option exercises and the related tax benefit.
Page 17 of 44
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business depends in large part upon the capital expenditures
of manufacturers of electronic devices, including miniature capacitors and
semiconductor memory devices, and circuits used in wireless telecommunications
equipment, including pagers and cellular phones, automotive electronics and
computers. The markets for products manufactured by the Company's customers are
cyclical and have historically experienced periodic downturns, which often have
had a negative effect on the demand for capital equipment such as that sold by
the Company. Several large, multinational electronics companies constituted
41.8% of the Company's fiscal 1996 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 66.8% of the Company's net sales for
fiscal 1996. 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.
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 15.3% 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.
ESI believes that it has the product offerings and resources needed for
continuing success; however, future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust its operations. Factors external
to the company can result in volatility of the Company's common stock price.
Because of the foregoing factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.
Page 18 of 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31,
-------
1996 1995
---- ----
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 18,622 $ 11,385
Securities available for sale. . . . . . . . . . . . . . 18,363 17,269
Trade receivables, less allowance for doubtful accounts
of $314 and $299 at May 31, 1996 and 1995. . . . . . . 39,792 33,331
Inventories -
Finished goods . . . . . . . . . . . . . . . . . . . . 2,979 2,091
Work-in-process. . . . . . . . . . . . . . . . . . . . 6,188 7,225
Raw materials and purchased parts. . . . . . . . . . . 21,000 15,566
--------- ---------
Total inventories. . . . . . . . . . . . . . . . . . 30,167 24,882
Deferred income taxes. . . . . . . . . . . . . . . . . . 3,884 2,946
Other current assets . . . . . . . . . . . . . . . . . . 819 760
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . 111,647 90,573
PROPERTY AND EQUIPMENT, AT COST. . . . . . . . . . . . . . 38,853 36,003
Less-Accumulated depreciation. . . . . . . . . . . . . . (22,191) (20,387)
--------- ---------
Net property and equipment . . . . . . . . . . . . . . 16,662 15,616
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . 4,216 4,409
--------- ---------
$132,525 $110,598
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 5,142 $ 7,002
Accrued liabilities -
Payroll related. . . . . . . . . . . . . . . . . . . . 3,433 3,398
Commissions. . . . . . . . . . . . . . . . . . . . . . 1,890 1,706
Income taxes . . . . . . . . . . . . . . . . . . . . . 2,463 1,258
Other. . . . . . . . . . . . . . . . . . . . . . . . . 4,405 1,758
--------- ---------
Total accrued liabilities. . . . . . . . . . . . . . . 12,191 8,120
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 276 1,032
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . 17,609 16,154
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, without par value; 1,000 shares
authorized; no shares issued . . . . . . . . . . . . . -- --
Common stock, without par value; 40,000 shares
authorized; 8,655 and 8,374 shares issued and
outstanding at May 31, 1996 and 1995 . . . . . . . . . 55,790 49,762
Retained earnings. . . . . . . . . . . . . . . . . . . . 59,126 44,682
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . 114,916 94,444
--------- ---------
$132,525 $110,598
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
Page 19 of 44
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MAY 31,
------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales. . . . . . . . . . . . . . . . . . . . $159,705 $108,215 $72,550
Cost of sales. . . . . . . . . . . . . . . . . . 72,754 51,413 35,838
------ ------ ------
Gross margin . . . . . . . . . . . . . . . . . 86,951 56,802 36,712
Operating expenses:
Selling, service and administrative. . . . . . 39,858 27,635 20,049
Research, development and engineering. . . . . 16,243 13,108 8,235
Acquired in-process research and development . 6,000 -- --
----- ------ -----
Total operating expenses. . . . . . . . . . . 62,101 40,743 28,284
------ ------ ------
Operating income . . . . . . . . . . . . . . . . 24,850 16,059 8,428
Interest income (expense), net . . . . . . . . . 1,185 565 (557)
Other income (expense), net. . . . . . . . . . . (719) (167) 2,081
----- ----- -----
Income before income taxes . . . . . . . . . . . 25,316 16,457 9,952
Provision for income taxes . . . . . . . . . . . 9,234 4,940 2,078
----- ----- -----
Net income . . . . . . . . . . . . . . . . . . . $ 16,082 $ 11,517 $ 7,874
-------- -------- -------
Net income per share. . . . . . . . . . . . . . $ 1.87 $ 1.53 $ 1.23
-------- -------- -------
Weighted average number of shares
used in computing per share amounts. . . . . . 8,606 7,510 6,414
The accompanying notes are an integral part of these statements.
Page 20 of 44
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996
COMMON STOCK
------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -----
(IN THOUSANDS)
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 stock offering. . . . . . . . 1,380 22,535 -- 22,535
Change in unrealized gain on investments . . . -- -- 60 60
Cumulative translation adjustment. . . . . . . -- -- 1,655 1,655
----- ------- ------- --------
BALANCE AT MAY 31, 1995 . . . . . . . . . . . . . 8,374 49,762 44,682 94,444
Net income . . . . . . . . . . . . . . . . . . -- -- 16,082 16,082
Stock plans:
Employee stock purchase plan . . . . . . . 11 223 -- 223
Exercise of stock options. . . . . . . . . 74 483 -- 483
Tax benefit of stock options exercised . . -- 540 -- 540
Shares issued for acquisitions . . . . . . . . 196 4,782 -- 4,782
Change in unrealized loss on investments . . . -- -- (42) (42)
Cumulative translation adjustment. . . . . . . -- -- (1,596) (1,596)
----- ------- ------- --------
BALANCE AT MAY 31, 1996 . . . . . . . . . . . . . 8,655 $55,790 $59,126 $114,916
----- ------- ------- --------
----- ------- ------- --------
The accompanying notes are an integral part of these statements.
Page 21 of 44
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31,
------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . $16,082 $11,517 $7,874
Aquired in-process research and development. . . 6,000 -- --
Depreciation and amortization. . . . . . . . . . 2,759 2,618 2,261
(Gain) loss on sale of property and equipment. . -- (433) 142
Deferred income taxes. . . . . . . . . . . . . . (770) (1,626) --
Gain on sale of product lines. . . . . . . . . . -- -- (2,623)
Stock compensation agreement . . . . . . . . . . -- 19 25
(Increase) decrease in trade receivables . . . . (5,036) (15,575) 3,920
Increase in inventories. . . . . . . . . . . . . (3,153) (2,858) (3,670)
Decrease (increase) in other current assets. . . 15 (347) 24
(Decrease) increase in accounts payable and
accrued liabilities. . . . . . . . . . . . . . (2,657) 4,293 (2,015)
Deferred revenue . . . . . . . . . . . . . . . . (756) 833 (55)
Effect of exchange rates on operating accounts . (1,596) 1,655 (413)
------- ------- ------
Net cash provided by operating activities. . . . 10,888 96 5,470
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash
acquired (1) . . . . . . . . . . . . . . . . . (492) -- --
Purchase of Chicago Laser subsidiary, net of
cash acquired (2). . . . . . . . . . . . . . . -- (707) --
Purchase of property and equipment . . . . . . . (3,635) (2,989) (2,149)
Proceeds from the sale of property and
equipment. . . . . . . . . . . . . . . . . . . -- 648 2,077
Purchase of securities . . . . . . . . . . . . . (30,986) (20,950) --
Proceeds from sales of securities and
maturing securities. . . . . . . . . . . . . . 29,850 4,000 --
Proceeds from sales of product lines . . . . . . -- -- 4,843
Decrease (increase) in other assets. . . . . . . 366 (1,458) (105)
------- ------- ------
Net cash (used in) provided by investing
activities . . . . . . . . . . . . . . . . . . (4,897) (21,456) 4,666
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to retire long-term debt. . . . . . . . -- (768) (6,358)
Reduction of notes payable (3) . . . . . . . . . -- (415) (459)
Proceeds from stock offering . . . . . . . . . . -- 22,535 --
Proceeds from exercise of stock options
and stock plans and related tax benefits . . . 1,246 3,172 2,111
------- ------- ------
Net cash provided by (used in)
financing activities . . . . . . . . . . . . . 1,246 24,524 (4,706)
------- ------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . 7,237 3,164 5,430
CASH AND CASH EQUIVALENTS AT JUNE 1. . . . . . . . 11,385 8,221 2,791
------- ------- ------
CASH AND CASH EQUIVALENTS AT MAY 31. . . . . . . . $18,622 $11,385 $8,221
------- ------- ------
------- ------- ------
The accompanying notes are an integral part of these statements.
Page 22 of 44
(1) Acquisition of the XRL subsidiary:
Assets less liabilities acquired, net of cash acquired . . . $(5,073)
Issuance of common stock . . . . . . . . . . . . . . . . . . 4,581
-------
Net cash used to acquire business. . . . . . . . . . . . . . $ (492)
(2) Acquisition of the Chicago Laser subsidiary:
Assets less liabilities acquired, net of cash acquired . . . $(2,646)
Issuance of common stock . . . . . . . . . . . . . . . . . . 1,939
-------
Net cash used to acquire business. . . . . . . . . . . . . . $ (707)
(3) For the year ended May 31, 1995, this included debt acquired in August 1994
related to the Chicago Laser acquisition which was subsequently paid off in
August 1994.
(4) Cash payments for interest were not significant in 1996 and 1995. In 1994,
cash payments for interest were $654.
Page 23 of 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BUSINESS ENVIRONMENT
The accompanying consolidated financial statements include the accounts of
Electro Scientific Industries, Inc. and its subsidiaries (the Company), all of
which are wholly owned. The Company designs and manufactures sophisticated
products used around the world in electronics manufacturing including: laser
manufacturing systems for semiconductor yield improvement, production and test
equipment for the manufacture of surface mount ceramic capacitors, circuit fine
tuning systems, precision laser electronic packaging systems and machine vision
systems. The Company serves the global electronics market from its headquarters
in Portland, Oregon and through subsidiaries located in the United States,
Europe and Asia.
CONCENTRATIONS OF CREDIT RISK
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents,
securities held for sale, trade receivables and financial instruments used in
hedging activities. The Company invests its cash in cash deposits, money market
funds, commercial paper, certificates of deposit and readily marketable debt
securities. The Company places its investments with high credit quality
financial institutions and limits the credit exposure from any one institution
or instrument. To date, the Company has not experienced losses on any of these
investments. The Company sells a significant portion of its products to a small
number of electronics manufacturers: 41.8% of fiscal 1996 revenues were derived
from ten customers. The Company's operating results could be adversely affected
if the financial condition and operations of these key customers deteriorate
substantially.
CONCENTRATIONS OF OTHER RISKS
The Company's operations involve a number of other risks and uncertainies
including but not limited to the cyclicality of the electronics market, rapidly
changing technology, international operations and hedging exposures. Refer to
Management's Discussion and Analysis for additional commentary.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All material intercompany accounts and transactions have been eliminated.
Page 24 of 44
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates and such
differences could be material to the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1994 and 1995 to conform with the 1996 presentation.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment except for contracts
related to complex equipment built to a buyer's specifications. Revenue from
these contracts is recognized on the percentage-of-completion method.
PRODUCT WARRANTY
The Company generally warrants its systems for a period of up to 12 months
for material and labor to repair and service the system. A provision for the
estimated cost related to warranty is recorded upon shipment.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
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.
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, if
significant.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Page 25 of 44
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).
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 $429, $2,025 and $370 at
May 31, 1996, 1995 and 1994, respectively. Foreign currency transaction gains
were $380 for the year ended May 31, 1996, and losses of $227 and $22 for the
years ended May 31, 1995 and 1994, respectively. These amounts are included in
other income (expense) in the accompanying Consolidated Statements of Income.
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 fiscal year 1994, the Company sold its
electronic calibration standards and measurement instrument product lines to
Tegam, Inc. of Geneva, Ohio. The proceeds included cash and notes of $800 and
potential royalties on future sales of the products. The agreement also provided
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.
Page 26 of 44
PROPERTY AND EQUIPMENT
Major classes of property and equipment consist of the following:
MAY 31,
-------
1996 1995
---- ----
Land ......................... $ 3,419 $ 3,419
Buildings and improvements.... 12,957 12,588
Machinery and equipment....... 22,135 19,493
Construction in progress..... 342 503
------- -------
$38,853 $36,003
------- -------
------- -------
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires an assessment of impairment of long-lived assets under certain
conditions and recognition of loss in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such assets.
In such instances a loss would be recorded based on the fair market value of the
applicable asset. SFAS 121 is effective for fiscal years beginning after
December 15, 1995. Adoption of SFAS 121 is not expected to have a material
impact on the Company's financial position or results of operations.
LINE OF CREDIT
The Company has a short-term revolving line of credit with a large foreign
bank totaling $7,000. This line expires in September 1996. 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 anytime during fiscal
1996.
EMPLOYEE BENEFIT PLANS
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting For Stock Issued to Employees." In
1995, the Financial Accounting Standards Board released Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting For Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, the Company has elected to provide detailed disclosures in
lieu of adoption. SFAS 123 is not expected to have any impact on the Company's
financial position or results of operations.
The Company has an employee savings plan under the provisions of section
401(k) of the Internal Revenue Code. The Company contributed $462, $334 and $255
to the plan for the years ended May 31, 1996, 1995 and 1994, respectively.
Page 27 of 44
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, 1996 and May 31, 1995 consists of
the following tax effects relating to temporary differences and carryforwards:
MAY 31,
-------
1996 1995
---- ----
Deferred tax assets:
Inventory valuation. . . . . . . . . . . . . . $1,129 $1,617
Vacation pay . . . . . . . . . . . . . . . . . 560 426
Warranty costs . . . . . . . . . . . . . . . . 350 314
Accrued compensation . . . . . . . . . . . . . 392 202
Deferred revenue . . . . . . . . . . . . . . . 89 275
Other. . . . . . . . . . . . . . . . . . . . . 38 389
------ ------
2,558 3,223
Tax loss and credit carryforwards. . . . . . . 1,874 185
------ ------
Total deferred tax assets. . . . . . . . . . 4,432 3,408
Less deferred tax liabilities . . . . . . . 548 462
------ ------
Net deferred tax asset. . . . . . . . . . . . . . $3,884 $2,946
------ ------
------ ------
At May 31, 1996, there was a net operating loss carryforward of $4,511
available for U.S. federal income tax purposes. These losses were acquired as
part of the XRL acquisition and expire through 2008.
During fiscal 1995 the net change in the valuation allowance was a
reduction of $2,413, which results from continued profitability and a
realization in fiscal 1995 of significant tax loss and credit carryforwards.
Page 28 of 44
The components of income before income taxes and the provision for income
taxes are as follows:
YEAR ENDED MAY 31,
------------------
1996 1995 1994
---- ---- ----
Income before income taxes:
Domestic . . . . . . . . . . . . . . . . $ 23,679 $13,369 $ 9,788
Foreign . . . . . . . . . . . . . . . . 1,637 3,088 164
-------- ------- -------
$ 25,316 $16,457 $ 9,952
-------- ------- -------
-------- ------- -------
Provision for income taxes:
Current:
Federal and State . . . . . . . . . . . $ 8,577 $ 3,762 $ 1,119
Foreign . . . . . . . . . . . . . . . . 887 1,736 437
-------- ------- -------
9,464 5,498 1,556
Deferred. . . . . . . . . . . . . . . . (770) (1,626) --
Income tax effect of stock options
exercised 540 1,068 522
-------- ------- -------
Total provision for income taxes. . . . . $ 9,234 $ 4,940 $ 2,078
-------- ------- -------
-------- ------- -------
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:
YEAR ENDED MAY 31,
------------------
1996 1995 1994
---- ---- ----
Provision computed at federal
statutory rate. . . . . . . . . . . . . . $8,861 $5,595 $3,384
Higher than U.S. tax rates in foreign
jurisdictions . . . . . . . . . . . . . . 314 687 256
Foreign operating losses with no tax benefits -- 66 307
Impact of U.S. tax loss and credit
carryforwards utilization . . . . . . . . (434) (1,236) (2,232)
Revision of prior year estimates . . . . . -- -- 274
Impact of state taxes. . . . . . . . . . . 711 273 101
Benefit of foreign sales corporation
(FSC) . . . . . . . . . . . . . . . . . . (137) (217) --
Other, net . . . . . . . . . . . . . . . . (81) (228) (12)
------ ------ ------
$9,234 $4,940 $2,078
------ ------ ------
------ ------ ------
Consolidated income tax payments amounted to $7,968, $4,388 and $1,663 for
the years ended May 31, 1996, 1995 and 1994, respectively.
Page 29 of 44
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, 1996 and 1995, the Company had forward
exchange contracts totaling $7,460 and $6,863, respectively. These contracts
generally mature in less than one year and the counterparty is a large, widely
recognized international bank; therefore, risk of credit loss as a result of
nonperformance 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
$1,495, $1,402 and $1,050 for the years ended May 31, 1996, 1995 and 1994,
respectively. The aggregate minimum commitment for rentals under operating
leases beyond May 31, 1996 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
Sheets. The fair market value of these securities at May 31, 1996 and 1995 is
$18,363 and $17,269, respectively. All of the Company's marketable debt
securities are invested in high-credit quality tax advantaged securities with
maturities of less than one year from the date of purchase; the amortized cost
of these securities is $18,345 and $17,209 at May 31, 1996 and 1995,
respectively.
During fiscal 1996 and 1995, proceeds of $29,850 and $4,000, respectively,
resulted from the sales or maturities of securities; there were no realized
gains or losses associated with these sales or maturities.
Page 30 of 44
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 the date of grant.
The following table summarizes activity in plans for the years ended
May 31, 1994, 1995 and 1996:
OPTIONS OUTSTANDING
-------------------
SHARES PRICE PER SHARE
------ ---------------
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
Granted . . . . . . . . . . . . . . . . . 276,904 18.00 - 39.38
Exercised . . . . . . . . . . . . . . . . (73,510) 2.63 - 24.00
Canceled or expired . . . . . . . . . . . (43,806) 3.50 - 33.00
------- ------ ------
BALANCE AT MAY 31, 1996 . . . . . . . . . . 834,896 $ 2.63 - $39.38
------- ------ ------
------- ------ ------
Options exercisable at May 31, 1996. . . . . 260,482 $ 2.63 - $24.00
Options available for grant at
May 31, 1996. . . . . . . . . . . . . . 320,410
Page 31 of 44
The Company has an employee stock purchase plan which allows qualified
employees to direct up to 15% 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.
GEOGRAPHIC REPORTING
The Company operates in the capital equipment segment of the electronics
industry with geographic operations in the United States, Europe and Asia.
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 the 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, 1996, 1995 and 1994 were as follows:
EUROPE ASIA TOTAL
------ ---- -----
May 31, 1996 . . . . . . . . . . . $1,532 $64,446 $65,978
May 31, 1995 . . . . . . . . . . . 3,741 33,890 37,631
May 31, 1994 . . . . . . . . . . . 853 15,234 16,087
In fiscal year 1996, there were no sales to any one customer in excess of
10% of consolidated net sales. During fiscal 1995 and 1994, one customer
accounted for 12.4% and 10.8%, respectively, of consolidated net sales.
Page 32 of 44
The following data represents segment information for the years ending
May 31:
ADJUSTMENTS
UNITED AND
STATES EUROPE ASIA ELIMINATIONS CONSOLIDATED
------ ------ ---- ------------ ------------
1996
- - ----
Sales to unaffiliated customers. . . . . . . . . . . . $ 119,064 $18,329 $ 22,312 $ -- $ 159,705
Transfers between geographic areas . . . . . . . . . . 28,009 8 543 (28,560) --
--------- ------- -------- --------- ---------
Total revenue. . . . . . . . . . . . . . . . . . . . . $ 147,073 $18,337 $ 22,855 $ (28,560) $ 159,705
--------- ------- -------- --------- ---------
--------- ------- -------- --------- ---------
Operating income(1). . . . . . . . . . . . . . . . . . $ 22,861 $ 260 $ 1,965 $ (236) $ 24,850
--------- ------- -------- --------- ---------
--------- ------- -------- --------- ---------
Identifiable assets at May 31, 1996. . . . . . . . . . $ 99,442 $ 8,624 $ 8,049 $ (20,575) $ 95,540
--------- ------- -------- ---------
--------- ------- -------- ---------
Corporate assets . . . . . . . . . . . . . . . . . . . 36,985
---------
Total assets at May 31, 1996 . . . . . . . . . . . . . $ 132,525
---------
---------
1995
- - ----
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. . . . . . . . . . $ 82,774 $ 7,994 $ 10,922 $ (19,746) $ 81,944
--------- ------- -------- ---------
--------- ------- -------- ---------
Corporate assets . . . . . . . . . . . . . . . . . . . 28,654
---------
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
---------
---------
(1) Includes the $6.0 million in-process research and development charge
associated with the acquisition of XRL, Inc.
ACQUISITIONS
XRL, INC. AND OTHER
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 yield improvement. The preliminary purchase
consideration consisted of 207 shares of ESI stock. These shares were
subsequently reduced by 28 shares due to stock repurchases and price adjustments
provided for by the agreement. The transaction was accounted for as a purchase.
Page 33 of 44
In connection with the purchase price allocation, the Company obtained an
appraisal of the intangible assets which indicated that substantially all of the
acquired intangible assets consisted of research and development projects in
process. The development of these projects had not reached technological
feasibility and the technology has no alternative future use. In accordance
with generally accepted accounting principles, the acquired in-process research
and development of $6.0 million was charged to expense during the quarter ended
August 31, 1995 and is reflected in the accompanying Consolidated Statements of
Income.
Pro-forma combined income statement data for the years ended May 31, 1996
and 1995 was not materially different from results presented in the accompanying
Consolidated Statements of Income.
The Company acquired certain assets of one other company during fiscal
1996; the acquisition was not significant to the financial position or results
of operations of the Company.
CHICAGO LASER SYSTEMS, INC.
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 $1,280 in cash and 333 shares of the Company's stock.
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 pro forma 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.
Page 34 of 44
PENDING MERGER
On May 14, 1996, the Company announced the signing of a definitive
agreement to merge with Applied Intelligent Systems, Inc. (AISI), a privately
held company based in Ann Arbor, Michigan. AISI provides machine vision
solutions for automated process control and visual inspection; its products are
primarily used in the semiconductor and electronics industries to assemble
computer chips and electronic printed circuit boards. The closing of the
transaction is subject to completion of certain closing conditions.
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
YEAR ENDED MAY 31, 1996 1ST 2ND 3RD 4TH
- - ----------------------- QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Net sales. . . . . $35,975 $40,836 $41,626 $41,268 $159,705
Gross margin . . . 19,208 22,113 22,592 23,038 86,951
Net income . . . . 540(1) 4,881 5,244 5,417 16,082
Net income per share $ 0.06 $ 0.57 $ 0.61 $ 0.63 $ 1.87
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(2)
(1) Includes the $6.0 million in-process research and development charge
associated with the acquisition of XRL, Inc.
(2) 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 35 of 44
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, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the three years in the period ended
May 31, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for the three years in the
period ended May 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 3, 1996
Page 36 of 44
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 information required by this item is included in the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders and is incorporated herein
by reference.
Information with respect to executive officers of the Company is included under
Item 4(a) of Part I of this Report. The information required to be included for
Item 405 of Regulation S-K for 1996 is included under "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 1996
Annual Meeting of Shareholders and is incorporated herein by reference.
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 1996 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 1996 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
Page 37 of 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Financial Statements and Schedules.
The following financial statements are included in this Annual Report on Form
10-K on the pages indicated.
Electro Scientific Industries, Inc.
and Subsidiaries: Page
----
Consolidated Balance Sheets as of
May 31, 1996 and 1995 19
Consolidated Statements of
Income for the Years Ended
May 31, 1996, 1995, and 1994 20
Consolidated Statements of
Shareholders' Equity for the Years Ended
May 31, 1996, 1995, and 1994 21
Consolidated Statements of
Cash Flows for the Years Ended
May 31, 1996, 1995, and 1994 22
Notes to Consolidated Financial Statements 24-35
Report of Independent Public Accountants 36
All schedules are omitted as the required information is inapplicable or not
significant.
Page 38 of 44
(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. Incorporated by reference to Exhibit 3-B
of the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1994.
4-A. 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. (1)
10-B. ESI 1989 Stock Option Plan, as amended. (1)
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. (1)
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 10-K for the fiscal year
ended May 31, 1992. (1)
11. Statement of Calculation of Earnings Per Share.
13. Portion of the 1996 Annual Report to Shareholders that is
incorporated herein by reference.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of fiscal year 1996.
- - ---------------
(1) Management contract or compensatory plan or arrangement.
Page 39 of 44
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: July 22, 1996 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 July 22, 1996.
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 and Chief
- - ----------------------------------- Financial Officer
Barry L. Harmon
(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 40 of 44
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
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. Incorporated by reference to
Exhibit 3-B of the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1994.
4-A 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, as amended.
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 10-K
for the fiscal year ended May 31, 1992.
11. Statement of Calculation of Earnings Per Share.
13. Portion of the 1996 Annual Report to Shareholders that is
incorporated herein by reference.
21. Subsidiaries of the Company.
23. Consent of Independent Public Accountants.
27. Financial Data Schedule.
Page 41 of 44