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

For the Fiscal Year Ended June 1, 2002

Commission File Number: 0-12853

ELECTRO SCIENTIFIC INDUSTRIES, INC.

(an Oregon corporation)

93-0370304
(I.R.S. Employer Identification No.)

13900 N.W. Science Park Drive, Portland, Oregon 97229

Registrant’s telephone number: (503) 641-4141

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Preferred Stock Purchase Rights

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.ý

The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $496,195,162 as of July 31, 2002 based upon the closing sales price ($17.96) of the Registrant’s Common Stock as reported by the Nasdaq Stock Market.

The number of shares outstanding of the Registrant’s Common Stock at July 31, 2002 was 27,627,793 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement for its 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

ELECTRO SCIENTIFIC INDUSTRIES, INC.

FORM 10-K
For the Fiscal Year Ended June 1, 2002

TABLE OF CONTENTS

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PART I

Item 1. Business

This 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” under “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Business Overview

Electro Scientific Industries, Inc. and its subsidiaries (“ESI”) provide high technology manufacturing equipment to the global electronics market. Our customers are primarily manufacturers of semiconductors, passive electronic components and electronic interconnect devices. Our equipment enables these manufacturers to reduce production costs, increase yields and improve the quality of their products. The components and devices manufactured by our customers are used in a wide variety of end-use products in the computer, communications and automotive industries.

We believe we are the leading supplier of advanced laser systems used to improve the production yield of semiconductor devices; high-speed test and termination equipment used in the high-volume production of multi-layer ceramic capacitors (MLCCs) and other passive electronic components; and advanced laser systems used to fine tune electronic components and circuitry. Additionally, we produce a family of laser drilling systems for production of high-density interconnect (HDI) circuit boards and advanced electronic packaging, as well as inspection systems and original equipment manufacturer (OEM) machine vision products.

Electronics Industry Overview

The electronic content of common items such as computers, communication products and automobiles continues to increase. For example, markets for consumer-oriented electronic products such as wireless telephones, computers, personal digital assistants, pagers, digital cameras and entertainment devices have developed rapidly as increasingly affordable products have been introduced that are smaller, lighter and more portable. In addition, automobile manufacturers now routinely include electronic ignition, anti-lock brakes, electronic fuel injection and other electronic systems in place of components that in the past were predominantly mechanical 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 higher performance attributes and smaller device sizes, electronic device manufacturers are increasing the circuit densities in these devices and tuning them to precise electrical values. Manufacturers of wireless 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 interchannel interference.

Smaller and lighter requirements also decrease the physical dimensions used in electronic interconnections within the electronic device, its surrounding package 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.

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The highly competitive consumer markets for electronic products drive the need for increasingly less expensive devices and components. Electronic devices and components are produced in large unit volumes and their production and testing is highly automated, utilizing a variety of manufacturing equipment. Manufacturers continuously seek to achieve reduced costs by improving the throughput, yield and quality of device and component production.

For example, semiconductor device manufacturers are continuing a transition from the use of 200mm and smaller silicon wafers to 300mm wafers. This enables manufacturers to fit significantly more electronic devices on a single silicon wafer. In addition, decreasing circuit densities enable more devices to be produced on a silicon wafer by reducing the size of each device on the wafer. The use of larger wafers and the design of smaller devices increases the throughput and capacity of electronic device manufacturing facilities, or fabs. Increasing circuit densities also requires the use of newer materials, such as copper, to create these miniaturized electronic circuits.

To improve production yield, or the number of acceptable devices produced per silicon wafer, device manufacturers are utilizing advanced yield improvement systems, such as memory repair, in the manufacture of memory devices such as Dynamic Random Access Memory, or DRAM, and non-memory devices such as logic with embedded memory, digital signal processors (DSPs) 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. By allowing manufacturers to achieve greater precision, increased equipment speed and fewer errors, machine vision is enabling technology in the semiconductor manufacturing process, from wafer production through final assembly and packaging. In addition, the manufacture and placement of components in the surface mount assembly area requires the high-speed and accuracy that can be obtained through integrated machine vision solutions.

Our Solution

We believe our products address the needs of electronic component 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. Our production systems are designed to be upgraded to accommodate the next generation of technology, providing customers the flexibility to add capacity or improve product performance at a reasonable incremental cost.

Our technology strengths include a deep understanding of the interaction of lasers with materials used in electronic production, high-speed optics, real-time production control systems, small parts handling systems, and multiple elements of machine vision, including lighting, character and pattern recognition and software algorithms. We combine this core technology expertise in unique and innovative ways with a thorough understanding of our customers’ processes and objectives to develop new and improved products.

Our customers manufacture semiconductors, passive components and electronic interconnect devices. They, 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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Our Strategy

Our Products

Semiconductor Yield Improvement Systems. Our yield improvement product line is designed and developed to cost-effectively meet the production challenges faced by semiconductor manufacturers, including shrinking circuit sizes, material changes and increased wafer sizes. 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 links on the device surface. During the manufacturing process, wafers with hundreds of individual memory devices are tested identifying defective cells. Our laser systems are then used to cut links to disconnect the defective portion and to replace it with one of the redundant cells.

Electronic Component Manufacturing Systems. We design and manufacture products that combine high-speed, small parts handling technology with microprocessor-based systems to provide highly automated, cost-effective solutions for manufacturers of MLCCs and other passive components such as arrays, inductors and varistors. These components are used in circuits that process analog and digital signals or operate at high frequencies in nearly all electronic products.

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Advanced Electronic Packaging Systems. Our laser drilling products are targeted at applications requiring the highest accuracy and smallest via, or hole, dimensions, in order to create electrical connections between layers in high-density circuit boards and electronic packages. We offer drilling and routing technology to address the rapidly changing applications in integrated circuit (IC) packages, multi-chip modules and HDI circuit boards. Our systems utilize either ultraviolet or CO₂ laser technology and come in single-head or dual-head configurations depending on customer requirements.

Vision and Inspection Systems. Our products include both machine vision subsystems sold to original equipment manufacturers (OEMs), and multi-function, stand-alone inspection systems sold to end users. In addition, our machine vision subsystems are a key component used in our other product lines.

In the OEM marketplace, we have concentrated our efforts on selling complete vision solutions and integration expertise to suppliers of semiconductor and electronics equipment. We have also developed and acquired new products to provide complete stand-alone inspection systems for semiconductor wafer sorting, inspection and defect review and integrated circuit mark and lead inspection.

We offer machine vision solutions that reduce application development time and shorten time- to-market for producers of equipment used to manufacture semiconductors and electronics. Products include patented specialized lighting, wafer alignment and identification products and application specific solutions for the surface mount industry.

Our machine vision systems are customer-specific solutions used to perform pick and place, wire bonding and other functions. They consist of:

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Our semiconductor automation and inspection product line is focused on IC package handling and inspection systems. Semiconductor wafer fabricators use our equipment to sort and inspect wafers throughout all phases of processing. These modular systems combine multiple handling and inspection functions onto single platforms. Device manufacturers and contract packaging houses use our equipment for mark and lead inspection and tape and reel packaging. Our systems inspect traditional devices with leads as well as newer leadless devices.

Circuit Fine Tuning Systems. We design and manufacture application-specific laser systems that adjust the electrical performance of a product or assembly containing many circuits by removing a precise amount of material from one or more components in the circuit. This is done to achieve the desired electrical specification for the entire product. This process is called “functional trimming,” and is performed while the product or assembly is under power. For example, in wireless phones, laser trimming of a few selected components in the product is used to tune the product to the desired frequency.

Our circuit fine tuning systems also adjust the resistance value of discrete resistors manufactured on ceramic substrates for use in surface mount technology end products. Typically, these discrete devices are produced at resistance values 20% to 30% below nominal levels and need to be trimmed to resistance value with very high accuracy. Our systems meet the demands for high-volume, high-accuracy miniature resistor trimming through precise positioning of the laser beam and high-speed measurement capability.

Our circuit fine tuning systems include:

We have also used our expertise in precise laser machining/trimming to develop additional products that expand our markets and applications. These include:

Historically, our circuit fine-tuning business has served as an incubator for our new businesses, including our semiconductor yield improvement and advanced packaging systems businesses.

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Customers

Our top twelve customers by revenue for fiscal 2002, listed alphabetically, were:

In fiscal years 2002, 2001 and 2000, no customer exceeded 10% of sales. Sales outside the U.S. accounted for 73.6%, 70.9% and 71.7% of our net sales for fiscal years 2002, 2001 and 2000, respectively. The most significant sales outside the U.S. were to Taiwan, Europe and Japan, which represented 23.4%, 16.1%, and 11.1% of our net sales for fiscal 2002, respectively.

Sales, Marketing and Service

We sell our products worldwide through direct sales and service offices located in or near: Austin; Boston; Portland (Oregon); Dallas; Los Angeles; San Diego; San Francisco; Tokyo, Oita and Nagoya, Japan; Seoul, Korea; Taipei and Chungli, Taiwan; Singapore; Guangzhou and Shanghai, China; Munich, Germany; West Sussex, England; and Fife, Scotland. We serve customers in additional countries through manufacturers’ representatives.

We have a substantial base of installed products in use by leading worldwide 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.

We maintain service personnel wherever we have a significant installed base. New systems are tested prior to delivery to ensure they meet our product specifications and requirements. We offer a variety of maintenance contracts and parts replacement programs.

Backlog

Backlog consists of written purchase orders for products, spare parts and service, which we expect to ship within twelve months. Backlog was $27.2 million at June 1, 2002 versus $55.5 million at June 2, 2001 and $160.3 million at June 3, 2000.

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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Our research and development expenditures for fiscal years 2002, 2001 and 2000 were $35.2 million (21.1% of net sales), $51.3 million (10.9% of net sales) and $35.1 million (11.7% of net sales), respectively.

Competition

Our markets are dynamic and highly competitive. The principal competitive factors in our markets are product performance, reliability, service, technical support, product improvement, price, established relationships with customers and product familiarity. 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, similar manufacturing equipment. There can be no assurance that competition in our markets will not intensify or that our technological advantages may not be reduced or lost as a result of technological advances by competitors or customers, or changes in electronic device processing technology.

Our principal competitor for semiconductor yield improvement systems is GSI Lumonics. For electronic component manufacturing equipment, our competitors include Tokyo Weld, Kanebo and Humo in Japan, as well as manufacturers that develop systems for internal use. Our advanced electronic packaging systems compete with laser systems provided by Hitachi Via Mechanics, Mitsubishi, Sumitomo and GSI Lumonics. Our vision products compete with vision suppliers such as Cognex, ICOS Systems, and Robotic Vision Systems. There are also numerous other vision companies and captive vendors in Japan, North America and Europe. Major competitors for circuit fine tuning systems include NEC and GSI Lumonics.

Manufacturing and Supply

Our largest production facilities are located in Portland, Oregon; Klamath Falls, Oregon; and Escondido, California. The manufacturing operations located in Portland consist of electronic subassembly and final system assembly for semiconductor yield improvement, advanced electronic packaging, and circuit fine tuning product lines. We now produce our vision products in Portland as a result of a relocation effort that took place in the first quarter of fiscal 2002. Electronic component manufacturing products are produced in our facilities in Escondido, California and Klamath Falls, Oregon.

We use qualified manufacturers to supply many components 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 could require substitutions that would have a temporary adverse impact on us. We believe our relationships with our suppliers are good.

Employees

As of June 1, 2002, we employed 875 people, including 191 in engineering, research and development, 306 in manufacturing and 378 in marketing, sales, technical support, customer service and administration. 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.

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Item 2. Properties

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 79 United States patents and 126 patents issued outside of the United States. During fiscal 2002 we applied for 24 new patents in the United States and 30 new patents outside of the United States. Additionally, as of June 1, 2002 we had 35 patent applications pending in the United States and 162 patent applications pending outside of the United States. Although our patents are important, we believe that the success of our business depends to a greater degree 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. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques, or that we can meaningfully protect our trade secrets.

Properties

Our executive and administrative offices, as well as one of our manufacturing facilities, are located in a three-building complex on 15 acres of land in Portland, Oregon. We own the buildings, which contain 196,500 square feet of space. In June of 2001 we began construction of a 62,000 square foot corporate headquarters building in Portland, Oregon. We plan to complete construction in September of 2002. We also own a 60,000 square foot plant on 10 acres of land in Escondido, California; a 29,000 square foot building on 3 acres of land near Minneapolis, Minnesota which is currently listed for sale; and a 53,000 square foot plant on 31 acres of land in Klamath Falls, Oregon.

We lease 21,945 square feet of office and industrial space in Ann Arbor, Michigan that is currently listed for sub-lease, and other office and service space in the United States and in eight foreign countries.

We believe the productive capacity of these facilities to be adequate and suitable for the requirements of our business.

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Item 3. Legal Proceedings

Legal Proceedings

On February 14, 2001, Cognex Corporation (Cognex) filed a lawsuit in the United States District Court for the District of Massachusetts (Cognex Corporation v. Electro Scientific Industries, Inc., No. 01-10287 RCL). The lawsuit alleges that our CorrectPlace ver. 5.0 product infringes United States Patent 5,371,690, which is owned by Cognex. The patent concerns the inspection of surface mount devices that are attached to the surface of an electronic circuit board. Cognex seeks injunctive relief, damages, costs and attorneys’ fees. We believe we have meritorious defenses to the action and intend to pursue them vigorously. Fact discovery is completed in the lawsuit. Additionally, certain of our customers have notified us that, in the event it is subsequently determined that their use of CorrectPlace ver. 5.0 infringes any patent, they may seek indemnification from us for damages or expenses resulting from this matter.

We initiated litigation against Dynamic Details, Inc. and GSI Lumonics, Inc. for patent infringement in March 2000 in the U.S. District Court for the Central District of California (Electro Scientific Industries v. Dynamic Details, Inc. and GSI Lumonics, Inc., No. SACV00-272 AHS (ANX)). We believe that Dynamic Details and GSI Lumonics are violating our U.S. patent 5,847,960 entitled “Multi-tool Positioning System”. The complaint alleges that Dynamic Details infringes our patent 5,847,960 and that GSI Lumonics has actively induced infringement of, and contributorily infringed, our patent 5,847,960. The complaint seeks injunctive relief and monetary damages. Dynamic Details, Inc. and GSI Lumonics, Inc. have filed a counterclaim for a declaratory judgment of non-infringement and invalidity of our patent 5,847,960. In August 2001, the District Court issued an order granting Dynamic Details and GSI Lumonics’ motion for summary judgment of non-infringement. We have appealed the District Court’s order to the U.S. Court of Appeals for the Federal Circuit and an appellate hearing has occurred. The appeal is pending.

Numerous users of our products have received notice of patent infringement from the Lemelson Medical, Educational & Research Foundation Limited Partnership (“Partnership”) alleging that their use of our products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified us that, in the event it is subsequently determined that their use of our products infringes any of the Partnership’s patents, they may seek indemnification from us for damages or expenses resulting from this matter.

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Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the fourth quarter ended June 1, 2002.

Executive Officers

Our executive officers, and their ages and positions as of July 3, 2002 are as follows:

Mr. Bolender was elected Chairman of the Board of ESI in January 1992 and named Acting President and Chief Executive Officer in April 2002. From February 1998 until his retirement in July 1999, Mr. Bolender was CEO of Protocol Systems, Inc., a manufacturer of vital sign monitoring equipment for the medical industry. Prior to his leadership of Protocol Systems, Mr. Bolender retired in 1991 from the position of President of the Electric Operations Group of PacifiCorp, a diversified public utility located in Portland, Oregon. Mr. Bolender is also a director of Benson Industries, Inc. Mr. Bolender is a TriMet board member, Oregon Medical Laser System advisory board member, and is a member of the Providence Governing Council.

Mr. Cooley joined us in 1993 as Director of Engineering for ESI’s laser based equipment products. He was elected Vice President in January 1999 and is responsible for Engineering and Corporate Research and Development. In April 1999, Mr. Cooley assumed the role of Chief Technology Officer. Prior to ESI, he held engineering management positions with Texas Instruments and Kulicke and Soffa Industries as well as several startup companies engaged in equipment development.

Mr. Dooley was elected Vice President and Chief Financial Officer in June 2000. In April 2002, he was elected Senior Vice President and Acting Chief Operating Officer. He joined us in 1992 as the Controller of Electronic Component Systems business and was named Corporate Controller in 1994. In 1996 he was named Director of Portland Manufacturing. Prior to joining us he held various financial management positions at IRT Corporation, Eli Lilly and Company, INTERMEDICS, Inc., and Johnson and Johnson, Inc.

Mr. Isselmann joined us in May 2000 as General Counsel. Before joining us, Mr. Isselmann was a Senior Attorney at Intel Corporation. Prior to working at Intel, he worked as an attorney for the Portland, Oregon law firm of Stoel Rives LLP from 1996-2000, and in 1998 at Tektronix Inc., Wilsonville, Oregon.

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Mr. Kapral joined us in May 2000 as Vice President responsible for our vision-based businesses and assumed responsibility for Human Resources in May 2002. From 1987 until he joined us, Mr. Kapral was both a corporate vice president and a business unit president of SGL Carbon Group, a major supplier to semiconductor manufacturers, with responsibility for SGL’s semiconductor activities in North America and Europe.

Mr. Klein joined us in September 2000 as Corporate Vice President of Manufacturing. In May 2002, he was named Vice President of Global Service. From 1998 until joining ESI, Mr. Klein was Vice President of Operations with the Furon Company. From 1994 to 1998, he was Vice President of Operations at Tech Industries. Prior to that, he held management positions with Rockbestos Company and the Eaton Corporation.

Mr. Kurdock joined us in February 1997 as Vice President and General Manager of Portland Operations and became responsible for company-wide Operations in May 2002. During the five years prior to joining us, Mr. Kurdock served as Vice President of the Surface Mount Division for Universal Instruments and previously held senior operating positions with the Silicon Valley Group and Perkin Elmer.

Mr. Longe joined us in October 2000 as Corporate Vice President. In May 2001 he was named Vice President of Worldwide Sales and in May 2002 he assumed responsibility for Sales, Marketing and Service. From 1992 until he joined ESI, he was with Evapco, Inc., where he was Vice President and Managing Director of Asia-Pacific operations and, prior to that, Vice President of the Industrial Products Group. His earlier experience included senior management positions with IMECO, a subsidiary of York International.

Mr. Reinhart joined us in 1993 as Communications and Contracts Manager and was named Director of Business Development in April 1995. Mr. Reinhart was elected a Vice President in September 1996 and was elected Corporate Secretary in June 1998. His experience includes finance, venture funding, mergers and acquisitions and administration in high-technology businesses.

Mr. Swenson joined us in 1961 as a project and applications engineer and was named Vice President, Advanced Development in 1979. Mr. Swenson was elected Senior Vice President of Advanced Research and Development in 1987.

Mr. Taft joined us in 1985 in our Electronic Component Manufacturing Systems unit and held various sales and management positions. Mr. Taft was named Asia Sales Manager in 1997 and was named Director of Sales and Marketing for our Semiconductor Yield Improvement Systems unit in 1998. He became General Manager of Semiconductor Products in 1999 and was elected Vice President of the Electronic Component Manufacturing Systems product line in April 2002. Prior to joining us, he was with Kyocera International.

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PART II

Item 5. Market for the Registrant’s Common Equity and Related Shareholder Matters

Common Stock Prices/Dividends

Our common stock trades on the Nasdaq National Market under the symbol ESIO. The following table shows, for the fiscal quarters indicated, the high, low and quarter end closing sales prices for the common stock as reported on the Nasdaq National Market.

We have not paid any cash dividends on our common stock during the last six fiscal years. We intend to retain our earnings for our business and do not anticipate paying any cash dividends in the foreseeable future.

The number of shareholders of record at June 1, 2002 was 756.

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Item 6. Selected Financial Data