UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
¨ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
x | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from June 3, 2007 to March 29, 2008
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
13900 N.W. Science Park Drive, Portland, Oregon | 97229 | |
(Address of principal executive offices) | (Zip Code) |
Registrants 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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sales price ($23.96) as reported by the NASDAQ National Market System, as of the last business day of the Registrants most recently completed second fiscal quarter (September 29, 2007) was $667,149,069.
The number of shares outstanding of the Registrants Common Stock as of June 6, 2008 was 27,090,958 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of this Form 10-K, by reference, portions of its Proxy Statement for its 2008 Annual Meeting of Shareholders.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I | ||||
Item 1. |
1 | |||
Item 1A. |
9 | |||
Item 1B. |
16 | |||
Item 2. |
16 | |||
Item 3. |
17 | |||
Item 4. |
17 | |||
PART II | ||||
Item 5. |
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 18 | ||
Item 6. |
20 | |||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | ||
Item 7A. |
36 | |||
Item 8. |
38 | |||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
69 | ||
Item 9A. |
69 | |||
Item 9B. |
73 | |||
PART III | ||||
Item 10. |
73 | |||
Item 11. |
73 | |||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 73 | ||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
73 | ||
Item 14. |
73 | |||
PART IV | ||||
Item 15. |
74 |
Item 1. | Business |
This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under the caption Factors That May Affect Future Results included within Item 1A. Risk Factors.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 as amended (Exchange Act). You can inspect and copy our reports, proxy statements, and other information filed with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, D.C 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at www.sec.gov where you can obtain most of our SEC filings. We also make available, free of charge on our website at www.esi.com , our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You can also obtain copies of these reports by contacting Investor Relations at (503) 641-4141.
Fiscal Year
On July 3, 2007, our Board of Directors approved a change in our reporting periods that results in a fiscal year consisting of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, our fiscal 2008 reporting period consisted of a 43-week period ending on March 29, 2008 (approximately ten months). Prior to the change in our reporting periods, the fiscal year ended on the Saturday nearest May 31. As such, fiscal 2007 ended on June 2, 2007 and fiscal 2006 ended on June 3, 2006 and those fiscal years contained 52 weeks and 53 weeks, respectively. All references to years relate to fiscal years unless otherwise noted.
Acquisition of New Wave Research, Incorporated
On July 20, 2007, we acquired New Wave Research, Incorporated (NWR), a privately-held company headquartered in Fremont, California. NWR is a global leader in the development of high-end lasers and laser-based systems and its products are used in the semiconductor market for sapphire wafer scribing, flat-panel display repair and semiconductor failure analysis, among other applications. The acquisition was an investment aimed at leveraging our combined core competencies into adjacent markets and driving revenue growth and shareholder value. See Acquisition of New Wave Research, Incorporated in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 4 Acquisition of New Wave Research, Incorporated of the Notes to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data of Part II of this Form 10-K for further discussion.
Business Overview
Electro Scientific Industries, Inc. and its subsidiaries (ESI) provide high-technology manufacturing equipment to the global semiconductor and micro-electronics markets, including advanced laser systems that are used to micro-engineer electronic device features in high-volume production environments. Our customers are primarily manufacturers of semiconductors, passive components and interconnect devices. Our equipment enables these manufacturers to achieve the yield and productivity gains in their manufacturing processes that can be critical to their profitability. The components and devices manufactured by our customers are used in a wide variety of end products in the computer, consumer electronics, communications and automotive industries. ESI was founded in 1944 and is headquartered in Portland, Oregon.
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We supply advanced laser microengineering and testing systems that allow semiconductor and micro-electronics manufacturers to physically alter select device features during high-volume production in order to heighten performance and boost production yields in a variety of end markets. Laser microengineering comprises a set of precise fine-tuning processes, including laser micro-machining, scribing, semiconductor memory-link cutting, device trimming and via drilling, that requires application-specific laser systems able to meet semiconductor and micro-electronics manufacturers exacting performance and productivity requirements. Our laser-based systems improve production yields or enable improved performance during the manufacturing process for semiconductor devices, high-density interconnect (HDI) circuits, including flexible interconnect material and advanced semiconductor packaging, high-brightness light emitting diodes (LED), flat panel liquid crystal displays (LCD) and general micro-machining applications.
Additionally, we produce high capacity test and optical inspection equipment which is critical to the quality control process during the production of multi-layer ceramic capacitors (MLCCs). Our equipment ensures that each MLCC meets both the electrical and physical tolerances required to perform properly.
Semiconductor and Micro-electronics Industry Overview
The semiconductor and micro-electronics markets continue to be driven by demand for advanced features and improved functionality for consumer items. The markets for consumer-oriented electronics such as smart phones, computers, handheld devices, digital video recorders, digital cameras and high-definition televisions have developed rapidly as increasingly affordable products have been introduced that are smaller, lighter and more portable. In addition, most automobile manufacturers now include electronic ignition, fuel injection, anti-lock brakes, and other electronic safety and sensor systems as standard equipment, replacing components that in the past were predominantly mechanical or hydraulic.
The increasing demand for electronic products has been accompanied by the need for faster, smaller, more complex, less expensive and higher-quality electronic devices and circuits. To achieve these performance and size improvements, semiconductor and other device manufacturers are increasing the circuit densities in these devices and tuning them to precise electrical values. Manufacturers of cellular telephones, for example, must use miniaturized circuits to accommodate the size limitations of their finished products. These circuits must also be tuned to operate within precise frequency specifications, enabling the existing wireless frequency bands to accommodate more users without inter-channel interference.
Smaller and lighter requirements also decrease the physical dimensions used in electronic interconnections for semiconductor packaging and the HDI circuit board on which it is mounted. Higher operating speeds of computers and communications products also require more input and output channels within these packages and between the packages and the HDI circuit board.
The highly competitive consumer markets for electronic products drive demand for lower-cost semiconductor devices and components. Semiconductor devices are produced in large unit volumes and their production and testing is highly automated, utilizing a variety of manufacturing equipment. Manufacturers continually seek to reduce costs by improving throughput, yield and quality. These manufacturers are also developing new materials to improve performance and reduce costs of their devices. These ongoing changes challenge semiconductor equipment suppliers to continually innovate new manufacturing process solutions and equipment.
For example, dynamic random access memory (DRAM) producers are continuing to shrink the size of individual memory devices on a wafer in order to increase production and lower costs. As the industry moves from the 90 nanometer technology node, which was the recent standard, down to 70 nanometers and below, the density of memory devices per 300mm wafer can increase as much as 50%. Since production costs per wafer are relatively fixed, increasing the number of devices per wafer represents a significant productivity increase without adding additional costs.
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To improve production yield, or the number of functioning devices produced per silicon wafer, device manufacturers are utilizing advanced systems, such as our ultraviolet (UV) laser memory repair products, to boost final yields in the manufacture of devices. This includes DRAM, NAND flash memory, and non-memory devices, such as logic with embedded memory and high-end electronic game chips.
As semiconductor manufacturers move toward higher densities and more complex architectures, machine vision has also emerged as a critical technology. Machine vision is an enabling technology in the semiconductor manufacturing process that allows manufacturers to achieve increased equipment speed with fewer errors. Moreover, machine-vision technology is proving to be integral to applications such as wafer identification. As the increased functionality of next-generation chips continues to drive up total wafer cost, the need to accurately track and identify wafers will become even more critical to chip manufacturers bottom lines.
Variations of these advanced semiconductor technologies and manufacturing processes that are routinely used in semiconductor fabs are increasingly being employed in the production of passive components, HDI circuit boards and advanced semiconductor packages. An example is the use of machine vision for optical inspection of passive components. As device sizes grow ever smaller and critical dimensions of the electrical contacts become more precise, machine vision, incorporated with high-speed handling and real-time software, allows for inspection of MLCCs at over 150,000 parts per hour.
Additionally, a growing portion of our business is derived from custom micro-machining applications. Any material that can be cut, drilled, or etched using a mechanical process can be micro-machined with greater precision and accuracy using a laser-based solution. As technologies shrink and the form factors of consumer goods and other products or devices become more compact, mechanical processes will not be able to meet the stringent specifications demanded by producers. The capabilities of laser-based solutions for micro-machining will enable our customers to move beyond the limitations of mechanical processes and generate significant growth for the Company in the future.
Our Solutions
We believe our products address the needs of semiconductor and micro-electronics manufacturers by providing them with a high return on their investment due to measurable production benefits, including improved yield, increased throughput, higher performance, smaller component size, greater reliability and enhanced flexibility. We typically design our production systems to be easily upgraded, enabling them to accommodate the next generation of technology and giving customers the flexibility to add capacity or improve product performance at a reasonable incremental cost.
Our core competencies enable us to design, manufacture, and market integrated solutions that direct and characterize photons, or light, for microengineering applications in high-volume manufacturing environments. These core competencies include a deep understanding of laser/material interaction, laser beam positioning, optics and illumination including image processing and optical character recognition, high-speed motion control, small parts handling, and systems engineering. We combine this technology expertise in unique and innovative ways with a thorough understanding of our customers processes and objectives to develop integrated solutions and products addressing multiple markets and applications.
Our customers manufacture semiconductors, passive components and interconnect/micromachining devices which, in turn, serve a wide range of electronic applications. The largest end-market applications for electronic devices and circuits that are produced using our systems are:
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Computers; |
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Telecommunications; |
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Consumer electronics; and |
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Automotive electronics. |
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Our Strategy
Our strategy is to leverage our core competencies to be a market leader across multiple new and existing markets and applications. These core competencies, combined with an understanding of our customer processes and the use of common platforms, enable us to address a broad range of microengineering applications and end markets in high-volume manufacturing environments. We intend to focus our efforts on businesses and applications where our differentiated capability enables us to be a market leader. The elements of our strategy are to gain share in our established markets and expand our addressable markets by entering adjacent applications within existing markets or extending existing applications or technologies into adjacent markets. We will continue to invest in research and development (R&D) to maintain our market leadership and increase the value of our products to global customers.
Gaining market share in existing markets
We intend to leverage our core competencies and existing technologies to grow our overall market position serving manufacturers in semiconductor, advanced semiconductor packaging, LED wafer production, LCD repair and passive componentsall markets in which we currently maintain a leadership position. We intend to maintain and grow our leadership position by developing new products that have higher performance, greater throughput and enhanced reliability, thereby lowering the effective cost of ownership to our customers.
Expand our addressable markets
We plan to leverage our core competencies, customer collaboration, and common platforms to expand our addressable markets by entering into adjacent applications such as via drilling, scribing, dicing, or optical inspection of different types of materials or devices within our existing markets including semiconductors, micro-electronics, and passive components. In addition, we believe there are opportunities to extend these same types of applications to enable better performance or yield improvement of devices or components used in adjacent end markets such as energy, medical, industrial and security. We intend to expand our addressable markets through both internal and external business development.
Invest in research and development to maintain our technological leadership
We intend to further develop our technological leadership by maintaining a significant level of investment in research and development. Our key technological capabilities include laser/material interaction, laser beam positioning, optics and illumination including image processing and optical character recognition, high-speed motion control systems, small parts handling systems, and systems integration. We consider our continuing ability to develop intellectual property to be an important component of our future success.
Increase the value of our products to global customers
We are focused on improving the yield, throughput and productivity of our customers by utilizing our technology, global infrastructure, customer service and ability to integrate multiple technologies. We work with our market-leading customers through high-level, multi-disciplinary management and employee teams to define and produce the next generation of manufacturing systems. This requires confidential interaction between the customer and ESI, sharing technology, product and production roadmaps often looking out over a three- to five-year period. Embracing the industry trend toward true globalization of our business has enabled us to elevate our presence in key world markets, particularly in the Asia-Pacific market.
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Our Products
We operate within one segment, high technology manufacturing equipment, which is comprised of products grouped according to our three key target markets: semiconductors, passive components and interconnect /micro-machining. Net sales by group, as a percentage of total sales, were as follows (in thousands):
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Fiscal year ended
June 2, 2007 |
Fiscal year ended
June 3, 2006 |
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Semiconductor |
$ | 109,156 | 44.2 | % | $ | 145,381 | 58.0 | % | $ | 126,682 | 61.2 | % | ||||||
Passive Components |
75,112 | 30.4 | 63,093 | 25.2 | 46,305 | 22.4 | ||||||||||||
Interconnect/Micro-machining |
62,887 | 25.4 | 42,350 | 16.8 | 34,019 | 16.4 | ||||||||||||
$ | 247,155 | 100.0 | % | $ | 250,824 | 100.0 | % | $ | 207,006 | 100.0 | % | |||||||
Semiconductor Group
Semiconductor Memory Yield Improvement Systems
Our semiconductor memory-yield improvement product line is designed to cost-effectively meet the production challenges faced by semiconductor manufacturers, including shrinking circuit sizes, material changes and increasing numbers of memory devices per wafer. As circuit densities in semiconductor memory devices such as DRAM have increased, manufacturers have built redundant cells into their memory designs and connected them with small electrical links on the device surface. During the manufacturing process, wafers with millions of individual memory cells are tested to identify defective cells. Our laser systems are then used to cut links that reprogram the device by disconnecting the paths to defective portions of the memory device and replacing them with functional redundant cells. This process drives significant post-repair yield improvements for our customers.
Our semiconductor memory-yield equipment is primarily used in the manufacture of DRAMs and NAND flash memory devices.
Our 98XX series systems are designed specifically for the 300mm wafer processing market, but can also handle 200mm wafers. Our UV laser fuse processing tools deliver best in class spot size with greater depth of focus for processing future generations of ICs. With the recent introduction of the dual-beam 9850 system, ESI provides significant throughput increases compared to a single beam repair tool. The 9850 can be configured for use in either infrared (IR) or UV laser fuse processes. These high-performance systems deliver increased manufacturing productivity and minimize capital requirements.
Machine-Vision Systems
Our machine-vision sub-systems are a key module integrated into our systems. Our machine-vision sub-systems are predominantly sold to original equipment manufacturers (OEMs) for incorporation into electronics-manufacturing equipment, performing alignment, identification, part placement, die and wire bonding and other functions.
In addition to alignment and inspection applications, we also provide a wafer identification tool that is sold to both OEMs and chipmakers. Our Bullet wafer-identification (ID) reader combines the industrys smallest read head with ESIs patented telecentric lighting technology, enabling the Bullet to identify any kind of wafer by reading all types of ID marksfrom hard scribe marks to super-soft marks used in new and emerging optical character recognition wafer-tracking applications. As the increased functionality of next-generation chips continues to drive up total wafer cost, the need to accurately track and identify each wafer will be critical to a chip manufacturers bottom line.
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Thin Film Trimming
Our Model 2100 thin-film-on-silicon (TFOS) trimming system continues to gain market traction. Over the past year, multiple leading analog integrated circuit (IC) manufacturers placed repeat orders to increase their installed base of these tools. This system uses a unique prober-independent architecture and patented 1.3-micron wavelength process to deliver superior throughput and yield. The Model 2100 enables manufacturers to improve the precision of the components they produce by trimming performance parameters to specific values for applications in wireless, instrumentation, and precision analog devices.
LED Wafer Scribing
Our Accuscribe line of sapphire wafer scribing tools is a key component in the manufacture of high-brightness blue LEDs. During production, these LEDs are created on a thin wafer of synthetic sapphire crystal that must be broken up into individual units at the end of the process. The brittle nature of the synthetic sapphire wafer requires that they be carefully cut in order to prevent unwanted fractures and yield losses when the wafer is broken apart into discreet LEDs. The Accuscribe system uses a laser scribing process to etch the wafer with a precise groove between individual LEDs. When mechanical force is applied to the wafer, it fractures along these grooves and allows the wafer to be split apart into discreet LEDs which results in high production yields.
LCD Repair
Our laser LCD repair systems are critical to improving yields in the manufacture of flat panel displays. During production, individual pixels of a display may develop electrical defects that result in either emitting no light or only producing a steady white light. To correct these defects, flat panel display producers employ a laser repair process to isolate the electrical defects during production by cutting the inputs to the pixel. Our laser systems are primarily sold as a key component to the manufacturers of LCD repair tools that are used in high-volume production environments.
Passive Components Group
We design and manufacture products that combine high-speed, small parts handling technology with real-time control systems to provide highly automated, cost-effective solutions for manufacturers of MLCCs and other passive components such as capacitor arrays, inductors, resistors, varistors and hybrid circuits. These components, produced in quantities of hundreds of billions of units per year, process analog, digital and high-frequency signals in nearly all electronic products. We provide several types of products and solutions in this market. Our MLCC test systems employ high-speed handling and positioning techniques to precisely load, test and sort MLCCs based on their electrical energy storage capacity, or capacitance, and their electrical energy leakage, or dissipation factor. Our model 35xx is the most productive tester in the market today and continues to gain acceptance with major MLCC manufacturers which have traditionally developed and used their own in-house systems. We offer termination systems which apply a conductive material to the ends of ceramic capacitors permitting connection of the device in a circuit on a high-density printed wiring board. Our optical inspection systems perform six-sided automated inspection of MLCCs and arrays for dimensional criteria and defects. Circuit fine-tuning systems are application-specific laser systems that adjust the electrical performance of a hybrid circuit, or that adjust an electronic assembly containing many circuits, by removing a precise amount of material from one or more circuit components. Finally, we produce consumable products such as carrier plates and termination belts, both of which are used to hold MLCCs in the manufacturing process.
Interconnect/Micro-machining Group
For electrical interconnect applications, our laser microvia engineering systems are targeted at applications that require the highest accuracy and smallest via dimensions to create electrical connections between layers in high-density circuit boards, flexible circuits and IC packages. Our microvia drilling technology addresses the rapidly changing applications in IC packages, multichip modules and HDI circuit boards. Our UV laser
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processing systems employ state-of-the-art technology in lasers, optics and motion control. Our products include single-beam and multi-beam systems that produce very high quality vias (holes) with the best-in-class placement accuracy for improved yield of packages and substrates.
In addition, our tools can be configured with a variety of lasers and material handling devices that make them ideal for general micro-machining applications. As technologies enable shrinking sizes and the form factors of consumer goods and other products or devices become more compact, mechanical processes will not be able to meet the stringent specifications demanded by producers. The capabilities of laser-based solutions for micro-machining will enable our customers to move beyond the limitations of mechanical processes and generate significant growth for the Company in the future.
Customers
Our top ten customers for fiscal 2008, 2007 and 2006 accounted for approximately 59%, 62%, and 55%, respectively, of total net sales, with two customers, Samsung and Hynix, accounting for approximately 23%, 34% and 25% of total net sales in fiscal 2008, 2007 and 2006, respectively. Except for a distributor in Japan, Canon Sales, no other customer in fiscal 2008, 2007 or 2006 accounted for more than 10% of total net sales. Canon Sales accounted for an additional 10% of total net sales in fiscal 2006. These high-volume customers purchase products from all three of our product groups.
Geographic sales, based on the location of the end user, were as follows (in thousands):
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June 2, 2007 |
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Asia |
$ | 183,783 | 74.4 | % | $ | 187,228 | 74.6 | % | $ | 155,959 | 75.3 | % | ||||||
Americas |
43,870 | 17.7 | 40,987 | 16.3 | 36,351 | 17.6 | ||||||||||||
Europe |
19,502 | 7.9 | 22,609 | 9.1 | 14,696 | 7.1 | ||||||||||||
$ | 247,155 | 100.0 | % | $ | 250,824 | 100.0 | % | $ | 207,006 | 100.0 | % | |||||||
Long-Lived Assets
Long-lived assets, exclusive of marketable securities and deferred tax assets, by geographic area were as follows at March 29, 2008 and June 2, 2007 (in thousands):
2008 | 2007 | |||||
United States |
$ | 89,525 | $ | 62,365 | ||
Asia |
16,945 | 9,430 | ||||
Europe |
127 | 136 | ||||
$ | 106,597 | $ | 71,931 | |||
Sales, Marketing and Service
We sell our products worldwide through direct sales and service offices, value-added resellers and independent representatives located around the world. ESI has direct sales and service personnel in Oregon, Texas and several other states; Japan, Korea, Taiwan, Singapore and China in Asia; and the United Kingdom, Germany and France in Europe. We serve selected customers in the United States, South America, Europe, Israel and additional countries through manufacturers representatives. Through fiscal 2008, Canon Sales was a distributor for our Semiconductor Group (SG) in Japan but the agreement ended on March 31, 2008 as the Company implemented an internal sales and service plan for SG products.
We have a substantial base of installed products in use by leading worldwide semiconductor and micro-electronics manufacturers. We emphasize strong working relationships with these customers to meet their needs for additional systems and to facilitate the successful development and sale of new products to these customers.
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We generally maintain service personnel wherever we have a significant installed base. We offer a variety of warranty, maintenance and parts replacement programs to service the requirements of a high-volume manufacturing environment.
Backlog
Backlog consists of purchase orders for products, spare parts and service that we expect to ship or perform within twelve months. Backlog does not include deferred revenue. Backlog was $42.1 million at March 29, 2008 compared to $56.7 million at June 2, 2007, representing a decrease of 26% primarily due to weak demand in the fourth quarter of fiscal 2008. The stated backlog is not necessarily indicative of sales for any future period nor does backlog represent any assurance that we will realize a profit from filling the orders.
Research, Development and Technology
We believe that our ability to compete effectively depends, in part, on our ability to maintain and expand our expertise in core technologies and product applications. The primary emphasis of our research and development is to advance our capabilities in:
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Lasers and laser/material interaction; |
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High-speed, micron-level motion control systems; |
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Precision optics; |
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Image processing and optical character recognition; |
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High-speed, small parts handling; |
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Real-time production-line electronic measurement; |
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Real-time operating systems; and |
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Systems integration. |
Our research and development expenditures for fiscal 2008 (ten months), 2007 and 2006 were $36.4 million (14.7% of net sales), $37.7 million (15.0% of net sales) and $33.8 million (16.3% of net sales), respectively.
Competition
Our markets are dynamic, cyclical and highly competitive. The principal competitive factors in our markets are product performance, ease of use, cost of ownership, reliability, service, technical support, a product improvement path, price, established relationships with customers, product familiarity and proprietary technology. We believe that our products compete favorably with respect to these factors. Some of our competitors have greater financial, engineering and manufacturing resources and larger distribution networks than we do. Some of our customers develop, or have the ability to develop, manufacturing equipment similar to our products. Competition in our markets may intensify and our technological advantages may be reduced or lost as a result of technological advances by competitors or customers or changes in electronic device processing technology.
The principal competitor for our semiconductor group is GSI Group Inc. Cognex Corporation is our principal competitor in the field of machine vision. Competitors for LED scribing include Disco Corporation, JP Sercel Associates, Inc. and Laser Solutions, Inc. LCD repair competitors include Big Sky Laser Technologies, Inc. and Hoya Corporation. Our interconnect/micro-machining group competes with laser systems provided by Hitachi Via Mechanics Ltd., LPKF Laser & Electronics AG and Mitsubishi Electric Corporation. For the passive component group, our competitors include All Ring Tech Co. Ltd., Daiichi Jitsugyo Viswill Co., Ltd., GSI Group Inc., Humo Laboratory, Ltd. and Tokyo Weld Co., Ltd. as well as component manufacturers that develop systems for internal use. See discussion of a patent infringement action that ESI has brought against All Ring Tech Co. Ltd. in Part I Item 3 Legal Proceedings.
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Manufacturing and Supply
Our production facilities are located in Portland, Oregon, Klamath Falls, Oregon, and Fremont, California. The Fremont facility manufactures products for our NWR division. The manufacturing operations located in Portland consist of electronic subassembly and final system assembly for all other products, except as described in the next paragraph and passive component consumable products, which are produced in our facility in Klamath Falls. In addition, we utilize a major global contract manufacturer in Singapore to complete final assembly for certain systems. As we move forward with efforts to streamline the organization and improve efficiencies, we expect a growing percentage of final systems will be shipped from the contract manufacturer.
We use qualified manufacturers to supply many components and sub-system modules of our products. Our systems use high-performance computers, peripherals, lasers and other components from various suppliers. Some of the components we use are obtained from a single source or a limited group of suppliers. An interruption in the supply of a particular component would have a temporary adverse impact on us. We believe our relationships with our suppliers are good.
Patents and Other Intellectual Property
We have a policy of seeking patents, when appropriate, on inventions relating to new products and improvements that are discovered or developed as part of our ongoing research, development and manufacturing activities. We own 147 United States patents and 222 patents issued outside of the United States as of March 29, 2008. Additionally, as of March 29, 2008, we had 104 patent applications pending in the United States and 316 patent applications pending outside of the United States. Although our patents are important, we believe that the success of our business also depends on the technical competence and innovation of our employees.
We rely on copyright protection for our proprietary software. We also rely upon trade secret protection for our confidential and proprietary information. Others may independently develop substantially equivalent proprietary information and techniques, and we may be unable to meaningfully protect our trade secrets.
Employees
As of March 29, 2008, we employed 743 people. Many of our employees are highly skilled, and our success will depend in part upon our ability to attract and retain such employees, who are in great demand. We have never had a work stoppage or strike, and no employees are represented by a labor union or covered by a collective bargaining agreement. We consider our employee relations to be good.
Item 1A. | Risk Factors |
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 make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may differ materially. 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 and we are experiencing weakness in some of our markets.
Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications, computers and other electronic products. The markets for electronic devices have experienced sharp downturns. In fiscal 2008, we began to see the impact of weakness in the memory market and
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lower capital spending, particularly in the fourth quarter. For example, orders were down 31% in the fourth quarter of fiscal 2008 from the third quarter of fiscal 2008. During such downturns, semiconductor and micro-electronics manufacturers, including our customers, can be expected to delay or cancel capital expenditures, which may have a negative impact on our financial results. During a downturn, we are not able to project when demand for our products will increase or that demand will not decrease further. Even if demand for our products does increase, there may be significant fluctuations in our profitability and net sales.
During this and any downturn, it is difficult for us to maintain our sales levels. As a consequence, to maintain profitability we need to reduce our operating expenses. Our ability to quickly reduce operating expenses is dependent upon the nature of the actions we take to reduce expense and our subsequent ability to implement those actions and realize expected cost savings. Additionally, we may be unable to defer capital expenditures and we need to continue to invest in certain areas such as research and development. This and any economic downturn may also cause us to incur charges related to impairment of assets and inventory write-offs, and we may experience delays in payments from our customers, which would have a negative effect on our financial results.
In addition, because we derive a substantial portion of our revenue from the sale of a relatively small number of products, the timing of, or changes to, orders by our customers may also cause our order levels and results of operations to fluctuate between periods, perhaps significantly. Accordingly, order levels or results of operations for a given period may not be indicative of order levels or results of operations for following periods.
Our business is highly competitive, and if we fail to compete effectively, 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. New companies may enter the markets in which we compete, or industry consolidation may occur, further increasing competition in those markets. Furthermore, our technological advantages may be reduced or lost as a result of technological advances by our competitors.
Our competitors greater resources in the areas described above may enable them to:
|
Better withstand periodic downturns; |
|
Compete more effectively on the basis of price and technology; and |
|
More quickly develop enhancements to and new generations of products. |
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; |
|
The ability to upgrade our products; |
|
Consistent availability of critical components; |
|
Our ability to ship products on schedules required; |
|
Quality of the technical service we provide; |
|
Timeliness of the services we provide; |
10
|
Our success in developing new products and enhancements; |
|
Our understanding of the needs of our customers; |
|
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.
We depend on a few significant customers and we do not have long-term contracts with any of our customers.
Our top ten customers for fiscal 2008 accounted for approximately 59% of total net sales in fiscal 2008, with two customers accounting for a cumulative 23% of total net sales in fiscal 2008. None of our customers has 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. In addition, the semiconductor industry, and particularly the memory market is very cyclical, which could result in consolidation or changes in various partnership and technology arrangements amongst our customers. These changes could affect demand for our products and impact our technology roadmaps.
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, or alternative technologies, may cause our customers to defer, change or cancel orders for our existing products, which may harm our operating results. In the past we have also experienced delays in new product development. Similar delays may occur in the future. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements or, where necessary, to license these technologies from others.
Product development delays may result from numerous factors, including:
|
Changing product specifications and customer requirements; |
|
Difficulties in hiring and retaining necessary technical personnel; |
|
Difficulties in reallocating engineering resources and overcoming resource limitations; |
|
Difficulties with contract manufacturers; |
|
Changing market or competitive product requirements; and |
|
Unanticipated engineering complexities. |
The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technology changes or emerging industry standards. Any failure to respond to technology change that may render our current products or technologies obsolete could significantly harm our business.
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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 from numerous suppliers in the production of our products, including custom electronic and mechanical components. 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, some key parts are available only from a single supplier or a limited group of suppliers in the short term. Operations at our suppliers facilities are subject to disruption for a variety of reasons, including changes in business relationships, competitive factors, 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.
Delays in manufacturing, shipment or customer acceptance of our products could substantially decrease our sales for a period.
We depend on manufacturing flexibility to meet the changing demands of our customers. Any significant delay or interruption in receiving raw materials or in our manufacturing operations as a result of software deficiencies, natural disasters, or other causes could result in reduced manufacturing capabilities or delayed product deliveries, any or all of which could materially and adversely affect our results of operations.
We also have an arrangement with a contract manufacturer in Singapore to complete the manufacture of certain of our products. Any significant interruption in this contract manufacturers ability to provide manufacturing services to us as a result of contractual disputes with us or another party, labor disruptions, natural disasters, delay or interruption in the receipt of inventory or other causes could result in reduced manufacturing capabilities or delayed deliveries for certain of our products, any or all of which could materially and adversely affect our results of operations.
In addition, we derive a substantial portion of our revenue from the sale of a relatively small number of products. Consequently, shipment and/or customer acceptance delays, including acceptance delays related to new product introductions or customizations, could significantly impact recognition of revenue and could be further magnified by announcements from us or our competitors of new products and technologies. Such announcements could cause our customers to defer purchases of our systems, change existing orders 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 acquire inventory based upon projected demand. If these projections are incorrect, we may carry inventory that cannot be used, which may result in significant charges for excess and obsolete inventory.
Our business is highly competitive and one factor on which we compete is the ability to ship products on schedules required by customers. In order to facilitate timely shipping, management forecasts demand, both in type and amount of products, and these forecasts are used to determine inventory to be purchased. Certain types of inventory, including lasers and optical equipment, are particularly expensive and can only be used in the production of a single type of product. If actual demand is lower than forecast with respect to the type or amount of products actually ordered, or both, our inventory levels may increase. As a result, there is a risk that we may have to incur material accounting charges for excess and obsolete inventory if inventory cannot be used, which could negatively affect our financial results.
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
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obtain and maintain patents and defend our intellectual property. For example, we have initiated litigation alleging that certain parties have violated various patents of ours, such as the action we initiated in Taiwan against All Ring Tech Co., Ltd. in August 2005. 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. However, these proprietary rights may not provide the competitive advantages that we expect 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, which could result in reduced sales and gross margins.
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. Competitors or others have in the past and may in the future assert infringement claims against our customers or us 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.
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.
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 in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.
Our worldwide direct sales and service operations and our overseas research and development facility expose us to employer-related risks in foreign countries.
We have established direct sales and service organizations throughout the world. We have also established a research and development facility in China. Having overseas employees involves certain risks. We are subject to compliance with the labor laws and other laws governing employers in the countries where our operations are located and as a result we may incur additional costs to comply with these local regulations. Additionally, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell, market and service our products. If we cannot effectively manage the risks related to employing persons in foreign countries, our operating results could be adversely affected.
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We completed an acquisition and may make acquisitions in the future, and these acquisitions may subject us to risks associated with integrating these businesses into our current business.
In fiscal 2008, we completed the acquisition of New Wave Research, Incorporated (NWR) and in the future we may make acquisitions of, or significant investments in, other businesses with complementary products, services or technologies.
Acquisitions, including the acquisition of NWR, 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 managements 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; |
|
Acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company; |
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Difficulties establishing satisfactory internal controls at acquired companies; and |
|
Incurring liabilities for which we may not be indemnified in full or at all. |
Our inability to effectively manage these acquisition risks could materially and adversely affect our business, financial condition and results of operations and could cause us not to realize the anticipated benefits of an acquisition on a timely basis or at all. 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 accounting for acquisitions, including the NWR acquisition, could result in significant charges resulting from amortization of intangible assets related to such acquisitions. We may make additional strategic investments in development stage companies and such investments are subject to a high degree of risk, and therefore it is possible that we could lose our entire investment.
We are exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations, legal and regulatory changes and the impact of regional and global economic disruptions.
International shipments accounted for 82% of net sales in fiscal 2008, with 74% 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. We also have an arrangement with a contract manufacturer in Singapore to complete the manufacture of certain of our products. Our non-U.S. sales, purchases and operations, including contract manufacturing, are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:
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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; |
|
Local labor disputes; |
|
Shipping delays and disruptions; |
|
Increases in shipping costs, caused by increased fuel costs or otherwise, which we may not be able to pass on to our customers; |
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|
Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and |
|
Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing suppliers, distributors and representatives, and repatriation of earnings. |
Our business and operating results are subject to uncertainties arising out of the possibility of regional or global economic disruptions (including those resulting from natural disasters and outbreaks of infectious disease), the economic consequences of military action or 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:
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The risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities; |
|
The risk of more frequent instances of shipping delays; and |
|
The risk that demand for our products may not increase or may decrease. |
Our tax rates are subject to fluctuation, which could impact our financial position, and our estimates of tax liabilities may be subject to audit, which could result in additional assessments.
Our effective tax rates are subject to fluctuation as the income tax rates for each year are a function of: (a) taxable income levels and the effects of a mix of profits (losses) earned by ESI and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates, (b) our ability to utilize deferred tax assets, (c) taxes, refunds, interest or penalties resulting from tax audits, (d) the magnitude of various credits and deductions as a percentage of total taxable income and (e) changes in tax laws or the interpretation of such tax laws. For example, ESI has historically realized a significant benefit from research & experimentation tax credits, which expired on December 31, 2007 and has not been renewed. Changes in the mix of these items may cause our effective tax rates to fluctuate between periods, which could have a material adverse effect on our financial position and results of operations.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. Significant judgment is exercised in determining our worldwide provisions for income taxes. Furthermore, we are occasionally under audit by tax authorities. Although we believe our tax estimates are reasonable, the final outcome of tax audits and the impact of changes in tax laws or the interpretation of tax laws could result in material differences from what is reflected in historical income tax accruals. If additional taxes are assessed as a result of an examination, a material effect on our financial results, tax positions or cash flows could occur in the period or periods in which the determination is made.
No market currently exists for auction rate securities we hold and as a result we may not be able to liquidate them at the current valuation, if at all. We have recorded an unrealized loss in accumulated other comprehensive income in equity on those securities. In addition, if the credit quality of the issuers or their guarantors declines, we may have to recognize an other-than temporary impairment on the income statement with respect to those securities.
As of March 29, 2008, the Company had a total of $19.6 million at par value invested in auction rate securities, which were valued at $15.7 million on the consolidated balance sheet. During the fourth quarter of fiscal year 2008, we recorded a reserve of 20%, or approximately $3.9 million, against our auction rate securities as an unrealized loss through accumulated other comprehensive income within shareholders equity, in accordance with accounting principles generally accepted in the United States of America due to the ongoing illiquidity of these securities. Although the contractual maturities of these securities range up to calendar year 2050 and with some having perpetual maturities, the securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally
15
every 28 to 35 days. This mechanism allowed existing investors to either retain their holdings or liquidate their holdings by selling such securities at par. With the liquidity issues experienced in the global credit and capital markets, our auction rate securities have experienced multiple failed auctions. While we continue to earn interest on these investments at the maximum contractual rate, the estimated current market value of these auction rate securities no longer approximates par value.
We believe the decline in market value is due to the lack of liquidity for asset-backed securities resulting from the sub-prime lending collapse that began in 2007, rather than specific concerns with respect to the issuers of the auction rate securities themselves, and that these securities will ultimately be liquidated in orderly transactions. However, if we need to liquidate the securities in the near future or if no orderly liquidation occurs, we may not be able to liquidate these securities at the current valuation or at all, which could impair our liquidity. Continued illiquidity of these securities could require additional reserves on our balance sheet by recognizing further unrealized losses through accumulated other comprehensive income. In addition, while we believe these investments continue to be of high credit quality and the respective credit ratings of the securities issuers also remain high, if their credit quality decreases or such credit ratings decline we may have to recognize an other-than temporary impairment to the value of the securities, which would adversely impact our results of operations. It is possible that continued uncertainty in the credit markets could also impact the liquidity of our other investments and cash equivalents, which could impair our liquidity or require us to recognize an impairment to the value of those investments, which could negatively impact our financial position and results of operations.
The loss of key personnel or our inability to attract, retain and assimilate sufficient numbers of managerial, financial, engineering and other technical personnel could have a material effect upon our results of operations.
Our continued success depends, in part, upon key managerial, financial, engineering and technical personnel as well as our ability to continue to attract, retain and assimilate 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, financial, engineering and technical employees. Attracting qualified personnel may be difficult and our efforts to attract and retain these personnel may not be successful. In addition, we may not be able to assimilate qualified personnel, including any new members of senior management, which could disrupt our operations.
We reported a material weakness in our internal control over financial reporting in a prior fiscal year and if material weaknesses are discovered in the future, our internal control over financial reporting could be adversely affected.
We have taken the steps necessary to remediate the previously identified material weakness. However, the identification of one or more additional material weaknesses in the future could result in material misstatements in our financial reports and could lead us or our auditors to conclude that we do not have effective controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act. This may negatively impact the markets view of our control environment and, potentially, our stock price.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Our executive and administrative offices, as well as our primary manufacturing facilities, are located in Portland and Klamath Falls, Oregon. The system manufacturing facilities are located in a four-building complex with 258,500 square feet of space on 15 acres in Portland, Oregon. The passive component consumable products are manufactured at a 53,000 square foot plant on 31 acres in Klamath Falls, Oregon. We own all of these buildings. We believe the productive capacity of these facilities to be adequate and suitable for the requirements of our business for the foreseeable future.
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We lease approximately 65,000 square feet of facilities in Fremont, California that are used for NWR operations and manufacturing. We also lease other office and facilities space in various locations throughout the United States and various foreign countries.
We do not expect compliance with federal, state and local provisions which have been enacted or adopted related to the discharge of materials into the environment, or otherwise relating to protection of the environment, to have a material effect on our capital expenditures, earnings or competitive position.
Item 3. | Legal Proceedings |
In August 2005, we commenced a proceeding in the Kaohsiung District Court of Taiwan (the Court) directed against All Ring Tech Co., Ltd. (All Ring) of Taiwan. We alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes our Taiwan Patent No. 207469, entitled Circuit Component Handler (the 207469 patent). As part of this proceeding, the Court issued a Provisional Attachment Order (PAO) in August 2005, restricting the use of some of All Rings assets. All Ring then filed a bond with the Court to obtain relief from the attachment of its assets. In July 2007, the Court issued a second PAO and approximately US$6.0 million was restricted in All Rings accounts. The second PAO remains in effect and cannot be revoked.
In October 2005, we filed a formal patent infringement action against All Ring in the Court. The Court-appointed expert has concluded that the Capacitor Tester and All Rings RK-T2000 both infringe every claim of the 207469 patent and that All Rings RK-L50 infringes a number of the claims as well. Also in October 2005, the Court executed a Preliminary Injunction Order (PIO) that prohibits All Ring from manufacturing, selling, offering for sale or using the Capacitor Tester until final judgment is entered in the formal patent infringement action. The Court dismissed All Rings application to revoke the PIO on January 18, 2008, and the PIO remains in place.
In November 2005, All Ring filed a cancellation action against our 207469 patent in the Taiwan Intellectual Property Office (the IPO). On July 5, 2007, the IPO issued a notice requiring us to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. We filed a response canceling the two claims and amending the remaining claims accordingly in August 2007.
On March 4, 2008, pursuant to All Rings motion, the Court issued a suspension order, staying the formal infringement action until after a final decision is rendered in the cancellation action. The High Court revoked the Courts suspension decision on May 2, 2008. On May 12, 2008, All Ring appealed the High Courts ruling. At the latest, the formal action will re-start soon after July 2008, when Taiwans new Intellectual Property Law comes into effect. Any cases previously suspended, such as our formal action, will re-start upon a party making a motion with the Court to do so. We intend to make such a motion and continue to vigorously pursue our patent infringement claims against All Ring and defend against the cancellation action.
Pursuant to the Courts Provisional Attachment Order and Preliminary Injunction Order, in October 2005, we were required to post a Taiwan dollar security bond with the Court. An additional Taiwan dollar bond of approximately US$2.1 million was posted in June 2007 related to the second PAO. The total security bonds were valued at approximately US$9.7 million at March 29, 2008 and this amount was included in other assets on the consolidated balance sheet at March 29, 2008.
Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our security holders during the quarter ended March 29, 2008.
17
Item 5. | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Common Stock Prices and Dividends
Our common stock trades on the NASDAQ Global Market under the symbol ESIO. There were 644 shareholders of record as of June 6, 2008, and on that date there were 27,090,958 common shares outstanding. The closing price on June 6, 2008 was $15.40.
The following table shows, for the fiscal quarters indicated, the high and low closing sale prices for the common stock as reported on the NASDAQ Global Market.
Fiscal 2008 |
High | Low | ||||
Period 1 (June 3, 2007 to June 30, 2007) |
$ | 21.50 | $ | 20.12 | ||
Quarter 2 |
24.85 | 20.59 | ||||
Quarter 3 |
24.99 | 18.80 | ||||
Quarter 4 |
19.96 | 15.45 | ||||
Fiscal 2007 |
High | Low | ||||
Quarter 1 |
$ | 20.40 | $ | 17.33 | ||
Quarter 2 |
22.34 | 19.17 | ||||
Quarter 3 |
22.87 | 18.69 | ||||
Quarter 4 |
21.24 | 18.61 |
We have not paid any cash dividends on our common stock during the last two fiscal years. We intend to retain any earnings for our business and do not anticipate paying any cash dividends in the foreseeable future.
Share Repurchase Transactions
On March 9, 2007, the Board of Directors authorized the repurchase of up to $50.0 million in shares of our outstanding common stock during the nine-month period beginning April 17, 2007 through transactions in the open market or in negotiated transactions with brokers or shareholders. Share repurchases under this authorization were suspended on October 9, 2007 after completing approximately $37.3 million of the $50.0 million share repurchase program. On January 22, 2008, the Board of Directors voted to resume the previous $50.0 million share repurchase program and the remaining $12.7 million in shares was repurchased during the fourth quarter of fiscal 2008. During fiscal 2008 we repurchased approximately 2.0 million shares for $39.6 million at an average price per share of $20.08, which was calculated inclusive of commissions and fees. The reacquired shares were immediately retired, as required under Oregon corporate law.
The following table sets forth information for the fourth quarter of fiscal 2008 regarding the share repurchase transactions in accordance with SEC Regulation S-K, Item 703:
Period |
Total
Number of Shares Purchased |
Average Price
Paid per Share |
Total Number of Shares
Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value
of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||
1/30/08 to 2/2/08 |
55,000 | $ | 16.59 | 1,755,578 | $ | 11,817,907 | ||||
2/3/08 to 3/1/08 |
388,390 | 16.39 | 2,143,968 | 5,453,024 | ||||||
3/2/08 to 3/29/08 |
334,790 | 16.29 | 2,478,758 | | ||||||
Total |
778,180 | $ | 16.36 | |||||||
On May 15, 2008, the Board of Directors authorized a new share repurchase program for up to $20.0 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation programs. The repurchases will be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. There is no fixed completion date for this repurchase program.
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Disclosures related to securities authorized for issuance under our Equity Compensation Plans are incorporated by reference into Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters of this annual report on Form 10-K from our Proxy Statement for our 2008 annual meeting.
Stock Performance Graph
The graph below compared the cumulative 58 months total return of holders of Electro Scientific Industries, Inc. common stock with the cumulative total returns of the S&P 500 index and the S&P Information Technology Index. The graph assumes that the value of the investment in Electro Scientific Industries, Inc. common stock and in each of the indices (including reinvestment of dividends) was $100 on May 30, 2003 and tracks it through March 29, 2008.
Historical stock prices performance should not be relied upon as indicative of future stock price performance.
* | $100 invested on 5/30/03 in stock or index-including reinvestment of dividends. |
Indexes calculated on month-end basis.
Cumulative Total Return | ||||||||||||
5/30/2003 | 5/29/2004 | 5/28/2005 | 6/3/2006 | 6/2/2007 | 3/29/2008 | |||||||
Electro Scientific Industries, Inc. |
100.00 | 151.53 | 120.48 | 131.32 | 137.77 | 107.58 | ||||||
S&P 500 |
100.00 | 118.33 | 128.07 | 139.14 | 170.85 | 150.06 | ||||||
S&P Information Technology |
100.00 | 121.98 | 123.08 | 123.99 | 152.54 | 138.52 |
Copyright © 2008, Standard & Poors, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
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Item 6. | Selected Financial Data |
(in thousands, except per share amounts) |
(Ten Months)
2008 |
2007 | 2006 | 2005 | 2004 | ||||||||||||
Statement of Operations Data |
|||||||||||||||||
Net sales |
$ | 247,155 | $ | 250,824 | $ | 207,006 | $ | 233,371 | $ | 207,242 | |||||||
Provision (benefit) for income taxes |
9,923 | 11,103 | (1,536 | ) | 6,437 | (9,308 | ) | ||||||||||
Net income 1, 2, 3, 4, 5 |
16,589 | 23,524 | 20,823 | 19,837 | 11,887 | ||||||||||||
Net income per sharebasic 1, 2, 3, 4, 5 |
0.59 | 0.81 | 0.72 | 0.70 | 0.42 | ||||||||||||
Net income per sharediluted 1, 2, 3, 4, 5 |
0.59 | 0.80 | 0.72 | 0.69 | 0.42 | ||||||||||||
Balance Sheet Data |
|||||||||||||||||
Cash, cash equivalents and short-term and long-term marketable securities 6 |
$ | 160,905 | $ | 228,691 | $ | 229,332 | $ | 218,901 | $ | 332,754 | |||||||
Working capital |
274,667 | 327,288 | 302,184 | 275,701 | 369,941 | ||||||||||||
Net property, plant and equipment |
47,962 | 43,859 | 43,338 | 32,959 | 33,531 | ||||||||||||
Total assets |
455,612 | 465,668 | 437,465 | 403,557 | 537,186 | ||||||||||||
Long-term debt |
| | | | 142,759 | ||||||||||||
Shareholders equity |
392,240 | 408,330 | 388,167 | 357,155 | 326,813 |
1. | Fiscal 2008 included pretax charges of $3.3 million to record the fair value adjustments primarily related to acquired inventory and amortization of acquired intangibles, and $2.8 million to record the write-off of in-process research & development related to the acquisition of New Wave Research, Incorporated. Fiscal 2008 included $2.4 million in share-based compensation expense required by Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R). |
2. | Fiscal 2007 included a pretax gain for an insurance recovery of $1.3 million on fire-damaged demonstration systems and a pretax gain of $1.0 million for an insurance settlement related to the shareholder and derivative lawsuits. Fiscal 2007 included $1.8 million in share-based compensation expense required by SFAS No. 123R. |
3. | Fiscal 2006 included a $5.9 million reduction in accrued income taxes due to the statutory closure of various tax years. Fiscal 2006 included $0.9 million in share-based compensation expense required by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees (APB No. 25). |
4. |
Fiscal 2005 included pretax charges of approximately $4.1 million for the redemption of our 4 1 / 4 % convertible subordinated notes due 2006 and $2.2 million resulting from the settlement and related legal costs for a patent infringement lawsuit. Fiscal 2005 included $1.1 million in share-based compensation expense required by APB No. 25. |
5. | Fiscal 2004 included a pretax charge of $3.8 million for the estimated settlement of class action and derivative lawsuits. Fiscal 2004 included $0.5 million in share-based compensation expense required by APB No. 25. |
6. | Fiscal 2008 included illiquid auction rate securities at fair value of $15.7 million. |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview of Business
Electro Scientific Industries, Inc. and its subsidiaries (ESI) provide high-technology manufacturing equipment to the global semiconductor and micro-electronics markets, including advanced laser systems that are used to micro-engineer electronic device features in high-volume production environments. Our customers are primarily manufacturers of semiconductors, passive components and interconnect devices. Our equipment enables these manufacturers to achieve the yield and productivity gains in their manufacturing processes that can be critical to their profitability. The components and devices manufactured by our customers are used in a wide variety of end products in the computer, consumer electronics, communications and automotive industries. ESI was founded in 1944 and is headquartered in Portland, Oregon.
We supply advanced laser microengineering and testing systems that allow semiconductor and micro-electronics manufacturers to physically alter select device features during high-volume production in order to heighten performance and boost production yields in a variety of end markets. Laser microengineering comprises a set of precise fine-tuning processes, including laser micro-machining, scribing, semiconductor memory-link cutting, device trimming and via drilling, that require application-specific laser systems able to meet semiconductor and micro-electronics manufacturers exacting performance and productivity requirements. Our laser-based systems improve production yields or enable improved performance during the manufacturing process for semiconductor devices, high-density interconnect (HDI) circuits, including flexible interconnect material and advanced semiconductor packaging, high-brightness light emitting diodes (LED), flat panel liquid crystal displays (LCD) and general micro-machining applications.
Additionally, we produce high capacity test and optical inspection equipment which are critical to the quality control process during the production of multi-layer ceramic capacitors (MLCCs). Our equipment ensures that each MLCC meets both the electrical and physical tolerances required to perform properly.
Change in Fiscal Reporting Periods
On July 3, 2007, our Board of Directors approved a change in our reporting periods that results in a fiscal year consisting of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, our fiscal 2008 reporting period consisted of a 43-week period ending on March 29, 2008 (approximately ten months). Prior to the change in our reporting periods, the fiscal year ended on the Saturday nearest May 31. As such, fiscal 2007 ended on June 2, 2007 and fiscal 2006 ended on June 3, 2006 and those fiscal years contained 52 weeks and 53 weeks, respectively. In accordance with the SEC Regulation S-X Rule 3-06, the ten month transition period representing fiscal 2008 is deemed to meet the requirement to file financial statements for a period of one year. All references to years relate to fiscal years unless otherwise noted. All references to fiscal 2008 relate to the ten-month period ended March 29, 2008.
Acquisition of New Wave Research, Incorporated
On July 20, 2007, we acquired New Wave Research, Incorporated (NWR), a privately-held company headquartered in Fremont, California. NWR is a global leader in the development of high-end lasers and laser-based systems and its products are used in the semiconductor market for sapphire wafer scribing, flat-panel display repair and semiconductor failure analysis, among other applications. The acquisition was an investment aimed at leveraging our combined core competencies into adjacent markets and driving revenue growth and shareholder value.
We acquired 100% of NWRs outstanding common stock for approximately $36.2 million, comprised of $34.9 million in cash and merger-related transaction costs of $1.3 million. The contractual purchase price of $36.0 million was reduced by $1.1 million related to certain net working capital adjustments and indemnity payments agreed upon prior to closing. The results for fiscal 2008 include the results of our NWR division from the date of acquisition forward.
21
Purchase accounting expenses recorded during the ten months ended March 29, 2008 were as follows (in thousands):
2008 | |||
Cost of sales |
$ | 1,946 | |
Selling, service and administration |
1,445 | ||
Write-off of in-process research & development |
2,800 | ||
$ | 6,191 | ||
Purchase accounting expenses recorded in cost of sales are primarily related to the fair value adjustments to acquired inventory and amortization of acquired intangibles. Purchase accounting expenses included in operating expenses of $4.2 million which included amortization of acquired intangibles, adjustments to the depreciable value of property, plant & equipment and the write-off of $2.8 million of in-process research & development. See further discussion of in-process research & development below in the discussion of expenses to compare to the prior year.
Overview of Financial Results
Due to the change in our fiscal reporting periods discussed above, within the following analyses, we presented supplemental comparisons of the ten-month fiscal 2008 ended March 29, 2008 to a pro-forma ten-month period ended March 31, 2007 for fiscal 2007. Necessary estimates were made for certain items in order to create the pro-forma ten-month statement of operations for fiscal 2007 to help facilitate meaningful discussions of our financial results. See Note 3 Comparative Statements of Operations for the Ten Months Ended March 31, 2007 (Unaudited) of the Notes to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data for further discussion.
The financial results of fiscal 2007 reflected strong demand for our products which accelerated beginning with the fiscal third quarter of 2007 through the third quarter of fiscal 2008. Business was further bolstered by the acquisition of New Wave Research in the second quarter of fiscal 2008 contributing to our overall strong results for the fiscal 2008 period. However, in the second half of fiscal 2008, the semiconductor memory industry began to experience falling memory prices which significantly impacted the profitability of memory producers and resulted in lower capital spending amongst our customers. We began to see the impact of this trend in our fourth quarter of fiscal 2008 resulting in a significant reduction in orders for our semiconductor memory yield improvement products. In addition, we began to see weakness in our passive component business due to absorption of added capacity earlier in the year and cautious spending related to concerns about the global economic environment. Orders for our passive components group (PCG) products and interconnect/micro-machining group (IMG) products have remained relatively strong due to our ability to penetrate new customer specific micomachining applications. Looking forward, the timing of a recovery in our markets is uncertain.
Total order volume of $224.4 million in fiscal 2008 decreased 18% compared to orders of $275.3 million in fiscal 2007. On a pro-forma ten-month basis, orders were relatively flat as orders resulting from the acquisition of NWR and growth in demand for our IMG products substantially offset the decrease in demand for our semiconductor group (SG) products.
On a pro-forma basis, orders for our SG products decreased approximately 23% compared to fiscal 2007. Strong demand early in the year for our new dual-beam Model 9850 IR and UV systems and increased orders due to the acquisition of NWR, were offset by a significant decline in demand for semiconductor products in the fourth quarter of fiscal 2008 consistent with weakness in the memory market and slowdown in capital expenditures. Excluding the addition of NWR, orders for SG products declined approximately 31% on a pro-forma basis.
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On a pro-forma basis, PCG orders increased slightly compared to fiscal 2007. The increase was due to strong orders for our new Model 3550 high capacitance testing system and for our 3300 series electrical test and 6650 visual inspection systems, reflecting the successful introduction of these new products and continued penetration into the Japanese MLCC market. Demand for additional capacity in this market is driven by consumer demand for leading edge consumer products such as handheld devices, multi-core PC processors, flat panel displays and high definition televisions which utilize a greater number of MLCCs per device.
On a pro-forma basis, orders for our IMG products increased approximately 73% in fiscal 2008 compared to fiscal 2007, including an increase of 30% resulting from the acquisition of NWR. The strong growth in orders was due to demand for micro-machining applications created by our ability to introduce and quickly bring to market new applications for our technology and continued expansion in the flex-circuit and IC packaging segments of this market.
Fiscal 2008 shipments were $244.6 million compared to $250.4 million in fiscal 2007. Within total shipments, on a pro-forma basis, IMG shipments increased approximately 86% and PCG shipments increased approximately 43%. SG shipments increased approximately 5%, driven by the acquisition of NWR. Backlog was $42.1 million as of March 29, 2008 compared to $56.7 million as of June 2, 2007, representing a decrease of 26% primarily due to weak demand in the fourth quarter of fiscal 2008.
Gross margins were 45.4% on net sales of $247.2 million in fiscal 2008 compared to 43.4% on net sales of $250.8 million in fiscal 2007. The acquisition of NWR resulted in an increase to net sales of $20.7 million with a corresponding gross margin of 37.8% which included $1.9 million in purchase accounting expenses.
Net operating expenses of $92.1 million increased $7.6 million from $84.5 million in fiscal 2007. On a pro-forma basis, operating expenses increased $23.2 million from $68.9 million. Of this increase, $15.6 million related to the acquisition of NWR which included a $2.8 million write-off of in-process research & development, $1.4 million in purchase accounting amortization of intangibles and $11.4 million in NWR operating expenses. The year over year increase in operating expenses also reflected the impact of $2.3 million of insurance recoveries which reduced expenses in the prior fiscal year.
Operating income was $20.0 million in fiscal 2008 compared to $24.2 million in fiscal 2007. On a pro-forma basis, operating income increased approximately $9.3 million from $10.7 million primarily due to increased gross margin on higher revenues. Non-operating income, comprised primarily of interest income on cash and investments, decreased to $6.5 million from $10.4 million due to the shortened fiscal year, lower average investment balances and decreased investment yields. Net income of $16.6 million in fiscal 2008 declined from $23.5 million in fiscal 2007 primarily due to the shortened fiscal year. On a pro-forma basis, net income increased $2.4 million from $14.2 million due to higher operating income partially offset by lower interest income and a higher tax rate.
Looking forward, we expect to see continued weakness in the overall semiconductor memory capital equipment market, and cautious spending related to uncertainty in the broader macro economy. The timing of a recovery in our markets is uncertain. Given lower estimated sales and operating results, we expect restructuring actions costing approximately $1.0 million in the first quarter of fiscal 2009.
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Results of Operations
The following table sets forth results of operations data as a percentage of net sales.
Ten months ended
March 29, 2008 |
Fiscal 2007 | Fiscal 2006 | |||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales |
54.6 | 56.6 | 55.8 | ||||||
Gross margin |
45.4 | 43.4 | 44.2 | ||||||
Selling, service and administration |
21.4 | 19.6 | 22.2 | ||||||
Research, development and engineering |
14.7 | 15.0 | 16.3 | ||||||
Write-off of in-process research & development |
1.1 | | | ||||||
Insurance recoveries |
| (0.9 | ) | | |||||
Operating income |
8.1 | 9.7 | 5.7 | ||||||
Interest and other income, net |
2.6 | 4.1 | 3.7 | ||||||
Income before taxes |
10.7 | 13.8 | 9.4 | ||||||
Income tax provision (benefit) |
4.0 | 4.4 | (0.7 | ) | |||||
Net income |
6.7 | % | 9.4 | % | 10.1 | % | |||
Ten Months Ended March 29, 2008 (Fiscal 2008) Compared to Fiscal 2007
Net Sales
Certain information regarding our net sales by product group is as follows (net sales in thousands):
Ten months ended
March 29, 2008 |
Fiscal 2007 |
Pro-forma ten months ended
March 31, 2007 (unaudited) |
||||||||||||||||
Net Sales |
Percent of
Total Net Sales |
Net Sales |
Percent of
Total Net Sales |
Net Sales |
Percent of
Total Net Sales |
|||||||||||||
Semiconductor (SG) |
$ | 109,156 | 44.2 | % | $ | 145,381 | 58.0 | % | $ | 97,706 | 53.0 | % | ||||||
Passive Components (PCG) |
75,112 | 30.4 | 63,093 | 25.2 | 52,365 | 28.4 | ||||||||||||
Interconnect/Micro-machining (IMG) |
62,887 | 25.4 | 42,350 | 16.8 | 34,362 | 18.6 | ||||||||||||
$ | 247,155 | 100.0 | % | $ | 250,824 | 100.0 | % | $ | 184,433 | 100.0 | % | |||||||
Fiscal 2008 net sales were $247.2 million compared to $250.8 million in fiscal 2007. On a pro-forma basis, net sales for the comparable ten-month period in fiscal 2007 were $184.4 million, which excluded the results of the latter two months of our reported fourth-quarter for fiscal 2007. As discussed above, business activity was ramping up significantly over the course of the latter part of fiscal 2007 and continued strongly through most of fiscal 2008. As a result, on a pro-forma basis, each product group reflected increases in net sales, rising approximately 12%, 43% and 83% for SG, PCG and IMG, respectively.
SG net sales in fiscal 2008 decreased $36.2 million or 25% compared to fiscal 2007. On a pro-forma basis, SG net sales increased by approximately $11.5 million, primarily due to $10.4 million as a result of the acquisition of NWR. The remaining increase of $1.1 million resulted from an increase in the volume of sales of our dual-beam IR and UV-based Model 9850, large capacity increases from NAND Flash producers and the migration to 70-nm technology. These increases were substantially offset by a decrease in the volume of sales of our existing single-beam IR-based memory link processing tools and overall weakness in the semiconductor memory market in the fourth quarter of fiscal 2008.
Fiscal 2008 PCG net sales increased $12.0 million or 19% compared to fiscal 2007. On a pro-forma basis, PCG net sales increased by $22.7 million driven by strong demand for our new Model 3500 series electrical test systems, Model 6650 visual inspection systems and increased penetration in Asian markets.
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IMG net sales were $62.9 million in fiscal 2008, an increase of $20.5 million or 48% compared to IMG
sales in fiscal 2007. On a pro-forma basis, IMG net sales increased by $28.5 million, including $10.3 million in net sales resulting from the acquisition of NWR. The remaining $18.2 million increase was driven by an increase in sales volumes of our
Gross Profit
The following table presents gross profit for the ten months ended March 29, 2008, fiscal 2007 and the pro-forma ten months ended March 31, 2007 (gross profit in thousands):
Ten months ended
March 29, 2008 |
Fiscal 2007 |
Pro-forma ten months ended
March 31, 2007 (unaudited) |
||||||||||||||||
Gross
Profit |
Percent of
Total Net Sales |
Gross
Profit |
Percent of
Total Net Sales |
Gross
Profit |
Percent of
Total Net Sales |
|||||||||||||
Gross Profit |
$ | 112,141 | 45.4 | % | $ | 108,770 | 43.4 | % | $ | 79,610 | 43.2 | % | ||||||
Gross profit was $112.1 million (45.4% of net sales) in fiscal 2008 compared to $108.8 million (43.4% of net sales) in fiscal 2007. Cost of sales in the current fiscal year included $1.9 million in purchase accounting expenses primarily related to the fair value adjustments for the acquired inventory and amortization of acquired intangibles. On a pro-forma basis, the increase in gross margin percentage was primarily due to favorable sales mix within our product groups and volume-based manufacturing efficiencies on increased production.
Operating Expenses
The following table presents operating expenses for the ten months ended March 29, 2008, fiscal 2007 and the pro-forma ten months ended March 31, 2007 (expenses in thousands):
Ten months ended
March 29, 2008 |
Fiscal 2007 |
Pro-forma ten months ended
March 31, 2007 (unaudited) |
||||||||||||||||||
Expenses |
Percent of
Total Net Sales |
Expenses |
Percent of
Total Net Sales |
Expenses |
Percent of
Total Net Sales |
|||||||||||||||
Selling, Service and Administration |
$ | 52,967 | 21.4 | % | $ | 49,119 | 19.6 | % | $ | 39,886 | 21.6 | % | ||||||||
Research, Development & Engineering |
36,371 | 14.7 | 37,703 | 15.0 | 31,328 | 17.0 | ||||||||||||||
Write-off of In-process R&D |
2,800 | 1.1 | | | | | ||||||||||||||
Insurance Recoveries |
| | (2,287 | ) | (0.9 | ) | (2,287 | ) | (1.2 | ) | ||||||||||
$ | 92,138 | 37.3 | % | $ | 84,535 | 33.7 | % | $ | 68,927 | 37.4 | % | |||||||||
Selling, Service and Administration Expenses
The primary items included in selling, service and administration (SS&A) expenses are labor and other employee-related expenses, travel expenses, professional fees, commissions and facilities costs. SS&A expenses were $53.0 million (21.4% of net sales) in fiscal 2008 compared to $49.1 million (19.6% of net sales) for fiscal 2007. On a pro-forma basis, SS&A expenses increased $13.1 million primarily due to expenses supporting higher volume sales and service activity as well as incremental costs related to the NWR acquisition and integration. NWR expenses were $8.9 million which included $1.4 million of amortization of intangible assets acquired.
Research, Development and Engineering Expenses
Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. Expenses
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associated with RD&E totaled $36.4 million (14.7% of net sales) in fiscal 2008, compared to $37.7 million (15.0% of net sales) for fiscal 2007. On a pro-forma basis, RD&E expenses increased by $5.0 million, including $3.9 million of incremental expenses resulting from the acquisition of NWR. The remaining $1.1 million increase is primarily related to increased project materials and consulting costs to support the development of new products in existing and emerging markets.
Write-off of In-process Research & Development
At the acquisition date, NWR had in-process research and development valued at $2.8 million and the immediate write-off of this amount was included in operating expenses for fiscal 2008. The in-process research and development related to three programs consisting of development of a diode-pumped solid-state laser-based LED wafer-scribing system, a next-generation Advanced Beam Delivery System and a next-generation laser product. The value of the in-process research and development was calculated based on the excess earnings method of the income approach, which measures the value of an asset by calculating the present value of related future economic benefits, such as cash earnings. In determining the value of in-process research and development, the assumed commercialization date for these products was April 2008. The current estimated commercialization dates for these products ranges from May 2008 to December 2008. The modeled cash flow was discounted back to the net present value and was based on estimates of revenues and operating profits related to the project. Significant assumptions used in the valuation of in-process research and development included: stage of development of the project, future revenues, estimated life of the products underlying technology, future operating expenses, and a discount rate of 18% to reflect present value.
Insurance Recoveries
In November 2006, we settled litigation related to insurance coverage for the shareholder and derivative lawsuits related to the restatement of financial results announced in 2003. As a result, we recorded a gain of $1.0 million in the second quarter of fiscal 2007 as an offset to operating expenses in the consolidated statement of operations. All related costs had been expensed as incurred in prior periods.
In June 2006, we received $1.3 million in insurance proceeds for demonstration systems that were destroyed in a fire at a customers plant. As the book value of these assets had previously been written off, we recorded a gain on the recovery in the first quarter of 2007 which was included as an offset to operating expenses in the consolidated statement of operations.
Restructuring and Cost Management Plans
In the fourth quarter of fiscal 2008, we began to see the impact of weakness in the memory market and lower capital spending. In response, we initiated a restructuring plan designed to reduce costs through a reduction-in-force and office consolidations in foreign subsidiary locations. In conjunction with the restructuring, 25 positions were eliminated in our U.S. and overseas offices, impacting all functional groups. These restructuring actions were completed in early April 2008 and we incurred approximately $1.0 million in costs related to the restructuring plan. Fiscal 2008 restructuring expenses of approximately $0.7 million were included in selling, service and administration expense and $0.3 million were included in research, development and engineering expenses.
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Interest and Other Income, Net
The following table presents interest and other income, net for the ten months ended March 29, 2008, fiscal 2007 and the pro-forma ten months ended March 31, 2007 (interest and other income, net in thousands):
Ten months ended
March 29, 2008 |
Fiscal 2007 |
Pro-forma ten months ended
March 31, 2007 (unaudited) |
||||||||||||||||
Interest and
Other Income, Net |
Percent of
Total Net Sales |
Interest and
Other Income, Net |
Percent of
Total Net Sales |
Interest and
Other Income, Net |
Percent of
Total Net Sales |
|||||||||||||
Interest and Other Income, net |
$ | 6,509 | 2.6 | % | $ | 10,392 | 4.1 | % | $ | 8,569 | 4.6 | % | ||||||
Interest and other income, net decreased by $3.9 million to $6.5 million in fiscal 2008 compared to $10.4 million in fiscal 2007. On a pro-forma basis, the decrease of $2.1 million was primarily due to a lower volume of average invested assets. In fiscal 2008, we used $36.2 million in cash to fund the purchase of NWR in July 2007 and during fiscal 2008 we used $40.3 million in cash related to our $50.0 million share repurchase program which began in late April 2007. Additionally, yields on our invested assets decreased due to lower market interest rates and a shift to more conservative investments held in our portfolio.
Income Taxes
The income tax provision recorded for the ten-month fiscal 2008 was $9.9 million on pretax income of $26.5 million, an effective rate of 37%. In fiscal 2007, the income tax provision recorded was $11.1 million on pretax income of $34.6 million, which represented an effective tax rate of 32%. The higher rate in fiscal 2008 was significantly impacted by discrete purchase accounting expenses of $2.8 million associated with the write-off of in-process research and development, which were non-deductible for tax purposes.
Our effective tax rate is subject to fluctuation based upon the occurrence
and timing of numerous discrete events, including, for example, changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination and finalization of income
tax returns. Based on currently available information, we are not aware of any further discrete events which are likely to occur that would have a material effect on our financial position, expected cash flows or results of operations. We anticipate
Net Income
The following table presents net income for the ten months ended March 29, 2008, fiscal 2007 and the pro-forma ten months ended March 31, 2007 (net income in thousands):
Ten months ended
March 29, 2008 |
Fiscal 2007 |
Pro-forma ten months ended
March 31, 2007 (unaudited) |
||||||||||||||||
Net
Income |
Percent of
Total Net Sales |
Net
Income |
Percent of
Total Net Sales |
Net
Income |
Percent of
Total Net Sales |
|||||||||||||
Net income |
$ | 16,589 | 6.7 | % | $ | 23,524 | 9.4 | % | $ | 14,225 | 7.7 | % | ||||||
As a result of the factors discussed above, net income in fiscal 2008 was $16.6 million, or $0.59 per basic and diluted share, compared to net income of $23.5 million, or $0.81 per basic share and $0.80 per diluted share in fiscal 2007 and compared to net income of $14.2 million, or $0.49 per basic share and $0.48 per diluted share on a pro-forma basis for the ten months ended March 31, 2007.
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Fiscal Year 2007 Compared to Fiscal Year 2006
Net Sales
Certain information regarding our net sales by product group is as follows (net sales in thousands):
2007 | 2006 | |||||||||||
Net Sales |
Percent of
Total Net Sales |
Net Sales |
Percent of
Total Net Sales |
|||||||||
Semiconductor (SG) |
$ | 145,381 | 58.0 | % | $ | 126,682 | 61.2 | % | ||||
Passive Components (PCG) |
63,093 | 25.2 | 46,305 | 22.4 | ||||||||
Interconnect/Micro-machining (IMG) |
42,350 | 16.8 | 34,019 | 16.4 | ||||||||
$ | 250,824 | 100.0 | % | $ | 207,006 | 100.0 | % | |||||
Net sales for fiscal 2007 increased $43.8 million or 21.2% to $250.8 million compared to $207.0 million in fiscal 2006. Each product group reflected strong increases in net sales, increasing 14.8%, 36.3% and 24.5% for SG, PCG and IMG, respectively.
The $18.7 million increase in SG revenue in fiscal 2007 compared to the prior fiscal year was due primarily to an increase in sales of our dual beam IR-based tool and our new UV-based tool, partially offset by a decrease in system sales volumes of our single beam IR-based memory link processing tools.
The increase of $16.8 million in fiscal 2007 PCG sales compared to fiscal 2006 was driven by strong demand for our electrical test systems as manufacturers sought to build production capacity for multi-layer ceramic capacitor (MLCC) components. End-market demand for MLCC products has increased for wireless handsets, dual core microprocessors, flat panel displays and automotive electronics.
IMG sales levels increased by $8.3 million in fiscal 2007 compared to prior year. The increase was due to higher sales volumes of our single-head UV micro-via drilling systems for flex circuits, many of which are now included in cell phones, digital cameras and notebook PCs. Sales volume also increased for our dual-head IC packaging tool, which offers improved cost-of-ownership, yield and performance compared to our earlier models.
Gross Profit
Gross profit was $108.8 million (43.4% of net sales) in fiscal 2007 compared to $91.5 million (44.2% of net sales) in fiscal 2006. Despite volume-based manufacturing efficiencies on shipments that increased by 21% compared to the prior year, our gross margin rates were lower in fiscal 2007 compared to the prior year primarily due to changes in product sales mix, both among our product groups and among products within the product groups. The semiconductor group historically comprised our highest-margin products. Compared to the prior year, that groups revenue decreased by 3% as a percentage of total net sales with the offsetting increase primarily in the PCG group products, which are lower margin products.
Operating Expenses
Selling, Service and Administration Expenses
The primary items included in selling, service and administration expenses are labor and other employee-related expenses, travel expenses, professional fees, commissions and facilities costs. Selling, service and administration expenses were $49.1 million (19.6% of net sales) in fiscal 2007, an increase of $3.1 million compared to $46.0 million (22.2% of net sales) in fiscal 2006. The net increase was primarily due to $4.7 million in increased compensation costs. A portion of employee compensation costs for those directly engaged in an enterprise resource planning (ERP) development was capitalized during fiscal 2006. As such, those capitalized costs were excluded from operating expenses for fiscal 2006. Additionally, we incurred higher share-based
28
compensation costs in fiscal 2007 related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 123R and higher variable incentive compensation costs due to increased business levels. These increases were partially offset by both lower professional fees and reduced legal fees related to the All Ring patent litigation.
Research, Development and Engineering Expenses
Expenses associated with research, development and engineering totaled $37.7 million (15.0% of net sales) for fiscal 2007, representing a $3.9 million increase from expenses of $33.8 million (16.3% of net sales) for fiscal 2006. The increase in research and development was primarily attributable to an increase in compensation costs due to 12% higher average headcount in fiscal 2007 compared to fiscal 2006, higher variable incentive compensation and higher share-based compensation costs related to the adoption of SFAS No. 123R. Other spending increases included professional services for patent registration and maintenance fees as well as an increase in funding for development projects and new technical capabilities.
Insurance Recoveries
In November 2006, we settled litigation related to insurance coverage for the shareholder and derivative lawsuits related to the restatement of financial results announced in 2003. As a result, we recorded a gain of $1.0 million in the second quarter of fiscal 2007 as an offset to operating expenses in the consolidated statement of operations. All related costs had been expensed as incurred in prior periods.
In June 2006, we received $1.3 million in insurance proceeds for demonstration systems that were destroyed in a fire at a customers plant. As the book value of these assets had previously been written off, we recorded a gain on the recovery in the first quarter of 2007 which was included as an offset to operating expenses in the consolidated statement of operations.
Other Income
Other income increased by $2.8 million to $10.4 million in fiscal 2007 compared to $7.6 million in fiscal 2006. The increase was primarily due to a rise in interest income of $2.3 million due to higher investment yields, which increased from an annualized effective year-to-date yield of 4.6% at the end of fiscal 2006 to 5.2% at the end of fiscal 2007. Weighted average invested assets in fiscal 2007 decreased to $222.9 million, compared to $225.2 million for fiscal 2006, which partially offset the increased investment yields. The increase in income due to rising market interest rates was also partially offset by a decrease in net interest income related to tax refunds. During fiscal 2007, we received net interest income related to various income and property tax refunds and payments totaling $0.4 million, compared to $0.7 million for the prior fiscal year.
Income Taxes
The income tax provision recorded for fiscal 2007 was $11.1 million on pretax income of $34.6 million, reflecting an effective rate of 32%. The fiscal 2007 income tax provision increased $12.6 million compared to the income tax benefit of $1.5 million on pretax income of $19.3 million in fiscal 2006, reflecting an effective tax benefit rate of 8%. The increase in the income tax provision was due both to the increase in taxable income and changes in the effective tax rate due to discrete income tax expense or benefit items recorded in fiscal 2007 and fiscal 2006. The fiscal 2007 income tax provision reflected a $1.0 million increase to income taxes payable related to a revision in Internal Revenue Service technical guidance. Comparatively, the income tax benefit for fiscal 2006 included a $5.9 million reduction in accrued income taxes due to the statutory closure of various tax years.
In October 2003 the Internal Revenue Service (IRS) began an audit of the tax years ending in 1996 through 2003. During fiscal 2005 we reached an agreement with the IRS on the tax return years under review. The examination process required a special report to be submitted by the IRS for congressional approval from the
29
Joint Committee on Taxation. In fiscal 2006, we received notice from the IRS that the Joint Committees review was completed without exception. As a result, we received approximately $7.2 million in tax refunds relating to those years in fiscal 2006.
Net Income
As a result of the factors discussed above, net income in fiscal 2007 was $23.5 million, or $0.81 per basic and $0.80 per diluted share, compared to fiscal 2006 net income of $20.8 million, or $0.72 per basic and diluted share.
Financial Condition and Liquidity
At March 29, 2008, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities totaling $145.2 million and accounts receivable of $60.3 million. At March 29, 2008, we had a current ratio of 5.95 and no long-term debt. Working capital decreased to $274.7 million at March 29, 2008 from $327.3 million at June 2, 2007, primarily due to the use of cash for the acquisition of NWR and the share repurchase program, partially offset by cash generated from operations.
On July 20, 2007, we completed our cash acquisition of NWR for approximately $36.2 million including merger-related transaction fees and net of cash acquired.
On March 9, 2007, the Board of Directors authorized the repurchase of up to $50.0 million in shares of our outstanding common stock over a nine-month period beginning April 17, 2007 through transactions in the open market or in negotiated transactions with brokers or shareholders. We suspended purchase transactions in early October 2007 after completing approximately $37.3 million of the $50.0 million share repurchase program. In January 2008, our Board of Directors voted to resume the previous $50.0 million share repurchase program and the remaining $12.7 million in shares was repurchased during the fourth quarter of fiscal 2008. During fiscal 2008 we repurchased approximately 2.0 million shares for $39.6 million.
As of March 29, 2008, we had a total of $19.6 million at par value invested in auction rate securities. Although the contractual maturities of these securities range up to calendar year 2050 with some securities having perpetual maturities, the securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings by selling such securities at par. With the liquidity issues experienced in the global credit and capital markets, our auction rate securities have experienced multiple failed auctions. While we continue to earn interest on these investments at the maximum contractual rate, the estimated market value of these auction rate securities no longer approximates par value.
We believe the decline in market value is due to the lack of liquidity for asset-backed securities resulting from the sub-prime lending collapse that began in 2007, rather than specific concerns with respect to the issuers of the auction rate securities themselves. We currently have the intent and ability to hold these securities until they reach maturity or are redeemed by the issuers and we continue to receive interest income when due. As such, we have determined that there has not been other than temporary impairment of the value of these securities. The fair values of these auction rate securities provided by our investment manager and reviewed by management were based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security.
An unrealized pretax loss on auction rate securities of $3.9 million has been recorded in accumulated other comprehensive income to reflect the fair value of these securities on the consolidated balance sheet at March 29, 2008 at approximately $15.7 million. We reclassified these auction rate securities, which were previously included in current assets, as long-term marketable securities on the consolidated balance sheet at March 29, 2008. We
30
continue to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of our investments. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in accumulated other comprehensive income or impairment charges in the consolidated statement of operations. To the extent the fair market values of our auction rate securities were to subsequently increase, such increase would reduce the unrealized loss recorded in accumulated other comprehensive income.
Sources and Uses of Cash
Cash flows provided by operating activities totaled $15.2 million in fiscal 2008. Cash totaling $36.4 million was provided by net income adjusted for non-cash items. Other significant items generating or consuming cash flows from operations included purchases of inventories and decreases in current liabilities.
Net trade receivables were $60.3 million at March 29, 2008 compared to $55.7 million at June 2, 2007. Receivables increased $4.6 million in part due to the acquisition of NWR receivables, which totaled $2.7 million at March 29, 2008, as well as the timing of shipments prior to fiscal year end. Although days sales outstanding increased to 78 days at the end of fiscal 2008, compared to 71 days at the end of fiscal 2007, our aging of accounts receivable has not deteriorated compared to the end of the prior year.
Inventories increased $20.5 million to $101.5 million at March 29, 2008 compared to $81.0 million at June 2, 2007. The increase included acquisition of NWR inventories, which totaled $6.0 million at March 29, 2008. The remaining increase is related to an increase in raw materials and finished goods inventory due to lower-than-expected shipments in the fourth quarter of fiscal 2008 and delay of shipments to future quarters at the request of certain customers.
Payables and accrued liabilities were $42.9 million at March 29, 2008 compared to $39.3 million at June 2, 2007, an increase of $3.6 million. The increase included acquisition of NWR current liabilities, which totaled $5.3 million at March 29, 2008. Net cash used to settle payables and accrued liabilities totaled $3.0 million, primarily related to the settlement of acquired NWR liabilities, which totaled $11.5 million at the date of acquisition.
Cash provided by investing activities totaled $59.9 million for fiscal 2008. We generated $105.8 million, net, in cash and cash equivalents through the maturity and sale of investments in our portfolio of marketable securities. We invested approximately $36.2 million of those proceeds in the acquisition of NWR. Additionally, we invested $6.0 million in property, plant and equipment, primarily test equipment and computer hardware and software, and $2.6 million in loaned and demonstration system assets. During fiscal 2008, we provided a $1.1 million loan to OmniGuide, Inc. which increased our cost method equity investment in OmniGuide to $7.1 million, all of which is classified as other assets on the consolidated balance sheet as of March 29, 2008. This $1.1 million bridge loan was converted into OmniGuide Series E Preferred Stock in May 2008, at which time, we also made an incremental $0.9 million investment in the Series E Preferred Stock. As of March 29, 2008 we had no material contractual commitments for future capital expenditures.
Net cash used in financing activities of $35.7 million were comprised of $40.3 million in cash used to settle repurchase transactions for approximately 2 million shares of our common stock pursuant to the share repurchase program discussed above, partially offset by $4.6 million in proceeds and excess tax benefits from the exercise of stock options and ESPP purchases in fiscal 2008.
We believe that our existing cash, cash equivalents and marketable securities are adequate to fund our operations, share repurchase program and contractual obligations for at least the next twelve months.
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Contractual Obligations
The contractual commitments and obligations below represent our estimates of future payments under fixed contractual obligations and commitments. The actual payments may differ from these estimates due to changes in our business needs, cancellation provisions, and other factors. We cannot provide certainty regarding the timing of the payment schedule and the amounts of payments.
The following table summarizes our contractual commitments and obligations as of March 29, 2008 (in thousands):
Payments Due By Period | |||||||||||||||
Contractual Obligation |
Total |
Less than
1 year |
1-3
years |
3-5
years |
More
than 5 years |
||||||||||
Purchase commitments |
$ | 36,774 | $ | 36,536 | $ | 238 | $ | | $ | | |||||
Derivative financial instruments, net |
19,958 | 19,958 | | | | ||||||||||
Operating leases |
5,179 | 2,356 | 2,664 | 159 | | ||||||||||
$ | 61,911 | $ | 58,850 | $ | 2,902 | $ | 159 | $ | | ||||||
We did not include $6.9 million of unrecognized tax benefits due to the uncertainty with respect to the timing of future cash flows as of March 29, 2008. We are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities and the total amounts of income tax payable and the timing of such tax payments may depend on the resolution of current and future tax examinations which cannot be estimated.
Derivative financial instruments represent various forward exchange contracts to hedge foreign currency transactions. Amounts are presented above in U.S. dollars, translated at exchange rates on March 29, 2008 and are a net presentation of amounts expected (to be received and paid) upon settlement of these contracts.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See Note 1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data for additional information.
Our critical accounting policies and estimates include the following:
|
Revenue recognition; |
|
Inventory valuation; |
|
Product warranty reserves; |
|
Allowance for doubtful accounts; |
|
Share-based compensation; |
|
Income taxes; |
|
Valuation of cost method equity investments; |
|
Long-lived asset valuations; and |
|
Goodwill and intangible assets. |
32
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104). Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. Revenue is recognized upon such delivery, provided that fulfillment of acceptance criteria can be demonstrated prior to shipment. Where the acceptance criteria cannot be demonstrated prior to shipment, or in the case of substantially new products, revenue is deferred until acceptance has been received. For multiple element arrangements, the fair values of any undelivered elements are deferred until the elements are delivered and acceptance criteria are met. Revenues are recorded net of taxes collected which are required to be submitted to government authorities. Installation services are not essential to the functionality of the delivered equipment and installation revenue is deferred until installation is complete. Historically, neither the costs of installation accrued nor the fair value of installation service revenue deferred has been material.
Revenues associated with sales to customers under local contracts in Japan are recognized upon title transfer, which generally occurs upon customer acceptance. On sales to our distributor in Japan, where title transfers to the distributor generally upon shipment, revenue recognition is subject to our standard revenue recognition policy. Subsequent to the end of fiscal 2008, the Company ended this agreement with the distributor in Japan.
Revenues related to spare parts and consumable sales are generally recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts.
Inventory Valuation
We regularly evaluate the value of our inventory based on a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. Purchasing requirements and alternative uses for the inventory are explored within these processes to mitigate inventory exposure. Raw materials with quantities in excess of forecasted usage are reviewed quarterly for obsolescence by our engineering and operating personnel. Raw material obsolescence write-downs are typically caused by engineering change orders or product end-of-life adjustments in the market. Finished goods are reviewed quarterly by product marketing and operating personnel to determine if inventory carrying costs exceed market selling prices. When necessary, we record inventory write-downs as an increase to cost of sales based on the above factors and take into account worldwide quantities and demand into our analysis. If circumstances related to our inventories change, our estimates of the value of inventory could materially change.
Product Warranty Reserves
We evaluate obligations related to product warranties quarterly. A standard one-year warranty is provided on most products. Warranty charges are comprised of costs to service the warranty, including labor to repair the system and replacement parts for defective items, as well as other costs incidental to the repairs. Warranty charges are recorded net of any cost recoveries resulting from either successful repair of damaged parts or from warranties offered by our suppliers for defective components. Using historical data, we estimate average warranty cost per system or part type and record the provision for such charges as an element of cost of goods sold upon recognition of the related revenue. Additionally, the overall warranty accrual balance is separately analyzed using the remaining warranty periods outstanding on systems and items under warranty, and any resulting changes in estimates are recorded as an adjustment to cost of sales. If circumstances change, or if a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material. Accrued product warranty is included on the consolidated balance sheet as a component of accrued liabilities. Our warranty expense in fiscal 2008 totaled $6.1 million.
33
Allowance for Doubtful Accounts
Credit limits are established by reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer to establish and modify their credit limits. On certain foreign sales, we require letters of credit. We regularly evaluate the collectibility of our trade receivable balances based on a combination of factors. When a customers account becomes past due, we talk with the customer to determine the cause. If we determine that a customer will be unable to fully meet its financial obligation to us, such as in the case of a bankruptcy filing or other material events impacting its business, we record a specific reserve for bad debt to reduce the related receivable to the amount we expect to recover given all information then available. If circumstances related to specific customers change, our estimates of the recoverability of receivables could materially change. We record estimated bad debt expense as an increase to selling, service and administration expenses. As of March 29, 2008, our allowance for doubtful accounts totaled $1.0 million and we recorded no bad-debt expense in fiscal 2008.
Share-Based Compensation
On June 4, 2006, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share-based payment awards granted to our employees and directors, including employee stock options, non-vested stock and purchases under the employee stock purchase plan, based on the estimated fair value of the award on the grant date. Upon the adoption of SFAS No. 123R, we maintained our method of valuation for stock option awards using the Black-Scholes valuation model, which has historically been used for the purpose of providing pro-forma financial disclosures in accordance with SFAS No. 123.
The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent managements best estimates based on our historical data, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.
Compensation expense is only recognized on awards that are estimated to ultimately vest. Therefore, based on historical forfeiture rates and patterns, the estimated future forfeitures are factored into the compensation expense to be recognized over the vesting period. We will update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.
Income Taxes
We are subject to income taxes in the United States and in numerous foreign jurisdictions and in the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. The Company accounts for uncertain tax positions in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 48 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). Accordingly, the Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those assets and liabilities are expected to be recovered or settled. Under SFAS No. 109 Accounting for Income Taxes, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. When management determines that it is more likely than not that a deferred tax asset will not be fully realized, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized. Should managements assumptions and expectations be inaccurate, our results of operations and financial condition could be adversely affected in future periods. At March 29, 2008, our net deferred tax assets totaled $15.9 million, which included a valuation allowance of $7.3 million.
34
Effective June 3, 2007, the Company adopted FIN 48. This interpretation clarifies the criteria for recognizing income tax benefits under FASB Statement No. 109, Accounting for Income Taxes, and requires additional disclosures for uncertain tax positions. Under FIN 48, the financial statement recognition of the benefit for tax positions is dependent upon the benefit being more likely than not to be sustainable upon examination. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than fifty-percent likely of being realized upon ultimate settlement. The adoption of FIN 48 did not have a material impact on the Companys consolidated financial position.
Valuation of Cost Method Investments
Minority equity investments include $5.0 million invested in a Series D Preferred Stock financing for Axsun Technologies, Inc., representing a 14.5% interest, $6.0 million invested in a Series D Preferred Stock financing for OmniGuide, Inc., representing an 11% interest and a $1.1 million bridge loan to OmniGuide, Inc. This $1.1 million bridge loan was converted into OmniGuide Series E Preferred Stock in May 2008, at which time, we also made an incremental $0.9 million investment in the Series E Preferred Stock. These investments are accounted for as cost method investments as specified by Accounting Principles Board Opinion (APB) No. 18, The Equity Method of Accounting for Investments in Common Stock. In accordance with Emerging Issues Task Force (EITF) 03-1, The Meaning of Other-Than- Temporary Impairment and Its Application to Certain Investments, at each reporting period end, we determine whether events or circumstances have occurred that are likely to have a significant adverse effect on the fair value of the investments. If there are no identified events or circumstances that may have a significant adverse effect on the fair value of the investments, the fair value of the investments are not calculated as it is not practicable to do so in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. As of March 29, 2008, management was not aware of any events or circumstances that indicated the investments were impaired, therefore the full carrying value of $12.1 million was included in other assets in the consolidated balance sheet.
Long-lived Asset Valuations
Long-lived assets, principally property and equipment and identifiable intangibles held and used by us, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets pursuant to SFAS No. 141 Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, which require that goodwill no longer be amortized, but instead be tested for impairment at least annually in accordance with the provision of SFAS No. 142. Goodwill was tested for impairment in the fourth quarter of fiscal 2008 utilizing a fair value comparison method that compared the Companys market capitalization against the carrying value of the goodwill and it was determined that there was no impairment as of March 29, 2008.
SFAS No. 142 also requires purchased intangible assets, other than goodwill, to be amortized over their estimated useful lives, unless an asset has an indefinite life. Purchased intangible assets with definite useful lives are carried at cost less accumulated amortization. Amortization expense is recognized on either a straight-line or sum-of-the-years digits method over the estimated useful lives of the intangible assets, which range from one to seven years.
35
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
The Company maintains a short-term and long-term investment portfolio consisting of commercial paper, U.S. government agency notes, corporate bonds and auction rate securities. These securities are subject to interest rate risk and will decline in value if interest rates increase. The majority of these securities are classified as available for sale securities; therefore, the impact of interest rate changes is reflected as a separate component of shareholders equity. Due to the short duration of our investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair value of our invested assets; however, our interest income on invested assets over a twelve-month period would change by approximately $0.6 million.
Investment Risk
As of March 29, 2008, we had a total of $19.6 million par value invested in auction rate securities. Although the contractual maturities of these securities range up to calendar year 2050, the securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings by selling such securities at par. With the liquidity issues experienced in the global credit and capital markets, our auction rate securities have experienced multiple failed auctions. While we continue to earn interest on these investments at the maximum contractual rate, the estimated market value of these auction rate securities no longer approximates par value.
We believe the decline in market value is due to the lack of liquidity for asset-backed securities resulting from the sub-prime lending collapse that began in 2007, rather than specific concerns with respect to the issuers of the auction rate securities themselves. We currently have the intent and ability to hold these securities until they reach maturity or are redeemed by the issuers and accrued interest income continues to be received when due. As such, we have determined that there has not been an other than temporary impairment of the value of these securities. With the assistance of our investment advisor, we estimated the fair value of these auction rate securities based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security.
An unrealized pretax loss on auction rate securities of $3.9 million has been recorded in accumulated other comprehensive income to reflect the fair value of these securities on the consolidated balance sheet at March 29, 2008. We reclassified these auction rate securities, which were previously included in current assets, as long-term marketable securities on the consolidated balance sheet at March 29, 2008. We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of our investments. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in accumulated other comprehensive income or impairment charges in the consolidated statement of operations. To the extent the fair market values of our auction rate securities were to subsequently increase, such increase would reduce the unrealized loss recorded in accumulated other comprehensive income.
Foreign Currency Exchange Rate Risk
We have limited involvement with derivative financial instruments and do not use them for trading purposes. We do, however, use derivatives to manage well-defined foreign currency risks. We enter into forward exchange contracts to hedge the value of accounts receivable primarily denominated in Japanese yen and other material non-functional currency monetary asset and liability balances. The net effect of an immediate 10% change in exchange rates on the forward exchange contracts and the underlying hedged positions would not be material to our financial position or the results of our operations.
36
The table below summarizes, by major currency, the notional amounts of our forward exchange contracts in U.S. dollars as of March 29, 2008 and June 2, 2007. The bought amounts represent the net U.S. dollar equivalents of commitments to purchase foreign currencies, and the sold amounts represent the net U.S. dollar equivalent of commitments to sell foreign currencies. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rate at the reporting date.
Bought (Sold)
(in thousands) |
||||||||
Foreign Currency |
2008 | 2007 | ||||||
Singapore Dollar |
$ | 18,047 | $ | | ||||
Japanese Yen |
11,405 | (4,514 | ) | |||||
Taiwan Dollar |
5,576 | (2,685 | ) | |||||
Korean Won |
(9,089 | ) | 7,782 | |||||
British Pound |
(3,304 | ) | 2,191 | |||||
Euro |
(2,677 | ) | 2,776 | |||||
Total, net |
$ | 19,958 | $ | 5,550 | ||||
37
Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Electro Scientific Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Electro Scientific Industries, Inc. and subsidiaries as of March 29, 2008 and June 2, 2007, and the related consolidated statements of operations, shareholders equity and comprehensive income, and cash flows for the ten-month period ended March 29, 2008 and the years ended June 2, 2007 and June 3, 2006. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 March 29, 2008 and June 2, 2007, and the results of their operations and their cash flows for the ten-month period ended March 29, 2008 and the years ended June 2, 2007 and June 3, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, effective June 3, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . Also, as discussed in Note 5 to the consolidated financial statements, effective June 4, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Electro Scientific Industries, Incs internal control over financial reporting as of March 29, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 11, 2008 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ KPMG LLP |
Portland, Oregon |
June 11, 2008 |
38
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 29, 2008 and June 2, 2007
(in thousands)
2008 | 2007 | ||||||
Assets |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 141,059 | $ | 100,462 | |||
Marketable securities |
2,011 | 124,607 | |||||
Total cash and securities |
143,070 | 225,069 | |||||
Trade receivables, net of allowances of $1,025 and $626 |
60,272 | 55,722 | |||||
Inventories |
101,501 | 80,981 | |||||
Shipped systems pending acceptance |
2,583 | 1,817 | |||||
Deferred income taxes, net |
14,906 | 9,504 | |||||
Prepaid and other current assets |
7,822 | 5,776 | |||||
Total current assets |
330,154 | 378,869 | |||||
Long-term marketable securities |
17,835 | 3,622 | |||||
Property, plant and equipment, net |
47,962 | 43,859 | |||||
Deferred income taxes, net |
1,026 | 11,246 | |||||
Goodwill |
12,267 | 1,442 | |||||
Acquired intangible assets, net |
10,261 | | |||||
Other assets |
36,107 | 26,630 | |||||
Total assets |
$ | 455,612 | $ | 465,668 | |||
Liabilities and Shareholders Equity |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ | 17,604 | $ | 13,826 | |||
Accrued liabilities |
25,300 | 25,465 | |||||
Deferred revenue |
12,583 | 12,290 | |||||
Total current liabilities |
55,487 | 51,581 | |||||
Long-term liabilities: |
|||||||
Income taxes payable |
7,885 | 5,757 | |||||
Commitments and Contingencies (Notes 15) |
|||||||
Shareholders equity: |
|||||||
Preferred stock, without par value; 1,000 shares authorized; no shares issued |
| | |||||
Common stock, without par value; 100,000 shares authorized; 27,112 and 28,766 issued and outstanding |
131,417 | 162,719 | |||||
Retained earnings |
262,135 | 245,546 | |||||
Accumulated other comprehensive income (loss) |
(1,312 | ) | 65 | ||||
Total shareholders equity |
392,240 | 408,330 | |||||
Total liabilities and shareholders equity |
$ | 455,612 | $ | 465,668 | |||
See Accompanying Notes to Consolidated Financial Statements
39
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the ten months ended March 29, 2008 and years ended June 2, 2007 and June 3, 2006
(in thousands, except per share data)
Ten months ended
March 29, 2008 |
Fiscal year ended
June 2, 2007 |
Fiscal year ended
June 3, 2006 |
|||||||||
Net sales |
$ | 247,155 | $ | 250,824 | $ | 207,006 | |||||
Cost of sales |
135,014 | 142,054 | 115,518 | ||||||||
Gross profit |
112,141 | 108,770 | 91,488 | ||||||||
Operating expenses (income): |
|||||||||||
Selling, service and administration |
52,967 | 49,119 | 45,955 | ||||||||
Research, development and engineering |
36,371 | 37,703 | 33,837 | ||||||||
Write-off of acquired in-process research & development |
2,800 | | | ||||||||
Insurance recoveries |
| (2,287 | ) | | |||||||
92,138 | 84,535 | 79,792 | |||||||||
Operating income |
20,003 | 24,235 | 11,696 | ||||||||
Interest and other income, net |
6,509 | 10,392 | 7,591 | ||||||||
Income before income taxes |
26,512 | 34,627 | 19,287 | ||||||||
Provision for (benefit from) income taxes |
9,923 | 11,103 | (1,536 | ) | |||||||
Net income |
$ | 16,589 | $ | 23,524 | $ | 20,823 | |||||
Net income per sharebasic |
$ | 0.59 | $ | 0.81 | $ | 0.72 | |||||
Net income per sharediluted |
$ | 0.59 | $ | 0.80 | $ | 0.72 | |||||
Weighted average number of sharesbasic |
27,929 | 29,125 | 28,823 | ||||||||
Weighted average number of sharesdiluted |
28,323 | 29,379 | 29,078 | ||||||||
See Accompanying Notes to Consolidated Financial Statements
40
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
For the ten months ended March 29, 2008 and years ended June 2, 2007 and June 3, 2006
See Accompanying Notes to Consolidated Financial Statements
41
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ten months ended March 29, 2008 and years ended June 2, 2007 and June 3, 2006
(in thousands)
See Accompanying Notes to Consolidated Financial Statements
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ELECTRO SCIENTIFIC INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
The accompanying consolidated financial statements include the accounts of Electro Scientific Industries, Inc. and its subsidiaries, all of which are wholly owned (collectively, the Company). All material intercompany accounts and transactions have been eliminated.
The Company provides high-technology manufacturing equipment to the global semiconductor and micro-electronics markets, including advanced laser systems that are used to micro-engineer electronic device features in high-volume production environments. The Companys customers are primarily manufacturers of semiconductors, passive components and interconnect devices. The Companys equipment enables these manufacturers to achieve the yield and productivity gains in their manufacturing processes that can be critical to their profitability. The components and devices manufactured by the Companys customers are used in a wide variety of end products in the computer, consumer electronics, communications and automotive industries. The Company serves the global semiconductor and micro-electronics markets from its headquarters in Portland, Oregon and through subsidiaries located in the United States, Europe and Asia.
Fiscal Year
On July 3, 2007, the Companys Board of Directors approved a change in the Companys reporting periods that results in a fiscal year consisting of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, the Companys fiscal 2008 reporting period consisted of a 43-week period ending on March 29, 2008 (approximately ten months). For comparative purposes, a consolidated statement of operations for the ten months ended March 31, 2007 is presented in Note 3 Comparative Statements of Operations for the Ten Months Ended March 31, 2007 (Unaudited). Prior to the change in the Companys reporting periods, the fiscal year ended on the Saturday nearest May 31. As such, fiscal 2007 ended on June 2, 2007 and fiscal 2006 ended on June 3, 2006 and those fiscal years contained 52 weeks and 53 weeks, respectively. All references to years relate to fiscal years unless otherwise noted. All references to fiscal 2008 relate to the ten-month period ended March 29, 2008.
Reclassifications
Certain reclassifications have been made in the accompanying consolidated financial statements for 2007 to conform to the 2008 presentation. Due to the implementation of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), $5.8 million of income taxes payable was reclassified from current to long-term liability. These reclassifications had no impact on previously reported results of operations or cash flows.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. Management believes that the estimates used are reasonable. Significant estimates made by management include: revenue recognition; inventory valuation; product warranty reserves; allowances for doubtful accounts; share-based compensation; income taxes; valuation of cost method equity investments; long-lived asset valuations; and goodwill and intangible assets valuation.
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Risks and Uncertainties
The Company uses financial instruments that potentially subject it to concentrations of credit risk. Such instruments include cash equivalents, marketable securities available for sale, trade receivables and financial instruments used in hedging activities. The Company invests cash in cash deposits, money market funds, commercial paper, certificates of deposit and readily marketable debt securities. Additionally, the Company holds investments in auction rate securities. Investments are placed with high credit quality financial institutions and the credit exposure from any one institution or instrument is minimized. To date, the amounts of realized losses experienced on these investments have not been material. See discussion of auction rate securities in Note 6 Marketable Securities.
The Company sells a significant portion of its products to a small number of large semiconductor and micro-electronics manufacturers. Ten customers accounted for approximately 59%, 62% and 55% of total net sales in fiscal 2008, 2007 and 2006, respectively. Two customers accounted for a cumulative 23%, 34% and 25% of total net sales in fiscal 2008, 2007 and 2006, respectively. One other customer accounted for an additional 10% of total net sales in fiscal 2006. The Companys operating results could be adversely affected if the financial condition and operations of these key customers decline.
The Company uses qualified manufacturers to supply many components and sub-system modules of its products. The systems that the Company manufactures use high-performance computers, peripherals, lasers and other components from various suppliers. The Company obtains some of the components from a single source or a limited group of suppliers. An interruption in the supply of a particular component would have a temporary adverse impact on the Companys operating results.
The Companys net investment exposure in foreign subsidiaries translated into U.S. Dollars using the period-end exchange rates at March 29, 2008 and June 2, 2007, was approximately $46.5 million and $35.4 million, respectively. The potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $4.7 million and $3.5 million at March 29, 2008 and June 2, 2007, respectively. The Company currently has no plans of liquidating any of its foreign subsidiaries, and therefore, foreign exchange rate gains or losses on foreign investments are reflected as a cumulative translation adjustment, net of tax, and do not affect the Companys results of operations.
The Companys operations involve a number of other risks and uncertainties including but not limited to those relating to the cyclicality of the semiconductor and micro-electronics markets, the availability of materials provided by suppliers, the effect of general economic conditions, rapid changes in technology and international operations.
Cash Equivalents and Marketable Securities
All highly liquid investments with a maturity of 90 days or less at the date of purchase are considered to be cash equivalents. Short-term marketable securities have maturities of less than one year or are subject to immediate pre-payment or call provisions. Marketable securities consist primarily of marketable debt securities and are classified as available for sale and recorded at fair market value. Unrealized gains and losses on marketable securities are recorded as a component of accumulated other comprehensive income within shareholders equity. To determine whether any existing impairment is considered other-than-temporary requiring recognition of an impairment loss in the results of operations, the Company evaluates its marketable securities based on the nature of the investments and the Companys intent and ability to hold the securities until the securities are no longer in an unrealized loss position. The Company determined that there was no other-than-temporary impairment as of March 29, 2008. See Note 6 Marketable Securities for additional information.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. Credit limits are established by reviewing the financial history and stability of each customer. Where appropriate,
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the Company obtains credit rating reports and financial statements of the customer to establish or modify their credit limits. On certain foreign sales, letters of credit are required. The collectibility of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material events impacting its business, a specific reserve for bad debt is recorded to reduce the related receivable to the amount expected to be recovered.
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. See Note 7 Inventories for additional information.
Shipped Systems Pending Acceptance
Shipped systems pending acceptance relate to systems that have been ordered and shipped to the customer, but have been deferred in accordance with the Companys revenue recognition policy. Shipped systems pending acceptance are recognized as cost of sales once all criteria for revenue recognition have been met and revenue is recorded. Shipped systems pending acceptance are valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Costs utilized in the valuation of shipped systems pending acceptance include material, labor and manufacturing overhead and exclude costs of installation.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance, repairs and minor improvements are charged to expense as incurred. Major improvements and additions are capitalized. When assets are sold or retired, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss is included as a component of operating expenses. See Note 8 Property, Plant and Equipment for additional information.
Costs of Computer Software for Internal Use
Costs incurred related to the implementation of an enterprise resource planning (ERP) system are accounted for in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). Computer software costs are capitalized according to the criteria specified by SOP 98-1, including external direct costs of materials and services consumed in obtaining and developing internal-use computer software and payroll and related costs for employees who are directly associated with the implementation project to the extent of the time spent directly on the project. See Note 8 Property, Plant and Equipment for additional information.
Long-Lived Asset Impairment
Long-lived assets, principally property, equipment and identifiable intangibles, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company evaluates recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company determined that there was no impairment as of March 29, 2008.
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Goodwill and Acquired Intangible Assets
The Company accounts for goodwill pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Goodwill was tested for impairment in the fourth quarter of fiscal 2008 utilizing a fair value comparison method that compared the Companys market capitalization against the carrying value of the goodwill and it was determined that there was no impairment as of March 29, 2008.
Purchased intangible assets with definite useful lives are carried at cost less accumulated amortization. Amortization expense is recognized on either a straight-line or sum-of-the-years digits method over the estimated useful lives of the intangible assets, which range from one to seven years.
Other Assets
Other assets include patents, consignment and demonstration (demo) equipment, minority equity investments and long-term deposits.
The Companys patents are accounted for in accordance with SFAS No. 142 and are amortized over their estimated useful lives of 17 years.
Consigned, demo and training equipment are recorded at the lower of standard costs or estimated market values, until the assets are sold. These assets are also reviewed quarterly for impairment.
Minority equity investments and related notes receivable include $5.0 million invested in a Series D Preferred Stock financing for Axsun Technologies, Inc., representing a 14.5% interest, $6.0 million invested in a Series D Preferred Stock financing for OmniGuide, Inc., representing an 11% interest and a $1.1 million bridge loan to OmniGuide, Inc. This $1.1 million bridge loan was converted into OmniGuide Series E Preferred Stock in May 2008, at which time, the Company also made an incremental $0.9 million investment in the Series E Preferred Stock. These investments are accounted for as cost method investments as specified by Accounting Principles Board Opinion (APB) No. 18, The Equity Method of Accounting for Investments in Common Stock. In accordance with Emerging Issues Task Force (EITF) 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, at each reporting period end, the Company determines whether events or circumstances have occurred that are likely to have a significant adverse effect on the fair value of the investments. If there are no identified events or circumstances that may have a significant adverse effect on the fair value of the investments, the fair value of the investments are not calculated as it is not practicable to do so in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. As of March 29, 2008, management was not aware of any events or circumstances that indicated the investments were impaired, therefore the full carrying value of $12.1 million was included in other assets in the consolidated balance sheet. See Note 9 Other Assets for additional information.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short maturities of these financial instruments. Marketable securities are recorded at fair market value based on quoted market prices for those investments at each period end.
Derivative Financial Instruments
The Companys primary objective for holding derivative financial instruments is to manage currency risk. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Companys accounting policies for these instruments are based on whether they meet the Companys criteria for designation as hedging transactions, either as cash flow or fair value hedges. A hedge of the exposure to variability in the cash flows of an asset or a liability, or of a forecasted transaction, is referred to as a cash flow hedge. A hedge of the exposure to changes in fair value of an asset or a liability, or of an unrecognized firm
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commitment, is referred to as a fair value hedge. The criteria for designating a derivative as a hedge include the instruments effectiveness in risk reduction and, in most cases, a one-to-one matching of the derivative instrument to its underlying transaction. See Note 14 Derivative Financial Instruments for further detail on cash flow and remeasurement hedge contracts as of March 29, 2008 and June 2, 2007.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104). Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured. Title and risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. Revenue is recognized upon such delivery, provided that fulfillment of acceptance criteria can be demonstrated prior to shipment. Where the acceptance criteria cannot be demonstrated prior to shipment, or in the case of substantially new products, revenue is deferred until acceptance has been received. For multiple element arrangements, the fair value of any undelivered elements is deferred until the elements are delivered and acceptance criteria are met. Revenues are recorded net of taxes collected which are required to be submitted to government authorities. Installation services are not essential to the functionality of the delivered equipment and installation revenue is deferred until installation is complete. Neither the costs of installation accrued nor the fair value of installation service revenue deferred has been material.
Revenues associated with sales to customers under local contracts in Japan are recognized upon title transfer, which generally occurs upon customer acceptance. On sales to the Companys distributor in Japan, where title transfers to the distributor generally upon shipment, revenue recognition is subject to the Companys standard revenue recognition policy. Subsequent to the end of fiscal 2008, the Company ended this agreement with the distributor in Japan.
Revenues related to spare parts and consumable sales are generally recognized upon shipment. Revenues related to maintenance and service contracts are recognized ratably over the duration of the contracts.
Product Warranty
The Company evaluates obligations related to product warranties quarterly. A standard one-year warranty from the date of acceptance is provided on most products. Warranty charges are comprised of costs to service the warranty, including labor to repair the system and replacement parts for defective items, as well as other costs incidental to the repairs. Warranty charges are recorded net of any cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Companys suppliers for defective components. Using historical data, the Company estimates average warranty cost per system or part type and records the provision for such charges as an element of cost of goods sold upon recognition of the related revenue. Additionally, the overall warranty accrual balance is separately analyzed using the remaining warranty periods outstanding on systems and items under warranty, and any resulting changes in estimates are recorded as an adjustment to cost of sales. If circumstances change, or if a significant change in warranty-related incidents occurs, the impact of the change in the warranty accrual could be material. Accrued product warranty is included on the consolidated balance sheet as a component of accrued liabilities. See Note 13 Product Warranty for additional information.
Research and Development
Research and development costs, which include labor and related employee expenses, patent maintenance fees, project materials, project subcontractors, depreciation of engineering equipment, building costs and other administration expenses, are expensed as incurred as research, development and engineering expense in the consolidated statements of operations.
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Taxes on Unremitted Foreign Income
Under APB No. 23, Accounting for Income TaxesSpecial Areas, the Company is required to provide for deferred taxes on the undistributed earnings of a subsidiary which is included in consolidated income of the parent, except to the extent that the income is intended to be indefinitely reinvested or remitted in a tax-free liquidation.
The Company provides for income taxes on its foreign subsidiaries results based on their effective income tax rates in each respective jurisdiction. Additional U.S. income tax expense is recorded on the unremitted foreign earnings, including any estimated withholding taxes, as if those earnings were repatriated to the U.S. parent company.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and presentation of comprehensive income and its components in financial statements. Comprehensive income includes net income and other comprehensive income, which includes charges or credits to equity that are not the result of transactions with shareholders. Comprehensive income within these consolidated financial statements includes cumulative foreign currency translation adjustments, unrealized gains and losses on securities available for sale and certain gains or losses on foreign currency forward contracts.
Net Income per Share
Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by SFAS No. 128, Earnings per Share. Basic EPS is computed utilizing the weighted average number of shares outstanding during the period. Diluted EPS also considers common stock equivalents, such as stock options and stock awards, to the extent that they are not antidilutive. See Note 16 Earnings Per Share for additional information.
Share-Based Compensation
Prior to June 4, 2006, the Company used the intrinsic value method under APB No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for stock options and unvested stock awards issued to its employees under its stock option plans.
On June 4, 2006, the Company adopted the provisions of SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS No. 123R), requiring the Company to recognize expense related to the fair value of its stock-based compensation awards. The Company elected to use the modified prospective transition method as permitted by SFAS No. 123R and therefore financial statement amounts for the prior periods have not been restated to reflect the fair value method of expensing stock-based compensation. Additionally, stock-based compensation expense under SFAS No. 123R includes expense for unvested stock-based payment awards granted prior to June 3, 2006 based on the grant date fair value determined in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
The Company uses the Black-Scholes model to estimate the fair value of all stock-based compensation awards on the date of grant, except for unvested stock awards which are valued at the fair market value of the Companys stock on the date of award. The Company recognizes the compensation expense for options and unvested stock awards on a straight-line basis over the requisite service period of the award. See Note 5 Share-Based Compensation for additional information.
Segment Reporting
The Company complies with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about
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products, major customers and the geographies in which the entity holds material assets and reports revenue. An operating segment is defined as a component that engages in business activities whose operating results are reviewed by the chief operating decision maker and for which discrete financial information is available. Based on the provisions of SFAS No. 131, the Company has determined that it operates in one segment. The Company manages its resources and assesses its performance on an enterprise-wide basis. The Companys product groups qualify for aggregation under SFAS No. 131 due to their similarities in customer base, economic characteristics, nature of products and services, and procurement, manufacturing and distribution processes.
Employee Benefit Plans
The Company has an employee savings plan under the provisions of Section 401(k) of the Internal Revenue Code. Contributions to the plan by the Company were $1.0 million, $1.1 million and $0.9 million in fiscal 2008, 2007 and 2006, respectively.
The Company has defined benefit retirement plans at certain of its foreign subsidiaries. During fiscal 2007, the Company adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) and recorded the effects of adopting SFAS No. 158 with an adjustment to accumulated other comprehensive income. The adoption of SFAS No. 158 did not materially impact the Companys consolidated financial position and results of operations.
2. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This pronouncement does not impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value measurements. In November 2007, the FASB deferred for one year the application of the fair value measurement requirements to nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on its financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS No. 159 is not expected to have a material impact on the Companys financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS No. 160). This standard requires all entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 requires that transactions between an entity and non-controlling interests are treated as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company currently owns 100% of each of its subsidiaries and as such, adoption of SFAS No. 160 is not expected to have a material impact on its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS No. 141R), which replaced SFAS No. 141. This pronouncement establishes requirements and principles for how the acquiring entity in a business combination recognizes and measures the identifiable assets acquired, the liabilities assumed, and any non-controlling interest on the financial statement; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. The Company will determine the impact of SFAS No. 141R on its financial position and results of operations if and when a future acquisition occurs.
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In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activitiesan amendment of SFAS Statement No. 133 (SFAS No. 161). This pronouncement requires enhanced disclosures about an entitys derivative and hedging activities. An entity is required to provide enhanced disclosures regarding how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect any entitys financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company has not yet determined the SFAS No. 161 adoption impact, if any, on its financial position and results of operations.
3. Comparative Statements of Operations for the Ten Months Ended March 31, 2007 (Unaudited)
On July 3, 2007, the Companys Board of Directors approved a change in the Companys reporting periods that results in a fiscal year consisting of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly the fiscal 2008 reporting period consisted of a 43-week period ending on March 29, 2008 (approximately ten months).
To create a pro forma ten-month statement of operations for fiscal 2007 for comparative purposes, the Company used quarterly results as reported in the Form 10-Q for the first three quarters of fiscal 2007, the period June 4, 2006 through March 3, 2007, and added the unaudited results for the fiscal month ended March 31, 2007. To calculate the estimated fiscal March 2007 results, management estimated certain items that were normally recorded on a quarterly basis, including standard cost variances, overhead allocations, certain operating expenses and the income tax provision. Certain standard cost variances and overhead allocations were estimated on a pro rata revenue basis for the quarter. Certain operating expenses were estimated on a pro rata or normalized basis, as appropriate. For comparative purposes, a consolidated statement of operations for the ten months ended March 31, 2007 is as follows (in thousands, except per share data):
Pro Forma
Ten months ended March 31, 2007 (unaudited) |
||||
Net sales |
$ | 184,433 | ||
Cost of sales |
104,823 | |||
Gross profit |
79,610 | |||
Operating expenses (income): |
||||
Selling, service and administration |
39,886 | |||
Research, development and engineering |
31,328 | |||
Insurance recoveries |
(2,287 | ) | ||
68,927 | ||||
Operating income |
10,683 | |||
Interest and other income, net |
8,569 | |||
Income before income taxes |
19,252 | |||
Provision for income taxes |
5,027 | |||
Net income |
$ | 14,225 | ||
Net income per sharebasic |
$ | 0.49 | ||
Net income per sharediluted |
$ | 0.48 | ||
Weighted average number of sharesbasic |
29,138 | |||
Weighted average number of sharesdiluted |
29,387 | |||
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4. Acquisition of New Wave Research, Incorporated
On July 20, 2007, the Company acquired New Wave Research, Incorporated (NWR), a privately held company headquartered in Fremont, California. NWR is a global leader in the development of high-end lasers and laser-based systems and its products are used in the semiconductor market for sapphire wafer scribing, flat-panel display repair and semiconductor failure analysis, among other applications. The acquisition was an investment aimed at leveraging the companies combined core competencies into adjacent markets and driving revenue growth and shareholder value, which supports the premium paid over the fair market value of individual assets.
The Company acquired 100% of NWRs outstanding common stock for approximately $36.2 million comprised of $34.9 million in cash and merger-related transaction costs of $1.3 million. The contractual purchase price of $36.0 million was reduced by $1.1 million related to certain net working capital adjustments and indemnity payments agreed to prior to closing. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analyses supporting the purchase price allocation include a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. The purchase price is subject to further changes, including the finalization of potential adjustments for payments to or from former NWR shareholders relating to the amount of NWRs net working capital on the date of acquisition, the resolution of various tax-related matters and additional merger-related transaction costs.
The following table presents the preliminary allocation of the purchase price of $36.2 million to the assets acquired and liabilities assumed based on their fair values (in thousands):
Accounts receivable |
$ | 5,246 | ||
Inventory |
6,110 | |||
Prepaid expense and other current assets |
3,609 | |||
Property, plant and equipment |
2,496 | |||
Intangible assets |
12,311 | |||
In-process research & development |
2,800 | |||
Goodwill (1) |
10,824 | |||
Other long-term assets |
958 | |||
Accounts payable and accrued liabilities |
(11,532 | ) | ||
Deferred revenue (2) |
(1,603 | ) | ||
Net assets acquired |
31,219 | |||
Escrow deposits pending disbursement (3) |
4,940 | |||
Total purchase price, net of cash acquired |
$ | 36,159 | ||
(1) | The goodwill amount is not tax deductible. |
(2) | The amount recorded for deferred revenue represents the fair value of the remaining obligation assumed related to custom acceptance criteria and remaining revenue on extended warranties. |
(3) | The final disbursement of escrow deposits will increase the goodwill recorded in the acquisition by the amount of the disbursement. This amount is included in other assets at March 29, 2008 on the consolidated balance sheet. The final disbursement of funds is anticipated to occur in fiscal 2009-2010. |
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The net amount of intangible assets purchased is reflected as Acquired intangible assets, net on the consolidated balance sheet as of March 29, 2008. The following table presents the details of the intangible assets purchased in the NWR acquisition as of July 20, 2007 and accumulated amortization to date at March 29, 2008 (in thousands):
Useful life |
Estimated
Fair Value at Acquisition |
Accumulated
Amortization |
Recorded value
at March 29, 2008 |
|||||||||
Developed technology |
7 years | $ | 8,100 | $ | (800 | ) | $ | 7,300 | ||||
Customer relationships |
6 years | 2,700 | (534 | ) | 2,166 | |||||||
Customer backlog |
1 year | 700 | (484 | ) | 216 | |||||||
Trade name and trademarks |
3 years | 400 | (92 | ) | 308 | |||||||
Change of control agreements |
1 year | 100 | (69 | ) | 31 | |||||||
Fair value of below-market lease (non-current portion) |
3.8 years | 311 | (71 | ) | 240 | |||||||
Subtotallong term |
12,311 | (2,050 | ) | 10,261 | ||||||||
Fair value of below-market lease (current portion) |
110 | | 110 | |||||||||
Total acquired intangible assets |
$ | 12,421 | $ | (2,050 | ) | $ | 10,371 | |||||
Amortization expense for intangible assets purchased in the NWR acquisition was approximately $2.1 million for the ten months ended March 29, 2008, and has been recorded in the consolidated statement of operations as follows (in thousands):
2008 | |||
Cost of sales |
$ | 800 | |
Selling, service and administration |
1,250 | ||
$ | 2,050 | ||
The estimated amortization expense of intangible assets purchased in the NWR acquisition in future years is as follows (in thousands):
Fiscal Year |
Amortization | ||
2009 |
$ | 2,330 | |
2010 |
1,954 | ||
2011 |
1,734 | ||
2012 |
1,472 | ||
2013 |
1,325 | ||
Future years |
1,556 | ||
$ | 10,371 | ||
At the acquisition date, NWR had in-process research and development valued at $2.8 million and the immediate write-off of this amount has been included in operating expenses for the ten-month period ended March 29, 2008. The in-process research and development related to three programs consisting of development on a diode-pumped solid-state LED wafer-scribing system, a next-generation Advanced Beam Delivery System and a next-generation laser product. The value of the in-process research and development was based on the excess earnings method of the income approach, which measures the value of an asset by calculating the present value of related future economic benefits, such as cash earnings. In determining the value of in-process research and development, the assumed commercialization date for these products was April 2008. The current estimated commercialization dates for these products ranges from May 2008 to December 2008. The modeled cash flow was discounted back to the net present value and was based on estimates of revenues and operating profits related
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to the project. Significant assumptions used in the valuation of in-process research and development included: stage of development of the project, future revenues, the estimated life of the products underlying technology, future operating expenses, and a discount rate of 18% to reflect present value.
Purchase accounting adjustments were made to record inventory at fair value on the date of acquisition. These adjustments resulted in $1.1 million in additional purchase accounting expenses to cost of sales in the ten months ended March 29, 2008.
The NWR results of operations are included in the Companys consolidated financial statements from the date of acquisition forward. Pro forma financial statements of the combined entities are not presented as the impact of the acquisition is not material.
5. Share-Based Compensation
On June 4, 2006, the Company adopted the provisions of SFAS No. 123R requiring the Company to recognize expense related to the fair value of its stock-based compensation awards. The Company elected to use the modified prospective transition method as permitted by SFAS No. 123R and therefore financial statement amounts for the prior periods presented in this Form 10-K have not been restated to reflect the fair value method of expensing stock-based compensation. Additionally, stock-based compensation expense under SFAS No. 123R included expense for unvested stock-based payment awards granted prior to June 3, 2006 based on the grant date fair value determined in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Disclosures for the period prior to the adoption of SFAS No. 123R included net income and net income per share as if the fair value of stock-based awards to employees had been applied. This pro forma information for fiscal 2006 is as follows (in thousands, except per share data):
2006 | ||||
Net income, as reported |
$ | 20,823 | ||
AddStock-based employee compensation expense included in reported net income, net of related tax effects |
866 | |||
DeductTotal stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effect |
(11,993 | ) | ||
Net income, pro forma |
$ | 9,696 | ||
Net income per sharebasic, as reported |
$ | 0.72 | ||
Net income per sharediluted, as reported |
$ | 0.72 | ||
Net income per sharebasic, pro forma |
$ | 0.34 | ||
Net income per sharediluted, pro forma |
$ | 0.33 | ||
The Compensation Committee of the Board of Directors accelerated the vesting of certain stock options during fiscal 2006. The total pro forma stock-based employee compensation expense for fiscal 2006 of $12.0 million includes $10.5 million for options that were granted in fiscal 2006 and fully vested during the fiscal year.
53
Share-based compensation was included in the Companys consolidated statements of operations as follows (in thousands):
Ten months ended
March 29, 2008 |
Fiscal year ended
June 2, 2007 |
Fiscal year ended
June 3, 2006 |
||||||||||
Cost of sales |
$ | 538 | $ | 509 | $ | 112 | ||||||
Selling, service, and administration |
2,306 | 1,665 | 1,057 | |||||||||
Research, development, and engineering |
877 | 710 | 184 | |||||||||
Stock-based compensation expense before income taxes |
3,721 | 2,884 | 1,353 | |||||||||
Income tax benefit |
(1,340 | ) | (1,040 | ) | (487 | ) | ||||||
Total stock-based compensation expense after income taxes |
$ | 2,381 | $ | 1,844 | $ | 866 | ||||||
The total amount of cash received from the exercise of stock options in the ten months ended March 29, 2008 was $2.5 million and the total amount of cash received from the ESPP purchases in the ten months ended March 29, 2008 was $2.0 million. For the ten months ended March 29, 2008, there was $0.1 million in tax benefit realized from the exercise of stock options and ESPP purchases. Upon exercise of stock options, the Company issues new shares of common stock from its authorized shares.
The Company elected to adopt the alternative transition method provided in FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards (FSP 123R-3) for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital (APIC) pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R.
As of March 29, 2008, no stock-based compensation costs were capitalized and the Company had $13.0 million of total unamortized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.6 years.
Valuation Assumptions
The Company uses the Black-Scholes model to estimate the fair value of all stock-based compensation awards on the date of grant, except for the unvested stock awards which are valued at the fair market value of the Companys stock on the date of award.
The Black-Scholes option pricing model is utilized to determine the fair value of options granted. The following weighted average assumptions were used in calculating the fair value during the periods presented:
2008 | 2007 | 2006 | |||||||
Risk-free interest rate |
4.27 | % | 4.55 | % | 4.33 | % | |||
Expected dividend yield |
0 | % | 0 | % | 0 | % | |||
Expected lives |
4.3 years | 4.6 years | 4.9 years | ||||||
Expected volatility |
42 | % | 49 | % | 56 | % |
54
Options were granted to members of the Scientific Advisory Board during fiscal 2007 and 2008. Since these are non-employee options, the valuation will not be final until the vesting dates, February 16, 2009 and May 18, 2009. As such, these options are revalued at the end of each reporting period. The expense for these non-employee options was estimated based on the following assumptions:
2008 | 2007 | |||||
Risk-free interest rate |
3.50 | % | 4.50 | % | ||
Expected dividend yield |
0 | % | 0 | % | ||
Expected lives |
10 years | 10 years | ||||
Expected volatility |
57.5 | % | 58.7 | % |
The following weighted average assumptions were made in calculating the fair value of all shares issued under the ESPP during the periods presented:
2008 | 2007 | 2006 | |||||||
Risk-free interest rate |
3.25 | % | 4.93 | % | 4.44 | % | |||
Expected dividend yield |
0 | % | 0 | % | 0 | % | |||
Expected lives |
1.2 years | 1.1 years | 1.1 years | ||||||
Expected volatility |
35 | % | 33 | % | 38 | % |
The risk-free rates used are based on the U.S. Treasury yields over the expected terms. The expected term and forfeiture estimates for stock options are based on an analysis of actual exercise behavior. The expected term for options granted to members of the Scientific Advisory Board is based on the contractual life of the option as required by EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The expected term for the ESPP is the weighted average length of the purchase periods. The Company uses its historical volatility over the estimated expected term as the expected volatility.
Stock Plans
In October 2004, the shareholders approved the adoption of the 2004 Stock Incentive Plan (the 2004 Plan) that replaced various stock compensation plans that were previously approved by the shareholders or the Board of Directors (the Replaced Plans), except with respect to options and other awards previously outstanding. Outstanding options and awards remained subject to the terms of the Replaced Plans under which they were originally granted. At that time, the shareholders also approved the reservation of 3,000,000 shares of common stock for issuance under the 2004 Plan. These shares are in addition to any shares of common stock that, at the time the 2004 Plan, were approved by shareholders, were available for grant under the Replaced Plans or that may subsequently become available for grant under any of the Replaced Plans through the expiration, termination, forfeiture or cancellation of grants. In January 2005, the Board of Directors approved certain amendments to the 2004 Plan. These amendments prohibit option grants with an exercise price less than fair market value, require that time-based restricted stock awards have a minimum vesting period of at least three years, with the subject shares vesting no more quickly than one-third annually over the three-year period, and expressly prohibit the reservation of additional shares under the 2004 Plan without shareholder approval. In April 2005, the Board of Directors approved another amendment to the 2004 Plan extending the period during which an option may be exercised following termination of employment or service if an optionee dies within the 90-day exercise period following termination.
The 2004 Plan allows for grants of stock options, stock bonuses (including unvested stock units), unvested stock and performance-based awards. Stock options outstanding under the 2004 Plan and the Replaced Plans vest over variable periods determined at the grant date, generally with terms of immediate vesting or up to four years, and expire ten years from the date of grant. Certain options granted in fiscal 2006 vested immediately or prior to the end of the fiscal year with sale restrictions. Options issued under the 2004 Plan and the Replaced Plans are exercisable at prices not less than fair market value on the date of the grant. The 2004 Plan prohibits repricing of
55
options granted without prior shareholder approval. Restricted stock grants issued under the Replaced Plans vest based on certain performance criteria that are tied to the Companys results of operations and/or length of service. Certain restricted stock units awarded under the 2004 Plan vest based on performance criteria that are tied to the Companys results of operations, personal performance criteria, and, in certain cases, length of service.
During fiscal 2007, the Company granted an option to purchase 100,000 shares to a key executive and options to purchase an aggregate of 25,000 shares to members of the Scientific Advisory Board. The Board of Directors authorized these grants as inducements for joining the Company and the grants were not made under a shareholder approved plan. The exercise price for each option grant is the fair market value of the Companys stock on the date of the grant. Options granted to the key executive become exercisable with respect to 25 percent of the underlying shares each year over four years. Options granted to members of the Scientific Advisory Board become exercisable on February 16, 2009 and May 18, 2009.
In September 1990, the shareholders approved the adoption of the 1990 Employee Stock Purchase Plan, as amended in September 1998, October 2003, October 2004 and January 2008 (the ESPP), pursuant to which 1,900,000 shares of common stock have been reserved for issuance to participating employees. Eligible employees may elect to contribute up to 15 percent of their base wage and any commissions during each pay period. The ESPP provides for separate overlapping twenty-four month offerings starting every three months. Each offering has eight purchase dates occurring every three months on designated dates. The offerings under the ESPP commence on February 15, May 15, August 15 and November 15 of each calendar year. Any eligible employee may participate in only one offering at a time and may purchase shares only through payroll deductions permitted under the ESPP. At the end of each three-month purchase period, the purchase price is determined and the accumulated funds are used to automatically purchase shares of common stock. The purchase price per share is equal to 85 percent of the lower of the fair market value of the common stock on (a) the first day of the offering period or (b) the date of purchase. The ESPP also provides that if the fair market value of the common stock on the first day of the new offering period is less than or equal to the fair market value of the common stock on the first date of any ongoing offering, employees participating in any such ongoing offering will be automatically withdrawn from it and enrolled in the new offering.
On January 25, 2005, the Compensation Committee accelerated the vesting of 315,000 shares of the Companys common stock subject to an option granted to Nicholas Konidaris, the Companys President and Chief Executive Officer, so that the option became fully exercisable on August 26, 2005. The option has an exercise price of $25.71. Under the terms of the original option agreement, 105,000 shares would have vested on each of January 7, 2006, January 7, 2007 and January 7, 2008. For financial reporting purposes, the Company accelerated approximately $1.5 million of unamortized expense related to this award ratably from the date of change over the reduced vesting period, which ended August 26, 2005. This expense would otherwise have been expensed ratably through December 2007. Additionally, a stock option granted to Mr. Konidaris to purchase 40,000 shares of the Companys common stock was accelerated effective January 25, 2005. The option had an exercise price of $25.50. Under the terms of the original option agreement, 10,000 shares would have vested on each of July 13, 2005, July 13, 2006, July 13, 2007 and July 13, 2008. In connection with both of these accelerations, Mr. Konidaris agreed that the shares underlying the accelerated options may not be sold by him until the dates those shares would otherwise have been vested under the terms of the original option agreements.
The acceleration of the stock option vesting schedules in fiscal 2006 reduced the amortization of the Companys stock option compensation expense for fiscal 2008 and 2007.
56
At March 29, 2008, the Company had 9,695,184 shares of its common stock reserved for issuance under all of the above plans combined. Of those shares, 4,589,577 are subject to issuance under currently outstanding stock options and stock awards and 5,105,607 shares are available for future grants. The weighted-average fair-value of stock-based compensation awards, including stock option awards granted and vested during the period, unvested stock awards granted during the period and the intrinsic value of stock options exercised during the period were (in thousands, except per share data):
2008 | 2007 | 2006 | |||||||
Stock Option Awards: |
|||||||||
Grant date fair value per share |
$ | 9.75 | $ | 9.85 | $ | 10.57 | |||
Total fair value of options granted |
$ | 2,384 | $ | 1,990 | $ | 14,147 | |||
Total fair value of options vested |
$ | 1,035 | $ | 1,039 | $ | 29,900 | |||
Total intrinsic value of options exercised |
$ | 590 | $ | 288 | $ | 2,009 | |||
Unvested Stock Awards: |
|||||||||
Grant date fair value per share |
$ | 22.50 | $ | 18.95 | $ | 20.13 | |||
Total fair value of awards granted |
$ | 9,832 | $ | 2,128 | $ | 674 | |||
Employee Stock Purchase Plan: |
|||||||||
Grant date fair value per share |
$ | 5.66 | $ | 6.09 | $ | 6.88 | |||
Total grant date fair value |
$ | 3,011 | $ | 3,377 | $ | 492 |
Share-Based Payment Award Activity
Information with respect to stock option activity is as follows:
Shares |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term |
Aggregate
Intrinsic Value (thousands) |
||||||||
Outstanding as of June 2, 2007 |
4,292,422 | $ | 25.03 | ||||||||
Granted |
244,499 | $ | 19.68 | ||||||||
Exercised |
(152,893 | ) | $ | 19.07 | |||||||
Expired or forfeited |
(371,448 | ) | $ | 22.48 | |||||||
Outstanding as of March 29, 2008 |
4,012,580 | $ | 25.16 | 5.63 | $ | 186 | |||||
Vested and expected to vest as of March 29, 2008 |
3,973,681 | $ | 25.21 | 5.60 | $ | 180 | |||||
Exercisable as of March 29, 2008 |
3,700,845 | $ | 25.57 | 5.34 | $ | 123 | |||||
Information with respect to unvested stock awards activity is as follows:
Shares |
Weighted
Average Grant Date Fair Value |
Weighted
Average Remaining Contractual Term |
Aggregate
Intrinsic Value (thousands) |
||||||||
Outstanding as of June 2, 2007 |
223,194 | $ | 20.01 | ||||||||
Awarded |
437,641 | $ | 22.50 | ||||||||
Vested |
(58,688 | ) | $ | 24.26 | |||||||
Forfeited |
(25,150 | ) | $ | 22.79 | |||||||
Outstanding as of March 29, 2008 |
576,997 | $ | 21.63 | 2.31 | $ | 9,336 | |||||
57
6. Marketable Securities
The Company accounts for marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Except as described below, marketable securities are classified as available for sale and, accordingly, they are recorded on the consolidated balance sheet at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income within shareholders equity. All investments in marketable debt securities are high credit quality securities.
As of March 29, 2008, the Company had a total of $19.6 million invested in auction rate securities. Although the contractual maturities of these securities range up to calendar year 2050, the securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings by selling such securities at par. With the liquidity issues experienced in the global credit and capital markets, the Companys auction rate securities have experienced multiple failed auctions. While the Company continues to earn interest on these investments at the maximum contractual rate, the estimated market value of these auction rate securities no longer approximates par value.
The Company believes the decline in market value is due to the lack of liquidity for auction rate securities resulting from the impact the sub-prime lending collapse has had on the bond insurers and the credit markets that began in 2007, rather than specific concerns with respect to the issuers of the auction rate securities themselves. The Company currently has the intent and ability to hold these securities until they reach maturity or are redeemed by the issuers and accrued interest income continues to be received when due. As such, the Company has determined that the values of these securities are not more than temporarily impaired. The Company has reviewed the market valuations provided by its investment advisor. These estimated fair market values are based upon a discounted cash flow model for fixed income securities which takes into account the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates that reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or redemption by the issuer; (iv) estimates of the recovery rates in the event of default for each security; (v) the financial condition, results and ratings of the bond insurers and issuers and (vi) the underlying trust assets of the securities.
An unrealized pretax loss on auction rate securities of $3.9 million has been recorded in accumulated other comprehensive income to reflect the fair value of these securities on the consolidated balance sheet at March 29, 2008. The Company reclassified these auction rate securities, which were previously included in current assets, as long-term marketable securities on the consolidated balance sheet at March 29, 2008. The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair market value of its investments. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, the Company may be required to record additional unrealized losses in accumulated other comprehensive income or impairment charges in the consolidated statement of operations.
Proceeds from the sales of available for sale securities were $47.3 million and $7.8 million during fiscal 2008 and 2006, respectively. Net losses on sales during fiscal 2008 and fiscal 2006 were $0.2 million and $0.1 million, respectively. There were no sales of available for sale securities in fiscal 2007. For purpose of determining gross realized gains and losses, the cost of securities sold is based on specific identification. Net unrealized holding gains (losses) on available for sale securities in the tax-effected amounts of ($2.6 million), $0.4 million and ($0.1 million) for fiscal 2008, 2007 and 2006, respectively, have been included in accumulated other comprehensive income.
58
Certain information regarding marketable securities at March 29, 2008 and June 2, 2007 is as follows (in thousands):
March 29, 2008 |
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
|||||||||
Available-for-sale debt securities (current): |
|||||||||||||
Federal government and government agency |
$ | 1,664 | $ | 27 | $ | | $ | 1,691 | |||||
Total |
1,664 | 27 | | 1,691 | |||||||||
Available-for sale debt securities (long-term): |
|||||||||||||
Auction rate securities |
19,600 | | (3,903 | ) | 15,697 | ||||||||
Corporate |
2,090 | 48 | | 2,138 | |||||||||
Total |
21,690 | 48 | (3,903 | ) | 17,835 | ||||||||
June 2, 2007 |
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
|||||||||
Available-for-sale debt securities (current): |
|||||||||||||
Federal government and government agency |
$ | 98,505 | $ | 273 | $ | (77 | ) | $ | 98,701 | ||||
Auction rate securities |
25,390 | | | 25,390 | |||||||||
Total |
123,895 | 273 | (77 | ) | 124,091 | ||||||||
Available-for sale debt securities (long-term): |
|||||||||||||
Federal government and government agency |
1,499 | | (2 | ) | 1,497 | ||||||||
Corporate |
2,140 | | (15 | ) | 2,125 | ||||||||
Total |
3,639 | | (17 | ) | 3,622 | ||||||||
Underlying maturities of investments at March 29, 2008 were approximately $1.7 million within one year, $2.1 million between one and five years, and $15.7 million beyond 10 years.
7. Inventories
The components of inventories at March 29, 2008 and June 2, 2007 are as follows (in thousands):
2008 | 2007 | |||||
Raw materials and purchased parts |
$ | 62,060 | $ | 50,021 | ||
Work-in-process |
15,154 | 19,170 | ||||
Finished goods |
24,287 | 11,790 | ||||
$ | 101,501 | $ | 80,981 | |||
8. Property, Plant and Equipment
Property, plant and equipment consisted of the following as of March 29, 2008 and June 2, 2007 (in thousands):
Estimated Useful
Lives |
2008 | 2007 | ||||||||
Land |
n/a | $ | 3,061 | $ | 3,047 | |||||
Buildings and improvements |
3 to 40 years | 39,587 | 37,884 | |||||||
Machinery and equipment |
3 to 10 years | 45,938 | 35,903 | |||||||
Computer equipment and software |
1 to 7 years | 27,628 | 25,726 | |||||||
116,214 | 102,560 | |||||||||
Less accumulated depreciation and amortization |
(68,252 | ) | (58,701 | ) | ||||||
$ | 47,962 | $ | 43,859 | |||||||
59
Depreciation and amortization expense totaled $7.8 million, $8.2 million and $7.6 million in fiscal 2008, 2007 and 2006, respectively.
Costs related to the implementation of an ERP system that met the criteria for capitalization under SOP 98-1 in fiscal 2008, 2007 and 2006 totaled $1.2 million, $0.8 million and $10.9 million, respectively.
9. Other Assets
Other assets consisted of the following as of March 29, 2008 and June 2, 2007 (in thousands):
2008 | 2007 | |||||
Patents, net |
137 | 188 | ||||
Consignment and demo equipment |
8,346 | 7,516 | ||||
Minority equity investments and related notes receivable |
12,115 | 11,000 | ||||
All-Ring patent suit court bond |
9,705 | 6,901 | ||||
Acquisition escrow deposit |
4,940 | | ||||
Other |
864 | 1,025 | ||||
$ | 36,107 | $ | 26,630 | |||
See Note 1 Summary of Significant Accounting Policies for discussion of minority equity investments.
Other assets include a Taiwan dollar security bond posted with the Kaohsiung Court in Taiwan related to the Companys filing of a patent infringement suit against All Ring Tech Co., Ltd. in that jurisdiction. In June 2007, the Company paid an additional $2.1 million to increase its Taiwan dollar security bond posted with the Kaohsiung Court in Taiwan related to the filing of a patent infringement suit against All Ring Tech Co., Ltd. in that jurisdiction. This deposit was valued at $9.7 million and $6.9 million at March 29, 2008 and June 2, 2007, respectively, and will be held by the court pending final resolution of the matter. See Note 18 Legal Matters for additional information.
Amortization expense totaled $2.4 million, $0.2 million and $0.3 million in fiscal 2008, 2007 and 2006, respectively. Amortization expense in fiscal 2008 includes $2.1 million for the amortization of intangible assets acquired with the purchase of NWR.
10. Income Taxes
The Company accounts for income taxes under the asset and liability method prescribed by SFAS No. 109, Accounting for Income Taxes. Under this method, deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement and tax balances of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those assets and liabilities are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. When management determines that it is not more likely than not that a deferred tax asset will be fully realized, a valuation allowance is established to reduce deferred tax assets to the amount expected to be realized.
60
Net deferred tax assets at March 29, 2008 and June 2, 2007 consisted of the following (in thousands):
2008 | 2007 | |||||||
Deferred tax assets and liabilities: |
||||||||
Current |
||||||||
Receivable and inventory valuation |
$ | 4,526 | $ | 3,950 | ||||
Payroll-related accruals |
434 | 383 | ||||||
Product warranty costs |
1,361 | 1,401 | ||||||
Deferred revenue |
3,247 | 3,356 | ||||||
Tax loss and credit carryforwards |
12,265 | | ||||||
Other accrued liabilities |
(93 | ) | 3,453 | |||||
Total current deferred tax assets |
21,740 | 12,543 | ||||||
Valuation allowance, current |
(6,834 | ) | (3,039 | ) | ||||
Net current deferred tax assets |
14,906 | 9,504 | ||||||
Non-current |
||||||||
Property, plant and equipment |
(110 | ) | 638 | |||||
Other comprehensive (income) loss |
725 | (49 | ) | |||||
Unremitted foreign earnings |
(1,496 | ) | (880 | ) | ||||
Tax loss and credit carryforwards |
1,853 | 14,876 | ||||||
Other accrued liabilities |
524 | 258 | ||||||
Total non-current deferred tax asset |
1,496 | 14,843 | ||||||
Valuation allowance, non-current |
(470 | ) | (3,597 | ) | ||||
Net non-current deferred tax assets |
1,026 | 11,246 | ||||||
Total deferred tax assets |
23,238 | 27,385 | ||||||
Total valuation allowance |
(7,306 | ) | (6,635 | ) | ||||
Net deferred tax assets |
$ | 15,932 | $ | 20,750 | ||||
As of March 29, 2008, the Company had approximately $14.1 million in tax assets resulting from federal, state and foreign net operating losses and tax credits. A detailed breakdown of the net operating loss carryforwards (tax-effected) and tax credits at March 29, 2008 and June 2, 2007 are as follows (in thousands):
2008 | 2007 | |||||
Federal net operating losses |
$ | 2,886 | $ | 2,316 | ||
State net operating losses |
3,240 | 3,052 | ||||
Foreign operating losses and tax credits |
398 | 1,455 | ||||
Federal and state research credits |
6,261 | 6,724 | ||||
Federal minimum tax credit |
1,246 | 1,243 | ||||
Federal capital losses |
87 | 86 | ||||
$ | 14,118 | $ | 14,876 | |||
The fiscal 2008 federal net operating losses of $2.9 million were acquired as part of acquisitions and expire on various dates through fiscal 2027. The state net operating losses of $3.2 million expire on various dates through fiscal 2024. The majority of the foreign net operating losses may be carried forward indefinitely. The federal and most of the state research credits expire on various dates through fiscal 2028. Certain state research credits and the federal minimum tax credits are available indefinitely.
A valuation allowance of $7.3 million and $6.6 million has been recorded as of March 29, 2008 and June 2, 2007, respectively. If any of the valuation allowance related to the acquired federal net operating losses is subsequently recognized, the benefit will be recorded as a reduction to goodwill in accordance with SFAS
61
No. 109. The Company expects to utilize all deferred tax assets acquired from NWR, therefore no valuation allowance has been established on these acquired assets. The Company believes that its valuation allowance on deferred tax assets is adequate and that it is more-likely-than-not that the net deferred tax assets of $15.9 million at March 29, 2008 will be realized in the future. The valuation allowance was increased by $0.7 million in fiscal 2008, $0.5 million in fiscal 2007 and $2.6 million in fiscal 2006, respectively. In future periods, adjustments to the valuation allowance against the deferred tax assets may be recorded based upon changes in future forecasts of taxable income.
The components of income before income taxes and the provision for (benefit from) income taxes, all from continuing operations, are as follows (in thousands):
Ten months ended
March 29, 2008 |
Fiscal year ended
June 2, 2007 |
Fiscal year ended
June 3, 2006 |
|||||||||
Income before income taxes: |
|||||||||||
Domestic |
$ | 21,678 | $ | 30,213 | $ | 16,274 | |||||
Foreign |
4,834 | 4,414 | 3,013 | ||||||||
Total income before income taxes |
$ | 26,512 | $ | 34,627 | $ | 19,287 | |||||
Provision for (benefit from) income taxes: |
|||||||||||
Current: |
|||||||||||
U.S. federal and state |
$ | 5,091 | $ | 5,565 | $ | (5,163 | ) | ||||
Foreign |
2,116 | 1,216 | 1,054 | ||||||||
7,207 | 6,781 | (4,109 | ) | ||||||||
Deferred: |
|||||||||||
U.S. federal and state |
2,992 | 3,746 | 2,462 | ||||||||
Foreign |
(276 | ) | 576 | 111 | |||||||
2,716 | 4,322 | 2,573 | |||||||||
Total provision for (benefit from) income taxes |
$ | 9,923 | $ | 11,103 | $ | (1,536 | ) | ||||
Tax benefits of $0.1 million, $0.5 million, and $1.6 million associated with share-based compensation were allocated to common stock in fiscal 2008, 2007 and 2006, respectively.
A reconciliation of the Companys effective tax rate to the United States federal statutory income tax rate is as follows:
2008 | 2007 | 2006 | |||||||
U.S. federal statutory income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
State income taxes, net of federal benefit |
0.8 | 0.9 | 5.0 | ||||||
Tax credits |
(4.8 | ) | (5.5 | ) | (5.8 | ) | |||
Domestic production and export tax incentives |
(1.2 | ) | (3.6 | ) | (12.3 | ) | |||
Non-U.S. income taxed at different rates |
1.5 | 2.3 | (0.8 | ) | |||||
Changes in accrued taxes |
2.0 | 4.0 | (30.9 | ) | |||||
In-process research and development write-off |
3.8 | | | ||||||
Other, net |
0.3 | (1.0 | ) | 1.8 | |||||
37.4 | % | 32.1 | % | (8.0 | )% | ||||
62
The fiscal 2008 rate includes a discrete purchase accounting expense of $2.8 million associated with the write-off of in-process research and development, which is non-deductible for tax purposes.
In October 2003, the Internal Revenue Service (IRS) began an audit of the Companys tax years ending in 1996 through 2003. During fiscal 2005, the Company and the IRS reached agreement on the tax return years under review. The examination process requires a special report to be submitted by the IRS for congressional approval from the Joint Committee on Taxation. In fiscal 2006, the Company received notice from the IRS that the Joint Committees review was completed without exception. As a result, in fiscal 2006, the Company received approximately $7.2 million in tax refunds and recorded a $5.9 million reversal of previously accrued income taxes relating to those years.
The Company operates globally but considers its significant tax jurisdictions to include the United States, Taiwan, China, Korea, Japan, Singapore and the United Kingdom. There are currently no ongoing tax examinations. As of March 29, 2008, the following tax years remained subject to examination by the major tax jurisdictions indicated:
Major Jurisdictions |
Open Tax Years |
|
China |
2004 and forward | |
Japan |
2003 and forward | |
Korea |
2001 and forward | |
Singapore |
2000 and forward | |
Taiwan |
2001 and forward | |
United Kingdom |
2000 and forward | |
United States |
2003 and forward |
Adoption of FIN 48
Effective June 3, 2007, the Company adopted FIN 48. This interpretation clarifies the criteria for recognizing income tax benefits under SFAS No. 109 and requires additional disclosures under uncertain tax positions. Under FIN 48 the financial statement recognition of the benefit for tax positions is dependent upon the benefit being more likely than not to be sustainable upon examination. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than fifty-percent likely of being realized upon ultimate settlement. The adoption of FIN 48 did not have a material impact on the Companys financial position.
A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the ten months ended March 29, 2008 is as follows (in thousands):
Unrecognized tax benefits balance at June 2, 2007 |
$ | 5,583 | ||
Gross increases for tax positions of prior years |
1,395 | |||
Gross decreases for tax positions of prior years |
(524 | ) | ||
Gross increases for tax positions for current year |
417 | |||
Settlements |
| |||
Lapse of statute of limitations |
| |||
Unrecognized tax benefits balance at March 29, 2008 |
$ | 6,871 | ||
The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate is $5.5 million at March 29, 2008. The unrecognized tax benefit acquired from New Wave Research acquisition is $1.4 million and if recognized, this amount would reduce goodwill in accordance with SFAS No. 109. The Company recognizes accrued interest and penalties on unrecognized tax positions in the provision for income taxes. The gross amount of accrued interest and penalties as of March 29, 2008 is $1.2 million. Other than for increases and decreases consistent with prior years, the Company does not anticipate any significant changes in unrecognized tax benefits in the next twelve months as the result of examinations or lapse of statutes of
63
limitation. The unrecognized tax benefits for fiscal 2008 and 2007 were presented as long-term income taxes payable on the consolidated balance sheets as of March 29, 2008 and June 2, 2007. The Company reclassified the fiscal 2007 unrecognized tax benefits balance from current accrued liabilities to long-term income taxes payable.
11. Accrued Liabilities
Accrued liabilities consist of the following at March 29, 2008 and June 2, 2007 (in thousands):
2008 | 2007 | |||||
Payroll-related |
$ | 11,248 | $ | 11,391 | ||
Product warranty |
3,740 | 3,893 | ||||
Income taxes payable |
| 2,961 | ||||
Purchase order commitment and receipts |
1,093 | 1,224 | ||||
Professional fees |
1,553 | 1,382 | ||||
Other |
7,666 | 4,614 | ||||
$ | 25,300 | $ | 25,465 | |||
See Note 13 Product Warranty for discussion of the accrual for product warranty.
12. Deferred Revenue
The following is a reconciliation of the changes in deferred revenue for fiscal 2008, 2007 and 2006 (in thousands):
2008 | 2007 | 2006 | ||||||||||
Beginning balance |
$ | 12,290 | $ | 13,321 | $ | 12,986 | ||||||
NWR deferred revenue acquired |
1,603 | | | |||||||||
Revenue deferred |
38,176 | 26,521 | 23,425 | |||||||||
Revenue recognized |
(39,486 | ) | (27,552 | ) | (23,090 | ) | ||||||
Ending balance |
$ | 12,583 | $ | 12,290 | $ | 13,321 | ||||||
13. Product Warranty
The following is a reconciliation of the changes in the aggregate product warranty accrual for fiscal 2008, 2007 and 2006 (in thousands):
2008 | 2007 | 2006 | ||||||||||
Beginning balance |
$ | 3,893 | $ | 3,716 | $ | 3,625 | ||||||
NWR warranty reserve acquired |
774 | | | |||||||||
Warranty charges incurred, net |
(6,127 | ) | (6,080 | ) | (5,617 | ) | ||||||
Provision for warranty charges |
5,200 | 6,257 | 5,708 | |||||||||
Ending balance |
$ | 3,740 | $ | 3,893 | $ | 3,716 | ||||||
Warranty charges incurred include labor charges and replacement parts for system repairs under warranty and are recorded net of any cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Companys suppliers for defective components. The provision for warranty charges reflects the estimate of future anticipated net warranty costs to be incurred for all products under warranty at fiscal year end and is recorded to cost of sales.
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14. Derivative Financial Instruments
The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. It does, however, use derivatives to manage well-defined foreign currency risks. Prior to fiscal 2008, the Company entered into forward exchange contracts to hedge forecasted Japanese sales commitments and the value of accounts receivable primarily denominated in Japanese yen. Currently, the Company hedges material non-functional currency monetary asset and liability balances. Foreign exchange contracts having gains and losses are recognized at the end of each fiscal period in the Companys results of operations. Such gains and losses are typically offset by the corresponding changes to the related underlying hedged item. Cash flows from derivative financial instruments are classified in the same category as the cash flows from the items being hedged.
At March 29, 2008 and June 2, 2007, the Company had net forward exchange contracts to purchase foreign currencies totaling $20.0 million and $5.6 million, respectively. In general, these contracts mature in less than one year and the counterparties are large, highly rated banks; therefore, the Company believes that the risk of loss as a result of nonperformance by the banks is minimal.
The table below summarizes, by major currency, the notional amounts of forward exchange contracts in U.S. dollars as of March 29, 2008 and June 2, 2007. The bought amounts represent the net U.S. dollar equivalents of commitments to purchase foreign currencies, and the sold amounts represent the net U.S. dollar equivalent of commitments to sell foreign currencies. The foreign currency amounts have been translated into a U.S. dollar equivalent value using the exchange rate as of March 29, 2008 and June 2, 2007.
Bought (Sold)
(in thousands) |
||||||||
Foreign Currency |
2008 | 2007 | ||||||
Singapore Dollar |
$ | 18,047 | $ | | ||||
Japanese Yen |
11,405 | (4,514 | ) | |||||
Taiwan Dollar |
5,576 | (2,685 | ) | |||||
Korean Won |
(9,089 | ) | 7,782 | |||||
British Pound |
(3,304 | ) | 2,191 | |||||
Euro |
(2,677 | ) | 2,776 | |||||
Total, net |
$ | 19,958 | $ | 5,550 | ||||
15. Commitments and Contingencies
The Company leases certain equipment, automobiles and office space under operating leases, which are non-cancelable and expire on various dates through fiscal 2013. The aggregate minimum commitment for rentals under operating leases beyond March 29, 2008 is as follows (in thousands):
Fiscal Year |
|||
2009 |
$ | 2,356 | |
2010 |
1,564 | ||
2011 |
1,100 | ||
2012 |
148 | ||
2013 |
11 | ||
Total minimum lease payments |
$ | 5,179 | |
Rental expense for all operating leases was $1.5 million, $0.9 million and $0.9 million in fiscal 2008, 2007 and 2006, respectively. In addition to the operating lease commitments detailed above, the Company had firm purchase order commitments in the ordinary course of business, which are primarily for inventories, totaling $36.8 million and $46.1 million at March 29, 2008 and June 2, 2007, respectively.
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In the normal course of business, the Company indemnifies customers with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from other third party claims that the Companys products, when used for their intended purposes, infringe the intellectual property rights of such other third parties. To date, the Company has not recorded any material charges related to these types of indemnifications.
16. Earnings Per Share
Following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share for fiscal 2008, 2007 and 2006 (in thousands):
2008 | 2007 | 2006 | ||||
Weighted average shares outstandingbasic |
27,929 | 29,125 | 28,823 | |||
Effect of dilutive stock options and awards |
394 | 254 | 255 | |||
Weighted average shares outstandingdiluted |
28,323 | 29,379 | 29,078 | |||
In fiscal 2008, 2007 and 2006, there were approximately 2,683,000, 3,373,000 and 2,600,000 anti-dilutive common stock equivalents related to employee stock options and awards that were excluded from the diluted EPS calculations because inclusion would have had an anti-dilutive effect.
17. Share Repurchase Program
On March 9, 2007, the Companys Board of Directors authorized the repurchase of up to $50.0 million in shares of the Companys outstanding common stock beginning April 17, 2007 through transactions in the open market or in negotiated transactions with brokers or shareholders. On October 9, 2007, the Company suspended purchase transactions under the initial share repurchase authorization.
On January 22, 2008, the Companys Board of Directors voted to resume the previous $50.0 million share repurchase program. Accordingly, the Board of Directors authorized the repurchase of up to $12.7 million in shares of the Companys outstanding common stock over a six-month period beginning January 29, 2008 through transactions in the open market or in negotiated transactions with brokers or shareholders.
During fiscal 2008, the Company repurchased 1,974,758 shares for $39.6 million under this share repurchase program at an average price per share of $20.08. Cash used to settle repurchase transactions totaled $40.3 million during fiscal 2008, and was reflected as a component of cash used in financing activities in the consolidated statements of cash flow.
In total, the Company repurchased 2,478,758 shares for $50.0 million under this share repurchase program. Commissions and fees of $0.1 million were included in the calculation of the average price per share of $20.20.
On May 15, 2008, the Board of Directors authorized a new share repurchase program for up to $20.0 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation programs. The repurchases will be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. There is no fixed completion date for the repurchase program.
18. Legal Matters
All Ring Patent Infringement Prosecution
In August 2005, the Company commenced a proceeding in the Kaohsiung District Court of Taiwan (the Court) directed against All Ring Tech Co., Ltd. (All Ring) of Taiwan. The Company alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes ESIs Taiwan Patent No. 207469, entitled
66
Circuit Component Handler (the 207469 patent). As part of this proceeding, the Court issued a Provisional Attachment Order (PAO) in August 2005, restricting the use of some of All Rings assets. All Ring then filed a bond with the Court to obtain relief from the attachment of its assets. In July 2007, the Court issued a second PAO and approximately US$6.0 million was restricted in All Rings accounts. The second PAO remains in effect and cannot be revoked.
In October 2005, the Company filed a formal patent infringement action against All Ring in the Court. The Court-appointed expert has concluded that the Capacitor Tester and All Rings RK-T2000 both infringe every claim of the 207469 patent and that All Rings RK-L50 infringes a number of the claims as well. Also in October 2005, the Court executed a Preliminary Injunction Order (PIO) that prohibits All Ring from manufacturing, selling, offering for sale or using the Capacitor Tester until final judgment is entered in the formal patent infringement action. The Court dismissed All Rings application to revoke the PIO on January 18, 2008, and the PIO remains in place.
In November 2005, All Ring filed a cancellation action against ESIs 207469 patent in the Taiwan Intellectual Property Office (the IPO). On July 5, 2007, the IPO issued a notice requiring the Company to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. The Company filed a response canceling the two claims and amending the remaining claims accordingly in August 2007.
On March 4, 2008, pursuant to All Rings motion, the Court issued a suspension order, staying the formal action until after a final decision is rendered in the cancellation action. The High Court revoked the Courts suspension decision on May 2, 2008. On May 12, 2008, All Ring appealed the High Courts ruling. At the latest, the formal action will re-start soon after July 2008, when Taiwans new Intellectual Property Law comes into effect. Any cases previously suspended, such as the Companys formal action, will re-start upon a party making a motion with the Court to do so. The Company intends to make such a motion and continue to vigorously pursue its patent infringement claims against All Ring and defend against the cancellation action.
Pursuant to the Courts Provisional Attachment Order and Preliminary Injunction Order, in October 2005, the Company was required to post a Taiwan dollar security bond with the Court. An additional Taiwan dollar bond of approximately US$2.1 million was posted in June 2007 related to the second PAO. The total security bonds were valued at approximately US$9.7 million at March 29, 2008 and this amount was included in the Companys other assets on the consolidated balance sheet at March 29, 2008.
In addition to the legal matters described above, in the ordinary course of business the Company is involved in various other legal matters, either asserted or unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
19. Shareholder Rights Plan
The Company has a shareholder rights plan, where 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 $270, subject to adjustment.
The Rights are not presently exercisable and will only become exercisable following the occurrence of certain specified events. Generally, the Rights become exercisable after a person or group acquires or commences a tender offer that would result in beneficial ownership of 15 percent or more of outstanding common stock. In addition, the Rights become exercisable if any party becomes a beneficial owner of 10 percent or more of outstanding common stock and is determined by the Board of Directors to be an adverse party. If a person or group acquires 15 percent of outstanding common stock or the Board of Directors declares a person to be an Adverse Person, 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 twice the exercise price of the Right.
If, after the Rights become exercisable, the Company is acquired in a merger or other business combination, each Right will be adjusted to entitle its holder to receive, upon exercise, common stock of the acquiring company
67
having a value equal to twice the exercise price of the Right, depending on the circumstances. The Rights expire on May 7, 2009 and may be redeemed by the Company for $0.001 per Right. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the Companys earnings.
20. Geographic and Product Information
Net sales by product type were as follows (in thousands):
Ten months ended
March 29, 2008 |
Fiscal year ended
June 2, 2007 |
Fiscal year ended
June 3, 2006 |
|||||||
Semiconductor Group (SG) |
$ | 109,156 | $ | 145,381 | $ | 126,682 | |||
Passive Components Group (PCG) |
75,112 | 63,093 | 46,305 | ||||||
Interconnect/Micro-machining (IMG) |
62,887 | 42,350 | 34,019 | ||||||
$ | 247,155 | $ | 250,824 | $ | 207,006 | ||||
Sales by geographic area, based on the location of the end user, were as follows (in thousands):
Ten months ended
March 29, 2008 |
Fiscal year ended
June 2, 2007 |
Fiscal year ended
June 3, 2006 |
|||||||
Asia |
$ | 183,783 | $ | 187,228 | $ | 155,959 | |||
Americas |
43,870 | 40,987 | 36,351 | ||||||
Europe |
19,502 | 22,609 | 14,696 | ||||||
$ | 247,155 | $ | 250,824 | $ | 207,006 | ||||
Long-lived assets, exclusive of marketable securities and deferred tax assets, by geographic area were as follows at March 29, 2008 and June 2, 2007 (in thousands):
2008 | 2007 | |||||
United States |
$ | 89,525 | $ | 62,365 | ||
Asia |
16,945 | 9,430 | ||||
Europe |
127 | 136 | ||||
$ | 106,597 | $ | 71,931 | |||
21. Restructuring and Cost Management Plans
In fiscal 2008, the Company began to see the impact of weakness in the memory market and lower capital spending, particularly in the fourth quarter. In response, the Company initiated a restructuring plan designed to reduce costs through a reduction-in-force and office consolidation in foreign subsidiary locations in the fourth quarter of fiscal 2008. In conjunction with the restructuring, 25 positions were eliminated in the Companys U.S. and overseas offices, impacting all functional groups. These restructuring actions were completed in early April 2008 and resulted in approximately $1.0 million in expenses related to the restructuring plan, of which $0.6 million was included in accrued liabilities at March 29, 2008. Fiscal 2008 restructuring expenses of approximately $0.7 million were included in selling, service and administration expense and $0.3 million were included in research, development and engineering expenses. The Company settled these accrued liabilities in the first quarter of fiscal 2009.
22. Insurance Recoveries
In November 2006, the Company settled litigation related to insurance coverage for the shareholder and derivative lawsuits related to the restatement of financial results announced in 2003 and recorded a gain of $1.0 million in the second quarter of fiscal 2007 as an offset to operating expenses in the consolidated statement of operations. All related costs were expensed as incurred in prior periods.
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In June 2006, the Company received $1.3 million on insurance proceeds for demonstration systems that were destroyed in a fire at a customers plant. As the book value of these assets had previously been written off, the Company recorded a gain on the recovery in the first quarter of fiscal 2007 which was included as an offset to operating expenses in the consolidated statement of operations.
23. Quarterly Financial Information (Unaudited)
1st Quarter 1 | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||
(in thousands, except per share data) | ||||||||||||
Year ended March 29, 2008 |
||||||||||||
Net sales |
$ | 16,961 | $ | 82,318 | $ | 77,286 | $ | 70,590 | ||||
Gross profit |
8,075 | 36,809 | 35,684 | 31,573 | ||||||||
Operating expenses 2 |
6,631 | 29,273 | 27,486 | 28,748 | ||||||||
Provision for income taxes |
842 | 4,066 | 3,392 | 1,623 | ||||||||
Net income |
1,418 | 5,530 | 6,662 | 2,979 | ||||||||
Basic net income per share |
0.05 | 0.20 | 0.24 | 0.11 | ||||||||
Diluted net income per share |
0.05 | 0.19 | 0.24 | 0.11 | ||||||||
Year ended June 2, 2007 |
||||||||||||
Net sales |
$ | 60,368 | $ | 59,301 | $ | 59,411 | $ | 71,744 | ||||
Gross profit |
26,265 | 24,274 | 24,955 | 33,276 | ||||||||
Operating expenses 3 |
20,068 | 20,640 | 21,004 | 22,823 | ||||||||
Provision for income taxes |
2,807 | 2,123 | 1,012 | 5,161 | ||||||||
Net income |
6,202 | 3,789 | 5,634 | 7,899 | ||||||||
Basic net income per share |
0.21 | 0.13 | 0.19 | 0.27 | ||||||||
Diluted net income per share |
0.21 | 0.13 | 0.19 | 0.27 |
The sum of the quarterly EPS data presented in the table above for fiscal 2008 and 2007 does not equal annual results due to the varying impacts of dilutive securities to the annual versus the quarterly EPS calculations (see Note 16 Earnings Per Share) and due to rounding.
1 | Due to a change in fiscal year end, the first quarter of fiscal 2008 represented only the four weeks ended June 30, 2007. |
2 | In the second quarter of fiscal 2008, operating expenses included a $2.8 million write-off of in-process research and development related to the acquisition of NWR. |
3 | In the first quarter of fiscal 2007, the Company recorded a gain for an insurance recovery of $1.3 million on fire-damaged demonstration systems. In the second quarter of fiscal 2007, the Company recorded a gain of $1.0 million for an insurance settlement related to the shareholder and derivative lawsuits. |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Attached to this annual report as exhibits 31.1 and 31.2 are the certifications of our President and Chief Executive Officer (CEO) and our Chief Financial Officer (CFO) required by Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Controls and Procedures section of our annual report on Form 10-K is our disclosure of the conclusions of our management, including our CEO and our CFO, regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report based on managements evaluation of those disclosure controls and procedures. This section of the Annual Report on Form 10-K should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.
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(a) Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. This controls evaluation was performed under the supervision and with the participation of management, including our CEO and CFO. Disclosure controls are procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (the Exchange Act), such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission (the SEC). Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls includes an evaluation of some components of our internal control over financial reporting. We also perform a separate annual evaluation of internal control over financial reporting for the purpose of providing the management report below.
The evaluation of our disclosure controls included a review of their objectives and design as well as their effect on the information generated for use in this Annual Report on Form 10-K. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our disclosure controls are also evaluated on an ongoing basis by our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and to modify them as necessary. We intend to maintain the disclosure controls as dynamic systems that we adjust as circumstances merit.
Based on the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted in (c) below, as of the end of the period covered by this Form 10-K, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to the Company is made known to management, including the CEO and the CFO, particularly during the time when our periodic reports are being prepared.
(b) Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 29, 2008 based on the guidelines established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of March 29, 2008.
KPMG LLP, an independent registered public accounting firm, has performed an independent assessment on the effectiveness of our internal control over financial reporting as referenced in their report included in (e) below.
(c) Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
70
override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(d) Changes in Internal Control
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
(e) Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Electro Scientific Industries, Inc.:
We have audited Electro Scientific Industries, Inc.s internal control over financial reporting as of March 29, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Electro Scientific Industries, Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting included in Item 9A(b). Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Electro Scientific Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 29, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Electro Scientific Industries, Inc. and subsidiaries as of March 29, 2008 and June 2, 2007, and the related consolidated statements of operations, shareholders equity and comprehensive income, and cash flows for the ten-month period ended March 29, 2008 and the years ended June 2, 2007 and June 3, 2006, and our report dated June 11, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP |
Portland, Oregon |
June 11, 2008 |
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Item 9B. | Other Information |
None.
Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item, including information about the Companys audit committee, is included under the headings Proposal 1: Election of Directors, Board Committees, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
The Company has adopted the ESI Code of Conduct, a code of ethics and business practices with which every person who works for the Company is expected to comply. In addition, the Company has adopted a Code of Ethics for Financial Managers with which all financial employees are expected to comply. The ESI Code of Conduct and Code of Ethics for Financial Managers are publicly available on the Companys website under Governance in the Investors Section (at http://www.esi.com/esi/investors ). This website address is intended to be an inactive, textual reference only; none of the material on this website is part of this report. If any waiver is granted, including any implicit waiver, from a provision of the ESI Code of Conduct or the Code of Ethics to the Companys executive officers, controller or directors, the Company will disclose the nature of such waiver on that website or in a report on Form 8-K.
Item 11. | Executive Compensation |
The information required by this item is included under the headings Board Compensation, Executive Compensation, Potential Payments Upon Termination or Change in Control, Compensation Discussion and Analysis, Compensation Committee Report and Compensation Committee Interlocks and Insider Participation in our Proxy Statement for our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
Certain information required by this item is included under the headings Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in our Proxy Statement for our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is included under Certain Relationships and Related Transactions and Corporate Governance Guidelines and Independence in our Proxy Statement for our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14. | Principal Accounting Fees and Services |
The information required by this item is included under Principal Accounting Fees and Services in our Proxy Statement for our 2008 Annual Meeting of Shareholders and is incorporated herein by reference.
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Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) and (a)(2) Financial Statements and Schedules
The Consolidated Financial Statements, together with the reports thereon of our independent registered public accounting firm, are included on the pages indicated below:
Page | ||
38 | ||
Consolidated Balance Sheets as of March 29, 2008 and June 2, 2007 |
39 | |
40 | ||
41 | ||
42 | ||
43 |
There are no schedules required to be filed herewith.
(a)(3) Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index. An asterisk (*) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement, which are required to be identified in this report.
Exhibit No. |
||
2.1 | Agreement and Plan of Merger dated as of July 4, 2007, by and among ESI, NWR, Neptune Merger Corp. and the Security holder Representative. Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K filed July 25, 2007. | |
3.1 | Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-A of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1991. | |
3.2 | Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-B of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1999. | |
3.3 | Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3 of the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended December 2, 2000. | |
3.4 | 2004 Restated Bylaws, as amended. Incorporated by reference to Exhibit 3.1 of the Companys Current Report on form 8-K filed on October 21, 2004. | |
4.1 | Amended and Restated Rights Agreement, dated as of March 1, 2001, between the Company and Mellon Investor Services, relating to rights issued to all holders of Company common stock. Incorporated by reference to Exhibit 4-A of the Companys Annual Report on Form 10-K for the fiscal year ended June 2, 2001. | |
10.1* | ESI 1983 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10-E of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1986. |
74
Exhibit No. |
||
10.2* | ESI 1989 Stock Option Plan, as amended. Incorporated by reference to Exhibit 10-B of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1997. | |
10.3* | 1996 Stock Incentive Plan. Incorporated by reference to Exhibit 10-E of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1997. | |
10.4* | 2000 Stock Option Plan. Incorporated by reference to Exhibit 10-F of the Companys Annual Report on Form 10-K for the fiscal year ended June 3, 2000. | |
10.5* | 2000 Stock Option Incentive Plan. Incorporated by reference to Appendix A of the Companys definitive Proxy Statement for its 2000 Annual Meeting of Shareholders. | |
10.6* | Employment Agreement between the Company and Nicholas C. Konidaris, dated January 7, 2004. Incorporated by reference to Exhibit 10.1 to the Companys previously filed Quarterly Report on Form 10-Q for the quarter ended February 28, 2004, as filed on April 6, 2004. | |
10.7* | Amendment No. 1 to Employment Agreement between the Company and Nicholas Konidaris, dated as of January 25, 2005. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on January 31, 2005 (the January 31 8-K). | |
10.8* | Amendment No. 1 to Stock Option Agreement between the Company and Nicholas Konidaris, dated as of January 25, 2005. Incorporated by reference to Exhibit 10.2 of the January 31 8-K. | |
10.9* | Form of Amendment No. 1 to Stock Option Agreement between the Company and Nicholas Konidaris dated as of January 25, 2005. Incorporated by reference to Exhibit 10.3 of the January 31 8-K. | |
10.10* | Form of Amendment No. 1 to Stock Option Agreement between the Company and Nicholas Konidaris dated as of January 25, 2005. Incorporated by reference to Exhibit 10.4 of the January 31 8-K. | |
10.11* | Form of Restricted Stock Units Award Agreement between the Company and Nicholas Konidaris, dated as of January 25, 2005. Incorporated by reference to Exhibit 10.6 of the January 31 8-K. | |
10.12* | Offer Letter to Tom Wu, dated December 12, 2005. Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on January 19, 2006. | |
10.13* | 2004 Stock Incentive Plan. Incorporated by reference to Exhibit 10.18 of the Companys Annual Report on Form 10-K filed July 27, 2005. | |
10.14* | Deferred Compensation Plan 2008 Restatement. | |
10.15* | Form of Notice of Grant of Stock Options and Option Agreement and related Option Terms and Conditions (Incentive Stock Options) (for awards made prior to July 20, 2005). Incorporated by reference to Exhibit 10.3 in the October 21 8-K. | |
10.16* | Form of Notice of Grant of Stock Options and Option Agreement and related Option Terms and Conditions (Non-Qualified Stock Options) (for awards made prior to July 20, 2005). Incorporated by reference to Exhibit 10.4 in the October 21 8-K. | |
10.17* | Form of Notice of Grant of Stock Options and Option Agreement and related Terms and Conditions (non-directors) (for awards made on July 20, 2005). Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed July 26, 2005. | |
10.18* | Form of Notice of Grant of Stock Options and Option Agreement and related Terms and Conditions (directors) (for awards made on July 20, 2005). Incorporated by reference to Exhibit 10.3 of the Companys Current Report on Form 8-K filed July 26, 2005. | |
10.19* | Form of Performance Based Restricted Stock Units Award Agreement (for awards made prior to July 19, 2006). Incorporated by reference to Exhibit 10.5 of the January 31 8-K. |
75
Exhibit No. |
||
10.20* | Form of Restricted Stock Units Award Agreement (for awards made prior to July 19, 2006). Incorporated by reference to Exhibit 10.7 of the January 31 8-K. | |
10.21* | Form of Notice of Grant of Stock Options and Option Agreement and related Option Terms and Conditions (Non-Qualified Stock Options granted to Non-Directors) (for awards made on May 24, 2006). Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 30, 2006. | |
10.22* | Form of Notice of Grant of Stock Options and Option Agreement and related Option Terms and Conditions (Non-Qualified Stock Options granted to Directors) (for awards made in May 2006). Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on May 30, 2006. | |
10.23* | Form of Restricted Stock Unit Agreement between the Company and Nicholas Konidaris dated as of October 4, 2006. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed October 11, 2006. | |
10.24* | Form of Change in Control Agreement between the Company and each of Robert DeBakker and Paul Oldham. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed September 26, 2006. | |
10.25* | Form of Restricted Stock Unit Agreement (for awards made on or after July 19, 2006 and prior to February 2008). Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed July 25, 2006. | |
10.26* | Form of Restricted Stock Unit Agreement for directors. Incorporated by reference to Exhibit 10.4 of the Companys Current Report on Form 8-K filed July 25, 2006. | |
10.27* | Form of Notice of Grant of Stock Options and Option Agreement and related Terms and Conditions (for awards made after February 2008). | |
10.28* | Form of Amended and Restated Performance-Based Restricted Stock Unit Agreement (for July 2006 awards). | |
10.29* | Form of Restricted Stock Unit Agreement (for awards made after February 2008). | |
10.30* | Form of Performance-Based Restricted Stock Unit Agreement (for awards made on or after July 2007). | |
10.31* | Amendment No. 1 to Deferred Compensation Plan 2008 Restatement. | |
21 | Subsidiaries of the Company | |
23 | Consent of Independent Registered Public Accounting Firm | |
24.1 | Power of Attorney for Frederick Ball | |
24.2 | Power of Attorney for Richard J. Faubert | |
24.3 | Power of Attorney for Edward C. Grady | |
24.4 | Power of Attorney for Barry L. Harmon | |
24.5 | Power of Attorney for W. Arthur Porter | |
24.6 | Power of Attorney for Gerald F. Taylor | |
24.7 | Power of Attorney for Keith L. Thomson | |
24.8 | Power of Attorney for Jon D. Tompkins |
76
Exhibit No. |
||
24.9 | Power of Attorney for Robert R. Walker | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | 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. | |
32.2 | 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. |
77
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: June 11, 2008 | ELECTRO SCIENTIFIC INDUSTRIES, INC. | |||
By: |
/s/ N ICHOLAS K ONIDARIS |
|||
Nicholas Konidaris | ||||
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 June 11, 2008.
Signature |
Title |
|||
/s/ N ICHOLAS K ONIDARIS Nicholas Konidaris |
President, Chief Executive Officer and Director
|
|||
/s/ P AUL O LDHAM Paul Oldham |
Vice President of Administration, Chief Financial Officer and Corporate Secretary
|
|||
/s/ K ERRY M USTOE Kerry Mustoe |
Vice President, Corporate Controller, and Chief Accounting Officer
|
|||
*F REDERICK A. B ALL Frederick Ball |
Director | |||
*R ICHARD J. F AUBERT Richard J. Faubert |
Director | |||
*E DWARD C. G RADY Edward C. Grady |
Director | |||
*B ARRY L. H ARMON Barry L. Harmon |
Director | |||
*W. A RTHUR P ORTER W. Arthur Porter |
Director | |||
*G ERALD F. T AYLOR Gerald F. Taylor |
Director | |||
*K EITH L. T HOMSON Keith L. Thomson |
Director | |||
*J ON D. T OMPKINS Jon D. Tompkins |
Chairman of the Board | |||
*R OBERT R. W ALKER Robert R. Walker |
Director | |||
*By: |
/s/ P AUL O LDHAM Paul Oldham, Attorney-in-fact |
78
Exhibit 10.14
CONFORMED COPY
ELECTRO SCIENTIFIC INDUSTRIES, INC.
DEFERRED COMPENSATION PLAN
2008 Restatement
January 1, 2008
Electro Scientific Industries, Inc. an Oregon corporation 13900 NW Science Park Drive Portland, Oregon 97229 |
Company |
TABLE OF CONTENTS
1. |
Effective Date; Company; Committee; Plan Year |
1 | ||
2. |
Eligibility |
2 | ||
3. |
Deferral Election |
2 | ||
4. |
Deferred Compensation Account |
5 | ||
5. |
Irrevocable Trust |
7 | ||
6. |
Payment to the Participant |
8 | ||
7. |
Payment to a Beneficiary or a Former Spouse |
11 | ||
8. |
Unscheduled Payments |
12 | ||
9. |
Amendment; Termination |
13 | ||
10. |
Claims Procedure |
14 | ||
11. |
General Provisions |
14 | ||
Appendix A | 16 |
i
INDEX OF TERMS
Bonus |
3.2(b) | 1, 2 | ||
CEO |
2.1 | 2 | ||
Cash Deferral Election |
3.1 | 2 | ||
Code |
Preamble | 1 | ||
Committee |
1.3 | 1 | ||
Company |
Preamble | 1 | ||
Compensation |
3.2 | 2 | ||
Controlled Group of Corporations |
6.1(a) | 8 | ||
Disability |
6.1(a) | 8 | ||
Employer |
1.2 | 1 | ||
Officer |
2.1 | 2 | ||
PRSU |
3.7 | 4 | ||
Participant |
2.2 | 2 | ||
Plan |
Preamble | 1 | ||
Plan Year |
1.4 | 1 | ||
RSU |
3.7 | 4 | ||
Restricted Stock Unit |
3.7 | 4 | ||
Retirement |
6.1(b) | 9 | ||
Salary |
3.2(a) | 2 | ||
Stock |
3.7 | 4 | ||
Stock Deferral Election |
3.6 | 3 | ||
Unforeseeable Emergency |
8.2(b) | 13 |
ii
ELECTRO SCIENTIFIC INDUSTRIES, INC.
DEFERRED COMPENSATION PLAN
2008 Restatement
January 1, 2008
Electro Scientific Industries an Oregon corporation 13900 NW Science Park Drive Portland, Oregon 97229 |
Company |
The Company adopted this Deferred Compensation Plan (the Plan) effective May 11, 2001, as a nonqualified plan of deferred compensation for Company Officers. The most recent amendment was signed March 12, 2004. The purpose of the Plan is to provide an additional benefit to Company Officers and other select employees as a means to attract and retain highly effective individuals.
Generally effective January 1, 2005, new section 409A of the Internal Revenue Code (the Code) imposed new requirements on nonqualified deferred compensation plans and provided for substantial penalties for noncompliance. Amounts that are deferred under the Plan after December 31, 2004 are subject to section 409A of the Code and the Plan is intended to comply with section 409A. In order to update the Plan to accommodate new developments and to maintain the intended deferral of compensation and related deferral of income taxation, the Company amends and restates the Plan, in its entirety, as follows.
1. | Effective Date; Company; Committee; Plan Year. |
1.1 This Restatement is generally effective January 1, 2008. Cash Deferral Elections for Bonuses otherwise payable in 2008 must be submitted by September 30, 2007.
1.2 The Plan shall apply to the Company and affiliates of the Company for whom an employee performs services. The term Employer refers to the Company or such affiliate for which such services are performed. Except as provided in 9.1 and 9.2, Company functions or responsibilities shall be exercised by the chief executive officer of the Company, who may delegate all or any part of those functions.
1.3 The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the Committee). The Committee shall interpret the Plan, determine eligibility and the amount of benefits, maintain records, determine interest rates and generally be responsible for seeing that the purposes of the Plan are accomplished. The Committee may delegate all or part of its administrative duties to others.
1.4 The Plan Year of the Plan is a calendar year.
1
1.5 The Plan is intended to be unfunded for purposes of deferring the time of taxation under the Code and for purposes of constituting an unfunded plan maintained by an employer primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees under Title I of ERISA.
2. | Eligibility. |
2.1 Officers and other employees designated by the chief executive officer of the Company (CEO), in the CEOs discretion, shall be eligible to participate in the Plan. The CEO may delegate authority to designate eligible employees. Officer means an appointed officer of the Company whose functions are not merely formal. An employee other than an Officer shall not be initially eligible unless the CEO reasonably expects that the employee will have Salary for the year of not less than $125,000, without regard for any salary reduction election.
2.2 Participant means an Officer or other eligible employee who has an Account under the Plan or who has elected to defer compensation pursuant to Section 3 for any Plan Year.
2.3 Participation shall continue until the individual has been paid all amounts in accordance with the Plan. An individual who ceases to be an Officer or who the CEO or delegate determines is no longer eligible shall continue to be a Participant, but shall not elect to defer additional amounts. Any election in effect while the individual is eligible shall remain in effect with respect to the entire Plan Year or with respect to a Bonus, as applicable.
3. | Deferral Election. |
3.1 An eligible employee may elect to participate for each Plan Year by completing a form prescribed by the Committee (a Cash Deferral Election), signing it and returning it to the Committee. The Cash Deferral Election provides for a deferral of Compensation under 3.2.
3.2 Compensation means the following, without regard for any deferral of compensation under the Plan:
(a) Base salary (Salary) earned and payable within the Plan Year (except for usual payroll administrative delay).
(b) Annual performance bonus (Bonus) payable within the Plan Year. Bonus is intended to be performance based compensation within the meaning of section 409A of the Code and related regulations. Amounts described as bonus within the payroll system that are not determined with respect to performance criteria established for the Companys fiscal year are not Bonus and are not Salary.
3.3 A Cash Deferral Election shall specify the percentage of Salary or Bonus to be deferred, subject to the following restrictions:
(a) A deferral of Salary shall be for a minimum of 10 percent and a maximum of 50 percent, unless the employee defers none of the Salary.
2
(b) A deferral of Bonus shall be a minimum of 10 percent and a maximum of 100 percent, unless the employee defers none of the Bonus.
3.4 To be effective for a Plan Year, the Cash Deferral Election must be returned before a date established by the Committee and the following apply:
(a) The date for submitting a Cash Deferral Election for Salary shall be not later than the December 31 before the first day of the Plan Year, except as provided in (c).
(b) The date for submitting a Cash Deferral Election for Bonus shall be not later than the date that is six months before the end of the performance period. The election shall apply to Bonus amounts otherwise payable in the Plan Year. An individual who has not performed services continuously from the date on which the Bonus performance criteria for the performance period are established may not defer Bonus for the Plan Year in which the performance period ends.
(c) An individual under 2.1 who first becomes an employee of an Employer during a Plan Year may elect to participate for the remainder of the Plan Year by completing, signing, and returning to the Committee a Cash Deferral Election within 30 days after becoming an employee. The Cash Deferral Election shall apply to the Participants elected percentage of Salary for the Plan Year earned after the end of the pay period in which the Cash Deferral Election is received by the Committee.
(d) An individual who first becomes an employee during a performance period may not elect to participate with respect to Bonus for the performance period.
(e) The Committee may determine that an employee is ineligible to elect a deferral of Bonus if the Committee determines that the timing of the election does not comply with requirements of section 409A of the Code. If the Committee determines that the employee is not eligible, any attempted deferral of Bonus shall be void.
3.5 Subject to stopping elective deferrals for the remainder of a year under 8.2, or in connection with a hardship withdrawal under a 401(k) plan of Employer to the extent of suspension required by the terms of the 401(k) plan, Cash Deferral Elections shall be irrevocable as of the date established by the Committee or otherwise applicable under 3.4 for delivery of the Cash Deferral Election.
3.6 An eligible employee may elect to participate with respect to restricted stock units granted in a Plan Year by completing a form prescribed by the Committee (a Stock Deferral Election), signing it and returning it to the Committee. The Stock Deferral Election provides for the deferral of compensation under a restricted stock unit to a time later than the time the restricted stock unit vests or is otherwise payable.
3
3.7 A restricted stock unit means a restricted stock unit granted under the Companys 2004 Stock Option Incentive Plan, subject to the following:
(a) A restricted stock unit (RSU) is payable in a share of Company common stock (Stock), subject to vesting.
(b) A performance based restricted stock unit (PRSU) is payable in a number of shares of Stock that is a multiple of the units granted. The multiplier is determined after the end of a performance measurement period applicable to the unit. The multiplier may be less than one and may be zero.
3.8 The Stock Deferral Election shall specify the restricted stock units that are subject to the Stock Deferral Election and the number of shares of Stock represented by the restricted stock units that are subject to the Stock Deferral Election in accordance with procedures adopted by the Committee. Fractional shares shall be disregarded. An election must cover a minimum of 10 percent of the shares represented by the restricted stock units granted to the Participant as of a certain date, without regard for the multiplier applicable to PSRUs.
3.9 To be effective for a Plan Year, the Stock Deferral Election must be returned before a date established by the Committee and the following shall apply:
(a) The Stock Deferral Election shall be irrevocable, and the date for submitting a Stock Deferral Election, shall not be later than the December 31 before the first day of the Plan Year, except as provided in (b).
(b) An individual under 2.1 who first becomes an employee of an Employer during a Plan Year may elect to defer restricted stock units granted in the Plan Year by completing, signing and returning to the Committee a Stock Deferral Election within 30 days after becoming an employee. A Stock Deferral Election may not be returned on or after the date that restricted stock units are granted to the participant in the Plan Year.
3.10 Employer shall reduce the Participants Salary and Bonus by the amounts deferred under a Cash Deferral Election and shall credit such amounts to the Participants Account under Section 4. Taxes under Chapter 21 of the Code (FICA taxes) due on a Participants deferred Salary and Bonus shall be withheld from the Participants remaining nondeferred compensation. If the Participant has insufficient remaining nondeferred compensation for timely payment of FICA taxes, the Participant shall pay cash to the Employer in an amount sufficient to cover the FICA tax due.
3.11 Employer shall credit the number of shares of Stock specified under the Stock Deferral Election to the Participants Account under section 4. Employer shall adjust the number of phantom shares that are subject to a multiplier by application of the multiplier as provided in the related PSRU, except fractional shares remaining after aggregating the adjusted phantom shares shall be disregarded. The Participant shall not receive compensation with
4
respect to RSUs or PRSUs covered by Stock Deferral Elections for income tax purposes upon the vesting of an RSU or the determination or application of a multiplier for a PRSU. The value of the shares of Stock reflected as phantom shares shall be treated as wages for purposes of FICA taxes as follows:
(a) Phantom shares shall be treated as wages at the time the shares are no longer subject to a substantial risk of forfeiture. Shares relating to a PRSU are considered to be subject to a substantial risk of forfeiture until the multiplier is determined. If the number of shares is subject to a multiplier, the number of shares treated as wages shall be the product of the number of shares granted times the multiplier.
(b) Related earnings, if any, shall be treated as wages when they are no longer subject to a substantial risk of forfeiture. Earnings credit on amounts that have been treated as wages before the effective date of the earnings credit shall not be treated as wages.
4. | Deferred Compensation Account. |
4.1 An Account shall be maintained for each Participant on the books of the Company until full payment has been made to the Participant or Beneficiaries under Sections 5 and 6 and the following shall apply, subject to Section 5:
(a) The Committee shall maintain such subaccounts under each Account as may be necessary to give effect to the Participants elections concerning time and form of payment, to proper earnings credit, to multipliers for PRSUs, and to any other terms of the Plan that may affect the balance of the Account.
(b) The Company shall not be obligated to set aside or earmark any funds or Stock for the Account, which shall be purely a bookkeeping device.
(c) All amounts of deferred compensation under this Plan shall remain at all times the unrestricted assets of the Company, and the promise to pay the deferred amounts shall at all times remain unfunded as to the Participants and Beneficiaries.
(d) All payments to Participants and Beneficiaries under the Plan shall be charged against Account and subaccount balances and guideline investments and phantom shares of Stock ratably, except amounts described in 8.1(b) shall be charged last for any distribution other than a distribution under 8.1(b). Forfeiture of phantom shares of Stock shall be charged against only the phantom shares.
4.2 The Account of each Participant shall be adjusted by adding credit for deferrals under Section 3 and credit for additional phantom shares of Stock after application of a multiplier as provided in 3.11. Deferred shares of Stock under Section 3 shall be credited as whole phantom shares. Cash amounts shall be credited as soon as practicable after the date the amount would have been paid if not deferred. Shares of deferred Stock shall be credited as soon
5
as practicable after receipt of a Stock Deferral Election whether or not the number of shares is subject to later adjustment because of determination of a multiplier. If application of a multiplier would cause credit of fractional phantom shares, the fractional phantom shares shall be recorded, maintained and aggregated with other fractional phantom shares, but fractional phantom shares remaining after aggregation shall be disregarded for payment and no other payment shall be made with respect to fractional phantom shares.
4.3 Subject to 4.4, the Company shall credit earnings to each Participants Account, based on guideline investment earnings, until the entire Account has been paid out, as follows:
(a) The Committee shall establish guideline investment funds for amounts other than Stock with investment objectives fixed by the Committee, and may change the funds in its discretion. The guideline funds may parallel funds or other investments available under any insurance policy or policies purchased by the Company in connection with the Plan, funds available under any irrevocable trust established under Section 5 or other investment indexes established from time to time by the Committee, but neither the Company nor a trustee shall have any obligation to invest any amounts in any guideline fund. A guideline fund shall not be composed substantially of Stock.
(b) Each Participant shall, under procedures established by the Committee, elect among available guideline funds for credit of earnings for the Participants Account under this Plan. In the absence of a proper election, a guideline fund designated by the Committee will be used. Participant elections may be changed at such times and subject to such limits as may be fixed by the Committee.
(c) The Committee shall credit Accounts in accordance with earnings (which may be negative) of the elected guideline funds in accordance with procedures established by the Committee.
4.4 Amounts recorded as phantom shares of Stock shall not be subject to 4.3 and the following shall apply:
(a) A phantom share of Stock shall be subject to the same forfeiture and vesting provisions that applied to the related restricted stock unit. A phantom share relating to a PRSU shall have the same performance multiplier as applied to the related PRSU, based on the same performance criteria as the related PRSU.
(b) Generally, phantom shares of Stock will continue to be recorded in shares of Stock. Phantom shares of Stock shall be adjusted to reflect any reorganization, Stock split or combination, dividend or distribution on the Stock, or other event affecting the Stock, as the Committee shall determine. Generally, if the adjustment or dividend would have been paid or recorded in Stock outside of the Plan, the credit to the Account shall be the same number of phantom shares as the number of shares of Stock outside of the Plan. Subject to (c), if the
6
adjustment or dividend would have been paid or recorded in cash outside of the Plan, the amount shall be credited in dollars to the Participants Account that is subject to 4.3 and treated as invested in guideline funds in accordance with the Participants most recent investment election. If the Participant has not elected guideline investments, the guideline fund designated by the Committee under 4.3 shall apply.
(c) Phantom shares of Stock shall be credited with additional phantom shares of Stock in place of dollars under (a) for cash dividends, distributions or other payments of cash applicable to actual shares of Stock if the record date is before the following:
(1) For phantom shares related to RSUs, the date phantom shares have vested.
(2) For phantom shares related to PRSUs, the date the number of shares has been determined by application of the performance multiplier under the related PRSUs.
The additional phantom shares representing earnings or payments shall be subject to forfeiture under the same terms as the phantom shares that were credited with the earnings or payments.
(d) The Committee shall determine the adjustments and credits under (b) and (c) with reference to the terms of the restricted stock units deferred under the Plan and in a manner that does not provide for duplicative credits of amounts representing earnings on the restricted stock units or phantom shares of Stock or for acceleration of vesting of earnings amounts relative to the principal amounts deferred.
(e) Fractional phantom shares shall be recorded, maintained, and aggregated with respect to adjustments and earnings credits, but fractional shares remaining after aggregation shall be disregarded for payment and no other payment shall be made with respect to fractional shares.
5. | Irrevocable Trust. |
5.1 The Company may, but shall not be required to, establish an irrevocable trust to cover certain liabilities to Participants, and may transfer cash or other property to such a trust. For example, the Company may choose not to cover liabilities related to certain Participants or not to transfer cash or other property to the trust with respect to all liabilities.
5.2 The Company may issue or transfer Stock to a trust under 5.1.
7
5.3 If the Company creates a trust under 5.1, assets transferred to the trust shall be invested as follows:
(a) Investment of such assets shall be at the absolute discretion of the Committee, the trustee, or both on a shared basis, as provided in the trust. Neither the Company nor the trustee shall be required to invest in such funds in accordance with Participants elections under 4.3 (c). The Company and the trustee may, however, choose, in their discretion, to invest in the elected guideline funds in accordance with the elections.
(b) The guideline investment funds under 4.3 shall be solely for measuring the amount of earnings credits to Accounts.
5.4 The trust under 5.1 shall be a grantor trust and all assets held in trust shall be assets of the Company subject to the trust terms. All assets of the trust shall at all times be subject to the claims of creditors of the Company in circumstances described in the trust. Participants will not receive a priority interest in the trust assets ahead of such creditors and Participants shall have no interest in any particular trust asset. Participants interests in the trust will be governed by the trust terms at all times.
5.5 The trust terms may provide that the assets of the trust may be used to pay amounts with respect to certain Accounts or subaccounts and not others, subject to claims of creditors.
6. | Payment to the Participant. |
6.1 Deferred Salary and Bonus and related earnings credit based on the Participants Account shall be payable in cash, and phantom shares of Stock shall be payable in whole shares of Stock, upon a Termination of the Participant and as provided in 6.5 and the following shall apply:
(a) Termination means a separation from service from the controlled group of corporations, as defined in Section 1563(a) of the Code, of which the Company is a member. In applying Code sections 1563(a), (b) and (c) for purposes of determining the controlled group of corporations to which the Company belongs, the language at least 50 percent is substituted for at least 80 percent in those sections. In applying Treasury Regulation section 1.414(c)-2 for purposes of determining trades or businesses that are under common control with the Company, the language at least 50 percent is substituted for at least 80 percent in that section. Disability shall be a Termination. A Participant is disabled if the Committee determines that any of the following apply:
(1) The Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
(2) The Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer.
8
(3) The Social Security Administration has determined the Participant to be totally disabled.
(b) If the Termination is a Retirement, the benefit shall be paid to the Participant in the form determined under 6.2. Retirement means a Termination after the Participant has attained age 55.
(c) If (b) does not apply, the benefit shall be equal to the balance of the Participants Account and shall be paid to the Participant in a lump sum within 60 days following the date of Termination, subject to 6.6 and 6.7.
(d) Employer may delay any payment to the extent that Employer anticipates that Employers deduction with respect to the payment would be limited or eliminated by application of section 162(m) of the Code. A delayed payment will be made at the earliest date the Employer reasonably anticipates that the deduction of the payment will not be limited or eliminated by application of section 162(m) of the Code.
6.2 The deferred compensation payable upon Retirement shall be an amount equal to the Participants Account, payable as follows, as elected by the Participant in writing on a form provided by the Committee, subject to 6.6 and 6.7:
(a) A lump sum payable in the January following the Participants Retirement.
(b) Five substantially equal annual installments commencing in the January following the Participants Retirement.
(c) Ten substantially equal annual installments commencing in the January following the Participants Retirement.
6.3 A Participants election under 6.2 shall be submitted at the same time as the Participants first deferral election under Section 3. The election shall apply to the entire Account of the Participant, including subsequent deferrals and earnings credit, subject to 6.5.
6.4 A Participant may change an election under 6.2 once as follows:
(a) The election must be submitted to the Committee at least 12 months before the applicable payment date under 6.2 and may not take effect until 12 months after the election is made.
(b) An election under 6.2 for payment under 6.2(a) may be changed to provide for either of the following:
(1) Payment in a lump sum payable in a February that is at least 5 years, but not more than 10 years, after the date in 6.2(a).
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(2) Payment in five substantially equal annual installments commencing in the February that is five years after the January described in 6.2(a), with subsequent installments in Januaries.
(c) An election for payment under 6.2(b) may be changed to provide for either of the following:
(1) Payment in a lump sum in the February that is five years after the January described in 6.2(b).
(2) Payment in five substantially equal annual installments commencing in the February that is five years after the January described in 6.2(b), with subsequent installments in Januaries.
6.5 A Participant may elect with respect to deferrals of Compensation for any Plan Year to have all amounts deferred for the Plan Year, plus related earnings credit, paid in a Plan Year specified by the Participant. A Participant may make a separate election with respect to a deferral of Stock. The following shall apply:
(a) The Participant shall specify in the Deferral Election under 3.1 or 3.6 for the Plan Year a date for payment subject to the following:
(1) The date for payment may not be earlier than the third anniversary of the beginning of the Plan Year to which the election applies.
(2) If the deferral relates to restricted stock units, the date may not be earlier than the last date that the phantom shares of Stock will vest or be determined according to performance criteria, without taking into account any provisions of the restricted stock unit for acceleration of vesting upon specified events.
(3) The date may not be later than the January of the year in which the Participant would attain age 65.
(b) Payment shall be made in a lump sum as soon as practicable either within 30 days after the specified payment date or after the specified payment date but in the same calendar year as the specified payment date.
(c) If the Participant has a Termination before the payment date, whether or not the Termination constitutes a Retirement, the amount shall be paid at the time provided in 6.1(c).
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6.6 Payment on account of Termination, including Retirement, may not start or be made to a Participant who is a key employee as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code, before the date which is six months after the date of Termination. Disability shall not be a Termination for purposes of this 6.6. The Committee may determine that a Participant is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees. A Participant shall have no claim, rights or remedy if the determination is not correct.
(a) If the Participant terminates service because of death or if the Participant dies before or within the six months, benefits shall be paid as soon as practicable after death, except as provided in 7.1(a). If an installment payment is delayed because of this provision, the installment shall be paid as soon as practicable after six months; later installments shall be made in accordance with the original schedule and shall not be affected.
(b) If the Participant has specified a payment date under 6.5 and the specified payment date is within the six months, payment shall be made in accordance with 6.5.
6.7 If shares of Stock are payable in connection with phantom shares that are subject to a multiplier and the number of shares actually payable has not been determined at the date scheduled for payment the following shall apply:
(a) If benefits are payable in a lump sum, the shares shall be paid within 90 days after the applicable multiplier has been determined.
(b) If benefits are payable in installments, the shares subject to a multiplier shall be disregarded for purposes of calculating the amount of the installment, but shall be included for purposes of calculating the amount of installments payable on or after the date the multiplier is applied.
6.8 The Employer shall withhold from benefit payments to the Participant any amount required by law.
7. | Payment to a Beneficiary or a Former Spouse. |
7.1 On the Participants death, a benefit equal to the Participants Account shall be paid in cash and shares of Stock, as applicable, to the Participants Beneficiary in the same form applicable to the Participant because of Termination. If the Participant had started payments in installments, payments shall continue in accordance with the Participants election.
7.2 Beneficiary means the person or persons named by the Participant in the most recent designation filed by the Participant with the Committee. If the Participant was married at the time a designation of a spouse Beneficiary was made and is no longer married to that spouse at the time of death, the benefit shall be paid as though the former spouse predeceased the Participant unless the Participant files a new beneficiary designation after divorce that names the former spouse as beneficiary. If no Beneficiary has been designated or all designated Beneficiaries have died prior to the Participants death, the Beneficiary shall be determined in the following order of priority:
(a) The Participants surviving spouse.
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(b) The Participants surviving children in equal shares.
(c) The Participants surviving parents in equal shares.
(d) The Participants estate.
7.3 If a Beneficiary dies after the Participant and before the entire benefit of the Beneficiary has been paid, it shall be paid in a lump sum as soon as practicable to the estate of the deceased Beneficiary.
7.4 Payments may be made to a spouse or former spouse in connection with a divorce in accordance with a qualified domestic relations order as defined in section 206(d)(3) of ERISA and procedures adopted by the Committee. Reference to section 206(d)(3) is for purposes of specifying administrative requirements and procedures and shall not be interpreted to mean that any ERISA requirements apply or are incorporated into the Plan. The reference shall not give any person any rights under ERISA.
8. | Unscheduled Payments. |
8.1 A Participant may elect to be paid the entire Account balance in a lump sum in cash at any time before the Account would otherwise be payable, subject to the following:
(a) Ten percent of the payment shall be forfeited as a penalty for early withdrawal.
(b) The provisions of 8.1 are applicable only to amounts that were credited to a Participants account as of December 31, 2004 (and subsequent related earnings credits) with respect to services performed before January 1, 2005, pursuant to the terms of the Plan in effect on October 3, 2004, and such amount shall constitute the entire Account balance eligible for payment.
(c) The provisions of 8.1 are not applicable to Participants who were eligible to change elections before December 31, 2007 pursuant to any special transition rule under section 409A of the Code or related proposed or final regulations or Internal Revenue Service Notices, whether or not the Participant actually changed an election.
8.2 A Participant may be paid amounts up to 100 percent of the vested Account balance because of Unforeseeable Emergency, as determined by the Committee, before those amounts otherwise would have been paid, subject to the following:
(a) The payment shall be a lump sum in cash and shall be limited to the amount reasonably necessary to satisfy the emergency need, including amounts necessary to pay federal, state and local income taxes or penalties as reasonably anticipated to result from the payment.
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(b) Unforeseeable Emergency means a severe financial hardship to the extent the hardship cannot be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the recipients assets (to the extent liquidation would not cause severe financial hardship), by cessation of deferrals under the Plan for the remainder of the Plan Year, or from other reasonably available resources and is caused by one or more of the following:
(1) Illness or accident of the Participant or Beneficiary, or the spouse or dependent (as defined in section 152 of the Code without regard to sections 152(b)(1), (b)(2) and (d)(1)(B)) of the Participant.
(2) Loss of or damage to a Participants or Beneficiarys possessions or property due to casualty, including the need to rebuild a home following damage to the home that is not covered by insurance.
(3) Other similar extraordinary and unforeseeable circumstances arising from events beyond the Participants or Beneficiarys control.
(c) Deferrals of Salary shall cease for the remainder of the Plan Year.
(d) Deferrals may be ceased if cessation would meet the need, either separately or together with payment of cash. If deferrals cease, they shall cease for the remainder of the Plan Year.
8.3 The Committee shall establish guidelines and procedures for implementing unscheduled payments. An application shall be written, be signed by the Participant or Beneficiary, and include a statement of facts concerning the financial hardship, if applicable, and any other facts required by the Committee.
8.4 If the Company or the Internal Revenue Service determines that any amount deferred under the Plan will be included in income because of section 409A of the Code prior to the time the amount is otherwise payable, the amount shall be paid to the Participant as soon as practicable.
9. | Amendment; Termination. |
9.1 The Board of Directors of the Company may amend this Plan effective the first day of any month by notice to the Participants. The CEO or delegate may amend the Plan to make technical, administrative or editorial changes on advice of legal counsel to comply with applicable law or to clarify the Plan. No amendment may reduce the value of guideline investment funds or phantom shares of Stock credited to any Account as of the valuation date immediately preceding the effective date of the amendment. No Participant shall have any rights to particular guideline investment funds or to have Accounts recorded in phantom shares. If the amendment ceases the deferral of compensation, but is not a termination under 9.2, the following shall apply:
(a) Deferral credit shall continue in accordance with elections until the end of the Plan Year.
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(b) Earnings credit shall continue in accordance with the provisions of the Plan, as amended.
9.2 The Board of Directors of the Company may terminate the Plan and provide for payment of amounts under all Accounts as follows:
(a) No payments other than payments that would be payable if the termination had not occurred will be made within 12 months of the termination of the Plan.
(b) All payments shall be made within 24 months of the termination of the Plan.
(c) Any amendments to the Plan in connection with termination shall not reduce amounts credited to Accounts, and earnings credit shall continue pending full payment.
10. | Claims Procedure. |
Any person claiming a benefit or requesting an interpretation, ruling or information under the Plan shall present the request in writing to the Committee, and the procedures provided in Appendix A shall apply. The Committee may amend the procedures.
11. | General Provisions. |
11.1 If suit or action is instituted to enforce any rights under this Plan, the prevailing party may recover from the other party reasonable attorneys fees at trial and on any appeal.
11.2 Any notice under this Plan shall be in writing and shall be effective when actually delivered or, if mailed, when deposited as first class mail postage prepaid. Mail shall be directed to the Company at the address stated in this Plan, to the Participants last known home address shown in the Companys records, or to such other address as a party may specify by notice to the other parties. Notices to an Employer or the Committee shall be sent to the Companys address.
11.3 The rights of a Participant under this Plan are personal. Except for the limited provisions of Section 7, no interest of a Participant or one claiming through a Participant may be directly or indirectly assigned, transferred or encumbered and no such interest shall be subject to seizure by legal process or in any other way subjected to the claims of any creditor. A Participants rights to benefits payable under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance, except as provided in 7.4. Such rights shall not be subject to the debts, contracts, liabilities, engagements or torts of the Participant or a Beneficiary.
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11.4 Amounts payable under this Plan shall be a general obligation of the Company and paid out of its general assets. If an Employer merges, consolidates, or otherwise reorganizes or if its business or assets are acquired by another company, this Plan shall continue with respect to those eligible individuals who continue in the employ of the successor company. The transition of Employers shall not be considered a termination of employment for purposes of this Plan. In such an event, however, a successor corporation may terminate this Plan as to its Participants on the effective date of the succession by notice to Participants within 30 days after the succession.
11.5 The Committee may decide that because of the mental or physical condition of a person entitled to payments, or because of other relevant factors, it is in the persons best interest to make payments to others for the benefit of the person entitled to payment. In that event, the Committee may in its discretion direct that payments be made as follows:
(a) To a parent or spouse or a child of legal age;
(b) To a legal guardian; or
(c) To one furnishing maintenance, support, or hospitalization.
Company | ELECTRO SCIENTIFIC INDUSTRIES, INC. | |||||||
By: | NICK KONIDARIS | |||||||
Nick Konidaris | ||||||||
Date signed: 2/26/08 |
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Appendix A
to
Electro Scientific Industries, Inc.
Deferred Compensation Plan
Claims Procedure
1. | Filing a Claim. |
If you claim a benefit or have a question about the Plan, you should contact the head of Human Resources, as representative of the Committee. Most claims and questions will be resolved informally. If you wish to present a formal claim, put it in writing and give it to the representative to forward to the Committee Chair, who will respond as soon as practicable, but not later than 90 days after receipt of your claim unless the Plan gives written notice before the end of the 90-day period that additional time is required. The notice will explain the special circumstances that require additional time and the expected date of the response. The extension will not be more than an additional 90 days.
If an extension is necessary to obtain information from you, the extension period may be further extended by the amount of time you take to provide the specified information.
You may have a representative to assist you or to conduct the claim, and review of any denial, for you. The Committee Chair may require that you notify the Committee Chair in writing about your authorization of a representative.
Determinations about your claim will be based on and in accordance with plan documents and will be applied consistently with respect to similarly situated Participants and beneficiaries.
2. | Claim Denial. |
If your claim is denied, the Committee Chair will notify you in writing. The notice will state the following:
(a) | The specific reasons for the denial. |
(b) | Reference to the relevant Plan provisions. |
(c) | A description of additional material or information that is needed and an explanation of why the material or information is needed. |
(d) | A description of the Plans review procedures and your right to bring a civil action under section 502(a) of the Employee Retirement Income Security Act of 1974 (ERISA) if your claim is also denied after review. |
If your claim involves benefits upon disability, you will be notified if any internal rule, guideline, protocol or other similar criterion was relied upon in the decision to deny your claim, and that you may have a copy of any such rule, guideline, protocol or other criterion free of charge upon request.
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3. | Review of Claim Denial. |
If you make a claim and it is denied, you may ask for review by written notice to the Committee. If your claim is denied, you must request review in writing within 60 days. If you fail to request review of a denied claim within the applicable deadline, you will lose your right to bring an action in court. The full Committee will review the matter and may grant you a hearing, but is not required to. The following apply in connection with the review:
(a) | You may submit written comments, documents, records and other information. |
(b) | Upon your request, you will be provided, without charge, reasonable access to, and copies of, all documents, records and other information relevant to your claim. |
(c) | If your claim involves a determination of disability, upon your request, you will be provided with the identity of medical or vocational experts who advised the Plan, whether or not the advice was relied upon in deciding to deny your claim. |
(d) | The review will consider all aspects of your claim and all comments, documents, records and other information that you submit, whether or not you raised the issues or submitted such information when your claim was originally considered. |
4. | Decision Upon Review. |
The decision on review will be made within 60 days after receipt of your request for review in most cases. If there is a hearing or other special reason for delay, you will be so notified in writing or by electronic notice within the initial 60-day period and the time limit will be 120 days. The notice of any extension will explain the special circumstances that require additional time and the expected date of the decision upon review. If an extension is necessary to obtain information from you, the extension period may be further extended by the amount of time you take to provide the information.
The Committees decision will be provided in writing and will be final and bind all parties. An adverse determination will state the following:
(a) | The specific reasons for the determination. |
(b) | Reference to relevant Plan provisions. |
(c) | A reminder that you are entitled to access to and copies of all documents, records and information relevant to your claim upon request and without charge. |
(d) | A reminder that you may bring a civil action under section 502(a) of ERISA. |
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Exhibit 10.27
OPTION TERMS AND CONDITIONS
2004 Stock Incentive Plan
[Incentive][Non-Qualified] Stock Option
Pursuant to the Companys 2004 Stock Option Incentive Plan (the 2004 Plan), the Board of Directors has voted in favor of granting to the Optionee an option to purchase Common Stock of the Company (the Option) in the amount indicated on the attached notice.
1. The Option is granted upon the following terms:
1.1 Duration of Options. Subject to reductions in the Option period as hereinafter provided in the event of termination of employment or death of the Optionee, the Option shall continue in effect for a period of 10 years from the Grant Date.
1.2 Time of Exercise. Except as provided in paragraphs 1.5 and 1.6 and the Plan (including Section 17 thereof), the Option may be exercised from time to time in the following amounts: [Insert vesting schedule] .
1.3 Limitations on Rights to Exercise. Except as provided in paragraphs 1.5 and 1.6, the Option may not be exercised unless at the time of such exercise the Optionee is employed by the Company or any parent or subsidiary of the Company and shall have been so employed continuously since the date such option was granted.
1.4 Nonassignability. The Option is nonassignable and nontransferable by the Optionee except by will or by the laws of descent and distribution of the state or country of the Optionees domicile at the time of death, and is exercisable during the Optionees lifetime only by the Optionee.
1.5 Termination of Employment.
(a) Unless otherwise determined by the Board of Directors, if an Optionees employment or service with the Company terminates for any reason other than in the circumstances specified in subsection (b) or (c) below or Section 1.6, his or her option may be exercised at any time before the expiration date of the option or the expiration of three months after the date of termination, whichever is the shorter period, but only if and to the extent the Optionee was entitled to exercise the option at the date of termination.
(b) Unless otherwise determined by the Board of Directors, if an Optionees employment or service with the Company terminates because of total disability, his or her option may be exercised at any time before the expiration date of the option or before the date 12 months after the date of termination, whichever is the shorter period, but only if and to the extent the Optionee was entitled to exercise the option at the date of termination. The term total disability means a medically determinable mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes the Optionee to be unable to perform his or her duties as an employee, director, officer or consultant of the Company and unable to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability.
(c) Unless otherwise determined by the Board of Directors, if an Optionee dies while employed by or providing service to the Company, his or her option may be exercised at any time before the expiration date of the option or before the date 12 months after the date of death, whichever is the shorter period, but only if and to the extent the Optionee was entitled to exercise the option at the date of death and only by the person or persons to whom the Optionees rights under the option shall pass by the Optionees will or by the laws of descent and distribution of the state or country of domicile at the time of death.
(d) To the extent the Option held by any deceased Optionee or by the Optionee whose employment is terminated shall not have been exercised within the limited periods provided above, all further rights to purchase shares pursuant to the Option shall cease and terminate at the expiration of such periods.
(e) Absence on leave approved by the Company or on account of illness or disability shall not be deemed a termination or interruption of employment or service. Unless otherwise determined by the Board of Directors, vesting of options shall continue during a medical, family, military or other leave of absence, whether paid or unpaid.
1.6 Change in Control.
(a) If as a result of a Change in Control, the Companys Common Stock ceases to be listed for trading on a national securities exchange (an Exchange), any options subject to this award that are unvested on the date of the Change in Control shall continue to vest according to the terms and conditions of this award; provided that such award is replaced with an award for voting securities of the resulting corporation or the acquiring corporation, as the case may be (including without limitation, the voting securities of any corporation which as a result of the Change in Control owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) (the Surviving Company) which are traded on an Exchange (a Replacement Award), which Replacement Award shall consist of options with the number of options and exercise price determined in a manner consistent with Section 424(a) of the Internal Revenue Code of 1986, as amended, with vesting and any other terms continuing in the same manner as this award; provided, however, that in the event of a termination by the Company without Cause or by the Optionee for Good Reason during the vesting period of any Replacement Award, the Replacement Award shall immediately vest; and provided further that upon the vesting date of all or a portion of a Replacement Award, the Optionee shall be entitled to receive a lump sum cash payment, paid as soon as practicable, equal to the decrease, if any, in the value of a share of the Surviving Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of vesting of the Replacement Award) to the time of vesting multiplied by the total number of shares vesting on such date. If any options that are unvested at the time of the Change in Control are not replaced with Replacement Awards, such options shall immediately vest.
(b) If as a result of a Change in Control, the Companys Common Stock continues to be listed for trading on an Exchange, any options that are unvested on the date of the Change of Control shall continue to vest according to the terms and conditions of this award; provided however, that, in the event of a termination by the Company without Cause or by the Optionee for Good Reason during the vesting period of this award such award shall immediately vest; and provided further that upon the vesting date of all or portion of this award, the Optionee shall be entitled to receive a lump sum cash payment, paid as soon as practicable, equal to the decrease, if any, in the value of a share of the Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of the vesting) to the time of vesting, multiplied by the total number of shares vesting on such date.
(c) For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following events:
(A) any consolidation, merger or plan of share exchange involving the Company (a Merger) as a result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors (Voting Securities) immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting Securities of the surviving or continuing corporation immediately after the Merger, disregarding any Voting Securities issued or retained by such holders in respect of securities of any other party to the Merger;
(B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company;
(C) the adoption of any plan or proposal for the liquidation or dissolution of the Company;
(D) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or
(E) any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities.
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Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the Board of Directors, no Change in Control shall be deemed to have occurred for purposes of this Agreement if (1) the Optionee acquires (other than on the same basis as all other holders of the Company Common Stock) an equity interest in an entity that acquires the Company in a Change in Control otherwise described under subparagraph (A) or (B) above, or (2) the Optionee is part of group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a Change in Control under subparagraph (E) above.
(d) For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 14 (d) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company.
(e) Retirement. Termination by the Optionee or by the Company of the Optionees employment based on Retirement shall mean termination on or after the Optionees 65th birthday.
(f) Cause. Termination by the Company of Optionees employment for Cause shall mean termination upon (A) the willful and continued failure by the Optionee to perform substantially the Optionees reasonably assigned duties with the Company consistent with those duties assigned to the Optionee prior to the Change in Control (other than any such failure resulting from the Optionees incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Optionee by the Chairman of the Board of Directors or Chief Executive Officer of the Company or the Surviving Company or, if Optionee is not an officer, or an officer or manager with responsibility for Optionees department, which specifically identifies the manner in which such executive believes that the Optionee has not substantially performed the Optionees duties, (B) the conviction of guilty or entering of a nolo contendere plea to a felony which is materially and demonstrably injurious to the Company or the Surviving Company or (C) the commission of an act by Optionee, or the failure of Optionee to act, which constitutes gross negligence or gross misconduct. For purposes of this paragraph (f), no act, or failure to act, on the Optionees part shall be considered willful unless done, or omitted to be done, by the Optionee in knowing bad faith. Any act, or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for the Company or the Surviving Company shall be conclusively presumed to be done, or omitted to be done, by the Optionee in good faith.
(g) Good Reason. Termination by the Optionee of his or her employment for Good Reason shall mean termination based on the following, after notice to the Company or the Surviving Company of the condition within one year of the occurrence of the condition and the failure of the Company or the Surviving Company to remedy the condition within 30 days after notice:
(A) a material diminution of Optionees status, title, position(s) or responsibilities from Optionees status, title, position(s) and responsibilities as in effect immediately prior to the Change in Control or the assignment to Optionee of any duties or responsibilities which are inconsistent with such status, title, position(s) or responsibilities (in either case other than is isolated, insubstantial or inadvertent actions which are remedied after notice), or any removal of Optionee from such position(s), except in connection with the termination of Optionees employment for Cause, total disability (as defined in Section 1.5(b)) or as a result of Optionees death or voluntarily by Optionee other than for Good Reason;
(B) a material reduction by the Company or Surviving Company in Optionees rate of base salary, bonus or incentive opportunity or a material reduction in benefits (other than reductions that do not impact Optionees compensation opportunity, taken as a whole, or a reduction in benefits applicable to substantially all employees); or
(C) the Companys or Surviving Companys requiring Optionee to be based more than fifty miles from the principal office at in which Optionee is based immediately prior to the Change in Control, except for reasonably required travel on the Companys business.
1.7 Purchase of Shares. Shares may be purchased or acquired pursuant to the Option only upon receipt by the Company of notice in writing from the Optionee of the Optionees intention to exercise, specifying the number of shares as to which the Optionee desires to exercise the Option and the date on which the Optionee desires to complete the transaction, which shall not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required in order to comply with the Securities Act of 1933, as amended, containing a representation that it is the Optionees present intention to acquire the shares for investment and not with a view to distribution. On or before the date specified for completion of the purchase of shares pursuant to the Option, the Optionee must have paid the Company the full purchase price of such shares in cash (including cash which may at the election of the Company be the proceeds of a loan from the Company), or in shares of Common Stock of the Company previously acquired and held by the Optionee for at least six months and valued at fair market value as defined in the 2004 Plan, or in any combination of cash and shares of Common Stock of the Company. No shares
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shall be issued until full payment therefor has been made, and the Optionee shall have none of the rights of a shareholder until a certificate for shares is issued to the Optionee. The Optionee shall, upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares with respect to which the Option was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the Optionee shall pay such amount to the Company on demand.
1.8 Changes in Capital Structure. In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or another corporation, by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for purchase pursuant to the Option and the corresponding Option price. Any such adjustment made by the Board of Directors shall be conclusive.
2. The obligations of the Company under this Agreement are subject to the approval of such state or federal authorities or agencies, if any, as may have jurisdiction in the matter. The Company will use its best efforts to take such steps as may be required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Companys shares may then be listed, in connection with the issuance or sale of any shares purchased upon the exercise of the Option.
3. Nothing in the 2004 Plan or this Agreement shall confer upon the Optionee any right to be continued in the employment of the Company or any subsidiary of the Company, or to interfere in any way with the right of the Company or any subsidiary by whom the Optionee is employed to terminate the Optionees employment at any time, with or without cause.
4. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company but except as hereinabove provided the Option herein granted shall not be assigned or otherwise disposed of by the Optionee.
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Exhibit 10.28
AMENDED AND RESTATED PERFORMANCE-BASED
RESTRICTED STOCK UNIT AWARD AGREEMENT
This Amended and Restated Award Agreement (the Agreement) is entered into as of , 2007 by and between Electro Scientific Industries, Inc., an Oregon corporation (the Company), and (Recipient), for the grant of restricted stock units with respect to the Companys Common Stock (Common Stock).
On July 19, 2006, the Compensation Committee of the Companys Board of Directors made a restricted stock units award to Recipient pursuant to the Companys 2004 Stock Incentive Plan (the Plan). The award is intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986. Recipient desires to accept the award subject to the terms and conditions of this Agreement.
IN CONSIDERATION of the mutual covenants and agreements set forth in this Agreement, the parties agree to the following.
1. Grant and Terms of Restricted Stock Units . The Company grants to Recipient under the Plan restricted stock units, subject to the restrictions, terms and conditions set forth in this Agreement.
(a) Rights under Restricted Stock Units. A restricted stock unit (a RSU) represents the unsecured right to require the Company to deliver to Recipient one share of Common Stock for each RSU. The number of shares of Common Stock deliverable with respect to each RSU is subject to adjustment as determined by the Board of Directors of the Company as to the number and kind of shares of stock deliverable upon any merger, reorganization, consolidation, recapitalization, stock dividend, spin-off or other change in the corporate structure affecting the Common Stock generally.
(b) Vesting. The RSUs issued under this Agreement shall initially be 100% unvested and subject to forfeiture as set forth below.
(i) Except as set forth in Section 1(d), if Recipient ceases to be employed by the Company for any reason or for no reason prior to the end of the Performance Period (as defined below), the unvested RSUs shall be forfeited to the Company.
(ii) To the extent that any of the RSUs first specified above are reduced in accordance with Section 1(b)(iii) upon achievement to any extent of the Performance Goal (as defined below) and except as provided in Section 1(d), the unvested RSUs shall be forfeited to the Company. The extent to which the Performance Goal is achieved, if at all, shall be determined no later than the date that the Companys Form 10-Q for the first quarter of fiscal year 2010 (the Determination Date) is filed. Nothing contained in this Agreement shall confer upon Recipient any right to be employed by the Company or to continue to provide services to the Company or to interfere in any way with the right of the Company to terminate Recipients services at any time for any reason, with or without cause.
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(iii) The Performance Goal shall be based on (A) the average earnings/(loss) per share of the Company for the twelve quarter period comprised of (1) fiscal 2007, (2) the second, third and fourth quarters of fiscal 2008, (3) fiscal 2009 and (4) the first quarter of fiscal 2010 (the Performance Period) as compared to the average earnings/(loss) per share of the Company for the twelve-quarter period comprised of fiscal 2004, 2005 and 2006 relative to (B) the average earnings/(loss) per share for each member of the peer group companies set forth on Exhibit A for the twelve-quarter period comprised of the three most recent fiscal years for which annual earnings information is available prior to the Determination Date (the Comparable Period) as compared to the average earnings/(loss) per share for such company for the twelve-quarter period comprised of the three fiscal years preceding the Comparable Period. All information with respect to members of the peer group will be based upon publicly available information. The RSUs shall be increased or reduced as follows:
Company Percentile Rank vs. Peer Group |
Portion of RSUs subject to this Agreement Vesting | |
³ 90 th |
200% | |
75 th |
150% | |
50 th |
100% | |
25 th |
50% | |
< 25 th |
0% |
RSUs will vest proportionately between 50% and 200% for Company rankings between the 25 th and 90 th percentiles. The Compensation Committee of the Board of Directors may, in its discretion, permit the vesting of any or all of the RSUs subject to this Agreement for a Company ranking below the 25 th percentile. Those RSUs determined pursuant to this Section 1(b)(iii) shall vest on the last day of the Performance Period, subject to Section 1(b)(i).
(c) Delivery Date. Except as set forth in Section 1(d)(iv), the delivery date for a RSU subject to this Agreement shall be as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(d) Proration upon Termination for Certain Reasons Prior to End of Performance Period; Treatment on Change in Control.
(i) Proration on Death or Total Disability . If Recipient ceases to be an employee of the Company by reason of Recipients death or physical disability prior to the end of the Performance Period, the RSUs shall not be forfeited under Section (b)(i) and the following shall apply:
(1) The number of RSUs Recipient would otherwise be entitled to receive pursuant to Section 1(b)(iii) if Recipient were employed through the end of the Performance Period (the Base Payout) shall be reduced to a number determined by multiplying the Base Payout by a percentage calculated by dividing the number of months elapsed from the beginning of the Performance Period to the date of termination of employment (rounded down to the whole month) by 24 (the Pro Rata Percentage). RSUs that exceed the reduced number shall be forfeited to the Company.
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(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(i); the Recipient shall have no right to any increase.
(3) The amounts of RSUs determined under (1) and (2) shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(4) The term total disability means a medically determinable mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes the Recipient to be unable to perform his or her duties as an employee, director, officer or consultant of the Company and unable to engage in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability.
(ii) Proration on Normal Retirement. If Recipient terminates his employment with the Company following normal retirement under the Companys retirement policy in place at such time but prior to the end of the Performance Period, the RSUs shall not be forfeited under Section (b)(i) and the following shall apply:
(1) The Base Payout shall be reduced to a number determined by multiplying the Base Payout by the Pro Rata Percentage. RSUs that exceed the reduced number shall be forfeited to the Company.
(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(ii); the Recipient shall have no right to any increase.
(3) The amounts of RSUs determined under (1) and (2) shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(iii) Proration on Termination Other Than for Cause. If the Company terminates Recipients employment with the Company other than for cause prior to the end of the Performance Period, the RSUs shall not be forfeited under Section (b)(i) and the following shall apply:
(1) The Base Payment shall be reduced to a number determined by multiplying the Base Payment by the Pro Rata Percentage. RSUs that exceed reduced number shall be forfeited to the Company.
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(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(iii); the Recipient shall have no right to any increase.
(3) The amounts of RSUs determined under (1) and (2) shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(4) The term cause shall mean (i) the willful and continued failure by Recipient to perform substantially Recipients reasonably assigned duties with the Company, other than a failure resulting from Recipients incapacity due to physical or mental illness, after a written demand for performance has been delivered to Recipient by the Company which specifically identifies the manner in which the Company believes that Recipient has not substantially performed Recipients duties, (ii) the conviction of guilty or entering of a nolo contendere plea to a felony which is materially and demonstrably injurious to the Company, or (iii) the commission of an act by Recipient, or the failure of Recipient to act, which constitutes gross negligence or gross misconduct. For purposes of this Section 1(d)(iii), no act, or failure to act, on Recipients part shall be considered willful unless done, or omitted to be done, by Recipient in knowing bad faith. Any act, or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Recipient in good faith.
(iv) Treatment following Change in Control.
(1) If as a result of a Change in Control, the Companys Common Stock ceases to be listed for trading on a national securities exchange (an Exchange), any RSUs subject to this award that are unvested on the date of the Change in Control shall continue to vest according to the terms and conditions of this award; provided that such award is replaced with an award for voting securities of the resulting corporation or the acquiring corporation, as the case may be (including without limitation, the voting securities of any corporation which as a result of the Change in Control owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) (the Surviving Company) which are traded on an Exchange (a Replacement Award), which Replacement Award shall consist of RSUs with a value (determined using the Surviving Companys stock price as of the date of the Change in Control) equal to the value of the replaced award of RSUs (determined using the Companys stock price and assuming attainment of target performance or actual performance achieved, if greater, as of the date of the Change in Control); provided, however, that in the event of a termination by the Company without Cause or by Recipient for Good Reason during the Performance Period, the Replacement Award shall immediately vest and the shares shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends; and provided further that Recipient shall be entitled to receive a lump sum cash payment, paid as soon as practicable after the
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Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends, equal to the decrease, if any, in the value of a share of the Surviving Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of vesting of the Replacement Award) to the time of vesting multiplied by the total number of RSUs vesting on such date. If any RSUs that are unvested at the time of the Change in Control are not replaced with Replacement Awards, the number of such RSUs shall immediately be adjusted based upon deemed attainment of target performance or actual performance achieved, if greater, shall immediately become vested and be delivered as soon as practicable.
(2) If as a result of a Change in Control, the Companys Common Stock continues to be listed for trading on an Exchange, any RSUs that are unvested on the date of the Change of Control shall continue to vest in accordance with the terms and conditions of this award; provided however, that, in the event of a termination by the Company without Cause or by Recipient for Good Reason during the vesting period of this award such award shall immediately vest and the shares shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends; and provided further that Recipient shall be entitled to receive a lump sum cash payment, paid as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends, equal to the decrease, if any, in the value of a share of the Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of the vesting) to the time of vesting, multiplied by the total number of RSUs vesting on such date.
(3) For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following events:
(A) Any consolidation, merger or plan of share exchange involving the Company (a Merger) as a result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors (Voting Securities) immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting Securities of the surviving or continuing corporation immediately after the Merger, disregarding any Voting Securities issued or retained by such holders in respect of securities of any other party to the Merger;
(B) Any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company;
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(C) The adoption of any plan or proposal for the liquidation or dissolution of the Company;
(D) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or
(E) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities.
Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the Board of Directors, no Change in Control shall be deemed to have occurred for purposes of this Agreement if (1) Recipient acquires (other than on the same basis as all other holders of the Company Common Stock) an equity interest in an entity that acquires the Company in a Change in Control otherwise described under subparagraph (A) or (B) above, or (2) Recipient is part of group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a Change in Control under subparagraph (E) above.
(4) For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 14 (d) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company.
(5) For purposes of this Agreement, termination by Recipient of his or her employment for Good Reason shall mean termination based on the following, after notice to the Company or the Surviving Company by the Recipient of the condition within one year of the occurrence of the condition and failure of the Company or the Surviving Company to remedy the condition within 30 days after notice:
(A) a material diminution of Recipients status, title, position(s) or responsibilities from Recipients status, title, position(s) and responsibilities as in effect immediately prior to the Change in Control or the assignment to Recipient of any duties or responsibilities which are inconsistent with such status, title, position(s) or responsibilities (in either case other than is isolated, insubstantial or inadvertent actions which are remedied after notice), or any removal of Recipient from such position(s), except in connection with the termination of Recipients employment for Cause, total disability (as defined in Section 1(d)(i)) or as a result of Recipients death or voluntarily by Recipient other than for Good Reason;
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(B) a material reduction by the Company or Surviving Company in Recipients rate of base salary, bonus or incentive opportunity or a material reduction in benefits (other than reductions that do not impact Recipients compensation opportunity, taken as a whole, or a reduction in benefits applicable to substantially all employees); or
(C) the Companys or Surviving Companys requiring Recipient to be based more than fifty miles from the principal office at in which Recipient is based immediately prior to the Change in Control, except for reasonably required travel on the Companys business.
(e) Restrictions on Transfer and Delivery on Death. Recipient may not sell, transfer, assign, pledge or otherwise encumber or dispose of the RSUs. Recipient may designate beneficiaries to receive stock if Recipient dies before the delivery date by so indicating on Exhibit B , which is incorporated into and made a part of this agreement. If Recipient fails to designate beneficiaries on Exhibit B , the shares will be delivered to Recipients estate.
(f) Reinvestment of Dividend Equivalents. On each date on which the Company pays a dividend on shares of Common Stock underlying a RSU, Recipient shall receive additional whole or fractional RSUs in an amount equal to the value of the dividends that would have been paid on the stock deliverable pursuant to the RSUs (if such shares were outstanding), divided by the closing stock price on the dividend payment date.
(g) Delivery on Delivery Date. As soon as practicable following the delivery date for a RSU, the Company shall deliver a certificate for the number of shares represented by all vested RSUs having a delivery date on the same date, rounded down to the whole share. No fractional shares of Common Stock shall be issued. The Company shall pay to Recipient in cash an amount equal to the value of any fractional shares that would otherwise have been issued, valued as of the delivery date.
(h) Recipients Rights as Shareholder. Recipient shall have no rights as a shareholder with respect to the RSUs or the shares underlying them until the Company delivers the shares to Recipient on the delivery date.
(i) Tax Withholding . Recipient acknowledges that, at the delivery date, the value of such vested RSUs will be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that the Company will be required to withhold taxes on this income amount. Promptly following the delivery date, the Company will notify Recipient of the required withholding amount. Concurrently with or prior to the delivery of the certificate referred to in Section 1(g), Recipient shall pay to the Company the required withholding amount in cash or, at the election of the Recipient (which election must be made on or before the Determination Date), by surrendering to the Company for cancellation shares of the Companys Common Stock to be issued with respect to the RSUs or other shares of the Companys Common Stock valued at the closing market price for the Companys Common Stock on the Determination Date. If the Recipient pays the withholding amount in shares of Common Stock, the Company shall pay to the Recipient in cash the amount of any resulting over payment.
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(j) Section 409A. The award made pursuant to this Agreement shall be interpreted in accordance with Section 409A and Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance issued after the grant of the award.
(i) Notwithstanding any provision of the award to the contrary, the Company may adopt such amendments to the award or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Company determines are necessary or appropriate to (1) exempt the award from the application of Section 409A or preserve the intended tax treatment of the benefits provided with respect to the award, or (2) comply with the requirements of Section 409A.
(ii) If an amount is determined to be subject to applicable provisions of Section 409A of the Code, payment in connection with termination of employment for a reason other than death or total disability may not start or be made to Recipient if the Company determines Recipient is a key employee as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code, before the date which is six months after the date of termination, notwithstanding any other provisions for time of payment in this Agreement. The Company may determine that Recipient is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees. Recipient shall have no claim, rights or remedy if the determination is not correct.
2. Miscellaneous.
(a) Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties with regard to the subjects hereof and may be amended only by written agreement between the Company and the Recipient.
(b) Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States mail as registered or certified mail, return receipt requested, postage prepaid, addressed to Electro Scientific Industries, Inc., Attention: Corporate Secretary, at its principal executive offices or to the Recipient at the address of Recipient in the Companys records, or at such other address as such party may designate by ten (10) days advance written notice to the other party.
(c) Rights and Benefits. The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by the Companys successors and assigns and, subject to the restrictions on transfer of this Agreement, be binding upon the Recipients heirs, executors, administrators, successors and assigns.
(d) Further Action. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.
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(e) Applicable Law; Attorneys Fees. The terms and conditions of this Agreement shall be governed by the laws of the State of Oregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys fees to be set by the trial court and, upon any appeal, the appellate court.
(f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original.
(g) Amendment and Restatement of Prior Agreement. This Agreement amends and restates in its entirety the Performance-Based Restricted Stock Unit Award Agreement, dated , 2006, between the Company and Recipient.
ELECTRO SCIENTIFIC INDUSTRIES, INC. | ||||
By: | ||||
Authorized Officer | ||||
, Recipient |
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EXHIBIT A
PEER GROUP COMPANIES
Applied Materials
Asyst Technologies
Axcelis Technologies
Brooks Automation
Coherent
Cohu
Credence Systems
Cymer
FEI
FSI International
GSI Lumonics
KLA-Tencor
Kulicke & Soffa Industries
Lam Research
LTX
Mattson Technology
Newport
Novellus Systems
Photronics
Teradyne
Ultratech
Varian Semiconductor
Veeco Instruments
Zygo
A - 1
EXHIBIT B
DESIGNATION OF BENEFICIARY
If more than one Secondary Beneficiary is named, the units will be divided equally among those Secondary beneficiaries who survive the undersigned.
This designation revokes and replaces all prior designations of beneficiaries under the Performance-Based Restricted Stock Units Award Agreement.
__________________________________ Date signed: _______________________, 20___
Signature
B - 1
Exhibit 10.29
RESTRICTED STOCK UNITS
AWARD AGREEMENT
This Award Agreement (the Agreement) is entered into as of , 2007 by and between Electro Scientific Industries, Inc., an Oregon corporation (the Company), and (Recipient), for the grant of restricted stock units with respect to the Companys Common Stock (Common Stock).
On , 200__, the Compensation Committee of the Companys Board of Directors made a restricted stock units award to Recipient pursuant to the Companys 2004 Stock Incentive Plan (the Plan) and Recipient desires to accept the award subject to the terms and conditions of this Agreement.
IN CONSIDERATION of the mutual covenants and agreements set forth in this Agreement, the parties agree to the following.
1. Grant and Terms of Restricted Stock Units . The Company grants to Recipient restricted stock units, subject to the restrictions, terms and conditions set forth in this Agreement.
(a) Rights under Restricted Stock Units. A restricted stock unit (a RSU) represents the unsecured right to require the Company to deliver to Recipient one share of Common Stock for each RSU. The number of shares of Common Stock deliverable with respect to each RSU is subject to adjustment as determined by the Board of Directors of the Company as to the number and kind of shares of stock deliverable upon any merger, reorganization, consolidation, recapitalization, stock dividend, spin-off or other change in the corporate structure affecting the Common Stock generally.
(b) Vesting and Delivery Dates. The RSUs issued under this Agreement shall initially be 100% unvested and subject to forfeiture. Subject to this Section 1(b), the RSUs shall vest % on each of the first anniversaries of the date of grant. The RSUs shall become vested on each vesting date only if Recipient continues to be an employee of the Company immediately after such vesting date. The delivery date for a RSU shall be the date on which such RSU vests.
(c) Acceleration before Vesting Date .
(1) Acceleration on Death or Total Disability . If Recipient ceases to be an employee of the Company by reason of Recipients death or physical disability, outstanding but unvested RSUs shall become immediately vested in an amount determined by multiplying the total number of RSUs subject to this Agreement by a percentage calculated by dividing the number of whole months elapsed from the date of this Agreement to the date of termination of employment by 60 (the Pro Rata Percentage); provided, however, that the number of RSUs so vested shall be reduced by the number of any RSUs that previously vested pursuant to Section 1(b). The delivery date shall also accelerate. The term total disability means a medically determinable mental or physical impairment that is
expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes Recipient to be unable to perform his or her duties as an employee, director, officer or consultant of the Company and unable to engage in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability.
(2) Acceleration on Normal Retirement. After Recipient attains age 65, outstanding but unvested RSUs shall become vested each calendar year in an amount determined by multiplying the total number of RSUs subject to this Agreement by the Pro Rata Percentage as of the earlier of December 31 of the year or the date of Recipients termination of employment; provided, however, that the number of RSUs so vested shall be reduced by the number of any RSUs that previously vested pursuant to Section 1(b). The delivery date shall also be accelerated.
(3) Acceleration on Termination Other Than for Cause. If the Company terminates Recipients employment with the Company other than for cause, outstanding but unvested RSUs shall become immediately vested in an amount determined by multiplying the total number of RSUs subject to this Agreement by the Pro Rata Percentage; provided, however, that the number of RSUs so vested shall be reduced by the number of any RSUs that previously vested pursuant to Section 1(b). The delivery date shall also be accelerated. The term cause shall mean (i) the willful and continued failure by Recipient to perform substantially Recipients reasonably assigned duties with the Company, other than a failure resulting from Recipients incapacity due to physical or mental illness, after a written demand for performance has been delivered to Recipient by the Company which specifically identifies the manner in which the Company believes that Recipient has not substantially performed Recipients duties, (ii) the conviction of guilty or entering of a nolo contendere plea to a felony which is materially and demonstrably injurious to the Company, or (iii) the commission of an act by Recipient, or the failure of Recipient to act, which constitutes gross negligence or gross misconduct. For purposes of this Section 1(c)(3), no act, or failure to act, on Recipients part shall be considered willful unless done, or omitted to be done, by Recipient in knowing bad faith. Any act, or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Recipient in good faith.
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(4) Treatment on Change in Control .
(i) If as a result of a Change in Control, the Companys Common Stock ceases to be listed for trading on a national securities exchange (an Exchange), any RSUs subject to this award that are unvested on the date of the Change in Control shall continue to vest according to the terms and conditions of this award; provided that such award is replaced with an award for voting securities of the resulting corporation or the acquiring corporation, as the case may be (including without limitation, the voting securities of any corporation which as a result of the Change in Control owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) (the Surviving Company) which are traded on an Exchange (a Replacement Award), which Replacement Award shall consist of RSUs with a value (determined using the Surviving Companys stock price as of the date of the Change in Control) equal to the value of the replaced award of RSUs (determined using the Companys stock price as of the date of the Change in Control); provided, however, that in the event of a termination by the Company without Cause or by Recipient for Good Reason during the vesting period of any Replacement Award, the Replacement Award shall immediately vest and the delivery date shall be accelerated; and provided further that upon the vesting date of all or a portion of a Replacement Award, Recipient shall be entitled to receive a lump sum cash payment, paid as soon as practicable, equal to the decrease, if any, in the value of a share of the Surviving Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of vesting of the Replacement Award) to the time of vesting multiplied by the total number of RSUs vesting on such date. If any RSUs that are unvested at the time of the Change in Control are not replaced at the time of Change in Control with Replacement Awards, such RSUs shall immediately vest and the delivery date shall be accelerated.
(ii) If as a result of a Change in Control, the Companys Common Stock continues to be listed for trading on an Exchange, any RSUs that are unvested on the date of the Change of Control shall continue to vest according to the terms and conditions of this award; provided however, that, in the event of a termination by the Company without Cause or by Recipient for Good Reason during the vesting period of this award such award shall immediately vest and the delivery date shall be accelerated; and provided further that upon the vesting date of all or portion of this award, Recipient shall be entitled to receive a lump sum cash payment, paid as soon as practicable, equal to the decrease, if any, in the value of a share of the Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of the vesting) to the time of vesting, multiplied by the total number of RSUs vesting on such date.
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(iii) For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following events:
(A) Any consolidation, merger or plan of share exchange involving the Company (a Merger) as a result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors (Voting Securities) immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting Securities of the surviving or continuing corporation immediately after the Merger, disregarding any Voting Securities issued or retained by such holders in respect of securities of any other party to the Merger;
(B) Any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company;
(C) The adoption of any plan or proposal for the liquidation or dissolution of the Company;
(D) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or
(E) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities.
Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the Board of Directors, no Change in Control shall be deemed to have occurred for purposes of this Agreement if (1) Recipient acquires (other than on the same basis as all other holders of the
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Company Common Stock) an equity interest in an entity that acquires the Company in a Change in Control otherwise described under subparagraph (A) or (B) above, or (2) Recipient is part of group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a Change in Control under subparagraph (E) above.
(iv) For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 14 (d) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company.
(v) For purposes of this Agreement, termination by Recipient of his or her employment for Good Reason shall mean termination based on the following, after notice to the Company or the Surviving Company by the Recipient of the condition within one year of the occurrence of the condition and failure of the Company or the Surviving Company to remedy the condition within 30 days after notice:
(A) a material diminution of Recipients status, title, position(s) or responsibilities from Recipients status, title, position(s) and responsibilities as in effect immediately prior to the Change in Control or the assignment to Recipient of any duties or responsibilities which are inconsistent with such status, title, position(s) or responsibilities (in either case other than is isolated, insubstantial or inadvertent actions which are remedied after notice), or any removal of Recipient from such position(s), except in connection with the termination of Recipients employment for Cause, total disability (as defined in Section 1(d)(i)) or as a result of Recipients death or voluntarily by Recipient other than for Good Reason;
(B) a material reduction by the Company or Surviving Company in Recipients rate of base salary, bonus or incentive opportunity or a material reduction in benefits (other than reductions that do not impact Recipients compensation opportunity, taken as a whole, or a reduction in benefits applicable to substantially all employees); or
(C) the Companys or Surviving Companys requiring Recipient to be based more than fifty miles from the principal office at in which Recipient is based immediately prior to the Change in Control, except for reasonably required travel on the Companys business.
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(d) Forfeiture of RSUs on Other Terminations of Service. If Recipient ceases to be an employee of the Company for any reason that does not result in acceleration of vesting pursuant to Section 1(c), Recipient shall immediately forfeit all outstanding but unvested RSUs granted pursuant to this Agreement and Recipient shall have no right to receive the related Common Stock.
(e) Restrictions on Transfer and Delivery on Death. Recipient may not sell, transfer, assign, pledge or otherwise encumber or dispose of the RSUs. Recipient may designate beneficiaries to receive stock if Recipient dies before the delivery date by so indicating on Exhibit A , which is incorporated into and made a part of this agreement. If Recipient fails to designate beneficiaries on Exhibit A , the shares will be delivered to Recipients estate.
(f) Reinvestment of Dividend Equivalents. On each date on which the Company pays a dividend on shares of Common Stock underlying a RSU, Recipient shall receive additional whole or fractional RSUs in an amount equal to the value of the dividends that would have been paid on the stock deliverable pursuant to the RSUs (if such shares were outstanding), divided by the closing stock price on the dividend payment date.
(g) Delivery on Delivery Date. As soon as practicable following the delivery date for a RSU, the Company shall deliver a certificate for the number of shares represented by all vested RSUs having a delivery date on the same date, rounded down to the whole share. No fractional shares of Common Stock shall be issued. The Company shall pay to Recipient in cash an amount equal to the value of any fractional shares that would otherwise have been issued, valued as of the delivery date.
(h) Recipients Rights as Shareholder. Recipient shall have no rights as a shareholder with respect to the RSUs or the shares underlying them until the Company delivers the shares to Recipient on the delivery date.
(i) Tax Withholding . Recipient acknowledges that, at the delivery date, the value of such vested RSUs will be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that the Company will be required to withhold taxes on this income amount. Promptly following the delivery date, the Company will notify Recipient of the required withholding amount. Concurrently with or prior to the delivery of the certificate referred to in Section 1(g), Recipient shall pay to the Company the required withholding amount in cash or, at the election of Recipient (which election must be made on or before the vesting date), by surrendering to the Company for cancellation shares of the Companys Common Stock to be issued with respect to the RSUs or other shares of the Companys Common Stock valued at the closing market price for the Companys Common Stock on the vesting date. If Recipient pays the withholding amount in shares of Common Stock, the Company shall pay to Recipient in cash the amount of any resulting over payment.
(j) Section 409A. The award made pursuant to this Agreement shall be interpreted in accordance with Section 409A and Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance issued after the grant of the award.
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(1) Notwithstanding any provision of the award to the contrary, the Company may adopt such amendments to the award or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Company determines are necessary or appropriate to (1) exempt the award from the application of Section 409A or preserve the intended tax treatment of the benefits provided with respect to the award, or (2) comply with the requirements of Section 409A.
(2) If an amount is determined to be subject to applicable provisions of Section 409A of the Code, payment in connection with termination of employment for a reason other than death or total disability may not start or be made to Recipient if the Company determines Recipient is a key employee as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code, before the date which is six months after the date of termination, notwithstanding any other provisions for time of payment in this Agreement. The Company may determine that Recipient is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees. Recipient shall have no claim, rights or remedy if the determination is not correct.
2. Miscellaneous.
(a) Entire Agreement; Amendment. This Agreement and the Plan (including without limitation Section 17 thereof) constitutes the entire agreement of the parties with regard to the subjects hereof and may be amended only by written agreement between the Company and Recipient.
(b) Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States mail as registered or certified mail, return receipt requested, postage prepaid, addressed to Electro Scientific Industries, Inc., Attention: Corporate Secretary, at its principal executive offices or to Recipient at the address of Recipient in the Companys records, or at such other address as such party may designate by ten (10) days advance written notice to the other party.
(c) Rights and Benefits. The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by the Companys successors and assigns and, subject to the restrictions on transfer of this Agreement, be binding upon Recipients heirs, executors, administrators, successors and assigns.
(d) Further Action. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.
(e) Applicable Law; Attorneys Fees. The terms and conditions of this Agreement shall be governed by the laws of the State of Oregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys fees to be set by the trial court and, upon any appeal, the appellate court.
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(f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original.
ELECTRO SCIENTIFIC INDUSTRIES, INC. | ||
By: | ||
Authorized Officer | ||
Recipient |
8
EXHIBIT A
DESIGNATION OF BENEFICIARY
If more than one Secondary Beneficiary is named, the units will be divided equally among those Secondary beneficiaries who survive the undersigned.
This designation revokes and replaces all prior designations of beneficiaries under the Restricted Stock Units Award Agreement.
__________________________________ Date signed: _______________________, 20___
Signature
A - 1
Exhibit 10.30
PERFORMANCE-BASED
RESTRICTED STOCK UNITS AWARD AGREEMENT
This Award Agreement (the Agreement) is entered into as of , 2007 by and between Electro Scientific Industries, Inc., an Oregon corporation (the Company), and (Recipient), for the grant of restricted stock units with respect to the Companys Common Stock (Common Stock).
On July , 2007, the Compensation Committee of the Companys Board of Directors made a restricted stock units award to Recipient pursuant to the Companys 2004 Stock Incentive Plan (the Plan). The award is intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986. Recipient desires to accept the award subject to the terms and conditions of this Agreement.
IN CONSIDERATION of the mutual covenants and agreements set forth in this Agreement, the parties agree to the following.
1. Grant and Terms of Restricted Stock Units . The Company grants to Recipient under the Plan restricted stock units, subject to the restrictions, terms and conditions set forth in this Agreement.
(a) Rights under Restricted Stock Units. A restricted stock unit (a RSU) represents the unsecured right to require the Company to deliver to Recipient one share of Common Stock for each RSU. The number of shares of Common Stock deliverable with respect to each RSU is subject to adjustment as determined by the Board of Directors of the Company as to the number and kind of shares of stock deliverable upon any merger, reorganization, consolidation, recapitalization, stock dividend, spin-off or other change in the corporate structure affecting the Common Stock generally.
(b) Vesting. The RSUs issued under this Agreement shall initially be 100% unvested and subject to forfeiture as set forth below.
(i) Except as set forth in Section 1(d), if Recipient ceases to be employed by the Company for any reason or for no reason prior to the end of the Performance Period (as defined below), the unvested RSUs shall be forfeited to the Company.
(ii) To the extent that the number of RSUs first specified above are reduced in accordance with Section 1(b)(iii) upon achievement to any extent of the Performance Goal (as defined below) and except as provided in Section 1(d), the reduction shall be forfeited to the Company. The extent to which the Performance Goal is achieved, if at all, shall be determined no later than the date that the Companys fiscal year 2010 audit is completed (the Determination Date). Nothing contained in this Agreement shall confer upon Recipient any right to be employed by the Company or to continue to provide services to the Company or to interfere in any way with the right of the Company to terminate Recipients services at any time for any reason, with or without cause.
(iii) The Performance Goal shall be based on (A) the average earnings/(loss) per share of the Company for the eleven quarter and two month period comprised of (1) April 1, 2007 through June 2, 2007 (determined by multiplying the reported earnings for the fourth quarter of fiscal 2007 by .692), (2) the ten month period ending March 29, 2008, (3) fiscal 2009 and (4) fiscal 2010 (the Performance Period) as compared to the average earnings/(loss) per share of the Company for the twelve-quarter period comprised of fiscal 2005, 2006 and 2007 relative to (B) the average earnings/(loss) per share for each member of the peer group companies set forth on Exhibit A for the twelve-quarter period comprised of the three most recent fiscal years for which annual earnings information is available prior to the Determination Date (the Comparable Period) as compared to the average earnings/(loss) per share for such company for the twelve-quarter period comprised of the three fiscal years preceding the Comparable Period. All information with respect to members of the peer group will be based upon publicly available information. The number of RSUs shall be increased or reduced as follows:
Company Percentile Rank vs. Peer Group |
Portion of RSUs subject to this Agreement Vesting | |
³ 90 th |
200% | |
75 th |
150% | |
50 th |
100% | |
25 th |
50% | |
< 25 th |
0% |
RSUs will vest proportionately between 50% and 200% for Company rankings between the 25 th and 90 th percentiles. The Compensation Committee of the Board of Directors may, in its discretion, permit the vesting of any or all of the RSUs subject to this Agreement for a Company ranking below the 25 th percentile. The number of RSUs determined pursuant to this Section 1(b)(iii) shall vest on the last day of the Performance Period, subject to Section 1(b)(i).
(c) Delivery Date. Except as set forth in Section 1(d)(iv), the delivery date for a RSU subject to this Agreement shall be as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(d) Proration upon Termination for Certain Reasons Prior to End of Performance Period; Treatment on Change in Control .
(i) Proration on Death or Total Disability . If Recipient ceases to be an employee of the Company by reason of Recipients death or physical disability prior to the end of the Performance Period, the RSUs shall not be forfeited under Section (b)(i) and the following shall apply:
(1) The number of RSUs Recipient would otherwise be entitled to receive pursuant to Section 1(b)(iii) if Recipient were employed through the end of the Performance Period (the Base Payout) shall be reduced to a number determined by multiplying the Base Payout by a percentage calculated by dividing the number of months elapsed from the beginning of the Performance Period to the date of termination of employment (rounded down to the whole month) by 24 (the Pro Rata Percentage). RSUs that exceed the reduced number shall be forfeited to the Company.
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(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(i); the Recipient shall have no right to any increase.
(3) The amount of RSUs determined under (1) and (2) shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(4) The term total disability means a medically determinable mental or physical impairment that is expected to result in death or has lasted or is expected to last for a continuous period of 12 months or more and that, in the opinion of the Company and two independent physicians, causes the Recipient to be unable to perform his or her duties as an employee, director, officer or consultant of the Company and unable to engage in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the two independent physicians have furnished their written opinion of total disability to the Company and the Company has reached an opinion of total disability.
(ii) Proration on Normal Retirement. If Recipient terminates his employment with the Company following normal retirement under the Companys retirement policy in place at such time but prior to the end of the Performance Period, the RSUs shall not be forfeited under Section (b)(i) and the following shall apply:
(1) The Base Payout shall be reduced to a number determined by multiplying the Base Payout by the Pro Rata Percentage. RSUs that exceed the reduced number shall be forfeited to the Company.
(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(ii); the Recipient shall have no right to any increase.
(3) The amount of RSUs determined under (1) and (2) shall be delivered as soon as practicable after the Determination Date but in no event later than December 31 of the calendar year in which the Performance Period ends.
(iii) Proration on Termination Other Than for Cause. If the Company terminates Recipients employment with the Company other than for cause prior to the end of the Performance Period, the RSUs shall not be forfeited under Section (b)(i) and the following shall apply:
(1) The Base Payment shall be reduced to a number determined by multiplying the Base Payment by the Pro Rata Percentage. RSUs that exceed reduced number shall be forfeited to the Company.
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(2) The Board of Directors or the Compensation Committee of the Board of Directors, in its discretion, may increase the number of RSUs the Recipient would otherwise be entitled to receive under this Section 1(d)(iii); the Recipient shall have no right to any increase.
(3) The amounts of RSUs determined under (1) and (2) shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends.
(4) The term cause shall mean (i) the willful and continued failure by Recipient to perform substantially Recipients reasonably assigned duties with the Company, other than a failure resulting from Recipients incapacity due to physical or mental illness, after a written demand for performance has been delivered to Recipient by the Company which specifically identifies the manner in which the Company believes that Recipient has not substantially performed Recipients duties, (ii) the conviction of guilty or entering of a nolo contendere plea to a felony which is materially and demonstrably injurious to the Company, or (iii) the commission of an act by Recipient, or the failure of Recipient to act, which constitutes gross negligence or gross misconduct. For purposes of this Section 1(d)(iii), no act, or failure to act, on Recipients part shall be considered willful unless done, or omitted to be done, by Recipient in knowing bad faith. Any act, or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Recipient in good faith.
(iv) Treatment following Change in Control.
(1) If as a result of a Change in Control, the Companys Common Stock ceases to be listed for trading on a national securities exchange (an Exchange), any RSUs subject to this award that are unvested on the date of the Change in Control shall continue to vest according to the terms and conditions of this award; provided that such award is replaced with an award for voting securities of the resulting corporation or the acquiring corporation, as the case may be (including without limitation, the voting securities of any corporation which as a result of the Change in Control owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) (the Surviving Company) which are traded on an Exchange (a Replacement Award), which Replacement Award shall consist of RSUs with a value (determined using the Surviving Companys stock price as of the date of the Change in Control) equal to the value of the
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replaced award of RSUs (determined using the Companys stock price and assuming attainment of target performance or actual performance achieved, if greater, as of the date of the Change in Control); provided, however, that in the event of a termination by the Company without Cause or by Recipient for Good Reason during the Performance Period, the Replacement Award shall immediately vest and the shares shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends; and provided further that Recipient shall be entitled to receive a lump sum cash payment, paid as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends, equal to the decrease, if any, in the value of a share of the Surviving Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of vesting of the Replacement Award) to the time of vesting multiplied by the total number of RSUs vesting on such date. If any RSUs that are unvested at the time of the Change in Control are not replaced with Replacement Awards, the number of such RSUs shall immediately be adjusted based upon deemed attainment of target performance or actual performance achieved, if greater, shall immediately become vested and be delivered as soon as practicable.
(2) If as a result of a Change in Control, the Companys Common Stock continues to be listed for trading on an Exchange, any RSUs that are unvested on the date of the Change of Control shall continue to vest in accordance with the terms and conditions of this award; provided however, that, in the event of a termination by the Company without Cause or by Recipient for Good Reason during the vesting period of this award such award shall immediately vest and the shares shall be delivered as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends; and provided further that Recipient shall be entitled to receive a lump sum cash payment, paid as soon as practicable after the Determination Date, but in no event later than December 31 of the calendar year in which the Performance Period ends, equal to the decrease, if any, in the value of a share of the Companys stock from the date of the Change in Control (as increased on a calendar quarterly basis using an annual interest rate, as of the last business day of the calendar quarter, for zero-coupon U.S. government securities with a constant maturity closest in length to the time period between the date of the Change in Control and the date of the vesting) to the time of vesting, multiplied by the total number of RSUs vesting on such date.
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(3) For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following events:
(A) Any consolidation, merger or plan of share exchange involving the Company (a Merger) as a result of which the holders of outstanding securities of the Company ordinarily having the right to vote for the election of directors (Voting Securities) immediately prior to the Merger do not continue to hold at least 50% of the combined voting power of the outstanding Voting Securities of the surviving or continuing corporation immediately after the Merger, disregarding any Voting Securities issued or retained by such holders in respect of securities of any other party to the Merger;
(B) Any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company;
(C) The adoption of any plan or proposal for the liquidation or dissolution of the Company;
(D) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof, unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or
(E) Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d -3 under the Securities Exchange Act of 1934), directly or indirectly, of Voting Securities representing fifty percent (50%) or more of the combined voting power of the then outstanding Voting Securities.
Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the Board of Directors, no Change in Control shall be deemed to have occurred for purposes of this Agreement if (1) Recipient acquires (other than on the same basis as all other holders of the Company Common Stock) an equity interest in an entity that acquires the Company in a Change in Control otherwise described under subparagraph (A) or (B) above, or (2) Recipient is part of group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a Change in Control under subparagraph (E) above.
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(4) For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 14 (d) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company, a wholly owned subsidiary of the Company or any employee benefit plan(s) sponsored by the Company.
(5) For purposes of this Agreement, termination by Recipient of his or her employment for Good Reason shall mean termination based on the following, after notice to the Company or the Surviving Company by the Recipient of the condition within one year of the occurrence of the condition and failure of the Company or the Surviving Company to remedy the condition within 30 days after notice:
(A) a material diminution of Recipients status, title, position(s) or responsibilities from Recipients status, title, position(s) and responsibilities as in effect immediately prior to the Change in Control or the assignment to Recipient of any duties or responsibilities which are inconsistent with such status, title, position(s) or responsibilities (in either case other than is isolated, insubstantial or inadvertent actions which are remedied after notice), or any removal of Recipient from such position(s), except in connection with the termination of Recipients employment for Cause, total disability (as defined in Section 1(d)(i)) or as a result of Recipients death or voluntarily by Recipient other than for Good Reason;
(B) a material reduction by the Company or Surviving Company in Recipients rate of base salary, bonus or incentive opportunity or a material reduction in benefits (other than reductions that do not impact Recipients compensation opportunity, taken as a whole, or a reduction in benefits applicable to substantially all employees); or
(C) the Companys or Surviving Companys requiring Recipient to be based more than fifty miles from the principal office at in which Recipient is based immediately prior to the Change in Control, except for reasonably required travel on the Companys business.
(e) Restrictions on Transfer and Delivery on Death. Recipient may not sell, transfer, assign, pledge or otherwise encumber or dispose of the RSUs. Recipient may designate beneficiaries to receive stock if Recipient dies before the delivery date by so indicating on Exhibit B , which is incorporated into and made a part of this agreement. If Recipient fails to designate beneficiaries on Exhibit B , the shares will be delivered to Recipients estate.
(f) Reinvestment of Dividend Equivalents. On each date on which the Company pays a dividend on shares of Common Stock underlying a RSU, Recipient shall receive additional whole or fractional RSUs in an amount equal to the value of the dividends that would have been paid on the stock deliverable pursuant to the RSUs (if such shares were outstanding), divided by the closing stock price on the dividend payment date.
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(g) Delivery on Delivery Date. As soon as practicable following the delivery date for a RSU, the Company shall deliver a certificate for the number of shares represented by all vested RSUs having a delivery date on the same date, rounded down to the whole share. No fractional shares of Common Stock shall be issued. The Company shall pay to Recipient in cash an amount equal to the value of any fractional shares that would otherwise have been issued, valued as of the delivery date.
(h) Recipients Rights as Shareholder. Recipient shall have no rights as a shareholder with respect to the RSUs or the shares underlying them until the Company delivers the shares to Recipient on the delivery date.
(i) Tax Withholding . Recipient acknowledges that, at the delivery date, the value of such vested RSUs will be treated as ordinary compensation income for federal and state income and FICA tax purposes, and that the Company will be required to withhold taxes on this income amount. Promptly following the delivery date, the Company will notify Recipient of the required withholding amount. Concurrently with or prior to the delivery of the certificate referred to in Section 1(g), Recipient shall pay to the Company the required withholding amount in cash or, at the election of the Recipient (which election must be made on or before the Determination Date), by surrendering to the Company for cancellation shares of the Companys Common Stock to be issued with respect to the RSUs or other shares of the Companys Common Stock valued at the closing market price for the Companys Common Stock on the Determination Date. If the Recipient pays the withholding amount in shares of Common Stock, the Company shall pay to the Recipient in cash the amount of any resulting over payment.
(j) Section 409A. The award made pursuant to this Agreement shall be interpreted in accordance with Section 409A and Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance issued after the grant of the award.
(i) Notwithstanding any provision of the award to the contrary, the Company may adopt such amendments to the award or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Company determines are necessary or appropriate to (1) exempt the award from the application of Section 409A or preserve the intended tax treatment of the benefits provided with respect to the award, or (2) comply with the requirements of Section 409A.
(ii) If an amount is determined to be subject to applicable provisions of Section 409A of the Code, payment in connection with termination of employment for a reason other than death or total disability may not start or be made to Recipient if the Company determines Recipient is a key employee as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code, before the date which is six months after the date of termination, notwithstanding any other provisions for time of payment in this Agreement. The Company may determine that Recipient is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees. Recipient shall have no claim, rights or remedy if the determination is not correct.
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2. Miscellaneous.
(a) Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties with regard to the subjects hereof and may be amended only by written agreement between the Company and the Recipient.
(b) Notices. Any notice required or permitted under this Agreement shall be in writing and shall be deemed sufficient when delivered personally to the party to whom it is addressed or when deposited into the United States mail as registered or certified mail, return receipt requested, postage prepaid, addressed to Electro Scientific Industries, Inc., Attention: Corporate Secretary, at its principal executive offices or to the Recipient at the address of Recipient in the Companys records, or at such other address as such party may designate by ten (10) days advance written notice to the other party.
(c) Rights and Benefits. The rights and benefits of this Agreement shall inure to the benefit of and be enforceable by the Companys successors and assigns and, subject to the restrictions on transfer of this Agreement, be binding upon the Recipients heirs, executors, administrators, successors and assigns.
(d) Further Action. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.
(e) Applicable Law; Attorneys Fees. The terms and conditions of this Agreement shall be governed by the laws of the State of Oregon. In the event either party institutes litigation hereunder, the prevailing party shall be entitled to reasonable attorneys fees to be set by the trial court and, upon any appeal, the appellate court.
(f) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original.
ELECTRO SCIENTIFIC INDUSTRIES, INC. | ||||
By: | ||||
Authorized Officer | ||||
, Recipient |
9
EXHIBIT A
PEER GROUP COMPANIES
Applied Materials
Asyst Technologies
Axcelis Technologies
Brooks Automation
Coherent
Cohu
Credence Systems
Cymer
FEI
FSI International
GSI Lumonics
KLA-Tencor
Kulicke & Soffa Industries
Lam Research
LTX
Mattson Technology
Newport
Novellus Systems
Photronics
Teradyne
Ultratech
Varian Semiconductor
Veeco Instruments
Zygo
A - 1
EXHIBIT B
DESIGNATION OF BENEFICIARY
If more than one Secondary Beneficiary is named, the units will be divided equally among those Secondary beneficiaries who survive the undersigned.
This designation revokes and replaces all prior designations of beneficiaries under the Performance-Based Restricted Stock Units Award Agreement.
__________________________________ Date signed: _______________________, 20___
Signature
B - 1
Exhibit 10.31
AMENDMENT NO. 1
TO
ELECTRO SCIENTIFIC INDUSTRIES, INC.
DEFERRED COMPENSATION PLAN
2008 Restatement
January 1, 2008
Electro Scientific Industries, Inc. an Oregon Corporation 13900 NW Science Park Drive Portland, OR 97229 |
Company |
The 2008 Restatement of the Electro Scientific Industries, Inc. Deferred Compensation Plan is amended to provide for participation in the Plan by members of the Board of Directors of the Company, and to make clarifications and corrections to terms, as follows (new text is shown by underline and deleted text is shown by strikeout):
A. | Eligibility |
2.1 * * *
2.2 Members of the Board of Directors of the Company (Board Members) shall be eligible to participate in the Plan.
2.
2
3
Participant means
a Board Member
, an
Officer
,
or other eligible employee who has an account under the Plan or who has elected to defer compensation pursuant to Section 3 for any Plan Year.
2.
3
4
Participation shall continue until the individual has been paid all amounts in accordance with the Plan. An
individual who ceases to be an Officer
or Board Member,
or
an employee
who the CEO or delegate determines is no longer eligible, shall continue to be a Participant, but shall not elect to defer additional amounts. Any election in
effect while the individual is eligible shall remain in effect with respect to the entire Plan Year or with respect to a Bonus, as applicable.
1
B. | Deferral Election |
3.1
A Board Member
or
A
a
n eligible employee may elect to participate for each Plan Year by completing a form prescribed by the Committee (a Cash Deferral Election), signing it and returning it to the Committee. The Cash Deferral
Election provides for a deferral of Compensation under 3.2.
3.2
Compensation means the following, without regard for
any deferral of
compensation
remuneration
under the Plan:
(a) * * *
(b) * * *
(c) Directors fees (Fees) earned and payable in cash or in shares of stock of the Company (or both) within the Plan Year (except for usual administrative delay for payment in arrears).
3.3
A Cash Deferral Election shall specify the percentage of Salary
,
or
Bonus
, or
Fees
to be deferred, subject to the following restrictions:
(a) * * *
(b) * * *
(c) A deferral of Fees shall be a minimum of 10 percent and a maximum of 100 percent, unless the Board Member defers none of the Fees. If Fees for a period are payable in cash and shares, the same percentage must apply to the cash portion and to the share portion.
3.4 To be effective for a Plan Year, the Cash Deferral Election must be returned before a date established by the Committee and the following apply:
(a) The date for submitting a Cash Deferral Election for Salary or Fees shall be not later than the December 31 before the first day of the Plan Year, except as provided in (c).
(b) * * *
(c) An individual under 2.1 who first becomes an employee of an Employer during a Plan Year
or an
individual under 2.2 who first becomes a Board Member during a Plan Year
may elect to participate for the remainder of the Plan Year by completing, signing, and returning to the Committee a Cash Deferral Election within 30 days after becoming an
employee
or a Board Member, and the following shall apply:
.
(1) The Cash Deferral Election shall apply to the Participants elected percentage of Salary for the Plan Year earned after the end of the pay period in which the Cash Deferral Election is received by the Committee.
2
(2) The Cash Deferral Election shall apply to the Participants elected percentage of Fees for the Plan Year earned for service as a Board Member after the end of the quarter in which the Cash Deferral Election is received by the Committee.
(3) An individual who is a Participant or is eligible to defer Compensation or restricted stock units and then first becomes an employee or a Board Member during a Plan Year may not elect to defer Compensation payable for services in the Plan Year with respect to the new status as an employee or new status as a Board Member.
(d) * * *
(e) * * *
* * *
3.6
A Board Member or
A
a
n eligible employee may elect to participate with respect to restricted stock units granted in a Plan Year by completing a form prescribed by the Committee
(a Stock Deferral Election), signing it and returning it to the Committee. The Stock Deferral Election provides for the deferral of compensation under a restricted stock unit to a time later than the time the restricted stock unit vests
or is otherwise payable.
* * *
3.7 A restricted stock unit means a restricted stock unit granted under the Companys 2004 Stock Option Incentive Plan, subject to the following:
(a) A restricted stock unit
(RSU)
that
is payable in a share of Company common stock
(Stock), subject to vesting
, is an RSU.
(b) * * *
3.9 * * *
(a) The
Stock Deferral Election shall be irrevocable, and the date for submitting a Stock Deferral Election
,
shall not be later than the December 31 before the first day of the Plan Year, except as provided in (b).
(b) An individual under 2.1 who first becomes an employee of an Employer during a Plan Year or an individual under 2.2 who first becomes a Board Member during a Plan Year may elect to defer restricted stock units granted in the Plan Year by completing, signing and returning to the Committee a Stock Deferral Election within 30 days after becoming an employee or Board Member, subject to (c) and the following:
(1)
A Stock Deferral Election may not be returned on or after the
date that restricted stock units are granted to the
participant
eligible individual
in the Plan Year.
3
(2) A Participant who could attain a retirement age that would accelerate the vesting of an RSU or accelerate the determination of the multiplier or the delivery of shares under a PSRU is not eligible to elect deferral with respect to such restricted stock units under this provision, and any Stock Deferral Election returned shall be ineffective with respect to such restricted stock units.
(c) An individual who is a Participant or is eligible to defer Compensation or restricted stock units and then first becomes an employee or a Board Member during a Plan Year may not elect to defer restricted stock units awarded in the Plan Year with respect to the new status as an employee or new status as a Board Member.
3.10
Employer shall reduce the Participants Salary
and
,
Bonus
and Fees
by the amounts deferred under a cash deferral election and shall credit such amount to the Participants Account under section 4. * * *
3.11 Employer shall credit the number of shares of Stock specified under the Stock Deferral Election to the Participants Account under section 4. Employer shall adjust the number of phantom shares that are subject to a multiplier by application of the multiplier as provided in the related PSRU, except fractional shares remaining after aggregating the adjusted phantom shares shall be disregarded. The Participant shall not receive compensation with respect to RSUs or PRSUs covered by Stock Deferral Elections for income tax purposes upon the vesting of an RSU or the determination or application of a multiplier for a PRSU. The value of the shares of Stock reflected as phantom shares shall be treated as wages to Participants who are employees for purposes of FICA taxes as follows:
* * *
C. | Payment |
6.1
Upon a Termination of the
Participant and as provided in 6.5,
D
d
eferred Salary and Bonus
, and deferred Fees otherwise payable in cash,
and related earnings credit based on the Participants Account shall be payable in
cash
.
, and
Upon a Termination of the Participant and as provided in 6.5, phantom shares of Stock shall be payable in whole shares of Stock
.
, upon a Termination of the Participant and as provided in 6.5
and
T
t
he following shall apply: * * *
4
D. | Unforeseeable Emergencies |
8.2 * * *
(c) Deferrals of Salary and Fees shall cease for the remainder of the Plan Year.
E. | Other Clarifications and Corrections |
4.2
The account of each Participant shall be adjusted by adding credit for deferrals under section 3 and credit for additional phantom shares of the Stock after application of a multiplier as provided in 3.11. Deferred shares of Stock under
Section 3 shall be credited as whole phantom shares. Cash amounts shall be credited as soon as practicable after the date the amount would have been paid if not deferred.
Deferred
S
s
hares of
deferred
Stock
shall be credited as soon as practicable after receipt of a stock deferral election whether or not the number of shares is subject to later adjustment because of determination of a multiplier. * * *
6.5 A Participant may elect with respect to deferrals of Compensation and shares of Stock under a restricted stock unit for any Plan Year to have all amounts deferred for the Plan Year, plus related earnings credit, paid in a Plan Year specified by the Participant. A Participant may make a separate election with respect to a deferral of Stock. The following shall apply:
* * *
6.6 Payment on account of Termination, including Retirement, may not start or be made to a Participant who is a key employee as defined in Section 416(i) of the Code, without regard to Section 416(i)(5) of the Code. Disability shall not be a Termination for purposes of this 6.6. The Committee may determine that a Participant is a key employee in the event of doubt or to avoid impractical efforts or expense to make an exact determination of key employees. A Participant shall have no claim, rights or remedy if the determination is not correct.
(a) If the Participant terminates service because of death or
if the Participant dies before or within the six months, benefits shall be paid as soon as practicable after death, except as provided in 7.1
(a)
. * * *
(b) * * *
F. | Effective Dates and Special Provisions |
Amendment No. 1 is generally effective January 1, 2008, except for provisions relating to eligibility of directors to participate.
5
Directors become eligible to participate effective May 15, 2008. For purposes of restricted stock units awarded to Board Members on or after May 15, 2008, individuals who are Board Members as of May 15, 2008 shall be treated under 3.9 of the Plan as first becoming a Board Member on May 15, 2008 and an election to defer the restricted stock units may be returned after the award of the units. The requirement under 3.9(b) to return the election within 30 days shall apply.
Company | ELECTRO SCIENTIFIC INDUSTRIES, INC. | |||||||
By: | ||||||||
Executed: , 2008 |
6
EXHIBIT 21
ESI Subsidiaries
As of March 29, 2008
Name |
State/Country of
Incorporation |
Percentage
of Voting Securities Owned |
|||
Electro Scientific Industries GmbH |
Germany | 100 | % | ||
ESI International Corp. |
Oregon | 100 | % | ||
Electro Scientific Industries Japan Co., Ltd. |
Japan | 100 | % | ||
ESI Korea Co. Ltd. |
Korea | 100 | % | ||
Electro Scientific Industries Europe Ltd. |
United Kingdom | 100 | % | ||
Electro Scientific Industries, SARL |
France | 100 | % | ||
Electro Scientific Industries Singapore PTE Ltd. |
Singapore | 100 | % | ||
ESI China, Inc. |
Oregon | 100 | % | ||
ESI Electronic Equipment (Shanghai) Co., Ltd. |
China | 100 | % | ||
ESI (Beijing) R&D Center Co., Ltd. |
China | 100 | % | ||
ESI Technology Development, Pte. Ltd. |
Singapore | 100 | % | ||
ESI China R&D Investment, Pte. Ltd. |
Singapore | 100 | % | ||
ESI Taiwan (Branch Office) |
Taiwan | 100 | % | ||
ESI (Beijing) Electro Optic Manufacturing Co. Ltd. |
China | 100 | % | ||
New Wave Research, Inc |
California | 100 | % | ||
New Wave Research, Ltd (FSC) |
Virgin Islands | 100 | % | ||
New Wave Research, K.K |
Japan | 100 | % | ||
New Wave Research, Ltd. |
Hong Kong | 100 | % | ||
New Wave Research Co., Ltd. (WOFE) |
China | 100 | % | ||
New Wave Research Co., Ltd. (FICE) |
China | 100 | % | ||
New Wave Research G.C. Ltd. |
Taiwan | 100 | % |
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of
Electro Scientific Industries, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 33-58292, 33-65477, 333-35927, 333-84552 and 333-88727) on Form S-3 and registration statements (Nos. 2-91731, 33-2623, 33-2624, 33-34098, 33-37148, 33-46970, 33-70584, 33-63705, 333-16485, 333-16487, 333-29513, 333-35917, 333-46443, 333-55060, 333-67356, 333-88411, 333-122660, 333-122661, 333-122662, 333-137878, 333-137879 and 333-146107) on Form S-8 of Electro Scientific Industries, Inc. and subsidiaries of our reports dated June 11, 2008, with respect to the consolidated balance sheets of Electro Scientific Industries, Inc. and subsidiaries as of March 29, 2008 and June 2, 2007, and the related consolidated statements of operations, shareholders equity and comprehensive income, and cash flows for the ten-month period ended March 29, 2008 and the years ended June 2, 2007 and June 3, 2006, and the effectiveness of internal control over financial reporting as of March 29, 2008, which reports appear in the March 29, 2008 annual report on Form 10-K of Electro Scientific Industries, Inc. and subsidiaries.
Our report on the consolidated financial statements refers to Electro Scientific Industries, Inc.s adoption of Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 , effective June 3, 2007, and the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment , effective June 4, 2006.
/s/ KPMG LLP |
Portland, Oregon |
June 11, 2008 |
EXHIBIT 24.1
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ FREDERICK A. BALL |
Frederick A. Ball |
EXHIBIT 24.2
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ RICHARD J. FAUBERT |
Richard J. Faubert |
EXHIBIT 24.3
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ EDWARD C. GRADY |
Edward C. Grady |
EXHIBIT 24.4
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ BARRY L. HARMON |
Barry L. Harmon |
EXHIBIT 24.5
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ W. ARTHUR PORTER |
W. Arthur Porter |
EXHIBIT 24.6
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ GERALD F. TAYLOR |
Gerald F. Taylor |
EXHIBIT 24.7
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ KEITH L. THOMSON |
Keith L. Thomson |
EXHIBIT 24.8
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ JON D. TOMPKINS |
Jon D. Tompkins |
EXHIBIT 24.9
POWER OF ATTORNEY
(Annual Report on Form 10-K)
The undersigned, an officer and/or director of Electro Scientific Industries, Inc., constitutes and appoints Nicholas Konidaris, Paul Oldham and Kerry Mustoe, and each of them, his or her true and lawful attorney and agent to do any and all acts and things and execute in his or her name as an officer or director of the Company the Annual Report on Form 10-K for the year ended March 29, 2008 and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission; and the undersigned does hereby ratify and confirm all that said attorneys and agents and each of them shall do or cause to be done by virtue hereof. Any one of said attorneys or agents shall have, and may exercise, all powers conferred.
Dated: May 15, 2008.
/s/ ROBERT R. WALKER |
Robert R. Walker |
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Nicholas Konidaris, certify that:
1. | I have reviewed this annual report on Form 10-K of Electro Scientific Industries, Inc.; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: June 11, 2008
/s/ Nicholas Konidaris |
Nicholas Konidaris President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Paul Oldham, certify that:
1. | I have reviewed this annual report on Form 10-K of Electro Scientific Industries, Inc.; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: June 11, 2008
/s/ Paul Oldham |
Paul Oldham |
Vice President of Administration, |
Chief Financial Officer and Corporate Secretary |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report on Form 10-K of Electro Scientific Industries, Inc. (the Company) for the ten-month period ended March 29, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Nicholas Konidaris, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Nicholas Konidaris |
Nicholas Konidaris |
President and Chief Executive Officer |
June 11, 2008
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report on Form 10-K of Electro Scientific Industries, Inc. (the Company) for the ten-month period ended March 29, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Paul Oldham, Vice President of Administration, Chief Financial Officer and Corporate Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Paul Oldham |
Paul Oldham |
Vice President of Administration, |
Chief Financial Officer and Corporate Secretary |
June 11, 2008 |
This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Electro Scientific Industries, Inc. and will be retained by Electro Scientific Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.