UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 0-12853
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(an Oregon corporation)
93-0370304
(I.R.S. Employer Identification No.)
13900 N.W. Science Park Drive, Portland, Oregon 97229
Registrant's telephone number: (503) 641-4141
Registrant's web address: www.esi.com
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No
--- ---
The number of shares outstanding of the Registrant's Common Stock at August
31, 2002 was 27,712,357 shares.
This Amendment No. 1 on Form 10-Q/A amends our quarterly report on Form
10-Q for the fiscal quarter ended August 31, 2002 which was filed on October 15,
2002. The amendment is a result of the restatement of our audited consolidated
financial statements for the fiscal year ended June 1, 2002 (and the quarters
contained therein) and our unaudited consolidated condensed financial statements
for the quarterly period ended August 31, 2002. We have also restated our
consolidated condensed financial statements for the quarterly period ended
November 30, 2002 and have filed an amendment on Form 10-Q/A for that period.
The restatement reflects adjustments to net sales, cost of sales and certain
operating expenses, and the related balance sheet accounts.
We have amended each item of our quarterly report on Form 10-Q for the
fiscal quarter ended August 31, 2002 that has been affected by the restatement.
This Amendment No. 1 does not reflect events occurring after the October 15,
2002 filing of our Form 10-Q or modify or update the disclosures set forth
therein in any way, except as required to reflect the effects of the
restatement.
The items of our quarterly report on Form 10-Q for the fiscal quarter ended
August 31, 2002 that are amended and restated herein are Items 1, 2 and 4 of
Part I and Item 6 of Part II. The remaining items originally contained in our
Form 10-Q for the fiscal quarter ended August 31, 2002 as filed with the
Securities and Exchange Commission on October 15, 2002 are unchanged.
This Amendment No. 1 on Form 10-Q/A should be read in conjunction with our
quarterly report on Form 10-Q for the fiscal quarter ended March 1, 2003 as
filed on August 11, 2003, including the materials under the subheading "Factors
That May Affect Future Results" in Part I, Item 2.
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Consolidated Condensed Financial Statements (unaudited and
restated)
Consolidated Condensed Balance Sheets - August 31, 2002
(restated) and June 1, 2002 (restated) 2
Consolidated Condensed Statements of Operations - Three
Months Ended August 31, 2002 (restated) and September 1,
2001 (restated) 3
Consolidated Condensed Statements of Cash Flows - Three
Months Ended August 31, 2002 (restated) and September 1,
2001 (restated) 4
Notes to Consolidated Condensed Financial Statements (restated) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (restated) 11
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
1
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Restated)
(Unaudited)
August 31, June 1,
2002 2002
------------------- ------------------
Assets
Current Assets:
Cash and cash equivalents $ 38,321 $ 29,435
Marketable securities 190,865 181,019
Restricted securities 6,308 6,353
------------------- ------------------
Total cash and securities 235,494 216,807
Trade receivables, net of allowances of
$1,366 at August 31 and $1,437 at June 1 58,776 55,810
Income tax refund receivable 10,984 14,402
Inventories, net 61,683 63,916
Shipped systems pending acceptance 4,358 2,007
Deferred income taxes 8,243 8,243
Other current assets 5,218 4,960
------------------- ------------------
Total Current Assets 384,756 366,145
Long-term marketable securities 59,750 73,445
Long-term restricted securities 9,019 12,047
Property, plant and equipment, at cost 96,625 95,656
Less - accumulated depreciation (39,450) (37,610)
------------------- ------------------
Net property, plant and equipment 57,175 58,046
Deferred income taxes - 80
Other assets 17,621 16,509
------------------- ------------------
Total Assets $ 528,321 $ 526,272
=================== ==================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 4,554 $ 3,246
Accrued liabilities 14,677 16,062
Deferred revenue 9,132 5,308
------------------- ------------------
Total Current Liabilities 28,363 24,616
Convertible subordinated notes 146,122 145,897
------------------- ------------------
Total Liabilities 174,485 170,513
Shareholders' Equity:
Preferred stock, without par value; 1,000 shares
authorized; no shares issued - -
Common stock, without par value; 100,000
authorized; 27,712 and 27,619 shares issued
and outstanding at August 31, 2002 and
June 1, 2002, respectively 137,291 136,370
Retained earnings 216,167 219,561
Accumulated other comprehensive income (loss) 378 (172)
------------------- ------------------
Total Shareholders' Equity 353,836 355,759
------------------- ------------------
Total Liabilities and Shareholders' Equity $ 528,321 $ 526,272
=================== ==================
The accompanying notes are an integral part of these statements
2
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(Restated)
For the Three Months Ended
------------------------------------------------------
August 31, 2002 September 1, 2001
----------------------- -----------------------
Net sales $ 39,360 $ 48,688
Cost of sales 23,503 27,705
----------------------- -----------------------
Gross margin 15,857 20,983
Operating expenses:
Selling, service and administration 14,570 22,542
Research, development and engineering 7,645 12,790
----------------------- -----------------------
22,215 35,332
----------------------- -----------------------
Operating loss (6,358) (14,349)
Interest income 2,943 1,937
Interest expense (2,007) (27)
Other income (expense), net (436) 186
----------------------- -----------------------
500 2,096
----------------------- -----------------------
Loss before income taxes (5,858) (12,253)
Benefit for income taxes (2,464) (4,055)
----------------------- -----------------------
Net loss $ (3,394) $ (8,198)
======================= =======================
Net loss per share - basic and diluted $ (0.12) $ (0.30)
======================= =======================
Weighted average number of shares - basic and diluted 27,650 27,172
======================= =======================
The accompanying notes are an integral part of these statements
3
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(Restated)
For the Three Months Ended
--------------------------------------------------
August 31, 2002 September 1, 2001
-------------------- --------------------
Cash flows from operating activities:
Net loss $ (3,394) $ (8,198)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 2,463 2,743
Tax benefit of stock options exercised 57 548
Provision for doubtful accounts 129 213
Loss on disposal and impairment of property and equipment - 2,231
Deferred income taxes 344 4,859
Changes in operating accounts:
(Increase) decrease in trade receivables, net (1,582) 12,934
(Increase) decrease in inventories, net 2,674 (2,955)
Decrease in income taxes receivable 3,418 -
(Increase) decrease in other current assets (229) (892)
Increase (decrease) in deferred revenue 3,824 (324)
Decrease in current liabilities (1,735) (26,114)
-------------------- --------------------
Net cash provided by (used in) operating activities 5,969 (14,955)
Cash flows from investing activities:
Purchase of property, plant and equipment (2,738) (8,641)
Maturity of restricted securities 3,073 -
Purchase of securities (36,312) (48,517)
Proceeds from sales of securities and maturing securities 40,613 36,365
Increase in other assets (2,585) (218)
-------------------- --------------------
Net cash provided by (used in) investing activities 2,051 (21,011)
Cash flows from financing activities:
Proceeds from exercise of stock options and stock plans 866 1,532
-------------------- --------------------
Net cash provided by financing activities 866 1,532
Net change in cash and cash equivalents 8,886 (34,434)
Cash and cash equivalents:
Beginning of period 29,435 68,522
-------------------- --------------------
End of period $ 38,321 $ 34,088
==================== ====================
Supplemental cash flow information:
Cash paid for interest $ 3,330 $ 10
Income tax refunds received 5,863 -
Cash paid for income taxes - 2,330
The accompanying notes are an integral part of these statements
4
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
We have prepared the consolidated condensed financial statements included herein
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted in these interim statements. We believe that the interim statements
include all adjustments (consisting of only normal recurring accruals) necessary
for a fair presentation of results for the interim periods. These consolidated
condensed financial statements are to be read in conjunction with the financial
statements and notes thereto included in our 2002 Annual Report on Form 10-K/A.
Certain prior year amounts have been reclassified to conform to current year
presentation.
Results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
Note 2 - Investigation and Restatements of Financial Statements
In March 2003, our Audit Committee commenced an internal investigation of the
circumstances surrounding the reversal of an employee benefits accrual that
occurred in the first quarter of 2003. The investigation also identified and
addressed: (1) unsupported accounting adjustments and clerical errors primarily
relating to inventory and cost of goods sold, and (2) certain other areas where
potential accounting errors could have occurred, including revenue recognition.
Restatement of 2002 Financial Statements
We have restated our financial statements for the fiscal year ended June 1, 2002
(and the quarters contained therein) principally related to the deferral of
revenue for certain transactions where customer specified acceptance criteria
existed but were not properly considered in determining whether our criteria for
revenue recognition had been met as of year-end. We also corrected our financial
statements for other matters we identified, including: the failure to write-off
fixed assets that were sold prior to year-end, but had not been removed from our
books, the write-off of inventory due to a change in our accounting for
defective parts being returned by customers, an unauthorized change in
depreciation methods and the correction of a bank error related to amortization
of bond premiums/discounts.
Restatement of Fiscal 2003 First and Second Quarters
We have also restated the financial statements for the quarters ended August 31,
2002 and November 30, 2002 related to the deferral of revenue, an unauthorized
change in depreciation method and the amortization of bond premiums/discounts as
described above.
For the first quarter of fiscal 2003, the financial statements have also been
restated to reflect the reinstatement of an inappropriately reversed accrual for
employee benefits. Other matters corrected for that quarter primarily include
the following: the write-down of inventory that was double counted, the
write-down of inventory due to an error in the computation of overhead, an
increase in operating expenses due to improper capitalization of a period
expense and an increase in warranty expense due to an unauthorized change in
accounting method.
5
For the second quarter of fiscal 2003, the financial statements have also
been restated for other matters primarily including: the write-down of inventory
due to an unauthorized change in our accounting for parts inventory at customer
locations, the write-down of inventory that was double counted, an increase in
accrued liabilities related to purchase commitments for excess and obsolete
inventory and an increase in warranty expense due to an unsupported accounting
entry.
We have restated our net sales, cost of sales, operating expense, other income,
tax benefit and earnings for the three month period ended August 31, 2002 and
our related balance sheet accounts at August 31, 2002 as follows (in thousands):
Tax
Cost of Operating Other (Benefit)/ Net Income
Net Sales Sales Expense Income Expense (Loss)
------------ ----------- ------------ ------------ --------------- -------------
------------ ----------- ------------ ------------ --------------- -------------
As previously reported - three $ 42,961 $22,985 $20,848 $1,105 $ 75 $ 158
months ended August 31, 2002
Revenue deferrals (3,601) (2,351) - - - (1,250)
Write-down of inventory and
other assets, net - 1,639 - - - (1,639)
Increase to warranty expense - 1,115 - - - (1,115)
Changes to depreciation expense - 115 (32) - - (83)
Increase to employee benefits
accrual - - 977 - - (977)
Adjustments due to timing of
operating expenses - - 293 - - (293)
Increase in bad debt expense - - 129 - - (129)
Adjustment to amortization of
bond premium - - - (173) - (173)
Reclass of interest on tax refund - - - (432) (432) -
Tax effect of adjustments - - - - (2,107) 2,107
------------ ----------- ------------ ------------ --------------- -------------
Total impact of adjustments (3,601) 518 1,367 (605) (2,539) (3,552)
------------ ----------- ------------ ------------ --------------- -------------
As restated - three months ended $39,360 $23,503 $22,215 $ 500 $(2,464) $(3,394)
August 31, 2002
============ =========== ============ ============ =============== =============
With the recognition of the above adjustments, our net loss per share was
restated to $0.12 for the quarter ended August 31, 2002 compared to the
previously reported net income per share of $0.01.
6
Adjustments to our balance sheet as a result of the restatements were as follows
(in thousands):
Shipped Inventory Other Long-term Total
Systems
Pending Current
Acceptance Assets Assets Assets
------------- ------------- ------------- -------------- ---------------
------------- ------------- ------------- -------------- ---------------
Total assets as previously reported - $ - $ 63,018 $316,263 $146,187 $525,468
August 31, 2002
Revenue deferrals, current period 2,351 - - - 2,351
Revenue deferrals, prior periods 2,007 - - - 2,007
Adjustments to inventory, other assets
and long-term assets - (1,335) - (2,449) (3,784)
Increase to allowance for doubtful
accounts - - (129) - (129)
Increase to sales discounts - - (300) - (300)
Change to prepaid expenses - - (293) - (293)
Adjustment to amortization of bond
premium - - - (173) (173)
Tax effect of adjustments - - 3,174 - 3,174
------------- ------------- ------------- -------------- ---------------
Total impact of adjustments 4,358 (1,335) 2,452 (2,622) 2,853
------------- ------------- ------------- -------------- ---------------
Total assets as restated - August 31, $ 4,358 $ 61,683 $318,715 $143,565 $528,321
2002
============= ============= ============= ============== ===============
Total
Other Liabilities and
Deferred Current Long-Term Shareholders' Shareholders'
Revenue Liabilities Liabilities Equity Equity
------------- ------------- ------------- -------------- ---------------
Total liabilities and equity as $ 2,171 $ 18,254 $146,122 $358,921 $525,468
previously reported - August 31, 2002
Revenue deferrals, current period 3,601 - - - 3,601
Revenue deferrals, prior periods 3,360 - - - 3,360
Increase to employee benefits accrual - 977 - - 977
Adjustment to amortization of bond
premium - - - 283 283
Net loss effect of adjustments -
current period - - - (3,552) (3,552)
Net loss effect of adjustments - prior
period - - - (1,816) (1,816)
------------- ------------- ------------- -------------- ---------------
Total Impact of adjustments 6,961 977 - (5,085) 2,853
------------- ------------- ------------- -------------- ---------------
Total liabilities and equity as $ 9,132 $ 19,231 $146,122 $353,836 $528,321
restated -
August 31, 2002
============= ============= ============= ============== ===============
Information in the following notes and in the Management's Discussion and
Analysis of Financial Condition and Results of Operations has been restated, as
appropriate, to reflect the restatements.
Note 3 - Accounts Receivable, Net
We entered into an agreement that allows us to sell accounts receivable from
selected customers at a discount to a financial institution. Receivables sold
under these provisions have terms and credit risk characteristics similar to our
overall receivables portfolio. Receivable sales have the effect of increasing
cash and reducing accounts receivable and days sales outstanding. Accounts
receivable sales under this agreement were $7.1 million for the period ended
August 31, 2002 and $9.0 million for the twelve-month period ended June 1, 2002.
Discounting fees were recorded as interest expense and were not material for the
three months ended August 31, 2002 and September 1, 2001. At August 31, 2002,
$7.8 million of receivables sold under these agreements remained outstanding,
compared to $9.0 million outstanding at June 1, 2002.
7
Note 4 - Inventories
Inventories are principally valued at standard costs, which approximate the
lower of cost (first-in, first-out) or market. Components of inventories were as
follows (in thousands):
August 31, 2002 June 1, 2002
-------------------- -----------------
(restated)
Raw materials and purchased parts $ 42,639 $ 41,013
Work-in-process 1,430 1,942
Finished goods 17,614 20,961
-------------------- -----------------
Total inventories $ 61,683 $ 63,916
==================== =================
Note 5 - Earnings Per Share
Because we incurred a loss in the three months ended August 31, 2002 and
September 1, 2001, the number of shares outstanding for the calculation of
earnings (loss) per share ("EPS") was the same for both the basic and diluted
calculations.
The following common stock equivalents were excluded from the diluted EPS
calculations because inclusion would have had an antidilutive effect (in
thousands):
Three Months Ended
------------------------------------
August 31, 2002 September 1, 2001
----------------- ----------------
Employee stock options 3,777 4,237
4 1/4% convertible subordinated notes 3,947 -
----------------- ----------------
7,724 4,237
================= ================
Note 6 - Comprehensive Loss
The components of comprehensive loss, net of tax, are as follows (in thousands):
Three Months Ended
----------------------------------
August 31, 2002 September 1, 2001
---------------- ----------------
(restated)
Net loss $(3,394) $(8,198)
Net unrealized gain on derivative instruments 14 88
Foreign currency translation adjustment 84 2
Net unrealized gain (loss) on securities 452 (184)
-------------- ----------------
Total comprehensive loss $(2,844) $(8,292)
============== ================
Note 7 - Income Taxes
The effective income tax rate for the interim period is based on estimates of
annual amounts of taxable income, tax credits and other factors. The income tax
rate for the three months ended August 31, 2002 and September 1, 2001 was 42.1%
and 33.1%, respectively. The higher tax benefit in the three months ended August
31, 2002 as compared to the statutory federal tax rate is largely a result of
the tax benefit related to research and development tax credits.
8
Note 8 - Recent Accounting Pronouncements
In August 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity." Under SFAS No. 146, liabilities for exit or disposal
activities are recognized and measured initially at fair value only when the
liability is incurred. This statement is effective for exit costs initiated
after December 31, 2002, and will be applied on prospective transactions only.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and normal operation of a long-lived asset, except
for certain lease obligations. We are evaluating the impact of SFAS No. 143, but
do not expect the adoption of SFAS No. 143 to have a significant impact on our
financial position or the results of our operations.
On June 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 provides a single accounting model
for long-lived assets to be disposed of and significantly changes the criteria
for classifying an asset as held-for-sale. Classification as held-for-sale is an
important distinction since such assets are not depreciated and are stated at
the lower of fair value less selling costs or carrying amount. SFAS No. 144 also
requires expected future operating losses from discontinued operations to be
displayed in the period in which the losses are incurred, rather than as of the
measurement date as previously required. The adoption of SFAS No. 144 did not
have a material impact on our financial position or the results of our
operations.
Note 9 -First Quarter Fiscal 2002 Restructuring and Special Charges
In order to better align our operating expenses with anticipated revenues, we
implemented a restructuring plan during June 2001. Pursuant to this plan, we
reduced our work force by a total of 419 employees in June and August 2001. This
reduction impacted all employee groups. In connection with this plan, we
recorded a charge of $2.4 million for employee severance and $0.2 million for
other employee expenses in the three months ended September 1, 2001.
The restructuring plan also included vacating buildings located in California,
Massachusetts, Michigan, Minnesota and Texas. As a result, we recorded a charge
of approximately $1.5 million for the three months ended September 1, 2001,
which consisted of $1.1 million for lease termination fees and $0.4 million for
the write-off of certain leasehold improvements. We also recorded a $3.5 million
inventory write-down related to discontinuing the manufacturing of certain
products for the three months ended September 1, 2001. This inventory write-down
was reflected in costs of sales.
9
The following table displays the components of the restructuring and special
charges for the three months ended September 1, 2001 (in thousands):
Three Months Ended
September 1, 2001
-------------------------
Employee severance and other employee expenses $ 2,579
Lease termination and other facility consolidation costs 1,482
Net asset write-downs 76
Other expenses 214
-------------------------
Total operating expense restructuring charge 4,351
Inventory write-downs (reflected in cost of sales) 3,497
-------------------------
Total restructuring and special charges $ 7,848
=========================
In both the current and prior year, all restructuring costs have been included
in the line items to which they functionally relate.
Note 10 - Restructuring Accruals
At August 31, 2002, we had $0.7 million remaining in accrued liabilities,
compared to $1.0 million at June 1, 2002. The majority of the remaining accrued
liabilities were related to lease termination fees and other facility
consolidation costs expected to be incurred through 2006.
The following table displays the rollforward of the restructuring accruals from
June 1, 2002 to August 31, 2002, which were established in the quarter ended
September 1, 2001 (in thousands):
Accruals at Charges to Amounts Accruals at
June 1, 2002 Accruals Used August 31, 2002
-------------- ---------------- ---------------- -----------------
Lease termination fees and other
facility consolidation costs $ 664 $ - $(151) $ 513
Purchase order obligations $ 334 $ - $(136) $ 198
Note 11 - Subsequent Event
On October 2, 2002, we announced a plan to relocate the manufacturing of our
Electronic Component Systems product line from Escondido, California to our
headquarters facility in Portland, Oregon. We plan on completing this move by
December 31, 2002. Approximately 45 employees at our Escondido facility have
been offered relocation to our headquarters. The remaining employees have been
offered a severance package following a sixty-day notice period. As a result of
the closure of the California facility and other cost reduction steps, we expect
that total employment will be reduced by approximately 100 people by the end of
December 2002, from the current level of approximately 800 people. Beginning in
the third quarter of fiscal 2003, which starts on December 1, 2002, we expect to
save at least $8.0 million annually as a result of facilities consolidation,
employment reductions and other cost reduction steps as related to this
restructuring plan. In the second quarter of fiscal 2003, we expect to record a
one-time charge of approximately $9.0 million for severance and other costs
related to the plant closure. Additional relocation costs of approximately $2.0
million will be charged in future quarters as they occur, and are expected to be
offset by a gain on the sale of the building and land.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (restated)
---------------------------------------------------------------
Overview
Electro Scientific Industries, Inc. and its subsidiaries ("ESI") provide high
technology manufacturing equipment to the global electronics market. Our
customers are primarily manufacturers of semiconductors, passive electronic
components and electronic interconnect devices. Our equipment enables these
manufacturers to reduce production costs, increase yields and improve the
quality of their products. The components and devices manufactured by our
customers are used in a wide variety of end-use products in the computer,
communications and automotive industries.
We believe we are the leading supplier of advanced laser systems used to improve
the production yield of semiconductor devices; high-speed test and termination
equipment used in the high-volume production of multi-layer ceramic capacitors
(MLCCs) and other passive electronic components; and advanced laser systems used
to fine tune electronic components and circuitry. Additionally, we produce a
family of laser drilling systems for production of high-density interconnect
(HDI) circuit boards and advanced electronic packaging, as well as inspection
systems and original equipment manufacturer (OEM) machine vision products.
Restatement
In March 2003 our Audit Committee commenced an internal investigation of certain
accounting matters. The investigation involved the review of (1) the
circumstances surrounding the reversal of an accrual for employee benefits, (2)
unsupported accounting adjustments and clerical errors primarily relating to
inventory and cost of goods sold, and (3) certain other areas where potential
accounting errors could have occurred, including revenue recognition. As a
result of the investigation, we determined that the unaudited consolidated
condensed financial statements for the three months ended August 31, 2002 and
November 30, 2002 and the audited consolidated financial statements for the year
ended June 1, 2002 (and the quarters contained therein) required restatement.
For the three-month period ended August 31, 2002, we restated our financial
statements to correct improper accounting entries, including entries for revenue
recognition, inventory write-downs, warranty expense and employee benefits
expense. The aggregate impact of these adjustments, and related tax effects, was
to reduce our net income for the three months ended August 31, 2002 from
$158,000 to a net loss of $3.4 million and to decrease our basic and diluted net
income per share from $0.01 to $(0.12).
A summary of the impact of the adjustments on our previously issued unaudited
consolidated condensed statement of operations for the three months ended August
31, 2002 and unaudited consolidated condensed balance sheet as of August 31,
2002 is presented in Note 2 to our notes to consolidated condensed financial
statements contained elsewhere in this amended report.
11
Results of Operations
Net sales of $39.4 million for the quarter ended August 31, 2002 (the first
quarter of fiscal 2003) were $9.3 million, or 19.2%, lower than net sales of
$48.7 million for the quarter ended September 1, 2001 (the first quarter of
fiscal 2002), and were $1.1 million, or 2.6%, lower than the net sales of $40.4
million for the immediately preceding quarter, which ended June 1, 2002.
The decrease in net sales in the first quarter of fiscal 2003 compared to the
first quarter of fiscal 2002 resulted primarily from decreases in sales of our
semiconductor yield improvement systems and electronic component manufacturing
systems. These decreases were offset in part by increases in sales of our
advanced electronic packaging systems, circuit fine tuning systems and vision
inspection systems.
Certain information regarding our net sales by product line is as follows (net
sales in thousands):
Three Months Ended August 31, Three Months Ended September
2002 (restated) 1, 2001 (restated)
------------------------------- ------------------------------
Net Sales Percent of Net Sales Percent of
Total Net Total Net
Sales Sales
Semiconductor Yield Improvement Systems $17,109 43.5% $22,987 47.2%
Electronic Component Manufacturing Systems 7,834 19.9 13,448 27.6
Advanced Electronic Packaging Systems 3,731 9.5 3,695 7.6
Vision and Inspection Systems 3,844 9.7 2,678 5.5
Circuit Fine Tuning Systems 6,842 17.4 5,880 12.1
------- ------- ------- ------
$39,360 100.0% $48,688 100.0%
------- ------- ======= ======
Gross margin decreased to $15.9 million (40.3% of net sales) for the first
quarter of fiscal 2003 from $21.0 million (43.1% of net sales) for the first
quarter of fiscal 2002. Included in cost of goods sold in the first quarter of
fiscal 2002 is $3.5 million for the write-down of inventory related to
discontinuing the manufacturing of certain products. Lower margins were due to a
change in product mix and lower utilization of factory capacity. We also
continue to see normal pricing pressure in all of our markets due to the
continued softness in overall electronics demand and pressure on our customers'
earnings.
Selling, service and administrative expenses decreased $8.0 million to $14.6
million (37.0% of net sales) in the first quarter of fiscal 2003 compared to
$22.5 million (46.3% of net sales) in the first quarter of fiscal 2002. Included
in selling, service and administrative expenses in the first quarter of fiscal
2003 was severance expense of $0.2 million. As a result of the restructuring
plan we implemented in June 2001 as discussed in Note 9, included in selling,
service and administrative expenses for the three month period ended September
1, 2001, was employee severance expense of $1.9 million, lease termination and
other facility consolidation costs of $1.5 million and net asset write-downs of
$0.8 million. Lower sales volume and a reduction of force resulted in decreased
commission and payroll expense in the first quarter of fiscal 2003 compared to
the first quarter of fiscal 2002.
Future operating results are highly dependent on our ability to maintain a
competitive advantage in the products and services we provide. To protect this
advantage, we continue to make investments in our research and development
efforts. Expenses associated with research, development and engineering
decreased $5.1 million to $7.6 million (19.4% of net sales) in the first quarter
of fiscal 2003 compared to $12.8 million (26.3% of net sales) in the first
quarter of fiscal 2002. The decrease was primarily due to decreases in research,
development and engineering headcount and lower project costs. As a result of
the restructuring plan we implemented in June 2001 as discussed in Note 9,
included in research, development and engineering expenses for the three month
period ended September 1, 2001, was employee severance and related expenses of
$0.6 million. We continue to invest in a significant number of development and
engineering projects that we see as important to our future.
12
In order to better align our operating expenses with anticipated revenues, we
implemented a restructuring plan in the first quarter of fiscal 2002. The
restructuring plan consisted of reducing our work force and vacating several
buildings. This reorganization resulted in restructuring charges of $4.4 million
in the first quarter of fiscal 2002, which are included in our statement of
operations in the line items to which they functionally relate. We also recorded
a $3.5 million inventory write-down related to discontinuing the manufacturing
of certain products in the first quarter of fiscal 2002. This inventory
write-down was reflected in our statement of operations as costs of sales. At
August 31, 2002, we had $0.7 million of accrued liabilities related to these
charges, which are expected to be incurred through 2006 (see also Notes 9 and 10
above).
Interest income for the first quarter of fiscal 2003 increased $1.0 million to
$2.9 million from $1.9 million in the first quarter of fiscal 2002. This
increase is mainly due to an increase in investment balances generated from our
sale of $150 million aggregate principal amount of 4 1/4% convertible
subordinated notes in December 2001 and January 2002.
Interest expense increased to $2.0 million in the first quarter of fiscal 2003
compared to $27,000 in the first quarter of fiscal 2002 due to our sale of
$150.0 million 4 1/4% convertible subordinated notes in December 2001 and
January 2002, which are due in 2006. Quarterly interest expense related to these
notes totals $1.6 million plus $0.2 million for the accretion of underwriting
discounts.
The income tax rate for the first quarter of fiscal 2003 was 42.1% compared
to 33.1% for the first quarter of fiscal 2002. The higher tax benefit for the
three months ended August 31, 2002 as compared to the statutory federal tax rate
is largely a result of tax interest refunds and the tax benefit related to
research and development tax credits.
Net loss for the first quarter of fiscal 2003 was $3.4 million, or $(0.12) per
diluted share, compared to a net loss of $8.2 million, or $(0.30) per diluted
share, in the first quarter of fiscal 2002.
Ending backlog on August 31, 2002 was $10.9 million compared to $22.6 million on
June 1, 2002.
Liquidity and Capital Resources
At August 31, 2002, our principal sources of liquidity consisted of existing
cash, cash equivalents and marketable securities of $288.9 million and accounts
receivable of $58.8 million. At August 31, 2002, we had a current ratio of
13.6:1 and long-term debt of $146.1 million. Working capital increased to $356.4
million at August 31, 2002 compared to $341.5 million at June 1, 2002.
13
Purchases of property, plant and equipment of $2.7 million in the first quarter
of fiscal 2003 were primarily for the continued construction of a new corporate
headquarters in Portland, Oregon. At August 31, 2002 we had capital commitments
of approximately $4.4 million for completion of the construction of our 62,000
square foot corporate headquarters building located on the Portland, Oregon
campus.
Current liabilities increased $3.7 million from June 1, 2002 primarily due to an
increase in deferred revenue generated from shipments of new products pending
acceptance, offset in part by the decrease in accrued interest expense generated
from our 4 1/4% convertible subordinated notes due 2006. We pay approximately
$3.2 million of interest on the subordinated notes semiannually on each June 21
and December 21.
At August 31, 2002 we had $146.1 million recorded on our balance sheet related
to our 4 1/4% convertible subordinated notes. The difference between the $150.0
million face value and the $146.1 million balance at August 31, 2002 relates to
underwriting discounts, which originally totaled $4.5 million and are being
amortized as additional interest expense over the life of the subordinated notes
at a rate of $0.2 million per quarter.
Critical Accounting Policies and Estimates
We reaffirm the critical accounting policies and our use of estimates as
reported in our annual report on Form 10-K/A for our fiscal year ended June 1,
2002, as filed with the Securities and Exchange Commission on August 11, 2003.
Factors That May Affect Future Results
The statements contained in this report that are not statements of historical
fact, including without limitation, statements containing the words "believes,"
"expects," and similar words, constitute forward-looking statements that are
subject to a number of risks and uncertainties. From time to time we may issue
other forward-looking statements. Investors are cautioned that such
forward-looking statements are subject to an inherent risk that actual results
may materially differ. The following information highlights some of the factors
that could cause actual results to differ materially from the results expressed
or implied by our forward-looking statements. Forward-looking statements should
be considered in light of these factors. Factors that may result in such
variances include, but are not limited to the following:
The industries that comprise our primary markets are volatile and unpredictable.
Our business depends upon the capital expenditures of manufacturers of
components and circuitry used in wireless communications, computers, automotive
electronics and other electronic products. In the past, the markets for
electronic devices have experienced sharp downturns. During these downturns,
electronics manufacturers, including our customers, have delayed or canceled
capital expenditures, which has had a negative impact on our financial results.
14
The current economic downturn has resulted in a reduction in demand for our
products and significant fluctuations in our profitability and net sales. We had
a net loss of $3.4 million during the three months ended August 31, 2002 on net
sales of $39.4 million and a net loss of $8.2 million for the three months ended
September 1, 2001 on net sales of $48.7 million. We cannot assure you that
demand for our products will increase.
During any downturn, including the current downturn, it will be difficult for us
to maintain our sales levels. As a consequence, in order to maintain
profitability we will need to reduce our operating expenses. However, much of
our operating expenses are fixed and our ability to reduce such expenses is
limited. Moreover, we may be unable to defer capital expenditures, and we will
need to continue investment in certain areas such as research and development.
We may incur charges related to impairment of assets and inventory write-offs.
We also may experience delays in payments from our customers. The combined
effect of these will have a negative effect on our financial results.
If the markets for our products improve, we must attract, hire and train a
sufficient number of employees, including technical personnel, to meet increased
customer demand. Our inability to achieve these objectives in a timely and
cost-effective manner could have a negative impact on our business.
Our recent capacity expansion may not be utilized successfully or
effectively, which could negatively affect our business.
We have completed a 53,000 square-foot manufacturing facility on a 31-acre
parcel in Klamath Falls, Oregon. In June 2001 we began construction of a 62,000
square foot corporate headquarters building in Portland, Oregon. Both projects
have been funded with existing capital resources and internally generated funds.
Our capacity expansion involves risks. For example, the electronics industry has
historically been cyclical and subject to significant economic downturns
characterized by over-capacity and diminished demand for products of the type
manufactured by us. In fiscal 2002 we adopted a restructuring plan that involved
the closure of several of our manufacturing facilities in response to the
current economic downturn. Unfavorable economic conditions affecting the
electronics industry in general, or any of our major customers, may affect our
ability to successfully utilize our additional manufacturing capacity in an
effective manner, which could adversely affect our operating results.
Our ability to reduce costs is limited by our need to invest in research
and development.
Our industry is characterized by the need for continued investment in research
and development. Because of intense competition in the industries in which we
compete, if we were to fail to invest sufficiently in research and development,
our products could become less attractive to potential customers, and our
business and financial condition could be materially and adversely affected. As
a result of our need to maintain our spending levels in this area, our operating
results could be materially harmed if our net sales fall below expectations. In
addition, as a result of our emphasis on research and development and
technological innovation, our operating costs may increase further in the
future, and research and development expenses may increase as a percentage of
total operating expenses and as a percentage of net sales.
15
We depend on a few significant customers and we do not have long-term contracts
with these or any of our other customers.
Twelve large, multinational electronics companies constituted 50.0% of our
fiscal 2002 net sales, and the loss of any of these customers could
significantly harm our business. In addition, none of our customers have any
long-term obligation to continue to buy our products or services, and any
customer could delay, reduce or cease ordering our products or services at any
time.
Delays in shipment or manufacturing of our products could substantially
decrease our sales for a period.
We will continue to derive a substantial portion of our revenues from the sale
of a relatively small number of products with high average selling prices, some
with prices as high as $2.0 million per unit. We generally recognize revenue
upon shipment of our products. As a result, the timing of revenue recognition
from a small number of orders could have a significant impact on our net sales
and operating results for a reporting period. Shipment delays could
significantly impact our recognition of revenue and could be further magnified
by announcements from us or our competitors of new products and technologies,
which announcements could cause our customers to defer purchases of our existing
systems or purchase products from our competitors. Any of these delays could
result in a material adverse change in our results of operations for any
particular period.
We depend on manufacturing flexibility to meet the changing demands of our
customers. Any significant delay or interruption of manufacturing operations as
a result of software deficiencies, natural disasters, or other causes could
result in ineffective manufacturing capabilities or delayed product deliveries,
any or all of which could materially and adversely affect our results of
operations.
Failure of critical suppliers of parts, components and manufacturing
equipment to deliver sufficient quantities to us in a timely and cost-effective
manner could negatively affect our business.
We use a wide range of materials in the production of our products, including
custom electronic and mechanical components, and we use numerous suppliers to
supply materials. We generally do not have guaranteed supply arrangements with
our suppliers. We seek to reduce the risk of production and service
interruptions and shortages of key parts by selecting and qualifying alternative
suppliers for key parts, monitoring the financial stability of key suppliers and
maintaining appropriate inventories of key parts. Although we make reasonable
efforts to ensure that parts are available from multiple suppliers, key parts
may be available only from a single supplier or a limited group of suppliers.
Operations at our suppliers' facilities are subject to disruption for a variety
of reasons, including work stoppages, fire, earthquake, flooding or other
natural disasters. Such disruption could interrupt our manufacturing. Our
business may be harmed if we do not receive sufficient parts to meet our
production requirements in a timely and cost-effective manner.
16
We may make additional acquisitions in the future, and these acquisitions
may subject us to risks associated with integrating these businesses into our
current business.
Although we have no commitments or agreements for any acquisitions, we have
made, and plan in the future to make, acquisitions of, or significant
investments in, businesses with complementary products, services or
technologies. Acquisitions involve numerous risks, many of which are
unpredictable and beyond our control, including:
-- Difficulties and increased costs in connection with integration of the
personnel, operations, technologies and products of acquired companies;
-- Diversion of management's attention from other operational matters;
-- The potential loss of key employees of acquired companies;
-- Lack of synergy, or inability to realize expected synergies, resulting from
the acquisition;
-- The risk that the issuance of our common stock in a transaction could be
dilutive to our shareholders if anticipated synergies are not realized; and
-- Acquired assets becoming impaired as a result of technological advancements
or worse-than-expected performance by the acquired company.
Our inability to effectively manage these acquisition risks could materially and
adversely affect our business, financial condition and results of operations. In
addition, if we issue equity securities to pay for an acquisition the ownership
percentage of our existing shareholders would be reduced and the value of the
shares held by our existing shareholders could be diluted. If we use cash to pay
for an acquisition the payment could significantly reduce the cash that would be
available to fund our operations or to use for other purposes. In addition, the
Financial Accounting Standards Board has disallowed the pooling-of-interests
method of acquisition accounting. This could result is significant charges
resulting from amortization of intangible assets recorded in connection with
future acquisitions.
Our markets are subject to rapid technological change, and to compete
effectively we must continually introduce new products that achieve market
acceptance.
The markets for our products are characterized by rapid technological change and
innovation, frequent new product introductions, changes in customer requirements
and evolving industry standards. Our future performance will depend on the
successful development, introduction and market acceptance of new and enhanced
products that address technological changes as well as current and potential
customer requirements. The introduction by us or by our competitors of new and
enhanced products may cause our customers to defer or cancel orders for our
existing products, which may harm our operating results. We have in the past
experienced a slowdown in demand for our existing products and delays in new
product development, and similar delays may occur in the future. We also may not
be able to develop the underlying core technologies necessary to create new
products and enhancements or, where necessary, to license these technologies
from others. Product development delays may result from numerous factors,
including:
-- Changing product specifications and customer requirements;
-- Difficulties in hiring and retaining necessary technical personnel;
-- Difficulties in reallocating engineering resources and overcoming resource
limitations;
-- Difficulties with contract manufacturers;
-- Changing market or competitive product requirements; and
-- Unanticipated engineering complexities.
17
The development of new, technologically advanced products is a complex and
uncertain process, requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely basis. Further, we cannot assure you
that our new products will gain market acceptance or that we will be able to
respond effectively to product announcements by competitors, technological
changes or emerging industry standards. Any failure to respond to technological
change would significantly harm our business.
We are exposed to the risks that others may violate our proprietary rights,
and our intellectual property rights may not be well protected in foreign
countries.
Our success is dependent upon the protection of our proprietary rights. In the
high technology industry, intellectual property is an important asset that is
always at risk of infringement. We incur substantial costs to obtain and
maintain patents and defend our intellectual property. For example, we have
initiated litigation alleging that certain parties have violated various of our
patents. We rely upon the laws of the United States and of foreign countries in
which we develop, manufacture or sell our products to protect our proprietary
rights. These proprietary rights may not provide the competitive advantages that
we expect, however, or other parties may challenge, invalidate or circumvent
these rights.
Further, our efforts to protect our intellectual property may be less effective
in some foreign countries where intellectual property rights are not as well
protected as in the United States. Many U.S. companies have encountered
substantial problems in protecting their proprietary rights against infringement
in foreign countries. If we fail to adequately protect our intellectual property
in these countries, it could be easier for our competitors to sell competing
products in foreign countries.
We may be subject to claims of intellectual property infringement.
Several of our competitors hold patents covering a variety of technologies,
applications and methods of use similar to some of those used in our products.
From time to time, we and our customers have received correspondence from our
competitors claiming that some of our products, as used by our customers, may be
infringing one or more of these patents. For example, in February 2001, Cognex
Corporation filed a lawsuit against us claiming we infringed a patent owned by
it. Competitors or others may assert infringement claims against our customers
or us in the future with respect to current or future products or uses, and
these assertions may result in costly litigation or require us to obtain a
license to use intellectual property rights of others. If claims of infringement
are asserted against our customers, those customers may seek indemnification
from us for damages or expenses they incur. We are not able to reliably estimate
the loss, if any, related to this matter at this time.
If we become subject to infringement claims, we will evaluate our position and
consider the available alternatives, which may include seeking licenses to use
the technology in question or defending our position. These licenses, however,
may not be available on satisfactory terms or at all. If we are not able to
negotiate the necessary licenses on commercially reasonable terms or
successfully defend our position, our financial condition and results of
operations could be materially and adversely affected.
18
We are exposed to the risks of operating a global business, including risks
associated with exchange rate fluctuations and legal and regulatory changes.
International shipments accounted for 74.8% of net sales for fiscal 2002, with
46.8% of our net sales to customers in Asia. We expect that international
shipments will continue to represent a significant percentage of net sales in
the future. Our non-U.S. sales and operations are subject to risks inherent in
conducting business abroad, many of which are outside our control, including the
following:
-- Periodic local or geographic economic downturns and unstable political
conditions;
-- Price and currency exchange controls;
-- Fluctuation in the relative values of currencies;
-- Difficulties protecting intellectual property;
-- Unexpected changes in trading policies, regulatory requirements, tariffs
and other barriers; and
-- Difficulties in managing a global enterprise, including staffing,
collecting accounts receivable, managing distributors and representatives
and repatriation of earnings.
In addition, as a result of our significant reliance on international sales, we
may also be adversely affected by challenges to U.S. tax laws that benefit
companies with certain foreign sales. In February 2000, the World Trade
Organization (WTO) ruled that foreign sales corporations (FSCs), which provide
an overall reduction in effective tax rates for companies with FSCs, violate
U.S. obligations under the General Agreement on Tariffs and Trade (GATT).
Responding to the WTO's decision that FSCs constitute an illegal export subsidy,
the U.S. government repealed the FSC rules effective October 1, 2000, subject to
certain transition rules, and created a new income tax benefit that permanently
excludes "foreign extraterritorial income" from taxable income. The
extraterritorial income (ETI) regime, which applies to transactions after
September 30, 2000, provides a similar tax benefit for export sales as the FSC
regime did. Following a European Union (EU) complaint, the WTO concluded in
August 2001 that the ETI provisions are also not WTO-compliant because
provisions violate the GATT agreements. The United States appealed the decision,
but in January 2002, an appellate body denied the appeal. On August 30, 2002, a
WTO arbitration panel issued a report approving the retaliatory tariffs
requested by the EU. The EU now has the authority to begin imposing trade
sanctions on U.S. exports up to the level approved by the arbitrators and the
authority for such sanctions will continue until the United States rectifies the
WTO violation. The U.S. government will likely choose to rectify the violation
to avoid retaliatory trade sanctions and is considering several options to do
so. It is possible that the U.S. government will repeal the ETI regime and if
the government does not replace it with an equivalent form of tax relief for
foreign income, our future results of operations may be adversely affected.
19
Our establishment of direct sales in Asia exposes us to the risks related
to having employees in foreign countries.
We have established direct sales and service organizations in China, Taiwan,
Korea and Singapore. Previously, we sold our products through a network of
commission-based sales representatives in these countries. Our shift to a direct
sales model in these regions involves risks. For example, we may encounter labor
shortages or disputes that could inhibit our ability to effectively sell and
market our products. We also are subject to compliance with the labor laws and
other laws governing employers in these countries and we will incur additional
costs to comply with these regulatory schemes. Additionally we will incur new
fixed operating expenses associated with the direct sales organizations,
particularly payroll related costs and lease expenses. If amounts saved on
commission payments formerly paid to our sales representatives do not offset
these expenses, our operating results may be adversely affected.
Our business is highly competitive, and if we fail to compete our business
will be harmed.
The industries in which we operate are highly competitive. We face substantial
competition from established competitors, some of which have greater financial,
engineering, manufacturing and marketing resources than we do. If we are unable
to compete effectively with these companies, our market share may decline and
our business could be harmed. Our competitors can be expected to continue to
improve the design and performance of their products and to introduce new
products. Furthermore, our technological advantages may be reduced or lost as a
result of technological advances by our competitors. Their greater capabilities
in these areas may enable them to:
-- Better withstand periodic downturns;
-- Compete more effectively on the basis of price and technology;
-- More quickly develop enhancements to and new generations of products; and
-- More effectively retain existing customers and obtain new customers.
In addition, new companies may in the future enter the markets in which we
compete, further increasing competition in those markets.
We believe that our ability to compete successfully depends on a number of
factors, including:
-- Performance of our products;
-- Quality of our products;
-- Reliability of our products;
-- Cost of using our products;
-- Our ability to ship products on the schedule required;
-- Quality of the technical service we provide;
-- Timeliness of the services we provide;
-- Our success in developing new products and enhancements;
-- Existing market and economic conditions; and
-- Price of our products as compared to our competitors' products.
We may not be able to compete successfully in the future, and increased
competition may result in price reductions, reduced profit margins, and loss of
market share.
20
Recent terrorist attacks have increased uncertainties for our business.
Like other U.S. companies, our business and operating results are subject to
uncertainties arising out of the recent terrorist attacks on the United States,
including the potential worsening or extension of the current global economic
slowdown, the economic consequences of military action or additional terrorist
activities and associated political instability, and the impact of heightened
security concerns on domestic and international travel and commerce.
In particular, due to these uncertainties we are subject to:
-- The risk that future tightening of immigration controls may adversely
affect the residence status of non-U.S. engineers and other key technical
employees in our U.S. facilities or our ability to hire new non-U.S.
employees in such facilities; and
-- The risk of more frequent instances of shipping delays.
The loss of key management or our inability to attract and retain
sufficient numbers of managerial, engineering and other technical personnel
could have a material adverse effect upon our results of operations.
Our continued success depends, in part, upon key managerial, engineering and
technical personnel as well as our ability to continue to attract and retain
additional personnel. The loss of key personnel could have a material adverse
effect on our business or results of operations. We may not be able to retain
our key managerial, engineering and technical employees. Our growth may be
affected by our ability to hire a new chief executive officer, new highly
skilled and qualified technical personnel, and personnel that can implement and
monitor our financial and managerial controls and reporting systems. Attracting
qualified personnel is difficult, and our recruiting efforts to attract and
retain these personnel may not be successful.
Item 4. Controls and Procedures
Immediately following the signature page of this amended quarterly report are
certifications of our President and Chief Executive Officer and our Chief
Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 (the
"Section 302 Certification"). This portion of our amended quarterly report on
Form 10-Q/A is our disclosure of the results of our controls evaluation
conducted under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, and within 90
days prior to the filing of this amended quarterly report referred to in
paragraphs (4), (5) and (6) of the Section 302 Certification and should be read
in conjunction with the Section 302 Certification for a more complete
understanding of the topics presented.
In March 2003 the Audit Committee of our Board of Directors, with the assistance
of outside legal counsel and forensic accountants, commenced an internal
investigation of certain accounting matters. The investigation involved the
review of (1) the circumstances surrounding the reversal of an accrual for
employee benefits, (2) unsupported accounting adjustments and clerical errors
primarily relating to inventory and cost of goods sold, and (3) certain other
areas where potential accounting errors could have occurred, including revenue
recognition. On July 15, 2003, we announced that the Audit Committee had
completed its review of these matters. As a result of the review, we determined
that the unaudited consolidated condensed financial statements for the three
months ended August 31, 2002 and November 30, 2002 and the audited consolidated
financial statements for the year ended June 1, 2002 required restatement.
21
Management has advised the Audit Committee that upon reviewing the restatement
adjustments and performing an evaluation of our controls and disclosure
procedures, management noted deficiencies in internal controls relating to:
1. Lack of complete sales documentation, particularly as it relates to
customer specified acceptance criteria;
2. Lack of adequate job transition/cross training and poorly documented
"desk" processes and procedures in the finance/accounting area;
3. Changes to accounting methodologies without notification to, or proper
authorization by, accounting oversight parties (i.e., the audit
committee and independent auditors); and
4. Lack of adequate tracking and monitoring of finished goods inventory
that was transferred out of the inventory management information
system.
The independent auditors advised the Audit Committee that these internal control
deficiencies constitute reportable conditions and, collectively, a material
weakness as defined in Statement of Auditing Standards No. 60. Certain of these
internal control weaknesses may also constitute deficiencies in our disclosure
controls.
While we, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, are in the process of
implementing a more effective system of disclosure controls and procedures, we
have instituted controls, procedures and other changes to ensure that
information required to be disclosed in this amended quarterly report on Form
10-Q/A has been recorded, processed, summarized and reported. The steps that we
have taken to ensure that all material information about our company is
accurately disclosed in this report include:
1. The appointment of an independent director to be Chairman of the Board
in April 2003, who was previously the Chief Executive Officer and
Chairman of the Board of KLA-Tencor Corporation;
2. The appointment of a previously independent director to be President
and Chief Executive Officer in April 2003, who was previously Chief
Financial Officer of Apex, Inc. and was the former Senior Vice
President and Chief Financial Officer of ESI for seven years until
1998;
3. The appointment of a new Chief Financial Officer in May 2003, who was
previously Chief Financial Officer of SpeedFam-IPEC, Inc. and Vice
President and Corporate Controller of Novellus Systems, Inc.;
4. The engagement of outside professionals specializing in accounting and
finance to assist our management in the collection, substantiation and
analysis of the information contained in this report; and
5. The performance of additional procedures by us designed to ensure that
these internal control deficiencies did not lead to material
misstatements in our consolidated financial statements.
22
We have also increased by two the number of independent directors on our board
by electing Richard J. Faubert, who previously served as President and Chief
Executive Officer of SpeedFam-IPEC, Inc. and held senior management positions at
Tektronix, Inc. and Genrad, Inc., and Frederick A. Ball, who previously served
as Senior Vice President and Chief Financial Officer of Borland Software
Corporation and as Vice President of Finance of KLA-Tencor Corporation.
Based in part on the steps listed above, our President and Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
In addition, in order to address further the deficiencies described above and to
improve our internal disclosure and control procedures for future periods, we
will:
1. Review and revise our processes and procedures for applying revenue
recognition policies, including more formalized training of finance,
sales, order management and other staffs;
2. Enhance accounting/finance training programs and desk processes and
procedures documentation as well as retain additional full-time
experienced accounting/finance personnel;
3. Provide additional management oversight and perform detailed reviews
of disclosures and reporting with the assistance of outside legal
counsel;
4. Account for all completed systems in the inventory management
information system; and
5. Use outside resources, as necessary, to supplement our employees in
the preparation of the consolidated financial statements and other
reports filed or submitted under the Securities Exchange Act of 1934.
These steps will constitute significant changes in internal controls. We will
continue to evaluate the effectiveness of our disclosure controls and internal
controls and procedures on an ongoing basis, and will take further action as
appropriate.
23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
This list is intended to constitute the exhibit index.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 27, 2002, reporting that the
Amended and Restated Rights Agreement, dated as of March 1, 2002, between us and
Mellon Investor Services, LLC to permit EQSF Advisors, Inc. to beneficially own
up to, but not including, an aggregate of 19.99% of the outstanding shares of
our common stock.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed by the undersigned
thereunto duly authorized.
Dated: August 11, 2003 ELECTRO SCIENTIFIC INDUSTRIES, INC.
By /s/ Barry L. Harmon
Barry L. Harmon
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ J. Michael Dodson
J. Michael Dodson
Vice President of Administration and
Chief Financial Officer
(Principal Financial and Accounting Officer)
25
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Barry L. Harmon, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Electro
Scientific Industries, Inc.;
2. Based on my knowledge, this amended quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amended quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
amended quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this amended
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
amended quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
amended quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: August 11, 2003
/s/ Barry L. Harmon
-------------------
Barry L. Harmon
President and Chief Executive Officer
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CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, J. Michael Dodson, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A of Electro
Scientific Industries, Inc.;
2. Based on my knowledge, this amended quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amended quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
amended quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this amended
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this amended quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
amended quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: August 11, 2003
/s/ J. Michael Dodson
---------------------
J. Michael Dodson
Vice President of Administration and
Chief Financial Officer
26