As filed with the Securities and Exchange Commission on June 20, 1996
Registration No. 333-5603
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in charter)
---------------
OREGON 93-0370304
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
13900 NW Science Park Drive 97229
Portland, Oregon (Zip Code)
(Address of Principal
Executive Offices)
---------------
Donald R. VanLuvanee
President and Chief Executive Officer
Electro Scientific Industries, Inc.
13900 NW Science Park Drive
Portland, OR 97229-5497
Telephone: (503) 641-4141
(Name, address, including ZIP code, and telephone number, including area
code, of agent for service for Registrant)
Copies to:
Annette M. Mulee Stanley E. Everett
Stephen J. Sturgill Kevin C. O'Neil
Stoel Rives LLP Brouse & McDowell
900 SW Fifth Avenue 500 First National Tower
Portland, Oregon 97204-1268 Akron, Ohio 44308-1471
(503) 224-3380 (330) 535-5711
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
LOCATION OR HEADING IN
ITEM PROSPECTUS/PROXY-
NO. ITEM IN FORM S-4 INFORMATION STATEMENT
A. INFORMATION ABOUT THE
TRANSACTION.
1. Forepart of the Facing Page of Registration
Registration Statement and Statement; Cross-Reference
Outside Front Cover Page of Sheet; Outside Front Cover
Prospectus/Proxy- Page of Prospectus/Proxy-
Information Statement .. Information Statement
2. Inside Front and Outside Available Information;
Back Cover Pages of Incorporation of Documents
Prospectus/Proxy- by Reference; Table of
Information Statement .. Contents
3. Risk Factors, Ratio of Outside Front Cover Page of
Earnings to Fixed Charges Prospectus/Proxy-
and Other Information .. Information Statement;
Summary; Risk Factors;
Selected Historical and Pro
Forma Financial
Information; Equivalent per
Common Share Data; Market
and Market Prices for
Common Stock; the ESI
Special Shareholders
Meeting; The Merger
Agreement
4. Terms of the Transaction Summary; The Merger; The
Merger Agreement;
Comparison of Shareholder
Rights
5. Pro Forma Financial Summary; Unaudited Pro
Information ....... Forma Combined Financial
Statements
6. Material Contacts With the The Merger; The Merger
Company Being Acquired . Agreement
7. Additional Information Not applicable
Required For Reoffering by
Persons and Parties Deemed
to be Underwriters ...
8. Interests of Named Experts Not applicable
and Counsel .......
9. Disclosure of Commission Not applicable
Position on Indemnification
for Securities Act
Liabilities .......
B. INFORMATION ABOUT REGISTRANT.
10. Information With Respect to Outside Front Cover Page of
S-3 Registrants ..... Prospectus/Proxy-
Information Statement;
Inside Front Cover Page of
Prospectus/Proxy-
Information Statement;
Summary; Risk Factors;
Information Concerning ESI
11. Incorporation of Certain Inside front cover page of
Information by Reference Prospectus/Proxy-
Information Statement
12. Information With Respect to Not applicable
S-2 or S-3 Registrants .
13. Incorporation of Certain Not applicable
Information by Reference
<PAGE>
14. Information With Respect to Not applicable
Registrants Other Than S-2
or S-3 Registrants ...
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED.
15. Information With Respect to Not applicable
S-3 Companies ......
16. Information With Respect to Not applicable
S-2 or S-3 Companies ..
17. Information With Respect to Outside Front Cover Page of
Companies Other Than S-2 or Prospectus/Proxy-
S-3 Companies ...... Information Statement;
Summary; Pro Forma Combined
Unaudited Financial
Statements; AISI
Managements' Discussion and
Analysis of Financial
Condition and Results of
Operations; Information
Concerning AISI;
Description of AISI Capital
Stock; AISI Financial
Statements
D. VOTING AND MANAGEMENT INFORMATION.
18. Information if Proxies, Notice of Special Meeting
Consents or Authorizations of ESI Shareholders;
are to be Solicited ... Outside Front Cover Page of
Prospectus/Proxy-
Information Statement;
Summary; The ESI Special
Shareholders Meeting; AISI
Written Shareholders
Consent; The Merger; The
Merger Agreement; AISI
Voting Securities and
Principal Shareholders
19. Information if Proxies, Not Applicable
Consents or Authorizations
are not to be Solicited in
an Exchange Offer ....
20. Indemnification of Officers Comparison of Shareholder
and Directors ...... Rights; Part II of the
Registration Statement
21. Exhibits and Financial Financial Statements;
Statement Schedules ... Exhibits
22. Undertakings ...... Part II of the Registration
Statement
<PAGE>
[LOGO]
ELECTRO SCIENTIFIC INDUSTRIES, INC.
13900 NW SCIENCE PARK DRIVE
PORTLAND, OREGON 97229-5497
Dear ESI Shareholder:
You are cordially invited to attend a special meeting of the
shareholders of Electro Scientific Industries, Inc. ("ESI") to be held at
10 a.m. local time, on July 30, 1996, at 14000 NW Science Park
Drive, Portland, Oregon, 97229-5497 (the "ESI Special Meeting").
At the ESI Special Meeting, you will be asked to consider and vote
on a proposal to issue up to 3,000,000 shares of ESI common stock ("ESI
Common Stock") to be delivered pursuant to an Agreement of Reorganization
and Merger (the "Merger Agreement"), dated as of May 13, 1996, among ESI,
AISI Merger Corp., a wholly-owned subsidiary of ESI ("Merger Corp."), and
Applied Intelligent Systems, Inc. ("AISI"). In the proposed Merger, AISI
will be merged with and into Merger Corp. and thereby become a wholly-owned
subsidiary of ESI, and each outstanding share of common stock of AISI
("AISI Common Stock") will be converted into a number of shares of ESI
Common Stock that corresponds to 3,000,000 divided by the sum as of the
Closing Date of all shares of AISI Common Stock outstanding plus all shares
of AISI Common Stock subject to outstanding options (the "Conversion
Ratio"). Approximately 2,350,000 shares of ESI Common Stock will be issued
for the outstanding shares of AISI Common Stock converted in the proposed
merger, and approximately 650,000 shares of ESI Common Stock will be
issuable upon exercise of outstanding AISI stock options.
Your approval is required for the issuance of up to 3,000,000
shares of ESI Common Stock because, when issued, those shares will
represent more than 20% of the total number of shares of ESI Common Stock
presently outstanding. The requirement for shareholder approval of the
issuance of these additional shares of ESI Common Stock is a condition for
maintaining ESI's status as a Nasdaq National Market issuer.
ESI'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ISSUANCE OF
UP TO 3,000,000 SHARES OF ESI COMMON STOCK IN CONNECTION WITH THE PROPOSED
MERGER AND HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF ESI
AND ITS SHAREHOLDERS. AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE ISSUANCE OF THE
ADDITIONAL SHARES OF ESI COMMON STOCK IN CONNECTION WITH THE PROPOSED
MERGER.
Details of the proposed transaction and other important
information concerning ESI and AISI are more fully described in the
accompanying Prospectus/Proxy, Consent and Information Statement. Please
give this material your careful attention.
Whether or not you plan to attend the ESI Special Meeting, please
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. You may revoke your proxy in the manner
described in the accompanying Prospectus/Proxy, Consent and Information
Statement at any time before it has been voted at the ESI Special Meeting.
If you attend the ESI Special Meeting, you may vote in person even if you
have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Very truly yours,
June 24, 1996 DONALD R. VANLUVANEE DAVID F. BOLENDER
------------------------ -----------------------
Donald R. VanLuvanee David F. Bolender
Portland, Oregon President and Chief Chairman of the Board
Executive Officer
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND
PROMPTLY MAIL THE ENCLOSED PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK
MAY BE REPRESENTED AT THE MEETING.
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC.
13900 NW SCIENCE PARK DRIVE
PORTLAND, OREGON 97229-5497
-----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 30, 1996
TO: THE SHAREHOLDERS OF ELECTRO SCIENTIFIC INDUSTRIES, INC.
A special meeting of the shareholders of Electro Scientific
Industries, Inc., an Oregon corporation ("ESI"), will be held at 10 a.m.
local time, on July 30, 1996, at 14000 NW Science Park Drive, Portland,
Oregon, 97229-5497 (the "ESI Special Meeting"), for the following purposes:
1. To approve issuance of up to 3,000,000 shares of ESI common stock
("ESI Common Stock") to be delivered pursuant to an Agreement of
Reorganization and Merger (the "Merger Agreement"), dated as of
May 13, 1996, among ESI, AISI Merger Corp., a wholly-owned
subsidiary of ESI ("Merger Corp."), and Applied Intelligent
Systems, Inc. ("AISI"). In the proposed merger, AISI will be
merged with and into Merger Corp. and thereby become a wholly-
owned subsidiary of ESI, and each outstanding share of Common
Stock of AISI ("AISI Common Stock") will be converted into a
number of shares of ESI Common Stock that corresponds to
3,000,000 divided by the sum as of the Closing Date of all shares
of AISI Common Stock outstanding plus all shares of AISI Common
Stock subject to outstanding options (the "Conversion Ratio").
Approximately 2,350,000 shares of ESI Common Stock will be issued
for the outstanding shares of AISI Common Stock converted in the
proposed merger, and approximately 650,000 shares of ESI Common
Stock will be issuable upon exercise of outstanding AISI stock
options. A copy of the Merger Agreement is attached as Annex A to
the Prospectus/Proxy, Consent and Information Statement
accompanying this Notice.
2. To transact such other business as may properly come before the
ESI Special Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on
June 18, 1996 as the record date for the determination of the holders of
ESI Common Stock entitled to notice of, and to vote at, the ESI Special
Meeting. Accordingly, only shareholders of record at the close of business
on such date are entitled to notice of and to vote at the ESI Special
Meeting and any adjournment or postponement thereof. The affirmative vote
of the holders of a majority of the shares of ESI Common Stock present (in
person or by proxy) at the ESI Special Meeting is necessary for approval of
the issuance of up to 3,000,000 additional shares of ESI Common Stock.
Details of the proposed transactions and other important
information concerning ESI and AISI are more fully described in the
accompanying Prospectus/Proxy, Consent and Information Statement. Please
give this material your careful attention.
You may revoke your proxy in the manner described in the
accompanying Prospectus/Proxy, Consent and Information Statement at any
time before it has been voted at the ESI Special Meeting. Any shareholder
attending the ESI Special Meeting may vote in person even if he or she has
returned a proxy.
By Order of the Board of Directors
LARRY T. RAPP
Larry T. Rapp, Vice President and
Corporate Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN,
DATE AND MAIL PROMPTLY THE ENCLOSED PROXY WHICH IS BEING SOLICITED ON
BEHALF OF THE ESI BOARD OF DIRECTORS. A RETURN ENVELOPE WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED FOR THAT PURPOSE.
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. APPLIED INTELLIGENT SYSTEMS, INC.
PROSPECTUS AND PROXY STATEMENT CONSENT AND
INFORMATION STATEMENT
2,350,000 Shares of Common Stock,
Without Par Value
------------------------
This Prospectus/Proxy, Consent and Information Statement (the
"Prospectus/Proxy-Information Statement") is being furnished to holders of
the common stock, without par value (the "ESI Common Stock") of Electro
Scientific Industries, Inc., an Oregon corporation ("ESI") in connection
with the solicitation of proxies by the Board of Directors of ESI for use
at a Special Meeting of Shareholders of ESI to be held on July 30, 1996 at
10 a.m., at 14000 NW Science Park Drive, Portland, Oregon, 97229-5497, and
at any and all adjournments or postponements thereof (the "ESI Special
Meeting").
This Prospectus/Proxy-Information Statement relates to the
proposed merger (the "Merger") of Applied Intelligent Systems, Inc.
("AISI") with and into AISI Merger Corp. ("Merger Corp."), a wholly-owned
subsidiary of ESI, pursuant to which AISI will become a wholly-owned
subsidiary of ESI in accordance with the terms of an Agreement of
Reorganization and Merger, dated as of May 13, 1996, among ESI, AISI and
Merger Corp. (the "Merger Agreement"). In the Merger, each outstanding
share of common stock of AISI ("AISI Common Stock") will be converted into
and represents the right to receive the number of shares of ESI Common
Stock that corresponds to a ratio (the "Conversion Ratio") determined by
dividing 3,000,000 by the sum of the total shares of AISI Common Stock
outstanding plus the total number of AISI shares subject to stock options
as of the day of the closing of the Merger (the "Closing Date"). Cash will
be paid in lieu of any fractional share of ESI Common Stock.
To effect the Merger, ESI proposes to issue up to 3,000,000 shares
of ESI Common Stock. Approximately 2,350,000 of these additional shares of
ESI Common Stock will be issued in connection with the Merger upon
conversion of the outstanding shares of AISI Common Stock, and
approximately 650,000 shares of ESI Common Stock will be issuable upon
exercise of outstanding AISI stock options. At the ESI Special Meeting, ESI
shareholders will be asked to approve the issuance of such shares of ESI
Common Stock. Their approval is not otherwise required to effect the
Merger.
This Prospectus/Proxy-Information Statement also constitutes the
Prospectus of ESI with respect to the 2,350,000 shares of ESI Common Stock
to be issued in connection with the Merger. ESI Common Stock is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "ESIO." On
June 18, 1996, the closing sale price for ESI Common Stock as reported on
Nasdaq was $23 per share.
This Prospectus/Proxy-Information Statement and the accompanying
form of proxy are first being mailed to the shareholders of ESI on or about
June 26, 1996. It is also being mailed to the AISI shareholders for consent
and information purposes.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY AISI SHAREHOLDERS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OR THIS PROSPECTUS/PROXY-INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS/PROXY-INFORMATION STATEMENT IS JUNE 24, 1996.
<PAGE>
All information contained in this Prospectus/Proxy-Information
Statement relating to AISI has been furnished by AISI and ESI is relying
upon the accuracy of that information. All information contained in this
Prospectus/Proxy-Information Statement relating to ESI has been furnished
by ESI and AISI is relying upon the accuracy of that information.
This Prospectus/Proxy-Information Statement includes a discussion
of anticipated future performance of ESI after the Merger, including
possible cost savings and other financial consequences of the proposed
Merger. This discussion is based on assumptions that are inherently
uncertain, including without limitation factors related to general economic
and competitive conditions. Accordingly, actual future results or values
may vary significantly from such estimates.
------------------------
No person has been authorized to give any information or to make
any representations not contained or incorporated in this
Prospectus/Proxy-Information Statement in connection with the matters
referred to herein and, if given or made, such information or
representations must not be relied upon as having been so authorized by
AISI or by ESI. This Prospectus/Proxy-Information Statement does not
constitute an offer of any securities other than the registered securities
to which it relates or an offer to any person in any jurisdiction where
such offer would be unlawful. The delivery of this
Prospectus/Proxy-Information Statement shall not, under any circumstances,
create any implication that the information herein is correct as of any
time subsequent to date hereof.
ii
<PAGE>
AVAILABLE INFORMATION
ESI is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files periodic reports and
other information with the Securities and Exchange Commission (the "SEC").
Such reports, proxy statements, and other information concerning ESI may be
inspected and copies may be obtained at prescribed rates at the offices of
the SEC, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, as
well as at the following regional offices: 75 Park Place, 14th Floor, New
York, New York 10007; and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. ESI has filed with the SEC a Registration Statement under
the Securities Act of 1933, as amended, with respect to the securities
offered pursuant to this Prospectus/Proxy-Information Statement. For
further information, reference is made to the Registration Statement and
the exhibits thereto, which are available for inspection at no fee at the
public reference section of the SEC at its principal office at Judiciary
Plaza, 450 Fifth Street, NW, Washington, D.C. 20549.
ESI hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus/Proxy-Information Statement is delivered,
upon written or oral request to Larry T. Rapp, Vice President and Corporate
Secretary, Electro Scientific Industries, Inc. 13900 NW Science Park Drive,
Portland, Oregon 97229, (503) 641-4141, copies of any and all of the
information that has been incorporated by reference into this
Prospectus/Proxy-Information Statement, other than exhibits to such
information unless such exhibits are specifically incorporated by reference
therein. The information relating to ESI contained in this
Prospectus/Proxy-Information Statement does not purport to be comprehensive
and should be read together with the information contained in the documents
or portions of documents incorporated by reference into this
Prospectus/Proxy-Information Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC are incorporated herein
by reference:
1. ESI's Annual Report on Form 10-K for the fiscal year ended May
31, 1995.
2. ESI's Quarterly Reports on Form 10-Q for the fiscal quarters
ended August 31, 1995, November 30, 1995 and February 29, 1996.
3. The description of the Common Stock contained in ESI's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission under section 12 of the Securities Exchange
Act of 1934, as amended.
All reports and other documents subsequently filed by ESI pursuant
to sections 13(a), 13(c), 14, and 15(d) of the Securities Exchange Act of
1934, as amended, prior to the termination of the offering shall be deemed
to be incorporated by reference herein and to be a part hereof from the
date of the filing of such reports and documents.
THIS PROSPECTUS/PROXY-INFORMATION STATEMENT INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS ARE AVAILABLE UPON REQUEST FROM LARRY T. RAPP, VICE PRESIDENT AND
CORPORATE SECRETARY, ELECTRO SCIENTIFIC INDUSTRIES, INC., 13900 NW SCIENCE
PARK DRIVE, PORTLAND, OREGON 97229, PHONE: (503) 641-4141. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
JULY 23, 1996.
iii
<PAGE>
TABLE OF CONTENTS
FOR PROSPECTUS/PROXY-INFORMATION STATEMENT
Page
SUMMARY OF PROSPECTUS/PROXY-INFORMATION STATEMENT..................... 1
RISK FACTORS.......................................................... 7
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION............... 10
ESI Selected Historical Financial Information.................... 10
AISI Selected Historical Financial Information................... 12
Unaudited Selected Pro Forma Financial Information............... 14
EQUIVALENT PER COMMON SHARE DATA...................................... 16
MARKET AND MARKET PRICES FOR COMMON STOCK............................. 17
THE ESI SPECIAL SHAREHOLDERS MEETING.................................. 17
General; Date, Time and Place of Meeting......................... 17
Matters to be Considered at the ESI Special Meeting.............. 18
Record Date; Voting at the ESI Special Meeting;
Vote Required.................................................. 18
Proxies .................................................... 19
AISI SHAREHOLDERS WRITTEN CONSENT..................................... 19
THE MERGER .................................................... 20
Description...................................................... 20
Background of the Merger......................................... 20
Reasons for the Merger........................................... 22
ESI's Reasons for the Merger................................. 22
AISI's Reasons for the Merger................................ 23
Certain U.S. Federal Income Tax Consequences..................... 23
Accounting Treatment............................................. 25
Interests of Certain Persons in the Merger; Certain Compensation
Matters...................................................... 25
Regulatory Matters............................................... 29
Appraisal Rights................................................. 29
THE MERGER AGREEMENT.................................................. 30
Effective Time of the Merger..................................... 30
Conversion of Shares............................................. 30
Treatment of AISI Stock Options.................................. 31
Resale of ESI Stock by Affiliates................................ 31
AISI's Conduct of Business Pending the Merger.................... 31
Nonsolicitation of Alternative Proposals......................... 32
Corporate Structure and Related Matters After the Merger......... 33
Certain Covenants................................................ 33
Conditions to the Merger......................................... 34
Indemnity and Escrow Agreement................................... 34
Termination; Breakup Fees........................................ 34
Fees and Expenses................................................ 35
Confidentiality.................................................. 35
INFORMATION CONCERNING ESI............................................ 35
Business .................................................... 35
Electronics Industry Overview.................................... 36
Overview of Markets, Products and Strategy....................... 36
Sales, Marketing and Service..................................... 42
Backlog .................................................... 42
Research, Development and Technology............................. 42
Competition...................................................... 43
Manufacturing and Supply......................................... 43
Employees .................................................... 44
Patents and Other Intellectual Property.......................... 44
INFORMATION CONCERNING AISI........................................... 44
Business .................................................... 44
iv
<PAGE>
Products .................................................... 45
Markets .................................................... 45
Technology....................................................... 45
Strategy .................................................... 47
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS..................... 49
AISI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS........ 55
DESCRIPTION OF AISI CAPITAL STOCK..................................... 60
AISI VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS..................... 62
COMPARISON OF SHAREHOLDER RIGHTS...................................... 63
Amendment to Certificate/Articles of Incorporation;
Amendment of Bylaws............................................ 64
Special Meetings of Shareholders................................. 65
Dividends .................................................... 65
Capital Stock ................................................... 65
Dissenters' Rights............................................... 65
Provisions Relating to Directors................................. 66
Anti-Takeover Statutes........................................... 68
LEGAL MATTERS......................................................... 70
EXPERTS .................................................... 70
SHAREHOLDER PROPOSALS................................................. 70
AISI FINANCIAL STATEMENTS............................................. F-1
LISTS OF ANNEXES
Annex A Agreement of Reorganization and Merger.
Annex B Michigan Dissenter Rights Statutes
v
<PAGE>
SUMMARY OF PROSPECTUS/PROXY-INFORMATION STATEMENT
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS/PROXY-INFORMATION STATEMENT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THIS
PROSPECTUS/PROXY-INFORMATION STATEMENT, THE ANNEXES HERETO AND DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. SHAREHOLDERS ARE URGED TO READ THIS
PROSPECTUS/PROXY-INFORMATION STATEMENT AND THE ACCOMPANYING ANNEXES IN
THEIR ENTIRETY. SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY THE SHAREHOLDERS OF AISI.
THE COMPANIES
ELECTRO SCIENTIFIC INDUSTRIES, INC.
ESI provides electronics manufacturers with equipment necessary to
produce components used in wireless telecommunications, computers,
automotive electronics, and many other electronic products. ESI is the
leading supplier of advanced laser systems used to adjust (trim) electronic
circuitry and to improve the yield of semiconductor memory devices. ESI
produces high-speed test and handling equipment used in the high-volume
production of miniature capacitors. Additionally, ESI designs and
manufactures machine vision products and laser electronic packaging systems
for manufacturers of electronics and other products. ESI's products enable
these manufacturers to reduce production costs, increase yields and improve
the quality of their products. ESI's customers include manufacturers of:
wireless telecommunication products (Ericsson, Motorola and Siemens);
automotive electronics (Bosch, Delco, Ford, Nippon-Denso and Siemens);
miniature capacitors (Kemet, Kyocera/AVX, Murata, Philips, Samsung and TDK)
and semiconductor memory devices (Fujitsu, Hitachi, Hyundai, IBM, Samsung
and Texas Instruments). See "Information Concerning ESI."
ESI's executive offices are located at 13900 NW Science Park
Drive, Portland, OR 97229 and its telephone number is (503) 641-4141.
APPLIED INTELLIGENT SYSTEMS, INC.
AISI provides electronics manufacturers with machine vision
solutions for automated process control and visual inspection for the
assembly of computer chips and electronic printed circuit boards. AISI
offers a unique, low cost computer architecture, easy-to-use software
development tools, and powerful application software which emulates the
human thought process. AISI's vision computers are configurable with a
chain of multiple computer processors working simultaneously. Neural
network software uses this increased capability to perform billions of
calculations per second, analyzing an image as if the vision system were a
human brain. AISI markets its products through direct sales, sales
representatives, and value added resellers in North America, Europe, and
Asia. Significant customers include: Intel, Kulicke & Soffa, Motorola and
Universal Instruments in the United States; Siemens in Germany; Philips
N.V. in Holland; Canon, Japan-EM, Sanyo Silicon and Toshiba in Japan;
Haitai Electronics and Samsung in Korea; and Motorola plants in Malaysia,
Taiwan, Hong Kong and the Philippines. See "Information Concerning AISI."
AISI's executive offices are located at 110 Parkland Plaza, Ann
Arbor, Michigan 48103 and its telephone number is (313) 995-2035.
AISI MERGER CORP.
Merger Corp. was recently organized by ESI for the purpose of effecting
the acquisition of AISI. It has no material assets and has not engaged in any
activities except in connection with the Merger. Its executive offices are
1
<PAGE>
located at 13900 NW Science Park Drive, Portland, Oregon 97229-5497. Its
telephone number at that address is (503) 641-4141.
THE MERGER
As a result of the proposed Merger, AISI will be merged with and
into Merger Corp. and thereby become a wholly-owned subsidiary of ESI. Each
outstanding share of AISI Common Stock will be converted into the right to
receive a number of shares of ESI Common Stock that corresponds to the
Conversion Ratio. See "The Merger Agreement--Conversion of Shares" and "The
Merger Agreement--Corporate Structure and Related Matters After the
Merger."
The terms and provisions of all outstanding AISI stock options
(the "Options") will continue in full force and effect following the
Merger. At the Effective Time, each Option will be assumed by ESI and will
be converted into an option to purchase ESI Common Stock after giving
effect to the Conversion Ratio. The exercise price per share will also be
redetermined based upon the Conversion Ratio. If all outstanding AISI
Options were to be exercised after the Merger, the aggregate proceeds to
ESI from such exercise would be approximately $4 million. The term,
exercisability, vesting schedule, status as an "Incentive Stock Option"
under Section 422 of the Code, if applicable, and all other terms and
conditions of the Options will to the extent permitted by law and otherwise
reasonably practicable be unchanged. See "The Merger Agreement--Treatment
of AISI Stock Options."
Shares of ESI Common Stock received by "affiliates" of AISI in the
proposed Merger will be subject to certain resale restrictions under
applicable accounting rules and securities laws. See "The Merger Agreement--
Resale of ESI Common Stock by Affiliates."
EFFECTIVE TIME OF THE MERGER
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, the parties thereto will file
certificates of merger with the Secretaries of State of each of Oregon and
Michigan. The merger will become effective at the time of the later of
those filings (the "Effective Time"). It is anticipated that the Merger
will occur in July or August, 1996.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction of a
number of conditions, including but not limited to (i) expiration or
termination of the Hart-Scott-Rodino Act waiting period described at
"Regulatory Matters" below; (ii) listing of up to 3,000,000 shares of ESI
Common Stock issued in connection with the Merger in the Nasdaq National
Market; (iii) the absence of any restrictive court orders or any other
legal restraints or prohibitions, and of any pending governmental
proceedings, preventing or making illegal the consummation of the Merger;
(iv) the continuing accuracy of the representations and warranties made in
the Merger Agreement on and as of the Effective Time (except those limited
by their terms to a different date) and (v) the receipt by ESI and AISI of
certain opinions regarding tax and accounting matters. See "The Merger
Agreement--Conditions to the Merger."
AISI has agreed that it will not encourage, initiate or solicit
alternative acquisition proposals, subject to the exercise of AISI director's
fiduciary duties. See "The Merger Agreement--Nonsolicitation of Alternative
Transactions."
2
<PAGE>
INDEMNITY AND ESCROW AGREEMENT
The Merger Agreement provides for a limited indemnification of ESI
and Merger Corp. by each AISI shareholder against damages resulting from
breach of AISI representations, warranties and covenants under the Merger
Agreement.
Pursuant to an escrow agreement (the "Escrow Agreement"), 10
percent of each AISI shareholder's shares of ESI Common Stock to be
received in the Merger, rounded down to the nearest full share, will be
delivered to an escrow agent (the "Escrow Agent") and be subject to the
terms of the escrow described in the Escrow Agreement (the "Escrow").
Claims on the Escrow are subject to amount and timing limitations,
including, among others, the requirement that AISI balance sheet reserves
must be used before any claim on the Escrow may be made.
In no event will any AISI shareholder have any liability in excess
of shares held in the Escrow.
Three persons will be appointed to act on behalf of all AISI
shareholders in connection with the Escrow (the "Shareholder
Representatives") and will be signatories to the Escrow Agreement. See "The
Merger Agreement--Indemnity and Escrow Agreement."
TERMINATION; BREAKUP FEES
The Merger Agreement may be terminated and the Merger may be
abandoned prior to the Effective Time, under the circumstances specified in
the Merger Agreement, including by mutual written agreement of ESI and AISI
and by either party if the Merger is not consummated by October 1, 1996.
Under certain termination circumstances, a breakup fee of $3 million is
payable by the terminating party. See "The Merger Agreement--Termination;
Breakup Fees."
THE ESI SPECIAL MEETING
The ESI Special Meeting will be held on July 30, 1996 at 10 a.m.,
local time, at 14000 NW Science Park Drive, Portland, Oregon, 97229-5497.
At the ESI Special Meeting, the shareholders of ESI will consider
and vote upon the issuance of up to 3,000,000 shares of ESI Common Stock to
be issued as merger consideration in connection with the Merger and such
other business as may properly come before the ESI Special Meeting or any
adjournments or postponements thereof. Of the 3,000,000 shares of ESI
Common Stock to be issued in connection with the Merger, approximately
2,350,000 shares will be issued upon conversion of the outstanding shares
of AISI Common Stock pursuant to the Merger Agreement, and approximately
650,000 shares will be issuable upon exercise of outstanding AISI Options.
ESI shareholder approval is required by ESI as a Nasdaq National
Market issuer. Pursuant to Nasdaq National Market listing rules,
shareholder approval is required by Nasdaq National Market issuers for,
among other things, issuance of common stock in connection with an
acquisition of the stock or assets of another company, if the newly issued
common stock (i) has or will have voting power equal to or in excess of 20%
of the voting power outstanding before the issuance or (ii) will be equal
to or in excess of 20% of the total number of shares of common stock before
the issuance. ESI shareholder approval is not required for the Merger
Agreement or the Merger under its corporate governance documents or the
Oregon Business Corporation Act. See "The ESI Special Shareholders
Meeting--Matters to be Considered at the ESI Special Meeting."
3
<PAGE>
The close of business on June 18, 1996 is the record date for
determination of holders of ESI Common Stock entitled to vote at the ESI
Special Meeting. As of that date, there were 8,656,726 shares of ESI
Common Stock outstanding and entitled to vote. See "The ESI Special
Shareholders Meeting--Record Date; Voting at the Special Meeting; Vote
Required."
Approval of the issuance of up to 3,000,000 shares of ESI Common
Stock in connection with the Merger, as well as any other matters which may
properly come before the meeting, will require the affirmative vote of the
holders of a majority of the shares of ESI Common Stock present (in person
or by proxy) at the ESI Special Meeting and entitled to vote thereon. As of
May 31, 1996, directors and executive officers of ESI and their affiliates
may be deemed to beneficially own approximately 3.0% of the outstanding
shares of ESI Common Stock. See "The ESI Special Shareholders
Meeting--Record Date; Voting at the Special Meeting; Vote Required;
Proxies."
ABSTENTIONS AND BROKER NON-VOTES WILL NOT BE COUNTED, BUT WILL HAVE THE
PRACTICAL EFFECT OF A VOTE AGAINST THE PROPOSAL SINCE THEY REPRESENT ONE LESS
VOTE FOR APPROVAL.
AISI SHAREHOLDERS WRITTEN CONSENT
Approval of the Merger by AISI shareholders will be obtained by the
written consent of the holders of at least a majority of the AISI Common
Stock. See "AISI Shareholders Written Consent" and "AISI Voting Securities
and Principal Shareholders."
APPRAISAL RIGHTS
ESI SHAREHOLDERS
ESI shareholders will not have dissent and appraisal rights as a
result the Merger or the issuance of the additional shares of ESI Common
Stock in connection with the Merger.
AISI SHAREHOLDERS
Any AISI shareholder who does not execute the written consent of
AISI shareholders approving the Merger has the right, pursuant to Sections
761 through 774 of the Michigan Business Corporation Act ("MBCA"), to
demand payment from AISI of the fair value of his shares in lieu of
converting such shares into ESI Common Stock. Strict compliance with the
procedures set forth in the statute is required. See "The Merger--Appraisal
Rights--AISI Shareholders."
REASONS FOR THE MERGER
ESI'S REASONS FOR THE MERGER
The Merger is expected to add to ESI's ability to serve the
expanding capital equipment needs of its global, multi-national customers
in the electronics industry. The Merger also offers the possibility of
achieving operating efficiencies through elimination of duplicate efforts
and avoidance of expected investments in research and development and in
sales and distribution channels that would occur if the businesses of the
two companies were not combined. See "The Merger--Reasons for the
Merger--ESI's Reasons for the Merger."
4
<PAGE>
AISI'S REASONS FOR THE MERGER
After exploring various other strategic alternatives, including an
initial public offering, AISI concluded that a sale of AISI to ESI would
provide market liquidity and would offer the greatest potential for
achieving long-term value for AISI Shareholders. See "The Merger--Reasons
for the Merger--AISI's Reasons for the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
It is expected that James E. Anderson, President and Chief
Executive Officer of AISI, will serve as an executive officer of ESI
following the Merger. It is also expected that Robert D. Pavey, Chairman of
the Board of Directors of AISI, will be appointed to the Board of Directors
of ESI. Vesting of options granted to AISI officers and employees will be
partially accelerated as a result of the Merger. See "The Merger--Interests
of Certain Persons in the Merger; Certain Compensation Matters."
SURRENDER OF CERTIFICATES
If the Merger becomes effective, ESI will cause First Chicago
Trust Company of New York (the "Transfer Agent") to mail a letter of
transmittal (the "Letter of Transmittal") and other documents, with
instructions to all holders of record of AISI Common Stock as of the
Effective Time for use in surrendering their stock certificates in exchange
for certificates representing ESI Common Stock and a cash payment in lieu
of fractional shares.
The Letter of Transmittal will provide for, among other things,
transmittal of each holder of record's shares of AISI Common Stock to the
Transfer Agent, agreement to the indemnification provisions contained in
the Merger Agreement, agreement to the terms of the Escrow Agreement,
including the escrow of shares of ESI Common Stock on behalf of such
shareholder and the appointment of the Shareholder Representatives. See
"The Merger Agreement--Conversion of Shares" and "The Merger
Agreement--Indemnification and Escrow Agreement."
The other documents with the Letter of Transmittal will include
stock powers to be endorsed in blank by each AISI shareholder with respect
to the shares of ESI Common Stock to be held pursuant to the Escrow
Agreement on behalf of such shareholder.
CERTIFICATES SHOULD NOT BE SURRENDERED BY AISI SHAREHOLDERS UNTIL
THE LETTER OF TRANSMITTAL AND OTHER DOCUMENTS DESCRIBED ABOVE HAVE BEEN
RECEIVED.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a pooling of interests.
See "The Merger--Accounting Treatment."
As a condition to the Merger, each of ESI and AISI will have received
the opinion of Arthur Andersen LLP, independent public accountants, to the
effect that the Merger will qualify for pooling of interests accounting. See
"The Merger Agreement--Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
5
<PAGE>
As a reorganization, holders of AISI Common Stock would not recognize gain or
loss for federal income tax purposes by reason of the conversion of AISI
Common Stock to ESI Common Stock, except for cash received in lieu of
fractional shares. See "The Merger--Certain U.S. Federal Income Tax
Consequences."
The Merger will not have any tax consequences to the shareholders
of ESI.
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder by the United
States Federal Trade Commission (the "FTC"), the Merger may not be
consummated until notifications have been given and certain information has
been furnished to the FTC and the Antitrust Division of the United States
Justice Department (the "Antitrust Division"), and the specified waiting
period has expired. The applicable waiting period under the HSR Act expired
on June 22, 1996. See "The Merger--Regulatory Matters."
6
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED, IN ADDITION
TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS/PROXY-INFORMATION
STATEMENT. THIS PROSPECTUS/PROXY-INFORMATION STATEMENT CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. ESI'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF SUCH RISKS AND UNCERTAINTIES,
INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN
THIS PROSPECTUS/PROXY-INFORMATION STATEMENT.
UNCERTAINTIES RELATED TO THE INTEGRATION OF AISI'S BUSINESS
The successful combination of companies in the high technology
industry may be more difficult to accomplish than in other industries.
There can be no assurance that ESI will be successful in integrating its
own distribution channels with those of AISI, that ESI will be successful
in coordinating the activities of the AISI and ESI sales forces or in
selling AISI's products to ESI's customer base, in integrating AISI into
ESI's management information systems or integrating AISI's technology so
that it can be fully utilized by ESI. There can be no assurance that ESI
can effectively integrate AISI into ESI's operations.
UNCERTAINTIES RELATED TO COMBINED OPERATIONS AFTER THE MERGER
While the acquisition of AISI by ESI offers the possibility of
achieving operating efficiencies, it also entails the diversion of
management's attention to the assimilation of operations and personnel of
AISI, which might have possible adverse short-term effects on ESI's
operating results. There can be no assurance that the combined companies
will retain their respective key personnel or customers, the same volume of
business from such customers, or that ESI will realize any of the potential
benefits of the Merger.
ELECTRONICS INDUSTRY DOWNTURNS MAY ADVERSELY AFFECT OPERATING RESULTS
ESI's business depends in large part upon the capital expenditures
of manufacturers of electronic devices, including miniature capacitors and
semiconductor memory devices, and circuits used in wireless
telecommunications equipment, including pagers and cellular phones,
automotive electronics, and computers. The markets for products
manufactured by ESI's customers are highly cyclical and have historically
experienced periodic downturns, which often have had a severe effect on the
demand for capital equipment such as that sold by ESI. There is no
assurance that these markets would not experience downturns in the future
or that such downturns would not have a material adverse effect on ESI's
operating results.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND
PRODUCT ENHANCEMENTS
The market for ESI's products is characterized by rapidly changing
technology and evolving industry standards. There can be no assurance that
ESI's current technology base will continue to address current and evolving
customer needs. ESI believes that its future success will depend on its
ability to develop and manufacture new products and product enhancements
and to introduce them successfully into the market. Failure to do so in a
timely fashion could harm ESI's competitive position. The announcements or
introductions of new products by ESI or its competitors may adversely
affect ESI's operating results, since these announcements or introductions
may cause
7
<PAGE>
customers to defer or forego ordering products from ESI's existing product
lines.
VARIABILITY OF QUARTERLY OPERATING RESULTS
ESI has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results due to a
variety of factors, including the timing of new product announcements and
releases by ESI and its competitors, market acceptance of new and enhanced
versions of ESI's products, timing and shipment of significant orders, mix
of products sold, customer cancellations or shipment delay, production
delays, exchange rate fluctuations, management decisions to commence or
discontinue products, length of sales cycles and cyclicality in the
electronics industry.
ESI derives a substantial portion of its net sales from the sale
of a relatively small number of systems, which typically range in price
from $150,000 to over $1 million. As a result, the timing of a single
transaction could have a significant impact on ESI's quarterly net sales
and operating results.
ESI's backlog at the beginning of a quarter does not include all
orders needed to achieve ESI's sales objectives for that quarter.
Consequently, ESI's net sales and operating results for a quarter will
depend upon ESI generating orders to be shipped in the same quarter that
the order is received. Furthermore, a substantial portion of ESI's net
sales has historically been realized near the end of each quarter.
Accordingly, the failure to receive anticipated orders or delays in
shipments near the end of a particular quarter, due, for example, to
unanticipated shipment reschedulings or cancellations by customers or
unexpected manufacturing difficulties, may cause net sales in a particular
quarter to fall significantly below ESI's expectations, which would have a
material adverse effect on ESI's operating results for such quarter.
The need for continued expenditures for research and development,
capital equipment and worldwide customer service and support would make it
difficult for ESI to reduce its expenses in a particular quarter if ESI's
sales goals for such quarter are not met. Accordingly, there can be no
assurance that ESI will not sustain losses in future quarters.
COMPETITION
The electronics capital equipment industry is highly competitive.
In each of the markets it serves, ESI faces substantial competition from
established competitors, some of which have greater financial, engineering,
manufacturing and marketing resources than ESI. In addition, many of ESI's
customers are in effect competitors of ESI because they have developed, or
have the ability to develop, manufacturing equipment for internal use.
ESI's competitors in each product area can be expected to continue to
improve the design and performance of their products and to introduce new
products with competitive price/performance characteristics. Competitive
pressures, including systems development efforts by certain of ESI's
customers, often necessitate price reductions which can adversely affect
operating results. Although ESI believes that it has certain technical and
other advantages over its competitors, maintaining such advantages will
require a continued high level of investment by ESI in research and
development and sales and marketing. There can be no assurance that ESI
will have sufficient resources to continue to make such investments or that
ESI will be able to make the technological advances necessary to maintain
such competitive advantages. See "Information Concerning ESI--Competition."
8
<PAGE>
PATENTS AND OTHER INTELLECTUAL PROPERTY
ESI's success depends in part on its proprietary technology. While
ESI attempts to protect its proprietary technology through patents,
copyrights and trade secrets, it believes that its success will depend
largely upon continued innovation and technological expertise. There can be
no assurance that ESI will be able to protect its technology or that
competitors will not be able to develop similar technology independently.
No assurance can be given that the claims allowed on any patents held by
ESI will be sufficiently broad to protect ESI's technology. In addition, no
assurance can be given that any patents issued to ESI will not be
challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to ESI.
In addition, ESI and its customers from time to time receive
letters from third parties, including some of ESI's competitors, alleging
infringement of such parties' patent rights by ESI's products. While such
letters are prevalent in ESI's industry and ESI has in the past been able
to license necessary patents or technology on commercially reasonable
terms, there can be no assurance that ESI would prevail in any litigation
seeking damages or expenses from ESI or to enjoin ESI from selling its
products on the basis of such alleged infringement, or that ESI would be
able to license any valid and infringed patents on reasonable terms.
Some customers using certain products of ESI have received a
notice of infringement from Jerome H. Lemelson, alleging that equipment
used in the manufacture of electronic devices infringes patents issued to
Mr. Lemelson relating to "machine vision" or "barcode reader" technologies.
Certain of these customers are engaged in litigation with Mr. Lemelson and,
together with certain other customers, have notified ESI that they may be
seeking indemnification from ESI for any damages and expenses resulting
from this matter. One of ESI's customers has settled its litigation with
Mr. Lemelson, and several other customers are currently engaged in
litigation involving Mr. Lemelson's patents. ESI cannot predict the outcome
of this or similar litigation or its effect upon ESI, and there can be no
assurance that any such litigation or claim would not have a material
adverse effect upon ESI's financial condition or results of operations. See
"Information Concerning ESI--Patents and Other Intellectual Property."
FLUCTUATIONS IN INTERNATIONAL SALES AND CURRENCY EXCHANGE RATES CAN ADVERSELY
AFFECT RESULTS
International sales accounted for 57.3%, 54.7%, 70.9% and 66.3% of
ESI's net sales for fiscal years ended May 31, 1993, 1994 and 1995 and the
nine months ended February 29, 1996, respectively. ESI expects that
international sales will continue to represent a significant percentage of
net sales in the future. As a result, a significant portion of ESI's sales
will be subject to certain risks, including changes in demand resulting
from fluctuations in interest and currency exchange rates, as well as by
factors such as the risk of government financed competition, changes in
trade policies, tariff regulations, difficulties in obtaining U.S. export
licenses and the difficulties of staffing and managing foreign operations.
See "Information Concerning ESI--Sales, Marketing and Service."
DEPENDENCE ON KEY EMPLOYEES
The future success of ESI is dependent, in part, on its ability to
retain certain key personnel. ESI also needs to attract additional skilled
personnel in many areas of its business to continue to grow. There can be
no assurance that ESI will be able to retain its existing personnel or
attract additional qualified employees in the future.
9
<PAGE>
DEPENDENCE ON SUPPLIERS
Certain of the components included in ESI's systems are obtained
from a single source or a limited group of suppliers. Although ESI seeks to
reduce dependence on those sole and limited source suppliers, the partial
or complete loss of certain of these sources could have at least a
temporary adverse effect on ESI's results of operations and damage customer
relationships. Further, a significant increase in the price of one or more
of these components could adversely affect ESI's results of operations. See
"Information Concerning ESI--Manufacturing and Supply."
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial data presented below should be read in
conjunction with the financial statements and the notes thereto
incorporated by reference for ESI and included elsewhere in this
Prospectus/Proxy-Information Statement for AISI.
ESI SELECTED HISTORICAL FINANCIAL INFORMATION. The consolidated
statement of operations data set forth below for the fiscal years ended May
31, 1993, 1994 and 1995 and the consolidated balance sheet information as
of May 31, 1994 and 1995 have been derived from the audited Consolidated
Financial Statements and Notes thereto incorporated by reference in this
Prospectus/Proxy-Information Statement. The consolidated statement of
operations data for the fiscal years ended May 31, 1991 and 1992 and the
consolidated balance sheet information as of May 31, 1991, 1992 and 1993
are derived from audited consolidated financial statements not incorporated
by reference in this Prospectus/Proxy-Information Statement. The
consolidated statement of operations data for the nine-month periods ended
February 28, 1995 and February 29, 1996 and the consolidated balance sheet
data as of February 29, 1996 have been derived from unaudited consolidated
financial statements of ESI also incorporated by reference in this
Prospectus/Proxy-Information Statement. In the opinion of management, such
unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements referred to above
and include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position of ESI and the
results of operations for the indicated periods. Operating results for the
nine months ended February 29, 1996 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending May 31,
1996.
<TABLE>
<CAPTION>
ESI
FISCAL YEAR ENDED MAY 31 NINE MONTHS ENDED
-------------------------- ------------------
FEBRUARY 28, FEBRUARY 29,
1991 1992 1993 1994(1) 1995 1995 1996
---- ---- ---- ------- ---- ---- ----
(UNAUDITED)
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Net Sales
<S> <C> <C> <C> <C> <C> <C> <C>
Laser systems and service.... $43,263 $30,134 $36,742 $41,985 $66,045 $46,369 $77,778
Capacitor manufacturing
equipment.................... 14,569 18,206 20,393 23,961 39,115 26,290 38,393
Vision systems............... -- 1,523 2,736 2,562 3,055 2,548 2,266
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
ESI
FISCAL YEAR ENDED MAY 31 NINE MONTHS ENDED
-------------------------- ------------------
FEBRUARY 28, FEBRUARY 29,
1991 1992 1993 1994(1) 1995 1995 1996
---- ---- ---- ------- ---- ---- ----
(UNAUDITED)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data
Divested product lines....... 8,845 8,307 7,980 4,042 -- -- --
------- ------- ------- ------- -------- -------- --------
Total........................ 66,677 58,170 67,851 72,550 108,215 75,207 118,437
Cost of sales.................... 34,345 33,308 36,141 35,838 51,413 35,412 54,524
------- ------- ------- ------- ------- ------- -------
Gross margin..................... 32,332 24,862 31,710 36,712 56,802 39,795 63,913
Operating expenses:
Selling, service and
administrative............... 22,557 22,070 19,189 20,049 27,635 19,726 29,705
Research, development and
engineering.................. 8,984 9,224 9,027 8,235 13,108 8,773 11,905
Acquired in-process research
and development(2)........... -- -- -- -- -- -- 6,000
------- -------- -------- -------- -------- -------- -------
Total operating expenses..... 31,541 31,294 28,216 28,284 40,743 28,499 47,610
------- ------- ------- -------- ------- ------- -------
Operating income (loss).......... 791 (6,432) 3,494 8,428 16,059 11,296 16,303
Interest income (expense) ....... (1,256) (964) (771) (557) 608 393 879
Other income (expense)........... 1,519 533 (108) 2,081 (210) (333) (291)
------- ------- -------- ------- -------- --------- ---------
Income (loss) before income
taxes............................ 1,054 (6,863) 2,615 9,952 16,457 11,356 16,891
Provision (benefit) for income
taxes............................ 191 (741) 371 2,078 4,940 3,397 6,226
------- -------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations....................... 863 (6,122) 2,244 7,874 11,517 7,959 10,665
Income from discontinued
operations after income taxes.... 330 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- -------
Net income (loss)................ $1,193 $(6,122) $2,244 $7,874 $11,517 $7,959 $10,665
====== ======= ====== ====== ======= ====== =======
Net income (loss) per share:
From continuing operations... $0.14 $(1.00) $0.37 $1.23 $1.53 $1.10 $1.24
From discontinued
operations................... $0.06 -- -- -- -- -- --
----- -------- -------- -------- -------- -------- --------
Net income (loss) per share...... $0.20 $(1.00) $0.37 $1.23 $1.53 $1.10 $1.24
===== ====== ===== ===== ===== ===== =====
Number of shares used in
computing per share
amounts...................... 6,096 6,095 6,146 6,414 7,510 7,238 8,593
====== ====== ====== ====== ===== ===== ======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MAY 31 FEBRUARY 29,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
CONSOLIDATED BALANCE SHEET (In thousands) (UNAUDITED)
DATA
<S> <C> <C> <C> <C> <C> <C>
Working capital............... $33,110 $23,739 $28,883 $36,247 $76,089 $89,211
Total assets.................. 68,692 58,536 61,161 62,366 110,598 129,997
Long-term debt, including
current portion............... 7,775 7,496 7,126 768 -- --
Shareholders' equity(3)....... 47,281 41,533 43,950 53,547 94,444 111,258
- ---------------
<FN>
(1) During the second quarter of fiscal year 1994, ESI sold the product
lines and certain assets of the MSI Material Division of its wholly-
owned subsidiary Palomar Systems, Inc., to Ferro Corporation of
Cleveland, Ohio. The proceeds of $4,000 were received in cash and the
funds were used to reduce the current portion of long term debt and
other short term debt. A gain of $2,100 from the sale of these product
lines was reflected in other income.
(2) For the nine months ended February 29, 1996, the acquired in-process
research and development expense of $6,000 was incurred in connection
with the purchase price of XRL, Inc. ESI obtained an appraisal of the
intangible assets which indicated that substantially all of the acquired
intangible assets consisted of research and development in process. In
accordance with generally accepted accounting principles, the acquired
in-process research and development was expensed during the first
quarter ended August 31, 1995.
(3) ESI has not paid cash dividends for any of the periods presented.
</FN>
</TABLE>
AISI SELECTED HISTORICAL FINANCIAL INFORMATION. The income
statement data for the years ended December 31, 1993, 1994 and 1995, and
the balance sheet data at December 31, 1994 and 1995 are derived from the
audited financial statements included elsewhere in this
Prospectus/Proxy-Information Statement. The income statement data for the
years ended December 31, 1991 and 1992, and the balance sheet data at
December 31, 1991, 1992 and 1993, are derived from audited financial
statements not included herein. The income statement data for the three
months ended March 31, 1995 and 1996 and the balance sheet data at March
31, 1996 are derived from unaudited financial statements that are included
elsewhere in this Prospectus/Proxy-Information Statement and that include,
in the opinion of management of AISI, all adjustments, consisting only of
normal, recurring adjustments, necessary for a fair presentation of the
information set forth therein. The income statement data for the three
months ended March 31, 1996 is not necessarily indicative of future
results.
12
<PAGE>
<TABLE>
<CAPTION>
AISI THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ---------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Income Statement Data: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................................... $6,174 $7,012 $10,763 $14,804 $22,579 $4,308 $5,964
Cost of vision system sales............. 2,153 2,356 3,506 5,337 9,959 1,818 2,933
----- ----- ----- ----- ----- ----- -----
Gross margin ........................... 4,021 4,656 7,257 9,467 12,620 2,490 3,031
----- ----- ----- ----- ------ ----- -----
Operating expenses:
Selling, service and administrative 1,938 2,199 3,191 4,027 4,711 1,050 1,116
Research, development and
engineering....................... 1,668 2,025 2,906 3,996 4,513 1,193 1,183
----- ----- ----- ----- ----- ----- -----
Total operating expenses........... 3,606 4,224 6,097 8,023 9,224 2,243 2,299
----- ----- ----- ----- ----- ----- -----
Operating income........................ 415 432 1,160 1,444 3,396 247 732
Other income (expense), net............. (23) (18) (67) 159(1) (95) (15) 16
----
Income before provision for income
taxes................................... 392 414 1,093 1,603 3,301 232 748
Provision for income taxes.............. -- -- 15 93 437 22 53
------- ------- ------ ------- ------- ------- -------
Net income.............................. $ 392 $ 414 $ 1,078 $ 1,510 $ 2,864 $ 210 $ 695
===== ===== ====== ====== ====== ====== ======
Net income per share.................... $ 0.11 $ 0.11 $ 0.29 $ 0.40 $ 0.70 $ 0.05 $ 0.17
===== ===== ====== ====== ====== ====== ======
Number of shares used in computing per
share amounts........................... 3,504 3,664 3,673 3,820 4,121 4,077 4,150
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, March 31,
------------ ---------
Balance Sheet Data: 1991 1992 1993 1994 1995 1996
- ------------------- ---- ---- ---- ---- ---- ----
(In thousands) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Working capital............................ $ 655 $ 528 $1,252 $2,188 $4,524 $4,943
Total assets............................... 1,965 2,765 5,057 8,286 11,675 11,949
Long-term capital lease obligations,
including current portion.................. -- -- -- -- 188 171
Shareholders' equity....................... 1,065 1,484 2,583 4,210 6,794 7,489
<FN>
(1) Includes $229 gain from insurance proceeds on equipment theft.
</FN>
</TABLE>
13
<PAGE>
UNAUDITED SELECTED PRO FORMA FINANCIAL INFORMATION(1)
THE PRO FORMA INFORMATION BELOW IS UNAUDITED AND PRESENTED FOR
ILLUSTRATIVE PURPOSES ONLY. THE INFORMATION PRESENTED BELOW IS NOT
NECESSARILY INDICATIVE OF THE RESULTS OR FINANCIAL POSITION THAT ACTUALLY
WOULD HAVE BEEN OBTAINED IF THE MERGER HAD BEEN CONSUMMATED, NOR IS IT
NECESSARILY INDICATIVE OF FUTURE OPERATING RESULTS OR FINANCIAL POSITION.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31 NINE MONTHS ENDED
-------------------------- -----------------
FEBRUARY 29,
1993 1994 1995 1996
---- ---- ---- ----
(In thousands, except per share data)
PRO FORMA CONSOLIDATED STATEMENTS
OF INCOME
Net Sales...............................
<S> <C> <C> <C> <C>
Laser systems and service........... $36,742 $41,985 $69,106 $77,778
Capacitor manufacturing equipment .. 20,393 23,961 39,115 38,393
Vision systems...................... 10,173 14,555 18,991 20,537
Divested product lines.............. 7,980 4,042 -- --
------- ------- --------- ---------
PRO FORMA CONSOLIDATED STATEMENTS
OF INCOME
Total............................... 75,288 84,543 127,212 136,708
Cost of sales........................... 38,643 39,745 59,366 62,665
-------- ------- ------- -------
Gross margin............................ 36,645 44,798 67,846 74,043
Operating expenses:
Selling, service and administrative 21,508 23,501 33,490 33,351
Research, development and
engineering......................... 11,201 11,410 17,642 15,224
Acquired in-process research and
development......................... -- -- -- 6,000
--------- --------- --------- -------
Total operating expenses............ 32,709 34,911 51,132 54,575
------ ------ ------ ------
Operating income........................ 3,936 9,887 16,714 19,468
Interest income (expense)............... (794) (631) 532 821
Other income (expense).................. (108) 2,081 21 (313)
-------- -------- --------- ---------
Income before income taxes.............. 3,034 11,337 17,267 19,976
Provision for income taxes.............. 371 2,093 4,757 5,907
------- ------- ------- -------
Net income.............................. $ 2,663 $ 9,224 $ 12,510 $ 14,069
======== ======== ======== ========
Net income per share.................... $ 0.32 $ 1.04 $ 1.24 $ 1.26
Number of shares used in computing
per share amounts................... 8,447 8,868 10,093 11,187
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
MAY 31 FEBRUARY 29,
-------- ------------
1993 1994 1995 1996
---- ---- ---- ----
(In thousands)
PRO FORMA CONSOLIDATED BALANCE
SHEET DATA
<S> <C> <C> <C> <C>
Working capital......................... $29,345 $37,604 $ 78,448 $ 94,485
Total assets............................ 64,123 68,403 118,621 142,422
Long-term obligations, including
current portion......................... 7,126 768 -- 188
Shareholders' equity.................... 45,447 56,439 98,489 118,802
<FN>
(1) Pro forma information is based on combined ESI and AISI after giving
effect to the proposed Merger on a pooling of interests accounting
basis, assuming the Merger had been effective during all periods
presented above. See "Unaudited Pro Forma Combined Financial
Statements."
</FN>
</TABLE>
15
<PAGE>
EQUIVALENT PER COMMON SHARE DATA
The following table sets forth selected historical per common
share data for ESI and AISI, pro forma data per share of ESI Common Stock,
and equivalent pro forma data per share of AISI Common Stock after giving
effect to the proposed Merger on a pooling-of-interests accounting basis,
assuming the Merger had been effective during all the periods presented.
The pro forma equivalent data for AISI are based on the historical amounts
per share, multiplied by the Conversion Ratio. The data should be read in
conjunction with the consolidated financial statements and notes thereto
and other financial information with respect to ESI and AISI incorporated
by reference into or set forth elsewhere in this
Prospectus/Proxy-Information Statement, and such data are qualified in
their entirety by reference thereto. See "Incorporation of Certain
Documents by Reference" and "Unaudited Pro Forma Combined Financial
Statements."
<TABLE>
<CAPTION>
MAY 31 FEBRUARY 29,
-------- ------------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
ESI COMMON STOCK(1)...............................
Net Income per share:(2)
Historical.................................... $0.37 $1.23 $ 1.53 $ 1.24
Pro forma combined............................ 0.32 1.04 1.24 1.26
Book value per share at period-end(3):
Historical.................................... 11.28 12.88
Pro forma combined............................ 9.30 10.94
AISI COMMON STOCK(1)..............................
Net income per share:(2)..........................
Historical.................................... 0.11 0.38 0.38 0.64
Pro forma equivalent.......................... 0.18 0.56 0.57 1.02
Book value per share at period-end(3).............
Historical.................................... 1.30 1.97
Pro forma equivalent.......................... 2.01 3.05
<FN>
(1) Neither ESI nor AISI paid any cash dividends for any of the periods
presented.
(2) Represents the 12 months ended May 31 and nine months ended
February 29, 1996 for ESI combined with the twelve months ended
March 31 and nine months ended December 31, 1995 for AISI.
(3) Included for specified periods (as of May 31 and February 29 for
ESI and as of March 31 and December 31 for AISI) only in
accordance with SEC rules.
</FN>
</TABLE>
16
<PAGE>
MARKET AND MARKET PRICES
FOR COMMON STOCK
ESI Common Stock is traded on the Nasdaq National Market under the
symbol "ESIO." The information presented in the table below represents the
high and low sales prices per share for ESI Common Stock for the periods
indicated. On May 13, 1996, the last full trading day prior to public
announcement of the Merger, the last sale price for ESI Common Stock was
$22.50, and on June 18, 1996, the most recent practicable date prior to the
date of this Prospectus/Proxy-Information Statement, the last sale price
for ESI Common Stock was $23. Following the Merger, ESI Common Stock will
continue to be traded on the Nasdaq National Market.
There is no established public trading market for AISI Common
Stock.
Fiscal
Year ESI COMMON STOCK
---- ----------------
1994 High Low
First Quarter................................ $14-3/4 $9-1/8
Second Quarter............................... 17 10-3/4
Third Quarter................................ 15-1/2 12-1/2
Fourth Quarter............................... 16 9-1/4
1995
First Quarter................................ 13-3/4 8-5/8
Second Quarter............................... 20-1/4 12-1/4
Third Quarter................................ 23-1/4 17-1/2
Fourth Quarter............................... 29-5/8 18-3/4
1996
First Quarter................................ 39-3/4 24-5/8
Second Quarter............................... 41-1/2 24-1/2
Third Quarter................................ 30-1/2 18-3/4
Fourth Quarter............................... 27-5/8 16-3/4
ESI has not paid any cash dividends on ESI Common Stock during the
last five fiscal years. ESI intends to retain its earnings for its business
and does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future.
AISI has never paid any cash dividends on AISI Common Stock and
has no intention of paying cash dividends in the foreseeable future.
AISI SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS
FOR ESI COMMON STOCK. NO ASSURANCE CAN BE GIVEN CONCERNING THE MARKET PRICE
FOR ESI COMMON STOCK BEFORE OR AFTER THE DATE ON WHICH THE MERGER IS
CONSUMMATED. THE MARKET PRICE FOR ESI COMMON STOCK WILL FLUCTUATE BETWEEN
THE DATE OF THIS PROSPECTUS/PROXY-INFORMATION STATEMENT AND THE DATE ON
WHICH THE MERGER IS CONSUMMATED AND THEREAFTER.
THE ESI SPECIAL SHAREHOLDERS MEETING
GENERAL; DATE, TIME AND PLACE OF MEETING
This Prospectus/Proxy-Information Statement is being furnished to
holders of ESI Common Stock in connection with the solicitation of proxies
by the ESI Board for use at the ESI Special Meeting to be held at 14000 NW
Science Park Drive, Portland, Oregon, 97229-5497 at 10 a.m., local
time, on July 30, 1996, or at any adjournments or postponements thereof,
for the purposes set forth herein and in the accompanying Notice of Special
Meeting of Shareholders of ESI.
17
<PAGE>
MATTERS TO BE CONSIDERED AT THE ESI SPECIAL MEETING
At the ESI Special Meeting, shareholders of record of ESI as of
the close of business on June 18, 1996, will be asked to consider and vote
upon the issuance by ESI of up to 3,000,000 shares of ESI Common Stock as
merger consideration upon conversion of all issued and outstanding shares
of AISI Common Stock held by AISI shareholders (other than dissenting AISI
shareholders) and to be issuable upon exercise of the AISI Options, and
(ii) to transact such other business as may properly come before the ESI
Special Meeting or any postponements or adjournments thereof. Of the
3,000,000 shares of ESI Common Stock to be issued in connection with the
Merger, approximately 2,350,000 shares will be issued with respect to the
outstanding shares of AISI Common Stock, and approximately 650,000 shares
will be issuable upon exercise of outstanding AISI Options.
ESI shareholder approval is required by ESI as a Nasdaq National
Market issuer. Pursuant to Nasdaq National Market listing rules,
shareholder approval must be required by Nasdaq National Market issuers
for, among other things, issuance of common stock in connection with an
acquisition of the stock or assets of another company if the newly issued
common stock has or will have voting power equal to or in excess of 20% of
the voting power outstanding before the issuance or the number of shares to
be issued is or will be equal to or in excess of 20% of the number of
shares of common stock before the issuance. ESI shareholder approval is not
required for the Merger Agreement or the Merger under its corporate
governance documents or the Oregon Business Corporation Act.
THE ESI BOARD HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST
INTERESTS OF ESI AND ITS SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE BY THE SHAREHOLDERS OF ESI
FOR APPROVAL OF THE ISSUANCE OF UP TO 3,000,000 SHARES OF ESI COMMON STOCK
IN CONNECTION WITH THE MERGER.
RECORD DATE; VOTING AT THE ESI SPECIAL MEETING; VOTE REQUIRED
The ESI Board has fixed June 18, 1996 as the record date for
the determination of the Shareholders of ESI entitled to notice of and to
vote at the ESI Special Meeting. Only holders of record of ESI Common Stock
on the record date will be entitled to notice of and to vote at the ESI
Special Meeting. As of the record date, there were 8,656,726 shares of
ESI Common Stock outstanding and entitled to vote. Each record holder of
ESI Common Stock on the record date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter
properly submitted for the vote of the shareholders of ESI at the ESI
Special Meeting.
The presence, in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of ESI Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum
at the Special Meeting. The approval of the issuance of up to 3,000,000
shares of ESI Common Stock to be issued in connection with the Merger will
require the affirmative vote of the holders of a majority of the shares of
ESI Common Stock present (in person or by proxy) at the Special Meeting and
entitled to vote thereon.
ABSTENTIONS AND BROKER NON-VOTES WILL NOT BE COUNTED, BUT WILL HAVE THE
PRACTICAL EFFECT OF A VOTE AGAINST THE PROPOSAL SINCE THEY REPRESENT ONE LESS
VOTE FOR APPROVAL.
As of May 31, 1996, directors and executive officers of ESI and
their affiliates may be deemed to be the beneficial owners of approximately
3.0% of the outstanding shares of ESI Common Stock. Each of the directors
and executive officers of ESI has indicated an intention to vote or direct
the
18
<PAGE>
vote of all shares of ESI Common Stock over which he or she has voting
control in favor of the issuance of the ESI Common Stock.
PROXIES
This Prospectus/Proxy-Information Statement is being furnished to
holders of ESI Common Stock in connection with the solicitation of proxies
by and on behalf of the ESI Board for use at the Special Meeting.
All shares of ESI Common Stock that are entitled to vote and are
represented at the Special Meeting by properly executed proxies received
prior to or at the Special Meeting and not duly and timely revoked, will be
voted at the Special Meeting in accordance with the instructions indicated
on such proxies. If no instructions are indicated, such proxies will be
voted FOR approval of issuance of up to 3,000,000 shares of ESI Common
Stock in connection with the Merger.
If any other matters are properly presented for consideration at
the Special Meeting (or any adjournments or postponements thereof),
including, among other things, consideration of a motion to adjourn or
postpone the Special Meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the enclosed forms of proxy and voting thereunder will
have discretion to vote on such matters in accordance with their best
judgment, except that proxies voted against issuance of the additional
shares of ESI Common Stock will not be voted for any adjournment or
postponement of the Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by
the person giving it at any time before it is voted. Proxies may be revoked
by (i) filing with the Secretary of ESI at or before the taking of the vote
at the Special Meeting, a written notice of revocation bearing a later date
than the proxy, (ii) duly executing a later dated proxy relating to the
same shares and delivering it to the Secretary of ESI before taking the
vote at the Special Meeting or (iii) attending the Special Meeting and
voting in person (although attendance at the Special Meeting will not in
and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to ESI,
13900 NW Science Park Drive, Portland, Oregon, 97229-5497, Attention:
Corporate Secretary, or hand-delivered to the Corporate Secretary of ESI at
or before taking the vote at the Special Meeting.
In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of ESI in person or by
telephone, telegram or other means of communication. Such directors,
officers and employees will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees and
fiduciaries, and ESI will reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith.
AISI SHAREHOLDERS WRITTEN CONSENT
Approval of the Merger by AISI's shareholders will be by written
consent of the holders of at least a majority of the outstanding shares of
AISI Common Stock, in lieu of a shareholders meeting. Consents will be
obtained only from the five largest AISI shareholders, who hold in the
aggregate in excess of 70 percent of the outstanding shares of AISI Common
Stock. All of the five largest shareholders have voting or observer
representation on the AISI board of directors, which unanimously approved
the Merger. There will be no general solicitation of consents, and this
Prospectus/Proxy-information Statement will
19
<PAGE>
be provided to all AISI shareholders other than the five largest
shareholders solely for informational purposes. Directors, officers and
employees of AISI will communicate in person or by telephone with the five
largest AISI shareholders regarding the consents, without additional
compensation. Written consents given may be revoked until AISI obtains
written consents from the holders of at least a majority of the outstanding
shares of AISI Common Stock and the notice required by the Michigan
Business Corporation Act has been mailed to all AISI shareholders. Consents
may be revoked by duly executing a later written revocation and delivering
it to AISI, Attention: Corporate Secretary, at 110 Parkland Plaza, Ann
Arbor, MI 48103.
THE MERGER
DESCRIPTION
Under the Merger Agreement, AISI will be merged with and into AISI
Merger Corp. ("Merger Corp."), a wholly-owned subsidiary of ESI formed for
this purpose, with Merger Corp. continuing as the surviving corporation. At
the Effective Time, each outstanding share of AISI Common Stock will be
converted into the right to receive a number of shares that corresponds to
the Conversion Ratio.
BACKGROUND OF THE MERGER
ESI uses high performance machine vision in its semiconductor
yield improvement product. ESI's management has long pursued a strategy to
increase the speed and accuracy of machine vision in semiconductor yield
improvement products. Also, ESI is enhancing the value of other ESI product
lines with machine vision and creating vision products which could be sold
to other end-users and original equipment manufacturers ("OEMs").
The first step in implementing this strategy was the purchase of
certain assets of Intelledex, Inc. in June 1991. In July 1992, Donald R.
VanLuvanee, President and Chief Executive Officer, joined ESI. His
experience includes incorporating machine vision into semiconductor
assembly equipment over twenty years ago. For several years, he was the
President of Kulicke & Soffa, Inc., the most significant customer of AISI.
His experience and the previously expressed interest of ESI's Board of
Directors in developing machine vision sales caused ESI to begin to focus
in this area.
The ESI Vision Products Division integrated its machine vision
product into the ESI semiconductor yield improvement product in fiscal
1993. During fiscal 1994, ESI added key technical and sales personnel to
increase its presence in the machine vision business. In July 1995 ESI
acquired XRL, Inc., previously a competitor in the semiconductor yield
improvement market, and added additional machine vision products and
engineering personnel. In fiscal 1996, ESI purchased certain assets of
Cybernetic Systems and Automation, Inc. and hired its founders to extend
product offerings to the broader electronics industry. Cybernetic Systems
and Automation, Inc. developed and sold products to inspect and align the
solder paste applied to printed circuit boards.
The machine vision industry has grown dramatically since ESI's
Board of Directors approved the purchase of the former Intelledex assets.
Machine vision capability in general and for solutions to specific problems
is a fundamental requirement in a broad array of products used to make or
assemble semiconductor and electronic products. ESI's vision-related sales
have more than tripled from a small base since fiscal 1992; however,
penetration of OEM accounts was limited. In late fiscal 1995, ESI's
management decided to alter its general application, custom hardware focus
and to begin to create specific vision products that run as software in a
general purpose, PC-based
20
<PAGE>
environment. During fiscal 1996, ESI has concentrated its efforts on
selling those products to OEM suppliers of semiconductor and electronics
equipment. This effort has been modestly successful.
AISI also has focused on forming OEM business arrangements for the
key discrete steps in the manufacture of semiconductors and electronic
printed circuit boards. AISI uses its machine vision technology to provide
its OEM customers with well-defined competitive advantages. By selectively
focusing on key customers, AISI seeks to achieve a premium price for the
OEM's product, which allows AISI the opportunity to maximize the value of
its vision products.
AISI has long term OEM relationships with Universal Instruments,
Philips, and Kulicke & Soffa. New OEMs include Canon, Toshiba Automation,
Sanyo Silicon, Samsung Aerospace, and Haitai Electronics. In 1995, $18.7
million of systems were sold to these eight customers. Motorola, Intel,
Siemens, Samsung Electronics, Ishikawajima-Harima Heavy Industries, and
Japan E-M use AISI's systems for automating a variety of manufacturing
operations. In 1995, $3.4 million of systems were sold to these six
accounts.
In the OEM vision market, AISI is believed to be the second
largest supplier and has been increasing its market share. However, it is
considerably smaller than the market leader in total sales. The size of a
vision supplier is an issue for large OEM's and semiconductor companies,
and it is preferable for the supplier to be a public company.
Between 1981 to 1989, AISI received $23 million of equity funding.
For several years the shareholders had anticipated a merger or a public
sale of equity securities. These considerations, combined with the growth
and profitability of the past five years, and the desire of AISI's
shareholders for liquidity, resulted in the objective to either
successfully complete an initial public offering of the Company's stock or
merge AISI into a public company whereby significant operating synergies
would be created between AISI and that company.
In July 1995 and periodically through the remainder of the
calendar year Joseph L. Reinhart, Director of Business Development for ESI
and Robert D. Pavey, Chairman of the Board of AISI had discussions
regarding the combination of AISI and ESI. During these discussions Mr.
Pavey noted that AISI was examining several business and financial options
including selling the company and offering shares to the public.
Concurrently, ESI recognized its need to focus on developing electronic
industry OEM accounts and the value of a high performance machine vision
system.
In 1995, AISI chose underwriters and commenced the process for an
initial public offering of common shares. This process was postponed in
October 1995 as the shares of other technology companies began to decline
in value and the outlook for business conditions appeared to be more
uncertain than the period January to September 1995.
In November 1995, the AISI Board of Directors decided to consider
a merger with one of a few selected companies, one of which was ESI. In
December 1995, AISI contacted Barry L. Harmon, ESI's Senior Vice President
and Chief Financial Officer, to inquire about ESI's interest in merging
with AISI and asked for an expression of interest in such a merger by
mid-January 1996.
The ESI Board of Directors held a regularly scheduled meeting on
January 12, 1996 and authorized ESI's management to express a positive
response to a potential merger with AISI and to pursue preliminary due
diligence activity.
21
<PAGE>
On January 19, 1996, Mr. Harmon and Mr. Reinhart met with several
of AISI's officers in Ann Arbor, Michigan to develop a deeper understanding
of the AISI business strategy, organization, products and financial
prospects. In late January 1996, AISI asked ESI to quantify its interest in
AISI. ESI responded to this request affirmatively at the level of 3,000,000
shares of ESI Common Stock; however, no formal offer was made to merge.
In February and March 1996, Messrs. VanLuvanee, Harmon and
Reinhart met twice with members of AISI's Board of Directors. These
preliminary discussions reviewed ESI's business strategy and financial
condition and assessed the financial prospects, business philosophy,
company culture and strategic direction for both ESI and AISI. These
meetings resulted in a general belief by both parties that a merger would
potentially benefit both companies; however, no agreement was reached.
On March 13, 1996, ESI proposed the Merger and the Conversion
Ratio in a letter to AISI, subject to review by its Board of Directors and
completion of due diligence. AISI reviewed the expressions of interest
received from ESI and evaluated other alternatives available to AISI,
including resumption of the process to undertake an initial public
offering.
On April 11 and 12, 1996, ESI held a regularly scheduled meeting
of its Board of Directors and approved a resolution to offer to merge with
AISI at the Conversion Ratio, subject to satisfactory completion of due
diligence, including direct contact with AISI's key customers and a
detailed analysis of the financial implications of the Merger. On April 15,
1996, the AISI Board of Directors authorized AISI officers to conduct
negotiations with ESI with regard to a merger agreement.
During the period from April 18, 1996 until May 13, 1996, ESI and
AISI management held several face-to-face and telephone meetings to
complete the Merger Agreement and to supply ESI with the detailed financial
and business information necessary to complete its due diligence. On May 9,
1996 and May 13, 1996, the Boards of Directors of ESI and AISI,
respectively, held special meetings, concluded that the proposed Merger
would be in the best interests of their respective shareholders, and
formally approved the Merger. On May 13, 1996, following the approval of
both Boards of Directors, the final Merger Agreement was executed by ESI
and AISI.
REASONS FOR THE MERGER
GENERAL
The Merger will effect a combination of AISI's business with ESI's
business on terms that have been carefully considered by the Boards of
Directors of each of AISI and ESI and which are believed by them to be fair
and equitable to their respective shareholders. The Merger Agreement is the
result of arm's length negotiations between AISI and ESI and represents a
consideration of many factors, including a judgment as to the nature and
potential of the businesses in which the companies are engaged and a
judgment as to the potential for the combined operations.
The Boards of Directors of AISI and ESI each believe that the
activities of the companies are compatible and that the Merger will enhance
the product development potential of the combined operations.
ESI'S REASONS FOR THE MERGER
The Merger is expected to add to ESI's ability to serve the
expanding capital equipment needs of its global, multi-national customers
in the
22
<PAGE>
electronics industry. All electronic products are subject to markets which
demand higher performance or lower cost over time. Machine vision improves
the quality and increases the efficiency of electronic device production.
The strengths of greater technical resources and worldwide selling and
customer support presence will uniquely position the combined business of
ESI and AISI to enhance or add machine vision in all aspects of
semiconductor fabrication and the assembly of electronic devices. The
Merger also offers the possibility of achieving improved operating
efficiencies through elimination of duplicate efforts.
The Board of Directors of ESI believes the combined business of
ESI and AISI will have the potential to realize increased market share and
improved operating and financial performance compared to the two entities
operated independently. In addition to the above benefits, the Board of
Directors of ESI has identified the following potential benefits for ESI's
shareholders:
- -- AISI develops and supplies high performance machine vision systems
targeted at the OEM electronics industry, providing an excellent
compliment to ESI's existing product offering and the vision
requirements of ESI's customers.
- -- The addition of AISI to ESI will result in the combined business
being among the recognized suppliers to the machine vision market.
Due to the relative size of the machine vision market in
comparison to the other markets served by ESI, the combined
business will offer ESI substantial opportunity to increase the
size of its overall business through effective utilization of
combined resources.
- -- The majority of AISI's revenues have been from domestic customers,
whereas the majority of ESI's revenues have been from off-shore
customers. The combined business will benefit from complementary
distribution strengths.
AISI'S REASONS FOR THE MERGER
In 1995, after several years of profitability, AISI explored
options to provide market liquidity to its shareholders and increase value,
including an initial public offering and merger with a public company. AISI
first opted for a public offering, but ultimately decided against
proceeding with the offering because of customer and market uncertainty.
AISI then considered merger options, including a merger with ESI. Among the
factors considered were: the price that could be obtained for AISI's common
stock; synergies between AISI and ESI; future appreciation in the value of
the stock of ESI's Common Stock; the business, results of operations, asset
quality and financial condition of ESI; the ability to account for the
Merger as a pooling of interests; the qualification of the Merger as a
tax-free reorganization; and the speed with which the Merger could be
completed. After considering all these factors, the Board of Directors of
AISI concluded that the Merger would provide the desired market liquidity
and the best prospect for increasing long-term value for AISI shareholders.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain U.S. federal income
tax consequences of the Merger that are generally applicable to ESI, Merger
Corp., AISI and holders of AISI Common Stock. This discussion is based on
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing regulations thereunder (including final, temporary or
proposed), and current administrative rulings and court decisions as of the
date of this Prospectus/Proxy-Information Statement, all of which are
subject to change.
23
<PAGE>
Any such change, which may or may not be retroactive, could alter the tax
consequences described herein.
The following discussion is intended only as a summary of certain
principal U.S. federal income tax consequences of the Merger and does not
purport to be a complete analysis or listing of all of the potential tax
effects. In particular, this discussion does not deal with all U.S. federal
income tax considerations that may be relevant to particular AISI
shareholders in light of their particular circumstances, such as
shareholders who are dealers in securities, who are subject to the
alternative minimum tax provisions of the Code, who are foreign persons, or
who acquired their shares in connection with stock option or stock purchase
plans or in other compensatory transactions. The discussion also does not
address the effects of the Merger on holders of AISI Options. In addition,
the following discussion does not address the tax consequences of the
Merger under foreign, state or local tax laws or the tax consequences of
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger), including without
limitation transactions in which shares of AISI Common Stock are acquired
or shares of ESI Common Stock are disposed of. This discussion assumes that
the AISI shareholders hold their AISI Common Stock as capital assets within
the meaning of Section 1221 of the Code.
EACH AISI SHAREHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
The Merger has been structured with the intent that it be a
tax-free reorganization under U.S. federal income tax law. It is a
condition to the obligations of ESI to consummate the Merger that Brouse &
McDowell, counsel to AISI, render to ESI at the Closing an opinion that the
Merger, if consummated on the terms of the Merger Agreement as described in
this Prospectus/Proxy-Information Statement, will constitute a
reorganization under Section 368(a)(1)(A) and (a)(2)(D) of the Code and
ESI, AISI and Merger Corp. will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code. In rendering such
opinion, counsel has relied in part upon certain written representations,
warranties and covenants of ESI, AISI, and certain shareholders of AISI.
No ruling has been sought from the Internal Revenue Service as to
the U.S. federal income tax consequences of the Merger, and the opinion of
counsel is not binding on the Internal Revenue Service or any court. There
is no assurance that the IRS will not successfully assert a contrary
position. Furthermore, the opinion of counsel is provided solely for the
benefit of ESI and does not constitute legal advice to AISI or any
shareholder of AISI.
The opinion of counsel will provide that the Merger, as a tax-free
reorganization, will have the following federal income tax consequences for
AISI shareholders, AISI and ESI:
(1) No gain or loss will be recognized by the shareholders of AISI
upon the exchange of all of their AISI Common Stock for ESI Common Stock
(including any fractional share interests).
(2) Each shareholder of AISI receiving cash in lieu of a
fractional share interest in ESI Common Stock in the Merger will be treated
as if such shareholder actually received the fractional share interest and
the fractional interest was subsequently redeemed by ESI. The deemed
redemption will be treated as a distribution not essentially equivalent to
a dividend within the meaning of Section 302(b)(1) of the Code. The cash to
be received by each such shareholder will be treated as a distribution in
full payment in exchange for the shareholder's fractional share interest
under Section 302(a) of the
24
<PAGE>
Code. Gain or loss will be recognized measured by the difference between
the amount of cash received and the basis of the AISI Common Stock
surrendered therefor, properly allocated to the fractional share interest.
(3) The tax basis of ESI Common Stock (including ESI Common Stock
considered as received in respect of any fractional share interest) to be
received by a shareholder of AISI in the Merger will be the same as the
basis of the AISI Common Stock surrendered in exchange therefor.
(4) The holding period of ESI Common Stock (including ESI Common
Stock considered as received in respect of any fractional share interest)
to be received by a shareholder of AISI in the Merger will include the
period during which the AISI Common Stock exchanged for such ESI Common
Stock was held by such shareholder of AISI.
(5) No gain or loss will be recognized by AISI as a result of the
Merger.
(6) No gain or loss will be recognized by either ESI or Merger
Corp. as a result of the Merger.
ACCOUNTING TREATMENT
The Merger is expected to be treated as a "pooling of interests"
for accounting purposes. This accounting method permits the recorded assets
and liabilities of both ESI and AISI to be carried forward to the surviving
corporation at their recorded historical amounts and no recognition of
goodwill in the combination is required of either company in the Merger.
As a condition to the Merger, ESI and AISI shall have each
received an opinion of Arthur Andersen LLP, independent public accountants,
to the effect that, based upon certain material facts and certain
representations and warranties described in such opinion, the Merger will
qualify for treatment as a pooling of interests.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CERTAIN COMPENSATION MATTERS
It is expected that, following the Merger, James E. Anderson,
President and Chief Executive Officer of AISI, will serve as a vice
president of ESI. It is also expected that Robert D. Pavey, Chairman of the
Board of Directors of AISI, will be appointed to be a director of ESI
shortly after the Merger.
Robert D. Pavey, 53, currently Chairman of AISI's Board of
Directors, has been a director of AISI since 1981. Mr. Pavey is a
co-founder and partner of Morgenthaler Ventures, a venture capital firm
formed in Cleveland, Ohio in 1969 and an early investor in AISI. He is a
director of Atria Software, Inc., a public company, and of Plustech Inc., a
company currently in registration, and of four other private portfolio
companies. Mr. Pavey is a past president of the National Venture Capital
Association.
Mr. Pavey, as each non-employee director of AISI, has served
without compensation, but has been reimbursed, upon request, for expenses
incurred in attending meetings of the Board of Directors.
Pursuant to certain Shareholders' Agreements dated February 17,
1984, and January 18, 1985 and a certain Agreement dated July 24, 1987,
several shareholders of AISI's Common Stock are required to vote any voting
securities of AISI that they may own at any time for the election as
directors of the designees of certain shareholders of AISI Common Stock.
These arrangements will terminate on or prior to the Merger.
25
<PAGE>
James E. Anderson, 49, joined the Company in November 1984 and was
elected to the positions of Director and President in February 1986. Prior to
1986 Mr. Anderson was responsible for the engineering, R&D, and operations
functions for the Company. From 1982 to 1984 Mr. Anderson helped establish
and served as general manager for Ashland Automation Services, Inc. a division
of Ashland Oil. From 1978 to 1982, Mr. Anderson held various marketing and
technical management positions with Manufacturing Data Systems, Inc. (MDSI)
and SAI Comsystems Inc. from 1976 to 1978. From 1968 to 1976 Mr. Anderson
served as a naval engineering officer and telecommunications specialist for
the Naval Security Group of the U.S. Navy. He holds a Bachelors degree in
Computer Science from Purdue University and a Masters Degree in Systems
Management from the University of South Carolina.
Under the original terms of the Options granted pursuant to AISI's
1989 Incentive Stock Option Plan, its 1991 Incentive Stock Option Plan, its
1992 Incentive Stock Option Plan, its 1995 Incentive Stock Option Plan, and
the three non-qualified stock option agreements between AISI and Barry
Borgerson (dated May 4, 1993), Dale Compton (dated April 10, 1990) and Jon
G. Ehrmann (dated July 30, 1990) (collectively, the "AISI Stock Plans"), a
portion of all outstanding Options, whether or not vested, will
automatically become vested and exercisable upon a change in control (as
defined therein). The consummation of the Merger will constitute a change
in control for purposes of such agreements. For James E. Anderson,
President and Chief Executive Officer of AISI, and Jon G. Ehrmann, Chief
Financial Officer of AISI, their option vesting will accelerate by 40
percent, and for all other optionees option vesting will accelerate by 20
percent. Additionally, pursuant to the Merger Agreement, each Option
granted under the AISI Stock Plans which is outstanding and unexercised
immediately prior to the Effective Time will be converted at the Effective
Time into, and will become, a stock option to purchase ESI Common Stock and
will continue to be governed by the terms of the AISI Stock Plans as
assumed. See "The Merger Agreement--Treatment of AISI Stock Options."
The Merger will constitute a change of control for the purposes of
the AISI Stock Plans, and will have the effect of accelerating the vesting
of a portion of Options granted to various persons under those plans. The
chart below details the effects of such accelerated vesting for AISI
officers, expressed as shares of ESI Common Stock.
<TABLE>
<CAPTION>
Total Number of
Options for Which
Vesting Will Be Approximate
Accelerated Value of
Scheduled Dates (expressed in shares Exercise Accelerated
Employee for Option Vestin ESI Common Stock) Price $ Options
- -------- ----------------- ----------------- -------- --------
<S> <C> <C> <C> <C>
James E. Anderson August 7, 2000 6,400 $12.50 $ 67,200
Stephen S. Wilson December 18, 1996 1,280 $ 3.13 $ 25,440
August 7, 2000 1,280 $12.50 $ 13,440
Donald D. Redding April 26, 2000 3,840 $ 9.38 $ 52,320
August 7, 2000 1,280 $12.50 $ 13,440
Jon G. Ehrmann August 21, 1996 2,240 $ 3.13 $ 44,520
August 7, 2000 2,560 $12.50 $ 26,880
Philip L. White July 7, 1999 9,866 $ 6.25 $165,260
Yvette M. Puskarich October 25, 1999 2,560 $ 9.38 $ 34,880
April 26, 2000 960 $ 9.38 $ 13,080
<FN>
* The values shown reflect the difference between the aggregate
value of the shares of ESI Common Stock subject to Options based
upon the closing price on June 18, 1996 of $23 per share of ESI
Common Stock, less the aggregate exercise price under such Options.
</FN>
</TABLE>
All shares of ESI Common Stock to be issued pursuant to exercise
of the AISI Options are included in the total 3,000,000 shares of ESI
Common Stock to
26
<PAGE>
be issued in connection with the Merger. If all outstanding AISI Options
were to be exercised after the Merger, ESI would receive proceeds of
approximately $4 million.
The Merger Agreement provides that ESI will, or will cause Merger
Corp. to, subject to the conditions set forth in the Merger Agreement,
continue in effect AISI's directors and officers liability insurance policy
(or any equivalent therefor) for officers and directors of AISI immediately
prior to the Merger.
SUMMARY COMPENSATION TABLE
The following table shows information concerning compensation paid
to Mr. Anderson for services to AISI in all capacities during the fiscal
year ended December 31, 1995.
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Name & Options Granted for All Other
Principal Position Salary Bonus(1) AISI Common Stock (#) Compensation
- ------------------ ------ -------- --------------------- ------------
<S> <C> <C> <C> <C>
James E. Anderson $163,541 $64,314 41,900 $14,930
President and Chief
Executive Officer
- ---------------
<FN>
(1) Represents bonus amounts paid in 1995 for services rendered in 1994.
</FN>
</TABLE>
Mr. Anderson participates in an annual bonus plan which is
available to all officers and certain policy-making employees. Under the
plan, no bonuses are payable unless AISI achieves predetermined profit and
revenue objectives set by the Board of Directors. In 1994, the profit and
revenue objectives were met.
27
<PAGE>
OPTIONS TABLE
The following table sets forth details regarding stock options
granted to Mr. Anderson in fiscal year 1995. In addition, there are shown
the hypothetical gains or "option spreads" that would exist for the
options, assuming rates of annual compound stock appreciation of 5% and 10%
from the date the options were granted over the full option term.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Option Grants in Last Fiscal Year Price Appreciation for Option Term
--------------------------------- ----------------------------------
% of Total
Options Granted
Options Granted for AISI
for AISI Common Stock Exercise or
Common Stock to Employees Base Price
Name (#) in Fiscal Year ($/Sh) Expiration Date 5%($) 10%($)
- ---- ----- -------------- -------- --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
James E. 41,900 15.5% $8.00 Aug. 7, 2005 $210,805 $534,222
Anderson
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth the number of shares covered by
both exercisable and unexercisable stock options as of December 31, 1995.
Also reported are values of "in-the-money" options that represent the
positive spread between the respective exercise prices of outstanding stock
options and the fair market value of AISI's Common Stock as of December 31,
1995 ($8.00) as determined by AISI's Board of Directors.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Anderson 162,900 25,000 $1,399,100 $ -0-
</TABLE>
In January 1995, Mr. Anderson exercised an option to purchase
44,000 shares of AISI Common Stock at a price of $1 per share. All these
options were granted on December 28, 1988 pursuant to AISI's 1989 Incentive
Stock Option Plan.
Options for the purchase of AISI Common Stock have been issued
under the AISI Stock Plans. Incentive stock options intended to qualify
under Section 422A of the Internal Revenue Code of 1986, as amended, may be
granted under the these AISI Stock Plans. The AISI Stock Plans are
administered by the Board of Directors which selects the optionees and
determines (i) the number of shares subject to each option; (ii) the
vesting schedule of the option; (iii) the exercise price, which, in the
case of incentive stock options, cannot be less than 100% of the fair
market value on the date of grant; and (iv) the duration of the option
(which in the case of incentive stock options, cannot exceed 10 years). All
options granted under the AISI Stock Plans are non-transferable other than
by will or the laws of descent and distribution and are exercisable during
the lifetime of the optionee only while the optionee is in the employ of
AISI or within ninety days after termination of
28
<PAGE>
employment. If an employee dies, the option is exercisable in full for one
year thereafter.
On July 8, 1994, AISI loaned Mr. Anderson the principal amount of
$500,000 at a fluctuating interest rate equal to the rate charged from time
to time on AISI's line of credit with its primary bank. As of the date
hereof, Mr. Anderson's aggregate unpaid indebtedness to AISI is $347,872
plus accrued interest. This amount is payable to AISI on demand, and its
repayment is primarily secured by a pledge of options to purchase AISI
Common Stock owned by Mr. Anderson.
REGULATORY MATTERS
Under the HSR Act and the rules promulgated thereunder by the FTC,
the Merger may not be consummated until notifications have been given and
certain information has been furnished to the FTC and the Antitrust
Division, and the specified waiting period requirements has expired. ESI
and AISI each filed notification and report forms under the HSR Act with
the FTC and the Antitrust Division on May 21, 1996 and May 23, 1996,
respectively. On June 22, 1996, the waiting period under the HSR Act
expired. At any time before or after consummation of the Merger, the FTC,
the Antitrust Division, state attorneys general or others could take action
under the antitrust laws with respect to the Merger, including seeking to
enjoin the consummation of the Merger or seeking divestiture of substantial
assets of ESI or AISI.
APPRAISAL RIGHTS
ESI SHAREHOLDERS
ESI shareholders will not have dissent and appraisal rights as a
result of the Merger or the issuance of up to 3,000,000 shares of ESI
Common Stock in connection with the Merger.
AISI SHAREHOLDERS
Pursuant to Section 407 of the Michigan Business Corporation Act
("MBCA"), it is expected that certain persons who collectively hold more
than a majority of the outstanding shares of AISI Common Stock will consent
in writing to the proposed Merger. If the Merger is consummated, MBCA
Sections 761 through 774 permit any holder of AISI Common Stock who did not
join in the written consent to demand payment of the fair value of his
shares of AISI Common Stock, in lieu of receiving shares of ESI's Common
Stock pursuant to the Merger. The text of MBCA Sections 761 through 774 is
attached as Annex B hereto and incorporated herein by reference. The
description of dissenters' rights contained in this
Prospectus/Proxy-Information Statement is qualified in its entirety by
reference to those sections of the MBCA which are attached hereto as Annex
B.
Each person entitled to dissenter's rights has received with this
Prospectus/Proxy-Information Statement that certain Notice of Shareholders
of Applied Intelligent Systems, Inc., of Certain Actions Taken by Written
Consent and Section 766 Notice to Dissenting Shareholder (the "Notice").
The Notice explains the action taken by written consent and sets forth the
procedure that must be followed by any AISI shareholder who wishes to
dissent and receive payment for his shares in lieu of ESI common stock. The
Notice is accompanied by a copy of MBCA Sections 761 through 774 and a
payment demand form which must be returned in accordance with the
instructions provided in the Notice no later than July 29, 1996.
29
<PAGE>
A holder of AISI Common Stock who wishes to dissent must make a
written demand and deposit his certificates in accordance with the terms of
the Notice. The demand must include the information specified in the Notice
and must be received by AISI by the date specified above.
FAILURE TO FOLLOW THE PROCEDURE SET FORTH IN SECTIONS 761 THROUGH 774
REGARDING DISSENTERS' RIGHTS, ATTACHED AS ANNEX B, INCLUDING WITHOUT
LIMITATION TIMELY RETURN OF THE PAYMENT DEMAND FORM AND ANY CERTIFICATES
EVIDENCING OWNERSHIP OF SHARES OF AISI COMMON STOCK, WILL CONSTITUTE A
WAIVER OF SUCH RIGHTS.
THE MERGER AGREEMENT
The following paragraphs summarize, among other things, the
material terms of the Merger Agreement, which is attached hereto as Annex A
and incorporated by reference herein. Recipients of this
Prospectus/Proxy-Information Statement are urged to read the Merger
Agreement in its entirety for a more complete description of the Merger.
EFFECTIVE TIME OF THE MERGER
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, the parties thereto will file
certificates of merger with the Secretaries of State of both Oregon and
Michigan. The Merger will become effective upon the later of such filings
(the "Effective Time").
CONVERSION OF SHARES
At the Effective Time, each outstanding share of AISI Common Stock
will be converted into the right to receive a number of shares of ESI
Common Stock that corresponds to the Conversion Ratio. AISI will merge with
and into Merger Corp., with Merger Corp. as the surviving corporation.
First Chicago Trust Company of New York has been designated as the transfer
agent ("Transfer Agent") in the Merger.
As promptly as practicable after the Effective Time, ESI will
cause the Transfer Agent to mail to each AISI shareholder, who is a
shareholder of record as of the Effective Time, transmittal material for
use in exchanging certificates of AISI Common Stock for certificates of ESI
Common Stock. The transmittal materials will contain information and
instructions with respect to the surrender of AISI Common Stock
certificates in exchange for new certificates representing ESI Common Stock
and cash in payment for any fractional shares resulting from the exchange.
The form of Transmittal Letter to be signed by each AISI
shareholder provides for, among other things, transmittal of such
shareholder's shares of AISI Common Stock to the Transfer Agent, agreement
to the indemnification provisions contained in the Merger Agreement,
agreement to the Escrow and the appointment of the Shareholder
Representatives.
The transmittal package also will include a form of stock power to
be endorsed in blank by each AISI Shareholder with respect to the shares of
ESI Common Stock subject to the Escrow and, for any AISI Shareholder who
did not execute the written consent approving the Merger, the Dissenters'
Rights notice required by Section 766 of the MBCA. See "Merger
Agreement--Indemnity and Escrow Agreement."
AISI SHAREHOLDERS SHOULD NOT SURRENDER ANY AISI COMMON STOCK
CERTIFICATES UNTIL THE LETTER OF TRANSMITTAL AND OTHER DOCUMENTS DESCRIBED
ABOVE HAVE BEEN RECEIVED.
30
<PAGE>
Fractional shares of ESI Common Stock will not be issued in the
Merger. Instead, each shareholder of AISI who would otherwise be entitled
to a fraction of a share will receive, in lieu thereof, an amount of cash
(rounded to the nearest whole cent) equal to the product of such fraction
and the Average Sales Price. For this purpose "Average Sales Price" means
the average of the high and low prices of ESI Common Stock, as reported in
THE WALL STREET JOURNAL, for the trading day immediately preceding the
Closing Date.
TREATMENT OF AISI STOCK OPTIONS
The terms and provisions of the Options will continue in full
force and effect following the Merger. At the Effective Time, each Option
will be assumed by ESI and will be converted into an option to purchase the
whole number of shares of ESI Common Stock corresponding to the number of
shares of AISI Common Stock which the holder of the Option would have been
entitled to receive had such holder exercised the Option in full
immediately prior to the Effective Time (whether or not such Option would
then have been exercisable), which number of shares will be equal to the
product (rounded to the nearest whole number) of (x) the number of shares
of AISI Common Stock for which such Option is exercisable MULTIPLIED BY (y)
the Conversion Ratio. The exercise price per share will be redetermined by
dividing the per share exercise price immediately prior to the Effective
Time by the Conversion Ratio. If all outstanding AISI Options were to be
exercised after the Merger, ESI would receive aggregate proceeds of
approximately $4 million.
The term, exercisability, vesting schedule, status as an
"Incentive Stock Option" under Section 422 of the Code, if applicable, and
all other terms and conditions of the Options will to the extent permitted
by law and otherwise reasonably practicable be unchanged; each Option which
is an Incentive Stock Option will be adjusted in accordance with the
requirements of Section 425(a) of the Code so as not to constitute a
modification, renewal or extension of the Option within the meaning of
Section 424 of the Code. Continuous employment with AISI will be credited
to the optionee for purposes of determining the vesting of the number of
shares of ESI Common Stock subject to exercise under the optionee's
converted Option after the Effective Time.
RESALE OF ESI COMMON STOCK BY AFFILIATES
A condition to ESI's obligations under the Merger Agreement, among
others, is that certain of the "major" shareholders of AISI and other AISI
shareholders who are other "affiliates" of AISI will have delivered letters
confirming their understanding and agreement that they will not, among
other things, sell, transfer or otherwise reduce their interest in the
shares of ESI Common Stock they receive in the Merger or reduce their risk
relating thereto until after ESI has published financial results covering
at least the 30 days of combined operations occurring after the Closing
Date.
In addition, such parties have agreed that they will not sell or
otherwise dispose of any shares of ESI Common Stock unless such sale or
disposition is permitted pursuant to the provisions of Rule 145 under the
Securities Act, is otherwise exempt from registration under the Securities
Act, or is effected pursuant to a registration statement under the
Securities Act.
AISI'S CONDUCT OF BUSINESS PENDING THE MERGER
Pending the consummation of the Merger, AISI has agreed to carry
on its business in the ordinary and usual manner and not to take any of the
following actions without the prior written consent of ESI: (a) amend its
Articles of Incorporation or Bylaws; (b) enter into any new agreements that
have the effect of increasing compensation or benefits payable to its
officers or employees, other than indemnification agreements with its
officers and
31
<PAGE>
directors on terms consistent with the provisions of AISI's Articles of
Incorporation and Bylaws; (c) change its authorized capitalization; (d)
declare, set aside or pay any dividends; (e) issue, sell, pledge, dispose
of or encumber any additional shares of, or securities convertible into or
exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of its capital stock of any class other than
pursuant to the exercise of AISI stock options outstanding on March 31,
1996; (f) redeem, purchase or otherwise acquire any shares of its capital
stock, merge into or consolidate with any other corporation or permit any
other corporation to merge into or consolidate with it, liquidate or sell
or dispose of any of its assets, or close any plant or business operation;
(g) incur, assume or guarantee any indebtedness, or modify or repay any
existing indebtedness; (h) enter into any transaction, make any commitment
(whether or not subject to the approval of the Board of Directors of AISI)
or modify any contracts or take or omit to take any action which could be
reasonably anticipated to have a material adverse effect on the business,
properties, financial condition or results of operations of AISI; (i)
transfer, lease, license, guarantee, sell, mortgage, pledge, or dispose of,
any property or assets (including without limitation any intellectual
property), encumber any property or assets or incur or modify any
liability, other than the sale of inventory in the ordinary and usual
course of business; (j) authorize capital expenditures other than in the
ordinary course of business, form any subsidiary, or make any acquisition
of, or investment in, assets or stock of any other person or entity; (k)
make any tax election; (l) permit any insurance policy naming it as a
beneficiary or a loss payable payee to be canceled, terminated or renewed
without prior notice to ESI; (m) change its method of accounting as in
effect at December 31, 1995, except as required by changes in generally
accepted accounting principles as concurred with by the AISI's independent
auditors, or change its fiscal year; (n) conduct any transactions which, in
the opinion of ESI or Arthur Andersen LLP, could disqualify the Merger for
pooling of interests accounting; or (o) authorize or enter into an
agreement to do any of the actions referred to in paragraphs (a) through
(n) above.
NONSOLICITATION OF ALTERNATIVE TRANSACTIONS
AISI has agreed that it will not directly or indirectly encourage,
initiate or solicit any inquiries or the submission of any proposals or
offers from any person relating to any merger, consolidation, sale of all
or substantially all of its assets or similar business transaction
involving AISI (each, an "Acquisition Transaction"). AISI has further
agreed that is will not participate in any negotiations regarding, furnish
to any other person any information with respect to, or otherwise assist or
participate in, any attempt by any third party to propose or effect any
such transaction. Notwithstanding, nothing in the Merger Agreement is
intended to prohibit (i) AISI from furnishing information to, or entering
into discussions or negotiations with, any person or entity that makes an
unsolicited proposal of an Acquisition Transaction if and to the extent
that (a) the Board of Directors of AISI determines in good faith, upon
advice of legal counsel, that such action is required for the directors of
AISI to fulfill their fiduciary duties and obligations under Michigan law
and (b) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, AISI provides
immediate written notice to ESI to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such
person or entity, or (ii) the Board of Directors of AISI from acting to
withdraw or modify its approval of the Merger following receipt of an
unsolicited proposal for an Acquisition Transaction if it determines in
good faith, upon advice of legal counsel, that such action is required for
the directors of AISI to fulfill their fiduciary duties and obligations
under Michigan law.
32
<PAGE>
CORPORATE STRUCTURE AND RELATED MATTERS AFTER THE MERGER
At the Effective Time, AISI will be merged with and into Merger
Corp.. As a result, the separate corporate existence of AISI will cease and
Merger Corp. will be the surviving corporation. From and after the
Effective Time, the Articles of Incorporation, Bylaws, Board of Directors
and officers of Merger Corp. in effect or in office, as the case may be,
immediately before the Effective Time will be the Articles of
Incorporation, Bylaws, Board of Directors and officers of the surviving
corporation. The name of the surviving corporation will be changed to
"Applied Intelligent Systems, Inc."
Each share of Common Stock of Merger Corp. issued and outstanding
immediately prior to the Effective Time will remain outstanding without change
by virtue of the Merger.
Prior to or at the closing of the Merger Agreement, AISI will
cause each of its employees who will become employees of the surviving
corporation to sign a confidentiality and noncompetition agreement in the
form signed by ESI's employees.
Prior to or at the closing of the Merger Agreement, ESI and the
Shareholder Representatives will execute the Escrow Agreement and will
cause an Escrow Agent to also execute the Escrow Agreement. At the
Effective Time one-tenth of the shares of ESI Common Stock that otherwise
would be delivered to the AISI shareholders will be delivered to the Escrow
Agent and held by the Escrow Agent subject to the indemnity and escrow
arrangements described below. See "The Merger Agreement--Indemnity and
Escrow Agreement."
CERTAIN COVENANTS
The Merger Agreement contains mutual covenants of ESI and AISI to
use their reasonable best efforts to secure all consents and approvals
required for the Merger and to cooperate with respect to publicity.
In addition to covenants relating to the conduct of its business
described above (see "The Merger Agreement--AISI's Conduct of Business
Pending the Merger"), AISI also covenants to give ESI and its agents access
to AISI and its book and records, to timely make all necessary filings to
be made by it under the Hart-Scott-Rodino Act, to obtain necessary
shareholder approvals and to provide information in connection with the
preparation of this Prospectus/Proxy-Information Statement.
ESI covenants (a) to not take or omit to take any action that
could reasonably be anticipated to have a material adverse effect on ESI,
(b) to take necessary actions in connection with the filing and
effectiveness of this Registration Statement and solicitation of proxies of
ESI shareholders for approval of the issuance of up to 3,000,000 shares of
ESI Common Stock in connection with the Merger, (c)to promptly list up to
3,000,000 shares of ESI Common stock in the Nasdaq National Market System,
(d) to timely make all necessary filings to be made by it under the
Hart-Scott-Rodino Act, (e) after the Effective Time, to issue up to
3,000,000 shares of ESI Common Stock, (f) to register the ESI Common Stock
issuable upon exercise of the Options on SEC Form S-8, and (g) for a period
of two years after the Effective Time, to continue in effect the present
AISI directors and officers insurance policies.
Merger Corp. covenants to not engage in any corporate activity other
than the Merger and other transactions contemplated under the Merger
Agreement.
33
<PAGE>
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction of
various conditions, including (a) expiration or termination of the waiting
period under the Hart-Scott-Rodino Act; (b) no order, decree or injunction
that would prevent consummation of the Merger; (c) no material adverse
change in the businesses of ESI or AISI; (d) AISI Shareholder approval of
the Merger and ESI Shareholder approval of the issuance of up to 3,000,000
shares of ESI Common Stock to effect the Merger; (e) registration of up to
3,000,000 shares of ESI Common Stock under the Securities Act of 1933 and
listing on the Nasdaq National Market System; (f) opinion of counsel with
respect to tax and other matters; (g) opinion of Arthur Andersen LLP with
respect to treatment of the Merger as a "pooling of interests"; (h)
delivery to ESI by certain persons and entities who are affiliates of AISI
of affiliate representation letters containing certain representations and
warranties with respect to such person's ownership of AISI Common Stock and
certain representations, warranties and covenants with respect to the
shares of ESI Common Stock to be acquired by such persons or entities; (i)
a physical count of all AISI tangible assets as of May 31, 1996; and (j)
delivery to ESI of confidentiality agreements by all continuing employees.
INDEMNITY AND ESCROW AGREEMENT
The Merger Agreement provides for indemnification of ESI and
Merger Corp. by each AISI shareholder, pro rata and to the extent of such
shareholder's shares of ESI Common Stock delivered to the Escrow Agent
pursuant to the Merger Agreement and the Escrow Agreement, for and against
any losses, costs, expenses, damages and liabilities, including reasonable
attorneys' fees (collectively, "Damages"), incurred by ESI or Merger Corp.
by reason of or arising out of any inaccuracy in any representation or
warranty or the breach of any covenant of AISI made in the Merger
Agreement.
The Merger Agreement further provides that 10% of each AISI
shareholder's shares of ESI Common Stock to be received in the Merger,
rounded down to the nearest full share, will be delivered to the Escrow
Agent and be subject to the terms of the Escrow.
Claims for indemnification must be made under the indemnity during
the first nine months following the Closing Date. No liability exists under
the indemnity for the first $100,000 of any claim. In addition, reserves
against probable contingencies existing on AISI's balance sheet as of the
Closing Date must be used before any claim may be made.
The Escrow will terminate as early as possible after the
nine-month period if no claims are pending. If claims are pending at the
end of the nine-month period, the Escrow must terminate not later than the
anniversary of the Closing Date.
In no event will any AISI shareholder have any liability in excess
of the shares held in the Escrow.
TERMINATION; BREAKUP FEES
The Merger Agreement may be terminated and the Merger may be
abandoned prior to the Effective Time, under the circumstances specified
therein, including (i) by mutual written agreement of ESI and AISI; (ii) by
either ESI or AISI, if the Merger shall not have been consummated by
October 1, 1996 and if the terminating party has not caused the failure of
the Merger to be consummated by its own willful failure to fulfill any of
its material obligations under the Merger Agreement; (iii) by either ESI or
AISI, if the shareholders of AISI do not approve the Merger or if the
shareholders of ESI fail to approve the issuance of the additional shares
of ESI Common Stock to
34
<PAGE>
effect the Merger; (iv) by either ESI or AISI if a court or a governmental
agency prohibits, by order, decree, ruling or any other action, the
transactions contemplated by the Merger Agreement; (v) by ESI if the AISI
Board of Directors shall have withdrawn or modified in a manner adverse to
ESI approval of the Merger, the Merger Agreement or the transactions
contemplated thereby; (vi) by ESI if AISI or its representatives shall have
taken actions to respond to unsolicited proposals or officers without
providing prior notices and cooperation to ESI; and (vii) by AISI if the
Board of Directors of AISI determines in good faith, upon advice of legal
counsel, that such termination of this Agreement is required for the
directors of AISI to fulfill their fiduciary duties and obligations under
Michigan law.
The Merger Agreement provides that ESI will pay a fee of $3
million to AISI if the Merger Agreement is terminated because ESI's
Shareholders have not approved the issuance of the additional shares of ESI
Common Stock to effect the Merger. AISI will pay a $3 million fee to ESI if
the Merger Agreement is terminated because (i) AISI's Shareholders do not
approve the Merger, (ii) the AISI Board of Directors withdraws or modifies
the approval of the Merger in a manner adverse to ESI or if AISI or its
representatives respond to unsolicited proposals or offers in a manner not
permitted by the Merger Agreement, or (iii) the AISI Board of Directors
makes a determination, on advice of legal counsel, that to do so is
required by the fiduciary duties of the directors under Michigan Law.
FEES AND EXPENSES
Except as set forth above (see "The Merger Agreement--Termination;
Breakup Fees"), all fees and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby will be paid by the
party incurring such expenses, whether or not the Merger is consummated.
ESI will pay all fees and expenses, other than AISI's attorneys'
fees, incurred in relation to the printing and filing of the
Prospectus/Proxy-Information Statement, the Registration Statement and any
amendments or supplements thereto.
CONFIDENTIALITY
Each party to the Merger Agreement has agreed to keep
confidential, pursuant to the Confidentiality Agreements dated December 7,
1995 (in favor of AISI) and March 1, 1996 (in favor of ESI)(collectively,
the "Confidentiality Agreements"), information provided to the other party
pursuant to the Merger Agreement with respect to the business, properties
and personnel of the party furnishing such information. The Confidentiality
Agreements contain terms restricting the disclosure and use of confidential
information exchanged between the two parties in evaluating the Merger and
otherwise.
INFORMATION CONCERNING ESI
BUSINESS
ESI provides electronics manufacturers with equipment necessary to
produce key components used in wireless telecommunications, computers,
automotive electronics, and many other electronic products. ESI is the
leading supplier of advanced laser systems used to adjust (trim) electronic
circuitry and to improve the yield of semiconductor memory devices. ESI
believes it is the leading producer of high-speed test and handling
equipment used in the high-volume production of miniature capacitors.
Additionally, ESI designs and manufactures machine vision products and
laser electronic packaging systems for manufacturers of electronics and
other products. ESI's
35
<PAGE>
products enable these manufacturers to reduce production costs, increase
yields and improve the quality of their products. ESI's customers include
manufacturers of: wireless telecommunication products (Ericsson, Motorola
and Siemens); automotive electronics (Bosch, Delco, Ford, Nippon-Denso and
Siemens); miniature capacitors (Kemet, Kyocera/AVX, Murata, Philips,
Samsung and TDK) and semiconductor memory devices (Fujitsu, Hitachi,
Hyundai, IBM, Samsung and Texas Instruments).
ELECTRONICS INDUSTRY OVERVIEW
In recent years, the electronic content of telecommunications
products, automobiles and personal computers has increased substantially.
For example, automobile manufacturers now routinely include electronic
ignition, anti-lock brakes, electronic fuel injection and other electronic
systems in place of components that until recently were predominantly
mechanical. In addition, new markets for consumer-oriented electronic
products such as cellular telephones, facsimile machines, pagers,
camcorders and personal computers have developed rapidly as increasingly
affordable products have been introduced.
Demand for electronics manufacturing equipment is driven by the
demand for electronic devices and circuits. Electronic devices are used in
virtually all electronic products, from inexpensive consumer electronics to
the most sophisticated computers. These devices are produced in very large
unit volumes.
The demands upon manufacturers to supply increasing quantities of
electronic devices have been accompanied by increased complexity and
reduced size. As electronic products become more powerful and portable, the
devices in these products must be faster, smaller and more reliable. To
achieve these attributes of higher performance, the electronic device
manufacturers use finer device geometries, increase densities, and tune the
devices to precise electrical values. Manufacturers of cellular telephones,
for example, must use miniaturized circuits to accommodate the size
limitations of the finished product. These circuits must also operate
within precise frequency specifications, typically requiring component
values with less than 0.5 percent tolerance, in order for the existing
cellular frequency bands to accommodate the expanding number of cellular
users without interchannel interference.
As electronic device densities and performance demands have
increased, the manufacturers of capacitors and resistors that are basic
components of assembled electronic devices have been compelled to reduce
size and to improve performance of these individual components. The
increasing miniaturization of these components makes production, testing
and handling difficult.
In addition to quantity, size and performance demands, a trend
throughout the electronics industry is cost reduction. The highly
competitive markets for electronic products create cost limitations at the
consumer level, and result in cost pressure on component manufacturers. The
manufacturers seek to reduce device costs by improving throughput, yield
and quality in device production.
OVERVIEW OF MARKETS, PRODUCTS AND STRATEGY
Pagers, cellular telephones, personal computers and automotive
electronics represent the largest end-market applications for electronic
devices and circuits that are produced using ESI's systems. ESI's customers
also serve a wide range of other electronic applications.
ESI believes that it is critical that each of its products provide
the customer with measurable production benefits, such as improved yield,
increased throughput, greater reliability, or increased flexibility,
resulting
36
<PAGE>
in the lowest cost of ownership and a high return on investment. ESI also
designs its production systems with a migration path for system upgrade,
thereby providing its customers flexibility to add capacity or improve
product performance at a reasonable incremental cost.
ESI believes it is the leading merchant equipment supplier to
three specialized markets: laser trimming, miniature capacitors test and
production and memory repair. ESI also serves the machine vision and laser
electronic packaging markets.
LASER TRIMMING SYSTEMS. ESI's laser trimming systems are used to
tune the precise frequency of electronic circuits that receive and transmit
signals in pagers, cellular telephones and other wireless devices. ESI's
laser trimming systems are also used to tune automotive electronic
assemblies such as engine control circuits.
ESI's laser systems are used by manufacturers supplying the
telecommunications, automotive, and consumer markets. Customers include
Bosch, Delco, Ericsson, Ford, IBM, Motorola, Nippon-Denso, Philips,
Siemens, Sumitomo and Vishay Intertechnology.
Laser trimming is used to adjust the electrical performance of an
electrical product or assembly containing many circuits. The laser trimming
system removes a precise amount of material from one or more circuits to
achieve the desired electrical specification for the entire product. This
process is called "functional trimming," and is performed while the product
or assembly is under power. For example, in pagers, laser trimming of a few
selected circuits in the product is used to tune the electrical performance
of the entire product to the desired frequency specification.
ESI's laser trimming systems also adjust the electrical
performance of individual devices such as film resistors, resistor
networks, capacitors and hybrid circuits. Laser trimming is required
because the screening process used to manufacture resistors cannot cost
effectively deposit material precisely enough to provide consistent
electrical values. The trimming system can also be rapidly reprogrammed to
trim devices to different values, enabling the manufacturer to efficiently
convert volume-produced devices of a single value into devices with a
variety of values.
37
<PAGE>
The following chart summarizes the models, typical applications
and key features of ESI's current laser trimming products.
ESI LASER TRIMMING PRODUCTS
<TABLE>
<CAPTION>
Throughput
Typical Accuracy (trims per Work Area
Product Application (microns) second) (inches)
- ------- ----------- --------- ------- --------
<S> <C> <C> <C> <C>
Model 4210 Surface mount 2.5 50 3.5 x 3.5
capacitor and
resistor
trimming
Model 977 Test intensive, 1.55 50 3 x 3
thick film,
functional
trimming
Model 960 Thick film 1.27 50 3 x 3
functional
trimming
Model 907 Chip resistor 1.27 100 3 x 3
trimming
Model 4410 Thick/thin film 1.0 15 4 x 4
functional
trimming
</TABLE>
TEST AND PRODUCTION SYSTEMS FOR MINIATURE CAPACITORS. ESI's
Palomar product offering consists of automated test, production and
handling equipment for manufacture of miniature multi-layer ceramic
capacitors ("MLCCs") which are used in very large numbers in nearly all
types of electronic circuits. Large numbers of MLCCs are used in circuits
that process analog signals or operate at high frequencies such as in video
products (VCRs and camcorders), voice communication products, wireless
telecommunication products and computers. Principal customers for ESI's
MLCC test and production equipment are Kemet, Kyocera/AVX, Murata, Philips,
Samsung and TDK.
The worldwide miniature capacitor market is estimated to be $4.5
billion (225 billion units) in 1996. Most of the leading producers are in
Japan, led by Kyocera, Murata and TDK. ESI believes it is the leading
merchant supplier of equipment to the MLCC industry for production of
miniature capacitors. Production demands imposed by miniaturization are
leading capacitor manufacturers to increasingly consider merchant equipment
suppliers as an alternative to internal development of manufacturing
equipment.
As circuit sizes have shrunk, the size of commonly used miniature
capacitors has also shrunk to as small as .04" x .02" x .01". These minute
sizes and the high unit volumes place extraordinary demands on
manufacturers. ESI's products combine high-speed, small parts handling
technology with microprocessor-based systems to provide highly automated
solutions for MLCC manufacturers. ESI's test and termination equipment and
specialty handling tools perform a broad range of functions in the
manufacturing process.
TEST. Virtually all capacitors are tested and sorted by
capacitance (electrical energy storage) and dissipation (electrical energy
leakage). ESI's equipment employs high-speed handling and positioning
techniques to precisely load, test and sort capacitors based upon these
electrical values.
TERMINATION. MLCCs are manufactured in a lamination process,
layering conducting and insulating materials. ESI's microprocessor-based
termination
38
<PAGE>
systems apply conductive material to the ends of surface mountable MLCCs,
permitting connection of the device in a circuit.
HANDLING TOOLING. ESI offers a wide range of specialized
production fixtures and tools for various stages of the manufacturing
process, including a series of patented carrier plates capable of handling
up to 8,000 devices per plate for termination application. The decreasing
size and growing volumes of MLCCs produced cause manufacturers to
continuously seek new tools and fixtures to improve throughput and handling
efficiency.
39
<PAGE>
The following chart summarizes certain of ESI's current products,
applications and key features:
ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS
<TABLE>
<CAPTION>
Product Application Key Features
- ------- ----------- ------------
TEST SYSTEMS
<S> <C> <C>
Models 16A and 18 Tests capacitance, High speed rotary tester
dissipation factor and with throughput of up to
voltage capability for 50,000 parts/hour.
small (Model 18) and
medium (Model 16A) size
MLCCs
Models 12-4 and 3001 IR Tests insulation High speed parallel
resistance (IR) of MLCCs tester with throughput
of up to 50,000
parts/hour. Model 3001
IR includes automatic
bulk loading.
Model 3300 Test capacitance High speed rotary tester
dissipation factor and with throughput of up to
voltage capability for 180,000 parts/hour.
small and medium size
MLCCs; tests insulation
resistance
TERMINATION SYSTEMS
Models 2001 and 2020 Electrical contact Microprocessor
attachment on MLCCs controlled surface mount
termination system with
throughput up to 130,000
parts/hour. Model 2020
includes an integrated
kiln.
Model 2007 Electrical contact High productivity
attachment on MLCCs microprocessor
controlled surface mount
termination system with
throughput up to 470,000
parts/hour.
HANDLING TOOLING
Carrier Plates Plates to batch handle Patented composite
MLCCs for test and carriers to handle the
termination full range of MLCC sizes
and up to 8,000 pieces
per batch.
Test Tooling Test fixtures for use Permits precise location
with ESI systems and positioning of MLCCs
during the test
operation.
</TABLE>
MEMORY REPAIR SYSTEMS. Memory repair systems are used by nearly
all manufacturers of dynamic random access memories (DRAMs) to increase
production
40
<PAGE>
yields. Personal computers and high performance workstations are the
largest market for semiconductor memory, although photocopiers, facsimile
machines and telecommunications equipment represent products requiring
increasing amounts of memory. Customers of ESI's memory repair systems
include Fujitsu, Hitachi, Hyundai, IBM, Motorola, Samsung, Siemens, and
Texas Instruments.
Laser memory repair is a process used by memory device
manufacturers to replace defective circuit elements with spare elements,
and thereby salvage a memory device. Lower cost, higher capacity memory
devices have been achieved by reducing the size of circuit elements and
increasing the number of circuit elements per device, thereby requiring
leading edge semiconductor processes. These processes generally result in
lower manufacturing yields, especially in the early stages of producing a
new generation of memory devices. Yield improvement is thus critical in the
early stages of producing a new generation device.
The primary method used by memory manufacturers to maintain and
increase yield is to include extra circuit elements on each device. These
"redundant" elements can then be used to replace defective elements found
by test after fabrication. ESI's laser systems perform this repair by
determining the optimum number and location of connections and
disconnections necessary to repair the device, rapidly positioning links
under the laser, and directing a laser energy pulse to cut those links to
deactivate defective memory cells and activate spare cells. Redundancy is
used by virtually every manufacturer of DRAMs and is increasingly being
used by manufacturers of other semiconductor memory devices such as static
random access memories, (SRAMS).
ESI currently offers the Model 9200HT PLUS and the Model 1225HP
laser processing systems for memory repair. The Model 9200HT PLUS is
designed to process increasingly dense memory devices, including 16 and 64
megabit DRAMs. To accommodate the range of memory sizes, the Model 9200HT
PLUS includes a programmable laser spot size feature. ESI's Model 9200HT
PLUS has a guaranteed mean time between failure of better than 1,500 hours
and has a raw throughput rate of 1,200 links per second. The Model 1225HP
laser memory repair system utilizes patented stage plus galvanometer beam
positioning to achieve 0.35 micron positioning accuracy. ESI holds the
patent for the ScribeView 2 illuminator, used for optical character
recognition (OCR), a vital step in the memory repair process.
VISION SYSTEMS. ESI's Vision Products Division designs and
manufactures machine vision products. ESI's vision systems combine advanced
computer technology, proprietary software and optical equipment to reduce
application development time and provide machine vision inspection that
facilitates quality products and fast throughput. The TurboHR+ vision
system is integrated in ESI's laser memory repair systems and is also
marketed independently to electronic and semiconductor industry customers
for general purpose inspection, part position verification for
manufacturing processes, wafer identification using optical character
recognition (OCR), measurement, alignment, machine guidance and assembly
verification. Customers for ESI's vision products include Hewlett Packard,
Motorola and Seagate.
ELECTRONIC PACKAGING AND MICROMACHINING SYSTEMS. ESI has expanded
its product offering in the micromachining systems business, which focuses
on surface contouring, cutting, and scribing of a variety of materials for
the electronics industry. ESI's advanced laser technology provides a cost
effective method for forming electrical connections between layers, called
vias, in a multiple layer substrate. The initial product, the Model 5000,
is targeted for use in small geometry substrate production. The Model 5100,
introduced in June 1996, represents the next generation and offers
productivity improvement by providing the capability to drill over 10,000
vias per minute. Applications in this market include new generations of IC
packages, multi chip modules, and high density circuit boards. The primary
41
<PAGE>
advantage of the ESI technology is the ability to process the wide variety
of materials used in the electronics industry, including ceramic,
traditional glass reinforced circuit boards, copper, and new organic
compounds. Customers include Automata, Erricson, Sheldahl, Siemens and W.L.
Gore.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service
offices located in or near: Boston, Dallas, Portland and San Diego in the
United States; Tokyo, Nagoya, Seoul and Taipei in Asia; and Munich, London,
Paris and Leiderdorp, Netherlands in Europe. ESI serves customers in
approximately 30 additional countries through manufacturers
representatives.
ESI has a substantial base of installed products in use by leading
worldwide electronics manufacturers. ESI emphasizes strong working
relationships with these leading manufacturers in order to meet their needs
for additional systems and to facilitate the successful development and
sale of new products to these customers.
ESI maintains service personnel wherever it has a significant
installed base and provides service anywhere its equipment is installed.
New systems are tested to ensure they meet requirements and acceptance
criteria incorporated into customer orders. ESI also offers a variety of
warranties (which vary from 90 days to three years), maintenance contracts,
and parts replacement programs.
ESI has an OEM contract with Advantest Ltd. to supply memory
repair systems in Japan. Sales to Advantest amounted to 4.0%, 7.0%, 7.2%
and 5.7% for the fiscal years 1993, 1994, 1995 and for the nine months
ended February 29, 1996. ESI maintains a presence in Korea through a
wholly-owned subsidiary.
International sales accounted for 57.3%, 54.7%, 70.9% and 66.3% of
ESI's net sales for fiscal years 1993, 1994, and 1995 and for the nine
months ended February 29, 1996.
Kyocera/AVX accounted for 10.8% and 12.4% of ESI's sales in fiscal
1994 and 1995, respectively. In fiscal year 1993, and for the nine months
ended February 29, 1996, no one customer exceeded 10% of sales: the loss of
certain customers could have a material adverse effect upon ESI's sales or
earnings.
BACKLOG
Backlog consists of written purchase orders for products for which
ESI has assigned shipment dates within the following twelve months. Backlog
also includes written purchase orders for spare parts and service to be
delivered or performed within the next twelve months. Backlog was $32
million at February 29, 1996 versus $26 million at May 31, 1995 and $8
million at May 31, 1994. ESI experienced increased backlog in all product
areas and expects all of its existing backlog to ship within the next
twelve months.
RESEARCH, DEVELOPMENT AND TECHNOLOGY
ESI believes that its ability to compete effectively depends, in
part, on whether it can maintain and expand its expertise in core
technologies and product applications. The primary emphasis of ESI's
research and development is to advance ESI's capabilities in:
o Lasers and laser/ material interaction
o High speed, sub-micron motion control systems
o Precision optics
o High speed, small parts handling
42
<PAGE>
o Image processing and optical character recognition
o Real-time production line electronic measurement
o Real-time software
o Systems integration
ESI's research and development expenditures for fiscal years 1993,
1994, and 1995 and for the nine months ended February 29, 1996 were $9.0
million (13.3% of net sales), $8.9 million (12.3% of net sales), $13.7
million (12.7% of net sales), and $11.9 million (10.1% of net sales),
respectively. The foregoing figures do not include research and development
expenditures funded by the Advanced Research Projects Agency (ARPA) of the
U.S. Government. In September 1993, ESI was awarded a cost-shared contract
from ARPA. Under the initial terms of the contract, ARPA provided $1
million of funding towards the development of a flat panel display laser
interconnect and repair system. In March 1995 and September 1995, the
contract scope of work was expanded and an additional $100,000 and
$210,000, respectively, of funding was awarded. This project is consistent
with ESI's technology strategy. During fiscal years 1994 and 1995, ESI
received approximately $1.1 million of funding from ARPA which offset
research and development expenses. In addition, research and development
expenditures for the nine months ended February 29, 1996 do not include the
acquired in-process research and development expense of $6.0 million
incurred in connection with the purchase price allocation of XRL, Inc.
COMPETITION
ESI's markets are competitive. The principal competitive factors
in the industry are product performance, reliability, service and technical
support, product improvements, price, established relationships with
customers and product familiarity. ESI believes that its products compete
favorably with respect to these factors. Some of ESI's competitors have
greater financial, engineering and manufacturing resources than ESI and
larger service organizations. In addition, certain of ESI's customers
develop, or have the ability to develop, similar manufacturing equipment.
There can be no assurance that competition in ESI's markets will not
intensify or that ESI's technological advantages may not be reduced or lost
as a result of technological advances by competitors or customers or
changes in electronic device processing technology.
For laser trimming systems, major competitors are NEC and General
Scanning. In miniature capacitor test and production equipment, ESI's
competition comes mainly from manufacturers that develop systems for
internal use, and in Japan, from test equipment manufactured by Tokyo Weld
and Humo, among others. ESI's major competitors for memory repair systems
are Nikon and General Scanning. The Vision Products Division competes with
stand alone vision suppliers such as Cognex and Robotic Vision Systems,
Inc., and with robotics and factory automation companies, such as Adept and
Allen Bradley. There are also numerous small vision companies and captive
vendors in Japan, North America and Europe.
MANUFACTURING AND SUPPLY
ESI's laser system manufacturing operations consist of electronic
subassembly, laser production and system final assembly. Principal
production facilities are headquartered in Portland, Oregon. In addition to
the Portland, Oregon facility, memory repair systems are also produced at
ESI's facility in Canton, Massachusetts. Miniature capacitor test and
production systems are manufactured by ESI's Palomar subsidiary near San
Diego. ESI also uses qualified manufacturers to supply many components of
its products.
ESI's laser systems use high performance computers, peripherals,
lasers and other components from various vendors, all obtained under
purchase
43
<PAGE>
agreements. Some components used by ESI are obtained from a single source
or a limited group of suppliers. An interruption in the supply of a
particular component could require substitutions which would have a
temporary adverse impact on ESI. ESI believes it has excellent
relationships with its suppliers; it has not experienced any material
shortages from its contractors.
EMPLOYEES
As of February 29, 1996, ESI employed 767 persons, including 179
in engineering and research and development, 326 in manufacturing and 134
in marketing, sales and customer service and support. Many of ESI's
employees are highly skilled, and ESI's success will depend in part upon
its ability to attract and retain such employees, who are in great demand.
ESI has never had a work stoppage or strike and no employees are
represented by a labor union or covered by a collective bargaining
agreement. ESI considers its employee relations to be good.
PATENTS AND OTHER INTELLECTUAL PROPERTY
ESI has a policy of seeking patents when appropriate on inventions
relating to new products and improvements which are discovered or developed
as part of ESI's on-going research, development and manufacturing
activities. ESI owns 34 United States patents and has applied for 14
patents in the United States. In addition, ESI has 31 foreign patents and
has applied for 38 additional foreign patents. Although ESI's patents are
important, ESI believes that the success of its business depends to a
greater degree on the technical competence and innovation of its employees.
ESI relies on copyright protection for its proprietary software.
ESI also relies upon trade secret protection for its confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques, or that ESI can meaningfully protect its trade secrets.
Some customers using certain products of ESI have received a
notice of infringement from Jerome H. Lemelson, alleging that equipment
used in the manufacture of semiconductor products infringes patents issued
to Mr. Lemelson relating to "machine vision" or "barcode reader"
technologies. Certain of these customers have notified ESI that they may be
seeking indemnification from ESI for any damages and expenses resulting
from this matter. One of ESI's customers has settled litigation with Mr.
Lemelson, and several other customers are currently engaged in litigation
involving Mr. Lemelson's patents. While ESI cannot predict the outcome of
this or similar litigation or its effect upon ESI, ESI believes that it
will not have a material adverse effect on its financial condition or
results of operations.
INFORMATION CONCERNING AISI
BUSINESS
AISI was incorporated on November 12, 1975 and adopted the name
Applied Intelligent Systems, Inc. on May 28, 1982. AISI provides machine
vision solutions for automated process control and visual inspection. AISI
uses innovative technology and aggressive customer support to provide
solutions which replace the human eye on the factory floor. Today, AISI
products are primarily used in the semiconductor and electronics industries
to assemble computer chips and electronic printed circuit boards. Machine
vision has become the technique of choice in today's advanced industries,
to meet the demands for increased standards of reliability and accuracy.
44
<PAGE>
AISI technology provides a unique, low cost computer architecture,
easy-to-use software development tools, and powerful application software
which emulate the human thought process. AISI produces computer vision
systems capable of making intelligent decisions in response to changing
situations machine vision that goes beyond simple "seeing" to actual
understanding. AISI's vision computers are configurable with a chain of
multiple computer processors working simultaneously. Neural network
software uses this increased capability to perform billions of simple
calculations per second, analyzing an image as if the vision system were a
human brain.
PRODUCTS
A machine vision system is a computer-based digital image
processing and analysis machine that replaces human vision in industrial
applications where human vision is inadequate due to speed, resolution or
fatigue factors or the inability to resolve and communicate the position or
condition of an object to a robot or other computer system in real time.
A machine vision system consists of image analysis software and
high-speed computer hardware to run the software in real time. When
connected to a video camera, the vision system interprets the video image
and provides information about objects in that image.
Machine vision systems are widely used in the manufacturing of
semiconductor components and electronic printed circuit boards. The machine
vision market is estimated to exceed $300 million and to be growing at a
rate of approximately 25-35% annually. This growth is driven by the trends
in the semiconductor and electronics market and improvements in machine
vision technologies which has resulted in increased penetration in these
markets.
MARKETS
The worldwide semiconductor industry is large and currently
growing rapidly. The increase in demand is driven by growth in traditional
markets for semiconductors such as computers, networking,
telecommunications and other advanced electronics applications, the
proliferation of semiconductor devices into new products and markets such
as cellular telephones, pagers, automobiles, medical products, household
appliances and other consumer products, and the rise in semiconductor
content in electronic products due, primarily, to the transition from
analog to digital equipment.
Strong semiconductor demand requires semiconductor manufacturers to
increase substantially their investment in plant and equipment. Today, a
typical fabrication plant costs in excess of $1 billion to construct, with
more than two-thirds of the cost allocated to equipment. In a typical
fabrication plant of the 1980's, the cost of equipment represented
approximately 50% of the total facility cost, but this percentage has risen
as the complexity of the average device has increased. This complexity has
been driven by the customers of semiconductor manufacturers who demand
integrated circuits that perform more complex tasks, run faster, generate
less heat and consume less power, while also being both smaller and less
expensive.
TECHNOLOGY
In order to incorporate more complex functionality into a smaller
package, to improve performance (which is affected by the distance signals
travel through the circuitry) and to control power consumption and heat
production, manufacturers are forced to use smaller and smaller device
features. A decade ago, integrated circuits generally had feature sizes of
three microns or more. Today's more complex integrated circuits may have
line geometries and feature sizes of less than 0.5 microns, and devices
which will require geometries of 0.25 microns or less are under
development. To package
45
<PAGE>
these newer devices, assembly equipment must be able to handle smaller,
more complex packages with higher pin counts or leads. As feature sizes
shrink and device densities increase, huge demands are placed on the
semiconductor equipment manufacturers.
This move toward devices that are denser and more complex has
allowed machine vision to emerge as a critical technology in the
manufacture of semiconductors. Machine vision enables semiconductor
manufacturers to achieve the precision necessary to produce these devices
while increasing equipment speed and lowering error rates. Machine vision
pervades the manufacturing process from wafer production through integrated
circuit packaging, and is used to control steppers, probers, dicers, die
bonders, wire bonders and packaging equipment.
The electronics assembly equipment market is growing at an annual
rate of approximately 20-30%. This growth is driven primarily by the
increased demand for consumer electronics, automotive and telecommunication
products which require increasingly sophisticated electronic assembly
techniques. Improvements in integrated circuit design and fabrication have
increased the complexity of individual components and have facilitated
significant changes in the methods of making interconnections between
components and circuit boards. For example, for surface mounted devices
with leads, as the number of leads increases and the spacing between leads
is reduced, the device becomes more fragile and placement becomes more
difficult. Machine vision allows electronics manufacturers to deal with
these obstacles while increasing production speeds and quality. Electronics
assembly equipment manufacturers are currently using machine vision in the
following process steps: bare board inspection, solder paste screening,
solder inspection, glue dispensing, device placement and post solder
inspection.
Today, semiconductor and electronics manufacturers are seeking to
increase productivity by improving speed, accuracy and quality, while
reducing plant, equipment and labor costs. In response to these pressures
and the increasing complexity of manufactured products, manufacturers are
beginning to merge discrete assembly steps, incorporate in-line inspection
and embedded process control, generate statistical information for process
control, overlap electrical and mechanical assembly, add flexibility
required for shorter life-cycles, and provide more precision than can be
afforded by mechanical components.
In response to these manufacturing requirements, machine vision
suppliers are required to deliver systems that provide faster application
speeds, process larger images, deliver more accuracy and robustness and
provide capabilities for defect detection and analysis. Higher vision
application speeds require faster vision algorithms or computers.
Compounding the problem, however, is the ongoing trend toward larger image
sizes. Over the last decade, image sizes have grown from 128 x 128 pixels,
through 256 x 256, to the current standard of 512 x 512 pixels per image.
Each doubling of the image size requires four times the computer speed to
do the same job, because the number of pixels quadruples. Higher quality
requires more accuracy and robustness. More accuracy and robustness can
only come from improved software algorithms or processing more pixels
within a given field of view. Recognizing errors, or defect detection and
analysis, is a very difficult problem in machine vision. Size differences,
shape differences, feature relationship differences, texture differences
and missing or additional material in the image, may all be considered
defects. Vision systems must employ sophisticated hardware and software
approaches to meet these challenges.
AISI's solutions to the demands of the semiconductor and
electronics industries are based on a proprietary hardware architecture and
an intelligent software approach. AISI's proprietary hardware architecture
utilizes
46
<PAGE>
massively parallel processing with many processing elements, greatly
increasing processing speeds. AISI manufactures linear, Single Instruction,
Multiple Data (SIMD) massively parallel computers, which may provide a
dedicated computer processing element for every column of pixels in an
image. This architecture was designed to be the best trade-off between cost
and performance for processing images. AISI's software approach is based
upon high level cognitive functions, such as neural networks, mathematical
morphology and fuzzy logic, which are designed to emulate human-like,
feature-based processing. AISI's proprietary hardware architecture and
intelligent software approach provide the AISI system with the flexibility
to address the varying challenges confronted by machine vision suppliers.
Higher vision application speeds are often realized if accuracy of
alignment is increased or computers become faster. High alignment accuracy
is achieved with AISI's proprietary pattern recognition software ("Vector
Correlation") and its improved automated pattern teaching algorithm,
insuring that the selected pattern is unique within the image. AISI
believes that its Vector Correlation algorithm can be up to twice as
accurate in production as typical template matching algorithms, with
accuracies being largely maintained even as the quality of the subject
images degrades. AISI utilizes a unique, massively parallel processor (MPP)
architecture, because faster CPUs alone do not solve problems presented by
large amounts of data generated by machine vision applications. The MPP's
ability to simultaneously process a large number of data provides an
inherent speed benefit over comparable serial processing systems.
Larger image sizes can be processed by AISI's MPP architecture
which is scalable and can be expanded as image sizes increase. Each time an
image doubles in size, AISI's array of processing elements can be doubled
resulting in higher throughput than serial processing.
AISI's products provide accuracy and robustness through Vector
Correlation and supporting algorithms. Vector Correlation is independent of
both lighting levels and shading, and it is more robust than other known
algorithms as the object becomes occluded and the background becomes more
complex. Algorithms may include fuzzy logic to extend robustness by
allowing a defined amount of ambiguity to enter into the algorithm.
AISI's software and hardware are optimized for the detection of
defects. Defect detection is best done by mathematical morphology. Although
mathematical morphology is too memory access intensive to be effective on a
serial vision computer, AISI's unique MPP morphology is well suited to this
task and is the result of a search for hardware that optimizes morphology.
Defect analysis goes beyond defect detection and is the determination of
the cause and impact of errors introduced in production. AISI provides
defect analysis by using intelligent neural networks to analyze image
features instead of pixels. This is the way a human would examine an image.
Features might be damaged but yet fully recognizable by a neural network or
a human. Neural networks are powerful tools for analyzing defects, but they
require powerful computer hardware, such as AISI's MPP.
STRATEGY
AISI has worked closely with its customers in developing new
capabilities for machine image recognition. AISI's strategy has been to
develop standard hardware and software products which are integrated by
customers into their industrial environment. AISI's approach is to make
available the entire software development environment, enabling customers
to design and refine applications of their own. AISI's commitment to
quality support and training has resulted in long-term relationships with
several of the world's leading semiconductor and electronic devices
manufacturers and equipment suppliers.
47
<PAGE>
AISI markets its products through direct sales, sales
representatives, and value added resellers in North America, Europe, and
Asia. Significant customers include: Motorola, Intel, Universal
Instruments, and Kulicke & Soffa in the United States; Siemens in Germany;
Philips N.V. in Holland; Canon, Sanyo Silicon, Toshiba, Japan-EM and
Ishikawajima-Harima Heavy Industries in Japan; Samsung and Haitai
Electronics in Korea; and Motorola plants in Malaysia, Taiwan, Hong Kong
and the Philippines.
48
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined statements of income
data for the nine month period ended February 29, 1996 and for each of the
years in the three year period ended May 31, 1995 and the unaudited pro
forma combined balance sheet data as of February 29, 1996, give the pro
forma effect of the proposed Merger of ESI and AISI on a
pooling-of-interests accounting basis. AISI has a calendar year-end and
accordingly all AISI statement of income data have been adjusted to twelve
month periods for each of the three periods ended March 31, 1995. The AISI
nine months statement of income data is as of December 31, 1995. The pro
forma financial data should be read in conjunction with the accompanying
financial information with respect to AISI and the financial information
incorporated by reference in this Proxy Statement/Prospectus with respect
to ESI. See "Information Incorporated by Reference." The following
anticipated events have not been included in the Unaudited Pro Forma
Combined Financial Statements: (1) Merger related expenses currently
estimated at $2.0 million after-tax will be recorded after consummation of
the Merger which is expected to occur during the first quarter of fiscal
1997 (Merger related expenses primarily consist of professional fees); and
(2) the positive effects of potential cost savings which may be achieved
subsequent to the Merger.
49
<PAGE>
<TABLE>
<CAPTION>
ESI AND AISI
PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ESI AISI
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
MAY 31, 1993 MARCH 31, 1993 ADJUSTMENT COMBINED
------------ -------------- ---------- --------
<S> <C> <C> <C> <C>
Net Sales
Laser systems and service........... $36,742 $ ---- $ ---- $36,742
Capacitor manufacturing equipment .. 20,393 ---- ---- 20,393
Vision systems...................... 2,736 7,437 ---- 10,173
Divested product lines.............. 7,980 ---- ---- 7,980
------- -------- -------- -------
Total............................... 67,851 7,437 ---- 75,288
Cost of sales........................... 36,141 2,502 ---- 38,643
------ ------- --------
Gross margin............................ 31,710 4,935 ---- 36,645
Operating expenses:
Selling, service and administrative 19,189 2,319 21,508
Research, development and
engineering......................... 9,027 2,174 ---- 11,201
Total operating expenses............ 28,216 4,493 ---- 32,709
------ -------- -------- ------
Operating income........................ 3,494 442 ---- 3,936
Interest expense........................ (771) (23) ---- (794)
Other expense........................... (108) ---- ---- (108)
------- -------- -------- --------
Income before income taxes.............. 2,615 419 ---- 3,034
Provision for income taxes.............. 371 ---- ---- 371
------ -------- -------- -------
Net income.............................. $ 2,244 $ 419 ---- $ 2,663
======= ======= ======== ========
Net income per share.................... $ 0.37 $ 0.11 $ ---- $ 0.32
Number of shares used in computing
per share amounts................... 6,146 3,664 ---- 8,447
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
50
<PAGE>
<TABLE>
<CAPTION>
ESI AND AISI
PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ESI AISI
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
MAY 31, 1994 MARCH 31, 1994 ADJUSTMENT COMBINED
------------ -------------- ---------- --------
<S> <C> <C> <C> <C>
Net Sales
Laser systems and service........... $41,985 $ ---- $ ---- $41,985
Capacitor manufacturing equipment .. 23,961 ---- ---- 23,961
Vision systems...................... 2,562 11,993 ---- 14,555
Divested product lines.............. 4,042 ---- ---- 4,042
-------- -------- ------- -------
Total............................... 72,550 11,993 ---- 84,543
Cost of sales........................... 35,838 3,907 ---- 39,745
------- -------- -------
Gross margin............................ 36,712 8,086 ---- 44,798
Operating expenses:
Selling, service and administrative 20,049 3,452 ---- 23,501
Research, development and
engineering......................... 8,235 3,175 ---- 11,410
-------- -------- ------
Total operating expenses............ 28,284 6,627 ---- 34,911
------- ------- -------- ------
Operating income........................ 8,428 1,459 ---- 9,887
Interest expense........................ (557) (74) ---- (631)
Other income............................ 2,081 ---- ---- 2,081
------- -------- -------- -------
Income before income taxes.............. 9,952 1,385 ---- 11,337
Provision for income taxes............. 2,078 15 ---- 2,093
------- ------- -------- -------
Net income.............................. $ 7,874 $ 1,370 ---- $ 9,244
======= ======= ======== ========
Net income per share.................... $ 1.23 $ 0.37 $ ---- $ 1.04
Number of shares used in computing
per share amounts................... 6,414 3,693 ---- 8,868
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
51
<PAGE>
<TABLE>
<CAPTION>
ESI AND AISI
PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ESI (A) AISI
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
MAY 31, 1995 MARCH 31, 1995 ADJUSTMENT COMBINED
------------ -------------- ---------- --------
<S> <C> <C> <C> <C>
Net Sales
Laser systems and service........... $ 69,106 $ ---- $ ---- $69,106
Capacitor manufacturing equipment .. 39,115 ---- ---- 39,115
Vision systems...................... 3,055 15,936 ---- 18,991
-------- ----- -------- -------
Total............................... 111,276 15,936 ---- 127,212
Cost of sales........................... 53,278 6,088 ---- 59,366
-------- ----- -------- -------
Gross margin............................ 57,998 9,848 ---- 67,846
Operating expenses:
Selling, service and administrative 29,303 4,187 ---- 33,490
Research, development and
engineering......................... 13,336 4,306 ---- 17,642
Total operating expenses............ 42,639 8,493 ---- 51,132
------ ------ -------- ------
Operating income........................ 15,359 1,355 ---- 16,714
Interest income (expense)............... 601 (69) ---- 532
Other income (expense).................. (208) 229 ---- 21
--------- ------- ----- --------
Income before income taxes.............. 15,752 1,515 ---- 17,267
Provision for income taxes.............. 4,658 99 ---- 4,757
------- ------- -------- -------
Net income.............................. $ 11,094 $ 1,416 ---- $ 12,510
======== ========= ======== ========
Net income per share.................... $ 1.46 $ 0.37 ---- $ 1.24
Number of shares used in computing
per share amounts................... 7,593 3,820 ---- 10,093
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
52
<PAGE>
<TABLE>
<CAPTION>
ESI AND AISI
PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ESI AISI
NINE MONTHS ENDED NINE MONTHS ENDED PRO FORMA PRO FORMA
FEB. 29, 1996 DEC. 31, 1995 ADJUSTMENT(B) COMBINED
------------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Net Sales
Laser systems and service............. $ 77,778 $ ---- $ ---- $77,778
Capacitor manufacturing equipment .... 38,393 ---- ---- 38,393
Vision systems........................ 2,266 18,271 ---- 20,537
-------- ------ ------
Total................................. 118,437 18,271 ---- 136,708
Cost of sales............................. 54,524 8,141 ---- 62,665
-------- -------- -------- -------
Gross margin.............................. 63,913 10,130 ---- 74,043
Operating expenses:
Selling, service and administrative.. 29,705 3,646 ---- 33,351
Research, development and
engineering........................... 11,905 3,319 ---- 15,224
Acquired in-process research and
development........................... 6,000 ---- ---- 6,000
------- -------- -------- -------
Total operating expenses.............. 47,610 6,965 ---- 54,575
------- -------- -------
Operating income.......................... 16,303 3,165 ---- 19,468
Interest income (expense)................. 879 (58) ---- 821
Other expense............................. (291) (22) ---- (313)
--------- --------- ---------
Income before income taxes................ 16,891 3,085 ---- 19,976
Provision (benefit) for income taxes...... 6,226 431 (750) 5,907
-------- -------- --------- -------
Net income................................ $ 10,665 $ 2,654 750 $ 14,069
======== ======== ======= ========
Net income per share...................... $ 1.24 $ 0.64 $ ---- $ 1.26
Number of shares used in computing
per share amounts..................... 8,593 4,121 ---- 11,187
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
53
<PAGE>
<TABLE>
<CAPTION>
ESI AND AISI
PRO FORMA COMBINED BALANCE SHEET
(in thousands)
(unaudited)
ESI AISI PRO FORMA PRO FORMA
AT FEB. 29, 1996 AT DEC. 31, 1995 ADJUSTMENT(B) COMBINED
---------------- ---------------- ------------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $ 12,288 $ 805 $ ---- $ 13,093
Securities available for sale........ 20,063 ---- ---- 20,063
Trade receivables, net............... 40,190 4,378 ---- 44,568
Inventories.......................... 29,894 4,020 ---- 33,914
Deferred income taxes ............... 3,136 ---- 750 3,886
Other current assets................. 1,272 85 ---- 1,357
-------- ------- -------- -------
Total current assets............... 106,843 9,288 750 116,881
------- ------- ------ -------
Property and equipment, at cost...... 38,729 4,637 ---- 43,366
Less-accumulated depreciation ..... (22,582) (2,365) ---- (24,947)
-------- ------- -------- --------
Net property and equipment....... 16,147 2,272 ---- 18,419
OTHER ASSETS:
Deferred income taxes................ 1,979 ---- ---- 1,979
Other assets......................... 5,028 115 ---- 5,143
------- ------ -------- -----
TOTAL ASSETS......................... $129,997 $ 11,675 $ 750 $142,422
======== ======== ======= ========
CURRENT LIABILITIES:
Accounts payable..................... $ 7,286 $ 2,594 $ ---- $ 9,880
Accrued liabilities:
Payroll related ................... 2,443 310 ---- 2,753
Commissions........................ 2,352 ---- ---- 2,352
Income taxes....................... 928 279 ---- 1,207
Other.............................. 4,104 912 ---- 5,016
------- ------- -------- -------
Total accrued liabilities........ 9,827 1,501 ---- 11,328
Deferred revenue..................... 519 669 ---- 1,188
------- ------- -------- -------
Total current liabilities............ 17,632 4,764 ---- 22,396
OTHER LONG TERM
LIABILITIES.......................... 1,107 117 ---- 1,224
-------- ------- -------- -------
Total liabilities.................... 18,739 4,881 ---- 23,620
SHAREHOLDERS EQUITY
Preferred stock...................... ---- ---- ---- ----
Common stock......................... 55,516 23,145 ---- 78,661
Retained earnings.................... 55,742 (16,351) 750 40,141
------ -------- ------ ------
Total shareholders' equity......... 111,258 6,794 750 118,802
------- ------- ------ -------
Total liabilities & equity........... $129,997 $ 11,675 $ 750 $142,422
======== ======== ======= ========
</TABLE>
Notes to Unaudited Pro Forma Combined Financial Statements
54
<PAGE>
Note A On August 12, 1994, ESI acquired the stock of Chicago Laser
Systems, Inc., a privately held company based in Des Plaines,
Illinois. ESI financial information for May 31, 1995 includes pro
forma combined income statement data as if this acquisition had
occurred at the beginning of the period.
Note B Pooling adjustment to reverse a portion of the AISI deferred tax
asset valuation allowance.
Note C The pro forma combined statement of income for ESI and AISI have
been prepared as if the Merger was completed at the beginning of
the periods presented. The pro forma combined net income per share
is based on the combined weighted average number of common and
common equivalent shares of ESI Common Stock and AISI Common Stock
for each period, based on the Conversion Ratio of 0.644 shares of
ESI Common Stock for each share of AISI Common Stock.
Note D No significant adjustments are required to conform the
accounting policies of the combined company.
AISI MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS
RESULTS OF OPERATIONS. The following table sets forth certain financial
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
YEAR ENDED DECEMBER 31, March 31,
----------------------- ---------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of vision system sales.......... 32.5 36.1 44.1 42.2 49.2
---- ---- ---- ---- ----
Gross profit......................... 67.5 63.9 55.9 57.8 50.8
---- ---- ---- ---- ----
Operating expenses:
Selling, service and
administrative expenses............ 29.7 27.2 20.9 24.4 18.7
Research, development and
engineering expenses................. 27.0 27.0 20.0 27.7 19.8
---- ---- ---- ---- ----
Total operating expenses............. 56.7 54.2 40.9 52.1 38.5
---- ---- ---- ---- ----
Operating income..................... 10.8 9.7 15.0 5.7 12.3
Other income (expense), net.......... (0.6) 1.1 (0.4) (0.3) 0.3
--- --- --- --- ---
Income before provision for
income taxes...................... 10.2 10.8 14.6 5.4 12.6
Provision for income taxes........... 0.2 0.6 1.9 0.5 0.9
--- --- --- --- ---
Net income........................... 10.0% 10.2% 12.7% 4.9% 11.7%
==== ==== ==== === ====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
SALES
Sales increased 38.4% to $6.0 million for the three months ended
March 31, 1996 from $4.3 million for the three months ended March 31, 1995.
This increase was primarily attributable to a 41.0% increase in system
sales volumes. The increase in sales volume was partially offset by lower
average
55
<PAGE>
sales prices. International sales decreased to 10.3% of sales for the three
months ended March 31, 1996 from 17.8% of sales for the three months ended
March 31, 1995.
The following table sets forth the components of AISI's sales:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1995 1996
---- ----
(UNAUDITED)
(IN THOUSANDS)
Sales:
<S> <C> <C>
Vision system sales............................................ $4,201 $5,924
Development funding and software sales......................... 107 40
------- --------
Total sales................................................. $4,308 $5,964
====== ======
</TABLE>
VISION SYSTEM SALES. The increase in vision system sales was due
primarily to an increase in unit shipments to existing customers offset by
a decrease in the average selling price of each unit. Vision system sales
to AISI's two largest customers during the first three months of 1996
increased $2.0 million or 68.3% over the same period of the prior year.
DEVELOPMENT FUNDING AND SOFTWARE SALES. Revenues recorded from
development funding and software sales during the three months ended March
31, 1996 and the three months ended March 31, 1995 represent the revenues
from several sales to existing customers.
GROSS PROFIT. The following table sets forth AISI's vision system
sales and gross profit from vision system sales:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1995 1996
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Vision system sales.............................................. $4,201 $5,924
Cost of vision system sales...................................... 1,818 2,933
------ ------
Vision system gross profit....................................... $2,383 $2,991
Vision system gross profit as a percentage
of vision system sales.......................................... 56.7% 50.5%
</TABLE>
Vision system gross profit as a percentage of vision system sales
decreased to 50.5% for the three months ended March 31, 1996 from 56.7% for
the three months ended March 31, 1995. This decline in gross profit margin
is primarily attributable to product mix issues resulting from increased
shipments of LANTERN products, increased costs of components used in two
main product lines and a decrease in average revenues per vision system
sold.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE
Research, development and engineering expenses decreased 0.8% to
$1.18 million or 19.8% of sales for the three months ended March 31, 1996
from $1.19 million or 27.7% of sales for the three months ended March 31,
1995. This
56
<PAGE>
relatively flat expense level is attributable to the net of increases in
personnel and facility rental expenses offset by expense reductions from
reduced purchases of parts and equipment for development projects.
SELLING, SERVICE AND ADMINISTRATIVE EXPENSE
Selling, service and administrative expenses increased 6.3% to
$1.1 million or 18.7% of revenues for the three months ended March 31, 1996
from $1.0 million or 24.4% of sales for the three months ended March 31,
1995. This expense increase is a result of greater utilization of
consultants and higher recruiting and relocation costs associated with new
employees.
OTHER INCOME (EXPENSE), NET
The other income (expense), net caption primarily represents the
net of interest income earned from investing excess funds and interest
expense incurred from borrowings under AISI's line of credit. As of March
31, 1996, AISI had no outstanding borrowings under its line of credit as a
result of an increase in cash flow from operations.
INCOME TAXES
The effective tax rates are lower than statutory rates primarily
due to the utilization of prior years net operating losses.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
SALES
AISI derives revenues principally from sales of vision systems. In
addition AISI has received non-recurring development funding revenues from
strategic partners and customers in connection with product development
projects. Sales increased $4.0 million or 37.6% from 1993 to 1994, and $7.8
million or 52.5% from 1994 to 1995. International sales as a percentage of
total sales rose from 23.9% in 1993 to 27.0% in 1994, and declined to 12.9%
in 1995. The amount of sales recorded from international sources has
historically been related to the level of development funding and software
sales recorded.
The following table sets forth the components of AISI's sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
Sales:
<S> <C> <C> <C>
Vision system sales............................................ $ 9,196 $12,715 $22,046
Development funding and software sales......................... 1,567 2,089 533
-------- --------- ----------
Total sales.................................................. $10,763 $14,804 $22,579
======= ======= =======
</TABLE>
VISION SYSTEM SALES. AISI's significant increase in revenues since
1993 has been due primarily to an increase in unit shipments partially
offset by a decrease in the average selling price of each unit. The growth
in product sales to AISI's two largest customers was $3.6 million from 1993
to 1994 and $8.3 million from 1994 to 1995.
DEVELOPMENT FUNDING AND SOFTWARE SALES. Revenues from development
services and software sales in 1993 and 1994 represent revenues recorded
from one and two projects, respectively, with one and two customers,
respectively. In 1995 revenues were derived from several projects.
57
<PAGE>
GROSS PROFIT
The following table sets forth AISI's system sales and gross
profit from system sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Vision system sales.............................................. $9,196 $12,715 $22,046
Cost of vision system sales...................................... 3,506 5,337 9,959
----- ----- -----
Vision system gross profit....................................... $5,690 $7,378 $12,087
Vision system gross profit as a percentage
of vision system revenues........................................ 61.9% 58.0% 54.8%
</TABLE>
AISI's vision system gross profit margin is affected by several
factors, including production volumes, mix between products, manufacturing
yields, repair activity, warranty costs and inventory valuation
adjustments.
The decline in vision system gross profit margins from 1993 to
1994 was primarily attributable to increased manufacturing costs associated
with initial volume shipments of the LANTERN product and an increase in
warranty costs due to the failure of a purchased component part.
Additionally, the average revenues per system sold continued to decrease in
1994.
The decline in vision system gross profit margins from 1994 to
1995 was attributable to increased costs on two proprietary components used
on two major product lines, and increases to inventory and warranty
reserves in anticipation of the crossover to LANTERN products.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE
Research, development and engineering expenses increased $1.1
million or 37.5% from 1993 to 1994 and $0.5 million or 12.9% from 1994 to
1995. However, such costs decreased as a percentage of total revenues from
27.0% in 1993 and 1994, to 20.0% in 1995. The increase in research,
development and engineering expense from 1993 to 1994 was attributable to
increased staffing and component parts usage to support hardware
engineering efforts directed at the LANTERN products and increased
application engineering efforts to support existing customers.
Additionally, increased usage of computer and test equipment resulted in an
increase in depreciation expense and equipment rental expense. The increase
in research, development and engineering expense from 1994 to 1995 was also
due to increases in staffing and depreciation expense.
SELLING, SERVICE AND ADMINISTRATIVE EXPENSE
Selling, service and administrative expenses were $3.2 million,
$4.0 million and $4.7 million representing 29.7%, 27.2% and 20.9% of total
sales in 1993, 1994 and 1995, respectively. The increase in selling,
general and administrative expense from 1993 to 1994 was due to headcount
increases to support increased sales volumes partially offset by a decrease
in sales commission expense as the level of revenues recorded through third
parties decreased in 1994 from 1993. The increase from 1994 to 1995 was due
to increased staffing and accelerated amortization of capitalized patent
and trademark costs.
OTHER INCOME (EXPENSE) NET
AISI's other income (expense) is primarily comprised of interest
expense. Interest expense represents interest on borrowings under AISI's
bank
58
<PAGE>
line of credit which is used primarily to provide working capital and for
equipment purchases. However, other income (net) in 1994 principally
consisted of a $0.2 million gain recorded as a result of a theft of Company
computers and related equipment for which the insurance proceeds exceeded
the book value of the stolen assets.
INCOME TAXES
The federal income tax provision recorded by AISI reflects the
impact of the Alternative Minimum Tax rules. The effective tax rates are
lower than statutory rates primarily due to the utilization of prior years
net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
AISI has funded its operations to date through the private sale of
equity securities, lease financing, bank borrowings and cash generated from
operations. Working capital was $4.9 million as of March 31, 1996.
Principal sources of liquidity at March 31, 1996 consisted of $2.7 million
in cash and a $3 million revolving, unsecured line of credit under a loan
agreement with a commercial bank, which expires in September, 1997 and was
unused and available at March 31, 1996. The agreement contains financial
covenants and restrictions relating to various matters. As of March 31,
1996, AISI was in compliance with such covenants and restrictions.
Net cash provided by operating activities was $0.2 million, $0.4
million and $3.2 million for 1993, 1994 and 1995, respectively, and $2.5
million for the three months ended March 31, 1996. The trend of increased
cash generated from operations has been due primarily to higher net income.
Net cash used for investing activities was $0.6 million, $1.4
million and $1.2 million for 1993, 1994 and 1995, respectively, and $0.5
million for the three months ended March 31, 1996. Cash used for investing
activities has consisted primarily of capital equipment purchases,
primarily for computers and manufacturing equipment.
Net cash provided by financing activities in 1993 was $0.5
million, primarily from borrowings under AISI's bank line of credit. Cash
provided by financing activities in 1994 was due to net borrowings of $0.8
million under AISI's bank line of credit and $0.1 million received upon the
exercise of stock options. Net cash used for financing activities was $1.3
million in 1995, and $0.1 million for the three months ended March 31,
1996. Cash used for financing activities has consisted primarily of
repayments of AISI's bank line of credit.
BUSINESS ENVIRONMENT
AISI's business success depends on the accurate identification of
viable markets, timely development of technologically superior products,
cost effective production processes and providing excellent products to a
small number of customers.
The cost of product development requires AISI to make large
investments in relationship to its ability to recover from unforseen market
shifts. A significant portion of AISI's future revenues will come from new
products. However, a number of uncertainties exist, including AISI's
product performance and uncertain market conditions. AISI will also
continue to be challenged to balance product cost with continued downward
pricing pressure. Accordingly, AISI cannot determine the ultimate effect
new products will have on sales or income from existing operations.
59
<PAGE>
During 1994, AISI completed the first release of products for a
new family of vision systems, named LANTERN. The LANTERN family consists of
three products: a VME bus-based system, a complete vision system on a
single board, and a PCI bus system which is in development. Due to the
market demand for these products, AISI put the first two of these systems
into production before they had gone through the reengineering phase to
reduce size and cost. Therefore, volume shipments of the LANTERN products
have caused and will continue to cause declines in gross margins until
revised versions of these systems are put into production; this is expected
to occur at the end of calendar 1996. The extent of the impact on gross
margins from volume shipments of LANTERN products will depend heavily upon
the product mix and timing of the completion of the reengineering process.
AISI has recently adopted an outsourcing strategy for the assembly
of its existing vision products. Currently, two contract manufacturers are
meeting all of AISI's manufacturing needs for its high volume products. The
use of contract manufacturers is expected to improve quality, decrease
manufacturing costs, and provide manufacturing flexibility. AISI expects
that contract manufacturers will provide most if not all of AISI's future
manufacturing services. Additionally, as part of its strategy to improve
inventory management AISI has entered into a distributor kitting
relationship with a major distributor. As a result of these transitions,
AISI may experience product shipment delays and short term increases in
manufacturing costs, both of which would negatively impact operating
results.
Revenues have increased and AISI has been profitable in recent
years; however, there can be no assurance that AISI's revenues will grow in
future periods, that they will grow at historical rates or that AISI will
remain profitable in future periods. As a result, AISI believes historical
results of its operations should not be relied upon as indications of
future performance.
AISI's revenues are currently dependent on sales to a few OEM
customers: 83% of AISI's sales for the three months ended March 31, 1996
were derived from two OEM customers. In 1993, 1994 and 1995, AISI's two
largest customers in each year accounted for approximately 57.6%, 61.4%,
and 76.9% of AISI's total sales, respectively. AISI has no long-term
purchase commitments from any of its customers and expects a significant
portion of its future sales to remain concentrated within a small number of
customers. The loss of any of these customers or any reductions in
purchases from these customers would be significant. In fiscal 1996, one of
AISI's significant customers has materially reduced its order rate from
levels that existed in late 1995. Continuation of this trend could have a
materially adverse impact on future results of operations.
AISI's operating results fluctuate, therefore cash flows can be
uneven. The key to assuring adequate liquidity is positive earnings. A bank
line of credit is used to balance short-term disparities between cash
receipts and disbursements, and remains an integral part of AISI's capital
resources. The cost to develop new products has a long-term benefit for
AISI; nevertheless, it is a current operating expense. Balancing generation
of income with the investment in research and development is critical to
AISI's future success.
DESCRIPTION OF AISI CAPITAL STOCK
As of June 1, 1996, there were 3,490,087 shares of AISI Common
Stock outstanding held by 237 holders of record. The issued and outstanding
shares of AISI Common Stock are validly issued, fully paid and
nonassessable. There is no established public trading market for AISI's
Common Stock.
60
<PAGE>
The holders of outstanding shares of AISI Common Stock are
entitled to receive dividends out of assets legally available therefor at
such times and in such amounts as the Board of Directors may from time to
time determine. The shares of AISI Common stock are neither redeemable nor
convertible, and the holders thereof have no preemptive or subscription
rights to purchase any securities of AISI. Upon liquidation, dissolution or
winding up of AISI, the holders of AISI Common Stock are entitled to
receive pro rata the assets of AISI which are legally available for
distribution, after payment of all debts and other liabilities and subject
to the prior rights of any holders of preferred stock then outstanding.
Each outstanding share of AISI Common Stock is entitled to one vote on all
matters submitted to a vote of stockholders.
There is no cumulative voting.
61
<PAGE>
AISI VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
AISI Common Stock is the only outstanding authorized voting
security of AISI. On June 1, 1996 there were 3,490,087 shares of AISI
Common Stock outstanding, entitled to one vote per share. AISI Common Stock
does not have cumulative voting rights.
The following table sets forth certain information with respect to
the beneficial ownership of AISI's Common Stock as of June 1, 1996 by (i)
each person who is known by AISI to own beneficially more than 5% of the
outstanding shares of AISI Common Stock, (ii) each director of AISI who
owns AISI's Common Stock, (iii) each of the executive officers who own
AISI's Common Stock, and (iv) all executive officers and directors of AISI
as a group.
<TABLE>
<CAPTION>
Beneficial
Ownership(1)(2)
Name and Address of Beneficial Owner Shares Percent
- ------------------------------------ ------ -------
<S> <C> <C>
Morgenthaler Venture Partners I (3) 445,967 12.8%
Morgenthaler Venture Partners II (3) 563,009 16.1%
700 National City Bank Building
Cleveland, Ohio 44114
State of Michigan ........................... 626,435 17.9%
Department of the Treasury
P.O. Box 15128
Lansing, Michigan 48901
Michigan Strategic Fund .................. 400,000 11.5%
525 West Ottawa Street
Third Floor, Law Building
Lansing, Michigan 48933
Robert D. Pavey (3) 0 0 %
700 National City Bank Building
Cleveland, Ohio 44114
Herbert D. Doan.......................... 509,630 14.6%
P.O. Box 431
Midland, Michigan 48641
James E. Anderson (4) .................... 174,397 5.0%
Jon G. Ehrmann (5) ........................ 109,364 3.1%
Hwei-Kai Hsi (6) .......................... 96,500 2.8%
Yvette M. Puskarich (7) .................. 19,875 0.6%
Donald D. Redding (8) .................... 21,333 0.6%
Philip H. White (9) ........................ 35,833 1.0%
Stephen S. Wilson (10) .................... 134,887 3.9%
W. Dale Compton .................... 15,000 0.4%
All executive officers and directors as a
group (10 individuals)(11) ................ 1,116,820 32.0%
<FN>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by each person and the percentage ownership of that
person, shares of AISI Common Stock subject to options held by that
person that are currently exercisable or exercisable within 60 days of
June 1, 1996 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage
ownership of each other person. Except as indicated in the footnotes
to this table and pursuant to applicable community property laws, the
62
<PAGE>
persons named in the table have sole voting and investment power with
respect to the shares set forth opposite such person's name.
(2) Applicable percentage of ownership is based on 3,490,087 shares
of AISI Common Stock outstanding on June 1, 1996.
(3) Mr. Pavey, the Chairman of the Board of Directors of AISI, is a
general partner of Morgenthaler Venture Partners I and Morgenthaler
Venture Partners II. Voting and investment power with respect to the
shares of AISI Common Stock owned by Morgenthaler Venture Partners and
Morgenthaler Venture Partners II is shared by the general partners of
the respective management partnerships of Morgenthaler Venture
Partners I and Morgenthaler Venture Partners II.
(4) Includes 173,733 shares issuable upon exercise of options that are
exercisable within 60 days of June 1. 1996.
(5) Includes 92,833 shares issuable upon exercise of options that
are exercisable within 60 days of June 1, 1996.
(6) Includes 84,500 shares issuable upon exercise of options that
are exercisable within 60 days of June 1, 1996.
(7) Includes 19,875 shares issuable upon exercise of options that
are exercisable within 60 days of June 1, 1996.
(8) Includes 21,333 shares issuable upon exercise of options that
are exercisable within 60 days of June 1, 1996.
(9) Includes 35,833 shares issuable upon exercise of options that
are exercisable within 60 days of June 1, 1996.
(10) Includes 126,732 shares issuable upon exercise of options that
are exercisable within 60 days of June 1, 1996.
(11) Includes an aggregate of 554,840 shares issuable upon exercise
of options held by officers and directors that are exercisable
within 60 days of June 1, 1996.
</FN>
</TABLE>
COMPARISON OF SHAREHOLDER RIGHTS
ESI and AISI are incorporated in Oregon and Michigan,
respectively. Shareholders of AISI receiving ESI Common Stock in connection
with the Merger, whose rights as shareholders are currently governed by the
Michigan Business Corporation Act and other laws of the State of Michigan
("Michigan Law"), AISI's Articles of Incorporation, as amended (the "AISI
Articles") and AISI's Bylaws (the "AISI Bylaws") (the AISI Articles and the
AISI Bylaws are referred to as the "AISI Charter Documents") will, upon the
Effective Time of the Merger, automatically become shareholders of ESI, and
their rights will be governed by the Oregon Business Corporation Act and
other laws of the State of Oregon ("Oregon Law"), ESI's Articles of
Incorporation, as amended (the "ESI Articles"), and ESI's Bylaws (the "ESI
Bylaws") (the ESI Articles and the ESI Bylaws are referred to as the "ESI
Charter Documents").
The following is a summary of material similarities and
differences between the rights of ESI shareholders under the ESI Articles,
the ESI Bylaws and Oregon Law on the one hand, and AISI shareholders under
the AISI Articles, AISI Bylaws and Michigan Law on the other hand. The
following discussion is not meant to be relied upon as an exhaustive list
or detailed description of such differences and is not intended to
constitute a detailed comparison or
63
<PAGE>
description of the provisions of the ESI Charter Documents, the AISI
Charter Documents, Michigan Law or Oregon Law. The following discussion is
qualified in its entirety by reference to the ESI Charter Documents, the
AISI Charter Documents, Michigan Law and Oregon Law, and holders of AISI
Stock are referred to the complete texts of such documents and laws.
Additional information concerning the ESI Common Stock also is provided in
the documents incorporated by reference. See "Additional Information" and
"Incorporation by Reference."
AMENDMENT OF CERTIFICATE OR ARTICLES OF INCORPORATION; AMENDMENT OF BYLAWS
ARTICLES OF INCORPORATION
Both Oregon Law and Michigan Law generally provide that in order
for an amendment to a corporation's articles of incorporation to be
adopted, the proposed amendment must be submitted to a vote at a meeting of
shareholders. Oregon Law requires that, prior to submission to the
shareholders, the board of directors must adopt a resolution setting forth
the proposed amendment and direct that it be submitted to the shareholders.
Under Oregon Law, an amendment to the articles of incorporation
is approved if a quorum exists and the votes cast favoring the amendment
exceed the votes cast opposing the action, unless the amendment would
create dissenters' rights, in which case a majority of the votes entitled
to be cast is required for approval. Supermajority voting requirements may
be imposed and maintained by the articles of incorporation, and may be
imposed by the board of directors with respect to any proposed amendment.
The ESI Articles contain no Supermajority provisions with respect to
amending the ESI Articles, except with respect to amending provisions
dealing with the following issues: (1) amendments to the ESI Bylaws, (2)
the removal of a director without cause, and (3) approval of certain
"Business Transactions" with "Related Persons." In each of these cases, an
amendment to the ESI Articles would require a vote of two-thirds (2/3) of
the shareholders entitled to vote with respect to that issue.
Under Michigan Law, in order for an amendment to a corporation's
articles of incorporation to be adopted, the amendment must be approved by
a majority of the outstanding stock entitled to vote thereon and, if any
class or series of shares is entitled to vote thereon as a class, a
majority of the outstanding stock of each class or series entitled to vote
thereon. Supermajority voting requirements may be imposed and maintained by
the articles of incorporation. The AISI Articles contain no supermajority
voting provisions.
BYLAWS
Under Oregon Law, either the board of directors or the
shareholders may amend or repeal the corporation's bylaws unless the
articles of incorporation reserve the power to amend the bylaws exclusively
to the Shareholders in whole or in part, or the Shareholders, in amending
or repealing a particular bylaw, provide expressly that the board of
directors may not amend or repeal that bylaw. Under the ESI Articles, the
ESI Board has the power to alter, amend or repeal the ESI Bylaws or to
adopt new bylaws subject to repeal or change by the ESI shareholders, but
the ESI Bylaws may not be adopted, altered, amended or repealed in any
respect by the ESI shareholders unless such action is approved by the
affirmative vote of the holders of not less than seventy-five percent (75%)
of the outstanding shares of ESI Common Stock.
Under Michigan Law, either the board of directors or the
shareholders may amend or repeal the corporation's bylaws, unless the
articles of incorporation or the bylaws provide that the power to adopt new
bylaws is reserved exclusively to the shareholders or that the bylaws or
any particular bylaw may not be altered or repealed by the board of
directors. The AISI
64
<PAGE>
Articles do not address amendments to the AISI Bylaws. The AISI Bylaws,
however, provide that they may be further added to, altered, amended or
repealed by either (1) the vote of not less than a majority of the members
of the Board then in office at any regular or special meeting, or (2) by
the shareholders at any annual or special meeting if notice of the proposed
addition, alteration, amendment or repeal is included in the notice of the
meeting or waived in writing.
SPECIAL MEETINGS OF SHAREHOLDERS
Oregon Law provides that a special meeting of shareholders may
be called by the board of directors or the holders of 10% or more of the
votes entitled to be cast on any issue proposed to be considered at the
special meeting, or by such persons as are specified in the articles of
incorporation or bylaws. The ESI Bylaws grant authority to the president to
call a special meeting of the ESI shareholders.
Michigan Law provides that a special meeting of shareholders may
be called by the board of directors, or by officers, directors or
shareholders as provided in the corporation's bylaws. In addition, the
holders of 10% or more of the votes entitled to be cast on any issue may,
for good cause shown, apply to a court for an order calling a special
meeting of the shareholders. The AISI Bylaws grant authority to the
president and the chairman of the board to call a special meeting of the
AISI Shareholders, and also allow the holders of shares representing at
least 20% of any class of stock to call a special meeting of the AISI
Shareholders without applying for a court order as described above.
DIVIDENDS
Under both Oregon Law and Michigan Law, the board of directors
of a corporation may authorize and the corporation may make distributions
(including dividends) to shareholders only if after giving effect to the
distribution (i) the corporation would be able to pay its debts as they
become due in the usual course of business and (ii) the corporation's total
assets would at least equal the sum of the total liabilities plus, unless
the corporation's articles of incorporation permit otherwise, the amount
that would be needed if the corporation were to be dissolved at the time of
the distribution to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution.
CAPITAL STOCK
Unlike ESI, which has two authorized classes of stock (common
and preferred), there is only one class of AISI stock, that being common
stock, no par value. The voting rights of holders of AISI Common Stock are
comparable to those of holders of ESI Common Stock discussed above. The
voting rights of ESI Preferred Stock are designated by the ESI Board. As
provided in the ESI Articles, for the one series of ESI Preferred Stock for
which the ESI Board has designated rights, there are no voting rights
except as required by law.
In certain limited circumstances, if AISI were to issue
additional shares, the AISI Articles provide that current AISI shareholders
are entitled to receive additional shares as protection against their
ownership in AISI being diluted. There is no similar provision in the ESI
Articles.
DISSENTERS' RIGHTS
Under Michigan Law, shareholders that otherwise would be entitled
to exercise dissenters' rights with respect to an articles amendment, a
merger, disposition of assets, or other extraordinary transaction do not
have any
65
<PAGE>
dissenters' rights if (a) the stock affected is either listed on a
national securities exchange or held of record by at least 2,000
shareholders or (b) the holders of such stock are to receive cash or shares
(or any combination thereof) and such shares, if any, are either listed on
a national securities exchange or held of record by more than 2,000
shareholders.
Under Oregon Law, shareholders that otherwise would be entitled
to exercise dissenters' rights do not have such rights if the stock
affected is listed on a national securities exchange or is a national
market system security, but the type of consideration to be received for
such stock does not affect the availability of dissenters' rights as it
does under Michigan Law.
AISI's Common Stock is neither listed on a national securities
exchange nor as a national market system security. ESI's Common Stock is
listed as a national market system security. Except as follows, the matters
with respect to which shareholders of a Michigan corporation such as AISI
and shareholders of an Oregon corporation such as ESI may have dissenters'
rights are generally comparable:
(i) Michigan Law contains a specific provision that
affords dissenters' rights to shareholders of an acquiring
corporation concerning a merger with or an acquisition of shares
or assets of another entity where the consideration for the
merger or acquisition is to be shares of the acquiring
corporation's common stock (or convertibles) and the merger or
acquisition would have a specified substantial dilutive effect.
(ii) Dissenters' rights are available under Michigan Law,
but not under Oregon Law, for an amendment to the articles of
incorporation which either (A) materially abolishes or alters a
preferential right of a shareholder's shares having preferences,
or (B) creates, alters or abolishes a material provision or
right in respect of the redemption of a shareholder's shares or
a sinking fund for the redemption or purchase of those shares.
(iii) Dissenters' rights are available under Oregon Law,
but not under Michigan Law, for amendments to the articles of
incorporation which materially and adversely affect the rights
of a shareholder's shares because the amendment either (A)
alters or abolishes a preemptive right of the shareholder to
acquire shares or other securities, or (B) reduces the number of
shares owned by the shareholder to a fraction of a share if the
fractional share so created is to be acquired for cash by the
corporation.
The procedural provisions of Michigan Law and Oregon Law
relating to dissenters' rights do not differ significantly.
PROVISIONS RELATING TO DIRECTORS
NUMBER OF DIRECTORS
Under both Oregon Law and Michigan Law, a corporation must have
a board of directors consisting of at least one director. The ESI Bylaws
provide that the ESI Board must consist of at least six and no more than
ten directors. Within that range, the ESI Board has the authority to set
the actual number, the current number being set at seven. The AISI Bylaws
provide that the AISI Board must consist of at least three and no more than
seven directors. Within that range, the AISI Board has the authority to set
the actual number, the current number being set at five.
66
<PAGE>
CUMULATIVE VOTING FOR DIRECTORS
Both Oregon Law and Michigan Law allow for cumulative voting in
the election of directors, but only if the articles of incorporation of the
corporation so provide. Under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the
number of directors to be elected. A shareholder may then cast all such
votes for a single candidate or may allocate the votes among as many
candidates as the Shareholder may desire. Without cumulative voting, the
holders of a majority of the shares voting in the election of directors
would have the power to elect all the directors to be elected, and no
person could be elected without the support of holders of a majority of the
shares. Neither the ESI Articles nor the AISI Articles provides for
cumulative voting.
VOTING FOR DIRECTORS BY PROXY
Under both Oregon Law and Michigan Law, every shareholder
entitled to vote at an election of directors has the right to vote either
in person or by proxy.
VACANCIES
Both Oregon Law and Michigan Law provide that, unless the
articles of incorporation provide otherwise, a vacancy in the board of
directors (including a vacancy created by an increase in the authorized
number of directors) may be filled by the shareholders or by the directors
then in office (even though fewer than necessary to form a quorum of the
board of directors). The AISI Bylaws provide that the directors remaining
in office may temporarily fill any vacancy on the AISI Board, but the
shareholders have the authority to elect a director to fill any vacancy
temporarily filled by the AISI Board, failing which the director appointed
by the AISI Board serves until his successor is elected at an annual or
special shareholders' meeting and is qualified. The ESI Articles do not
contain a similar provision.
REMOVAL
Under both Oregon Law and Michigan Law, a director may be
removed with or without cause unless the articles of incorporation provide
that directors may be removed only for cause. Under Oregon Law, a director
may be removed only at a meeting of the shareholders called for the purpose
of removing the director, and the meeting notice must state that the
purpose, or one of the purposes, of the meeting is the removal of a
director. Under the ESI Articles, a director may be removed without cause
only upon the vote of the holders of two-thirds (2/3) of the shares
entitled to vote at an election of directors. The AISI Articles contain no
provision respecting the removal of directors.
LIMITATION ON LIABILITY
As permitted by Michigan Law, the AISI Articles provide that, to
the full extent permitted by law, AISI's directors will not be liable to
AISI or its shareholders for monetary damages for breach of fiduciary duty.
Under Michigan Law, such provision cannot eliminate or limit director
liability for a breach of the duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of
law, distributions made in contravention of Michigan Law, transactions from
which directors receive an improper personal benefit or any act or omission
which occurred prior to the date on which the provision became effective
(April 28, 1992). This provision would ordinarily eliminate the liability
of directors for monetary damages to AISI and its shareholders even in
instances in which the directors had been negligent or grossly negligent.
The provision does not affect the ability of AISI or its shareholders to
seek equitable remedies such as injunction and
67
<PAGE>
does not limit the liability of directors under federal securities laws.
The ESI Articles contain a provision which is in all material respects
identical to the provision in AISI's articles of incorporation, and Oregon
Law is likewise similar to Michigan Law in this respect.
ANTI-TAKEOVER STATUTES
BUSINESS COMBINATIONS
MICHIGAN. Michigan Law contains provisions ("Chapter 7A")
which provide that business combinations between a Michigan corporation and
an "interested shareholder" generally require the approval of 90% of the
votes of each class of stock entitled to be cast, and not less than
two-thirds of the votes of each class of stock entitled to be cast other
than voting shares owned by such interested shareholder. An "interested
shareholder" is a person directly or indirectly owning 10% or more of a
corporation's outstanding voting power, or an affiliate of a corporation
who at any time within two years prior to the date in question directly or
indirectly owned 10% of more of such voting power. However, the
requirements cited above will not apply if (i) the corporation's board of
directors approves the transaction prior to the time the interested
shareholder becomes such or (ii) the transaction satisfies
certain fairness standards (generally relating to the amount and type of
consideration to be paid), certain other conditions are met and the
interested shareholder has been such for at least five years. Additionally,
Chapter 7A does not apply to a corporation which, on the date Chapter 7A
became effective (May 29, 1984), had an existing interested shareholder,
unless the articles or by-laws of such corporation specifically make
Chapter 7A applicable or the corporation's board of directors elects by
resolution to make the corporation subject thereto (either generally or as
to specific interested shareholders or business combinations). On May 28,
1984, AISI had one or more "interested shareholders," and therefore AISI is
not subject to Chapter 7A, although AISI's Board may, by resolution and
without a shareholder vote, cause AISI to become subject to Chapter 7A.
AISI has no present intention to elect to become subject to Chapter 7A.
OREGON. Oregon has enacted a business combination statute
that is contained in Sections 60.825 - 60.845 of the Oregon Business
Corporation Act (the "Oregon Combination Law"), which provides that any
person who acquires 15% or more of a corporation's voting stock (thereby
becoming an "interested shareholder") may not engage in certain "business
combinations" with the target corporation for a period of three years
following the date the person became an interested shareholder, unless (1)
the board of directors of the corporation has approved, prior to that
acquisition date, either the business combination or the transaction that
resulted in the person becoming an interested shareholder, (2) upon
consummation of the transaction that resulted in the person becoming an
interested shareholder, that person owns at least 85% of the corporation's
voting stock outstanding at the time the transaction is commenced
(excluding shares owned by persons who are both directors and officers and
shares owned by employee stock plans in which participants do not have the
right to determine confidentially whether shares will be tendered in a
tender or exchange offer), or (3) the business combination is approved by
the board of directors and authorized by the affirmative vote (at an annual
or special meeting and not by written consent) of at least 66 2/3% of the
outstanding voting stock not owned by the interested shareholder.
Under the Oregon Combination Law, for purposes of determining
whether a person is the "owner" of 15% or more of a corporation's voting
stock, ownership is defined broadly to include the right, directly or
indirectly, to acquire the stock or to control the voting or disposition of
the stock. A "business combination" is also defined broadly to include (1)
mergers and sales or other dispositions of 10% or more of the assets of a
corporation with or to an interested shareholder, (2) certain transactions
resulting in the
68
<PAGE>
issuance or transfer to the interested shareholder of any stock of the
corporation or its subsidiaries, (3) certain transactions which would
result in increasing the proportionate share of the stock of a corporation
or its subsidiaries owned by the interested shareholder, and (4) receipt by
the interested shareholder of the benefit (except proportionately as a
Shareholder) of any loans, advances, guarantees, pledges, or other
financial benefits.
These restrictions placed on interested shareholders by the
Oregon Combination Law do not apply under certain circumstances, including,
but not limited to, the following: (1) if the corporation's original
articles of incorporation contain a provision expressly electing not to be
governed by the Oregon Combination Law, (2) within 90 days after April 4,
1991, the corporation, by action of its board of directors, adopts an
amendment to its bylaws expressly electing not to be governed by the Oregon
Combination Law, or (3) if the corporation, by action of its shareholders,
adopts an amendment to its bylaws or articles of incorporation expressly
electing not to be governed by the Oregon Combination Law, provided that
such an amendment is approved by the affirmative vote of not less than a
majority of the outstanding shares entitled to vote and that such an
amendment will not be effective until 12 months after its adoption and will
not apply to any business combination with a person who became an
interested shareholder at or prior to such adoption. None of these
circumstances exist with respect to ESI; accordingly, the requirements of
the Oregon Combination Law apply to ESI.
CONTROL SHARES
MICHIGAN. Michigan Law contains provisions ("Chapter 7B"), which
provide that "control shares" of a corporation acquired in a control share
acquisition have no voting rights except as granted by the shareholders of
the corporation. "Control shares" are shares which, when added to shares
then owned or controlled by a shareholder, increase such shareholder's
control of voting power above one of three thresholds: more than 20%, more
than 33-1/3% or more than 50% of the outstanding voting power of the
corporation. Voting rights for shares acquired in a control share
acquisition must be approved by a majority of the votes cast by holders of
shares entitled to vote, excluding shares voted or controlled by the
acquiror and certain officers and directors. However, no such approval is
required for gifts or other transactions not involving consideration, for a
merger to which the corporation is a party, or certain other transactions
described in Chapter 7B. Submission for shareholder consideration of a
resolution to grant voting rights to control shares must be preceded by the
filing with the corporation of an acquiring person statement providing
certain specified information.
If a corporation's articles of incorporation or by-laws so
provide prior to a control share acquisition, control shares acquired in a
control share acquisition may be redeemed at "fair value" by the
corporation (i) if no acquiring person statement has been filed, at any
time during the period ending 60 days after the last control share
acquisition, or (ii) if an acquiring person statement has been filed, after
the meeting at which the voting rights of the control shares are submitted
for shareholder consideration, if the control shares are not accorded full
voting rights. Unless otherwise provided in a corporation's articles of
incorporation or by-laws, in the event that control shares acquired in a
control share acquisition are accorded full voting rights and the acquiring
person has acquired a majority of all voting power of the corporation, the
shareholders of the corporation, other than the acquiring person, have
dissenters' rights. "Fair value" means a value not less than the highest
price paid per share by the acquiring person in the control share
acquisition.
The AISI charter documents currently contain no provisions with
respect to control shares.
69
<PAGE>
OREGON. Oregon has enacted a control share statute that is in
all material respects identical to the Chapter 7B of Michigan Law.
The ESI charter documents currently contain no provisions with
respect to control shares.
LEGAL MATTERS
The legality of the shares of ESI Common Stock to be issued to
the AISI shareholders in connection with the Merger, and certain other
legal matters in connection with the Merger, will be passed upon by Stoel
Rives LLP, 900 SW Fifth Avenue, Suite 2300, Portland, OR 97204-1268.
Certain tax matters in connection with the Merger will be passed upon by
Brouse & McDowell, 500 First National Tower, Akron, Ohio 44308-1471.
EXPERTS
The consolidated financial statements incorporated in this
Prospectus/Proxy-Information Statement by reference to ESI's Annual Report
on Form 10-K for the year ended May 31, 1995 have been audited by the
Portland office of Arthur Andersen LLP, independent public accountants, as
indicated their report with respect thereto, and are incorporated herein by
reference in reliance upon the authority of said firm as experts in giving
said report.
The audited financial statements of AISI included in this
Prospectus/Proxy-Information Statement have been audited by the Ann Arbor
office of Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said report.
SHAREHOLDER PROPOSALS
If the Merger is consummated, shareholders of AISI will become
shareholders of ESI. ESI's next annual meeting of shareholders will take
place in September 1996. Any shareholder proposals to be considered for
inclusion in proxy material for ESI's annual meeting in September 1996 must
have been received at the principal executive office of ESI no later than
April 13, 1996.
70
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants................................................................. F-2
Balance Sheets at December 31, 1994 and 1995 and (unaudited) March 31, 1996.............................. F-3
Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 and
for the (unaudited) Three Months Ended March 31, 1995 and 1996........................................... F-4
Statements of Shareholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and for the (unaudited) Three Months Ended March 31, 1996.................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995
and for the (unaudited) Three Months Ended March 31, 1995 and 1996....................................... F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Applied Intelligent Systems, Inc.:
We have audited the accompanying balance sheets of Applied Intelligent
Systems, Inc. (a Michigan Corporation) as of December 31, 1995 and 1994,
and the related statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Applied Intelligent
Systems, Inc. as of December 31, 1995 and 1994 and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Ann Arbor, Michigan,
February 16, 1996
F-2
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1994 1995 1996
---- ---- ----
(in thousands) (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 113 $ 805 $ 2,702
Trade receivables, less allowance for doubtful
accounts of $50 and $155 at December 31,
1994 and 1995 and $170 at March 31, 1996................................. 3,574 4,378 2,627
Note receivable and related accrued interest............................. 521 -- --
Inventories -
Finished goods......................................................... 66 57 250
Work-in-process........................................................ 410 2,801 2,155
Raw materials and purchased parts...................................... 1,473 1,162 541
----- ----- ---
Total inventories.................................................... 1,949 4,020 2,946
Other current assets..................................................... 107 85 1,029
-------- ---------- ---------
Total current assets................................................. 6,264 9,288 9,304
------ --------- ---------
PROPERTY AND EQUIPMENT, AT COST............................................ 3,463 4,637 4,990
Less-Accumulated depreciation............................................ (1,700) (2,365) (2,460)
-------- --------- ---------
Net property and equipment............................................. 1,763 2,272 2,530
-------- --------- ---------
OTHER ASSETS............................................................... 259 115 115
--------- --------- ---------
$ 8,286 $ 11,675 $ 11,949
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings.................................................... $1,700 $100 $--
Current portion of obligations under capital
leases................................................................. -- 71 72
Accounts payable......................................................... 1,384 2,594 2,380
Accrued liabilities - payroll related.................................... 675 310 243
Deferred revenue......................................................... 58 669 481
Income taxes payable..................................................... -- 279 247
Accrued warranty......................................................... 162 330 352
Other accrued expenses................................................... 97 411 586
-------- -------- --------
Total current liabilities............................................ 4,076 4,764 4,361
------- ------- --------
LONG-TERM CAPITAL LEASE OBLIGATIONS........................................ -- 117 99
--------- -------- ---------
SHAREHOLDERS' EQUITY:
Common stock, no par value, stated value of $.01 per share, 10,000 shares
authorized, 3,405, 3,454 and 3,459 shares issued and outstanding at
December 31, 1994, December 31, 1995, and
March 31, 1996, respectively............................................. 34 35 35
Additional paid-in capital............................................... 23,391 23,469 23,475
Accumulated deficit...................................................... (19,215) (16,351) (15,656)
Note receivable and related accrued interest............................. -- (359) (365)
---------- --------- ---------
Total shareholders' equity........................................... 4,210 6,794 7,489
-------- --------- ---------
$ 8,286 $ 11,675 $ 11,949
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Vision system sales..................... $9,196 $12,715 $22,046 $4,201 $5,924
Software and other sales................ 1,567 2,089 533 107 40
-------- -------- --------- -------- --------
Net sales........................... 10,763 14,804 22,579 4,308 5,964
Cost of vision system sales............. 3,506 5,337 9,959 1,818 2,933
-------- -------- -------- -------- -------
Gross margin........................ 7,257 9,467 12,620 2,490 3,031
Operating expenses:
Selling, service and
administrative........................ 3,191 4,027 4,711 1,050 1,116
Research, development and
engineering........................... 2,906 3,996 4,513 1,193 1,183
-------- -------- -------- -------- --------
Total operating expenses............ 6,097 8,023 9,224 2,243 2,299
-------- -------- -------- -------- --------
Operating income........................ 1,160 1,444 3,396 247 732
Interest and other income
(expense)............................... (67) (70) (95) (15) 16
Gain from insurance proceeds
on equipment theft...................... -- 229 -- -- --
--------- -------- --------- --------- ---------
Income before income taxes.............. 1,093 1,603 3,301 232 748
Provision for income taxes.............. 15 93 437 22 53
-------- -------- -------- --------- --------
Net income.............................. $ 1,078 $ 1,510 $ 2,864 $ 210 $ 695
======= ======= ======= ======== =======
Net income per share.................... $ 0.29 $ 0.40 $ 0.70 $ 0.05 $ 0.17
======= ======= ======= ======== =======
Weighted average number of
shares used in computing per
share amounts........................... 3,673 3,820 4,121 4,077 4,150
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995,
AND THREE MONTHS ENDED MARCH 31, 1996
Common Stock Additional
------------ ----------
Number Paid-in Accumulated Note
of Shares Amount Capital Deficit Receivable Total
--------- ------ ------- ------- ---------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 3,317 $33 $23,254 $(21,803) -- $1,484
Net income.......................... -- -- -- 1,078 -- 1,078
Exercise of stock options........... 18 -- 21 -- -- 21
------ ----- -------- ---------- ------ ------
BALANCE AT DECEMBER 31, 1993 3,335 33 23,275 (20,725) -- 2,583
Net income.......................... -- -- -- 1,510 -- 1,510
Exercise of stock options........... 70 1 116 -- -- 117
----- ------- ---------- ------ ------
BALANCE AT DECEMBER 31, 1994 3,405 34 23,391 (19,215) -- 4,210
Net income.......................... -- -- -- 2,864 -- 2,864
Exercise of stock options........... 64 1 73 -- -- 74
Grant of common stock............... 1 -- 5 -- -- 5
Abandonment of common stock......... (16) -- -- -- -- --
Note receivable and related
accrued interest.................... -- -- -- -- (359) (359)
------ --- -------- -------- ----- -----
BALANCE AT DECEMBER 31, 1995 3,454 35 23,469 (16,351) (359) 6,794
Net income.......................... -- -- -- 695 -- 695
Exercise of stock options........... 5 -- 6 -- -- 6
Interest earned on note
receivable.......................... -- -- -- -- (6) (6)
-------- -------- -------- -------- ------ ------
BALANCE AT MARCH 31, 1996
(unaudited) 3,459 $35 $23,475 $(15,656) $ (365) $7,489
===== === ======= ========= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31 ENDED MARCH 31
----------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $1,078 $1,510 $2,864 $ 210 $ 695
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 257 434 984 157 197
LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT............ 22 23 42 -- 1
GAIN FROM INSURANCE PROCEEDS ON EQUIPMENT
THEFT................................................. -- (229) -- -- --
COMPENSATION EXPENSE ON STOCK GRANTS.................. -- -- 6 4 --
INTEREST INCOME ON LOAN............................... -- -- -- -- (6)
IMPACT ON CASH FLOWS FROM CHANGES IN OPERATING
ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE................................... (1,451) (1,117) (804) 175 1,751
INVENTORIES........................................... (283) (929) (2,071) (272) 174
PREPAID EXPENSES AND OTHER ASSETS..................... (138) (56) (9) (86) (44)
ACCOUNTS AND TAXES PAYABLE, ACCRUED EXPENSES
AND DEFERRED REVENUE.................................. 693 777 2,217 (11) (304)
------- ------- ------ ------ -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.......................................... 178 413 3,229 177 2,464
------- ------- ------ ---- ------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASES OF PROPERTY AND EQUIPMENT........................ (635) (1,164) (1,385) (243) (459)
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT............... -- 11 11 -- 3
INSURANCE PROCEEDS FROM EQUIPMENT THEFT.................... -- 301 -- -- --
PROCEEDS FROM LOAN REPAYMENT............................... -- -- 484 484 --
PAYMENT TO GRANT LOAN...................................... -- (500) (309) -- --
-------- ------- ------ ------- -------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................................ (635) (1,352) (1,199) 241 (456)
------- ------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
NET BORROWINGS (REPAYMENTS) UNDER LINE OF CREDIT........... 500 825 (1,600) (510) (100)
PROCEEDS FROM FINANCING OF EQUIPMENT....................... -- -- 221 -- --
REPAYMENTS OF CAPITAL LEASE OBLIGATIONS.................... -- -- (33) -- (17)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS.................... 21 117 74 44 6
-------- ------- ------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................................ 521 942 (1,338) (466) (111)
------- ------- ------- ------ ------
NET CHANGE IN CASH........................................... 64 3 692 (48) 1,897
CASH AND CASH EQUIVALENTS AT BEGINNING 46 110 113 113 805
-------- ------- ------- ------- -------
OF PERIOD..................................................
CASH AND CASH EQUIVALENTS AT END OF $110 $113 $805 $65 $2,702
======= ======= ======= ======= ======
PERIOD.....................................................
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
CASH PAID FOR INTEREST..................................... $ 44 $ 58 $ 76 $ 28 $ 5
CASH PAID FOR INCOME TAXES................................. $ 2 $ 59 $170 $ -- $ 20
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
1. THE COMPANY
Applied Intelligent Systems, Inc. (AISI) provides industrial machine vision
solutions for automated process control and visual inspection throughout a
wide range of manufacturing processes. AISI provides solutions for the
enhancement, analysis and understanding of digital imagery, replacing human
vision on the factory floor.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies described in this and other notes to financial
statements.
Cash Equivalents
AISI considers all highly liquid financial instruments purchased with
maturities of less than three months to be cash equivalents.
Inventories
Inventories are valued at standard costs which approximate the lower of
cost (determined using the first-in, first-out method) or market.
Work-in-process and finished goods inventories include materials, labor and
manufacturing overhead.
Other Current Assets (unaudited)
Other current assets at March 31, 1996, included a receivable of $900
resulting from the sale of a portion of AISI's inventory to AISI's contract
manufacturer. The net income statement effect of this transaction was not
material.
Property and Equipment
Additions to property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the respective estimated
useful lives of the related assets, which range from three to seven years.
Amortization of leasehold improvements is provided over the term of the
related lease or the estimated useful life of the improvement, whichever is
less. Maintenance and repairs are expensed as incurred.
Investment
In 1992, AISI acquired an ownership interest in a Korean company for $103.
This investment, included as a component of other assets in the
accompanying balance sheets, is accounted for using the cost method.
Revenue Recognition
Revenue from system sales is recognized under the terms of the respective
contracts. Revenue from software and engineering development is recognized
as AISI performs the services in accordance with the contract terms.
During 1993, AISI entered into a product development and sales agreement
with a Korean customer. Under the terms of the agreement, AISI provided
certain product development services and sold certain systems to the
F-7
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
customer. During 1993 and 1994, AISI recognized revenue of $1,000 and
$2,100 respectively, pursuant to this agreement.
Net Income Per Share
Net income per share is based on the weighted average number of shares
outstanding during the period after considering the dilutive effect of
outstanding stock options.
Software Development Costs
Software development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. Software development
costs incurred subsequent to the establishment of technological feasibility
are capitalized, if material. To date, no significant software development
costs have been incurred subsequent to the establishment of technological
feasibility.
Income Taxes
AISI accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires an asset and liability approach that recognizes deferred tax
assets and liabilities for the expected future tax consequences of events
that have been recognized in AISI's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all
expected future events other than enactments of changes in the tax law or
tax rates.
Concentration of Credit Risk
Financial instruments, which potentially subject AISI to concentration of
credit risk, consist principally of trade receivables. A majority of AISI's
trade receivables are derived from sales in various geographic areas to
companies within the semiconductor and electronics manufacturing
industries. AISI performs ongoing credit evaluations of its customers'
financial condition but generally does not require collateral. Management
believes the carrying value of trade receivables approximates fair value.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform with the 1995 presentation.
F-8
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ 1996
-----------
(unaudited)
1994 1995
---- ----
<S> <C> <C> <C>
Computers and test equipment $2,778 $3,438 $3,787
Furniture and fixtures 321 461 474
Leasehold Improvements 262 339 332
Equipment under capital leases -- 221 221
Office equipment 102 178 176
------ ------ -----
$3,463 $4,637 $4,990
====== ====== ======
</TABLE>
4. LINE OF CREDIT
AISI has an unsecured bank line of credit agreement expiring September 30,
1997, which provides for borrowings up to $3,000. Interest is charged at
the bank's prime rate. The borrowing rate on the line of credit was 8.5% as
of December 31, 1995.
The maximum amounts outstanding during 1993, 1994 and 1995 under AISI's
line of credit agreement were $950, $1,700 and $2,075, respectively. The
average amounts outstanding and the weighted average interest rates for
1993, 1994 and 1995 were approximately $692, $917 and $744 and 6.5%, 7.6%
and 9.1%, respectively.
The line of credit agreement contains a minimum tangible net worth
requirement and provides for certain other non-financial conditions. In
addition, AISI is required to maintain working capital of not less than
$750, and a ratio of total liabilities to tangible net worth not to exceed
1.5 to 1.0.
5. SHAREHOLDERS' EQUITY
Stock Transactions
During 1993, 1994 and 1995, 18 shares, 70 shares and 64 shares
respectively, were issued pursuant to the exercise of stock options, the
net proceeds of which were $21, $117 and $74, respectively.
Incentive Stock Option Plans
The 1995 Incentive Stock Option Plan (the 1995 Plan), the 1992 Incentive
Stock Option Plan (the 1992 Plan) and the 1991 Incentive Stock Option Plan
(the 1991 Plan) were approved by AISI's stockholders, as successor plans to
AISI's 1989 Incentive Stock Option Plan (the 1989 Plan). All options
available under the 1992 Plan, 1991 Plan and 1989 Plan have been granted.
These plans cover substantially all employees. Options to purchase AISI's
common stock are exercisable at a price equal to the fair market value of
the stock at the date
F-9
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
of grant, as determined by AISI's board of directors, and become
exercisable over a period of one to five years following the date of grant.
During 1995, options on approximately 124 shares were granted which were
immediately exercisable. All options expire ten years after the date of
grant. There are 350 shares reserved for issuance under the 1995 Plan, of
which options on 209 shares have been granted.
Information concerning incentive stock options for the years ended December
31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
------ -----
<S> <C> <C>
Outstanding at December 31, 1992........... 973 $ 1 - 4
---
1993 ACTIVITY:
Options granted........................ 32 $ 4
Options terminated..................... (5) $ 2
Options exercised...................... (15) $ 1 - 2
----
Outstanding at December 31, 1993........... 985 $ 1 - 4
Exercisable at December 31, 1993........... 685 $ 1 - 4
1994 ACTIVITY:
Options granted........................ 97 $ 4 - 6
Options terminated..................... (26) $ 1 - 4
Options exercised...................... (63) $ 1 - 4
----
Outstanding at December 31, 1994........... 993 $ 1 - 6
Exercisable at December 31, 1994........... 728 $ 1 - 4
1995 ACTIVITY:
Options granted........................ 271 $ 6 - 8
Options terminated..................... (24) $ 2 - 6
Options exercised...................... (61) $ 1 - 4
----
Outstanding at December 31, 1995........... 1,179 $ 1 - 8
=====
Exercisable at December 31, 1995........... 908 $ 1 - 8
</TABLE>
F-10
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Non-Qualified Stock Option Plans
AISI has granted options to certain directors of AISI to purchase shares of
common stock at prices ranging from $1 to $4 per share, pursuant to
previously established Non-Qualified Stock Option Plans. Options to
purchase AISI's common stock are exercisable at a price equal to the fair
market value of the stock at the date of grant, as determined by AISI's
board of directors, and become exercisable over a period of one to five
years following the date of grant. All options expire ten years after the
date of grant. Options to purchase 25 shares of common stock were
outstanding as of December 31, 1995. Options for 3 shares were exercised in
1993 at $1 per share. Options for 7 shares were exercised in 1994 at
exercise prices ranging from $1 to $4 per share and options for 3 shares
were exercised in 1995 at $1 per share.
6. INCOME TAXES
The components of the provision for income taxes in the accompanying
statements of income consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense:
Federal....................... $ 15 $ 93 $ 98
State......................... -- -- 339
Deferred tax expense............ 377 488 812
Change in valuation
allowance....................... (377) (488) (812)
------ ----- ------
Total provision................. $ 15 $ 93 $ 437
====== ====== ======
</TABLE>
A reconciliation of the provision (benefit) for income taxes at the federal
statutory income tax rate (34.0%) to the tax provision (benefit) as
reported is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Provision computed at federal statutory rate...... $372 $528 $1,122
Impact of state taxes............................. -- 50 189
Change in deferred tax valuation allowance........ (377) (488) (812)
Other, net........................................ 20 3 (62)
-- - ----
$ 15 $ 93 $ 437
==== ==== =====
</TABLE>
Deferred income taxes and benefits are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences which give rise to significant deferred tax
assets and liabilities are as follows:
F-11
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
---- ----
<S> <C> <C>
GROSS DEFERRED TAX ASSETS
Net operating loss carryforwards................... $6,213 $4,482
Business credit.................................... 474 463
Inventories and accounts receivable reserves....... 108 338
Accrued expenses................................... 92 534
Alternative minimum tax credit..................... 58 135
Property and equipment............................. 11 45
Other deferred tax assets.......................... 3 150
-------- -------
6,959 6,147
Valuation allowance................................... (6,959) (6,147)
------- -------
Net deferred taxes.................................... $ -- $ --
======== ========
</TABLE>
Valuation allowances of $6,959 and $6,147 have been applied to eliminate
the net deferred tax assets at December 31, 1994 and 1995, respectively,
since realization of these amounts is questionable.
AISI has available tax basis net operating loss carryforwards to reduce
future taxable income and general business credit carryforwards to offset
future taxes payable. Net operating loss carryforwards of $13,182 expire
over the period from 1999 through 2005. The general business and
alternative minimum tax credit carryforwards approximate $599 and expire
over the period from 1996 through 2002.
F-12
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Significant Customers
The following summarizes significant customers from which AISI earned 10%
or more of its annual revenues:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SIGNIFICANT SIGNIFICANT OF TOTAL
CUSTOMERS CUSTOMER REVENUES REVENUES
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1993 3 A $4,364 41%
D 1,837 17
B 1,161 11
Year ended December 31, 1994 3 A $6,061 41%
B 3,029 21
C 2,100 14
Year ended December 31, 1995 2 A $12,439 55%
B 4,917 22
</TABLE>
Export Sales
Export sales for the years ended December 31, 1993, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
Pacific
Europe Rim Total
------ --- -----
<S> <C> <C> <C>
December 31, 1993................. $ 91 $2,486 $2,577
December 31, 1994................. $150 $3,852 $4,002
December 31, 1995................. $269 $2,639 $2,908
</TABLE>
8. LEASES
AISI has entered into noncancelable operating and capital lease agreements
for its office, engineering, and manufacturing facilities and certain
equipment. The facility leases require that AISI pay for insurance, taxes
and maintenance and repairs. Rent expense under the operating leases was
approximately $358, $512 and $619 in 1993, 1994 and 1995, respectively.
Minimum future rental commitments under the operating and capital leases at
December 31, 1995 are as follows:
F-13
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING
OBLIGATIONS LEASES
----------- ------
<S> <C> <C>
1996 $ 82 $ 623
1997 82 562
1998 42 457
1999 -- 425
2000 -- 425
Thereafter -- 2,774
------ -----
Total minimum payments 206 $5,266
======
Less amounts representing interest 18
-----
Total present value of minimum lease
payments at December 31, 1995 188
Less current portion 71
-----
Long-term portion $117
====
</TABLE>
9. RELATED PARTY TRANSACTIONS
During 1994 AISI loaned $500 to an officer of AISI under the terms of a
demand note. During January, 1995, the officer repaid, to AISI, all of the
accrued interest and $461 of the principal on this note. During August
1995, AISI loaned $309 to an officer of ESI under the terms of a demand
note which bears interest at AISI's effective borrowing rate. The note is
secured by the officer's options to purchase AISI's common stock and
therefore the note balance has been classified as a component of
shareholders' equity on the balance sheet.
10. EMPLOYEE BENEFIT PLAN
AISI has a 401(K) plan covering all eligible employees. Participants may
elect to defer a certain percentage of qualified compensation through
voluntary contributions to the plan, and AISI may make discretionary
contributions to the plan based on the gross compensation of qualified
participants. AISI made no contributions to the plan in 1993, 1994, 1995
and for the three months ended March 31, 1996.
F-14
<PAGE>
ANNEX A
AGREEMENT
OF
REORGANIZATION AND MERGER
AMONG
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AN OREGON CORPORATION,
APPLIED INTELLIGENT SYSTEMS, INC.
A MICHIGAN CORPORATION,
AND
AISI MERGER CORP.,
AN OREGON CORPORATION.
MAY 13, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
1.1 The Merger...........................................................2
1.2 Effect of Merger.....................................................2
1.3 Merger Consideration.................................................3
1.3.1 AISI Stock..................................................3
1.3.2 Stock Splits, Etc...........................................3
1.3.3 Merger Corp. Stock..........................................4
1.3.4 Options.....................................................4
1.4 Surrender and Cancellation of Certificates...........................5
1.4.1 Surrender of Certificates...................................5
1.4.2 Option Agreements...........................................6
1.4.3 No Fractional Shares........................................6
1.4.4 Cancellation................................................7
1.4.5 Treasury Shares.............................................7
1.4.6 Escheat.....................................................7
1.4.7 Withholding Rights..........................................7
1.5 Dissenters' Rights...................................................8
1.5.1 Notice......................................................8
1.5.2 Rights of Dissenting Shares.................................8
1.6 Stock Transfer Books.................................................9
1.7 Closing..............................................................9
1.8 Subsequent Actions..................................................10
ARTICLE II
FURTHER AGREEMENTS
2.1 Noncompetition and Confidentiality Agreements.......................10
2.2 Escrow Agreement....................................................10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of AISI..............................11
3.1.1 Organization and Status....................................11
3.1.2 Capitalization.............................................11
3.1.3 Corporate Authority........................................12
3.1.4 Governmental Filings.......................................13
i
<PAGE>
3.1.5 Investments; Subsidiaries..................................13
3.1.6 No Adverse Consequences....................................13
3.1.7 Financial Statements.......................................14
3.1.8 Undisclosed Liabilities; Returns...........................14
3.1.9 Absence of Certain Changes or Events.......................15
3.1.10 Prohibited Payments........................................17
3.1.11 Litigation.................................................18
3.1.12 Compliance with Laws; Judgments............................18
3.1.13 Employment Matters.........................................18
3.1.13.1 Labor Matters................................18
3.1.13.2 Employee Benefits............................19
3.1.13.3 Employment Agreements........................20
3.1.13.4 Compensation.................................21
3.1.13.5 Confidentiality and Inventions Agreements....22
3.1.14 Title to and Condition of Real Property....................22
3.1.15 Title to and Condition of Fixed Assets.....................22
3.1.16 Intellectual Property......................................23
3.1.17 Certain Contracts and Arrangements.........................23
3.1.18 Status of Contracts........................................24
3.1.19 Insurance..................................................26
3.1.20 Permits and Licenses.......................................26
3.1.21 Taxes......................................................27
3.1.21.1 Returns......................................27
3.1.21.2 Taxes Paid or Reserved.......................28
3.1.21.3 Definition...................................28
3.1.22 Related Party Interests....................................29
3.1.23 No Powers of Attorney or Restrictions......................29
3.1.24 Environmental Conditions...................................30
3.1.24.1 Compliance...................................30
3.1.24.2 Hazardous Substances.........................30
3.1.24.3 Filings and Notices..........................31
3.1.24.4 Definitions..................................31
3.1.25 Consents and Approvals.....................................32
3.1.26 Records....................................................32
3.1.27 Receivables................................................32
3.1.28 Bank Accounts..............................................33
3.1.29 Product Warranties.........................................33
3.1.30 Inventories................................................33
3.1.31 Product Liability..........................................34
3.1.32 Backlog and Customer Information...........................34
3.1.33 Accounting Controls........................................34
3.1.34 Brokers and Finders........................................35
3.1.35 Reliance...................................................35
3.1.36 Accuracy of Representations and Warranties.................35
ii
<PAGE>
3.1.37 Prospectus/Proxy Statement.................................35
3.1.38 Continuity of Business Enterprise..........................36
3.2 Representations and Warranties of ESI...............................36
3.2.1 Organization and Status....................................36
3.2.2 Capitalization.............................................36
3.2.3 Corporate Authority........................................37
3.2.4 Governmental Filings.......................................37
3.2.5 SEC Reports and Financial Statements.......................38
3.2.6 Litigation.................................................38
3.2.7 No Adverse Consequences....................................38
3.2.8 Brokers and Finders........................................39
3.2.9 Prospectus/Proxy Statement.................................39
3.3 Representations and Warranties Relating to Merger Corp..............39
3.3.1 Organization and Status....................................39
3.3.2 Capitalization.............................................40
3.3.3 Corporate Authority........................................40
3.3.4 Governmental Filings.......................................40
3.3.5 Litigation.................................................41
3.3.6 No Operations..............................................41
ARTICLE IV
COVENANTS
4.1 Mutual Covenants....................................................41
4.1.1 Consents and Approvals.....................................41
4.1.2 Best Efforts...............................................41
4.1.3 Publicity..................................................41
4.1.4 Confidentiality............................................42
4.2 Covenants of AISI...................................................42
4.2.1 Conduct of Business........................................42
4.2.2 Acquisition Proposals......................................44
4.2.3 Investigations.............................................45
4.2.4 Antitrust Improvements Act.................................46
4.2.5 AISI Shareholders Approval.................................46
4.2.6 Information for Prospectus/Proxy Statement
and Registration Statement.................................47
4.3 Covenants of ESI....................................................47
4.3.1 Conduct of Business........................................47
4.3.2 Registration Statement.....................................47
4.3.3 ESI Shareholder Meeting....................................48
4.3.4 Listing of ESI Common Stock................................48
4.3.5 Antitrust Improvements Act.................................48
4.3.6 Issuance of Certificates...................................49
4.3.7 Registration of Option Shares..............................49
iii
<PAGE>
4.3.8 Directors & Officers Insurance.............................49
4.4 Covenants of Merger Corp............................................49
ARTICLE V
CONDITIONS
5.1 Conditions to the Obligations of All Parties........................50
5.1.1 Regulatory Approvals.......................................50
5.1.2 Litigation.................................................50
5.1.3 Section 368(a)(2)(D) of the Code Requirement...............51
5.2 Conditions to the Obligations of AISI...............................51
5.2.1 Representations, Warranties and Covenants..................51
5.2.2 No Material Adverse Change.................................52
5.2.3 Opinion of Counsel.........................................52
5.2.4 Registration of Securities; Listing........................52
5.2.5 Shareholders' Approval; Dissenters.........................52
5.2.6 Accountants Opinion........................................53
5.3 Conditions to the Obligations of ESI and Merger Corp................53
5.3.1 Representations, Warranties and Covenants..................53
5.3.2 Opinion of Counsel.........................................53
5.3.3 Consents and Approvals.....................................53
5.3.4 No Material Adverse Change.................................54
5.3.5 Accountants Opinion........................................54
5.3.6 Registration of Securities; Listing........................54
5.3.7 ESI Shareholders' Approval.................................54
5.3.8 Affiliate Representation Letters...........................55
5.3.9 Continuity of Interests Letter.............................55
5.3.10 Other Agreements...........................................55
5.3.11 Physical Count of Assets...................................55
5.3.12 Tax Clearance Certificate..................................55
5.3.13 Related Party Agreements...................................56
5.3.14 Confidentiality Agreements.................................56
5.3.15 Updated Financial and Other Information....................56
5.3.16 Environmental Report.......................................56
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival............................................................56
6.2 Scope of Indemnification............................................57
6.3 Escrow..............................................................57
6.4 Limitations.........................................................58
6.4.1 Minor Claims...............................................58
6.4.2 Escrowed Property..........................................58
iv
<PAGE>
6.5 Claim Procedure for Indemnification.................................58
6.5.1 Notice.....................................................58
6.5.2 Response to Third Party Claim..............................59
6.5.3 Diligent Conduct...........................................59
ARTICLE VII
TERMINATION
7.1 Termination by Mutual Consent.......................................59
7.2 Termination by Either AISI or ESI...................................59
7.3 Effect of Termination and Abandonment...............................61
7.4 Termination Fees....................................................61
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 Payment of Expenses.................................................62
8.2 Entire Agreement....................................................63
8.3 Assignment..........................................................63
8.4 Binding Effect; No Third Party Benefit..............................63
8.5 Amendment and Modification..........................................63
8.6 Waiver of Conditions................................................64
8.7 Counterparts........................................................64
8.8 Captions............................................................64
8.9 Subsidiary..........................................................64
8.10 Notices.............................................................64
8.11 Choice of Law.......................................................66
8.12 Attorneys' Fees.....................................................66
8.13 Separability........................................................66
v
<PAGE>
EXHIBITS
A - Plan of Merger
B - Form of ESI Confidentiality Agreement
C - Form of Escrow Agreement
D - Form(s) of Confidentiality and Inventions Agreements
E - Form of Counsel Opinion for ESI
F - Form of Counsel Opinion for AISI
G - Form of Affiliate Representation Letter
H - Form of Continuity of Interests Letter
vi
<PAGE>
SCHEDULES
Schedule Page
-------- ----
3.1 AISI Disclosure Schedule 11
3.1.2 AISI Shareholders and Option Holders 12
3.1.5 AISI Investments 13
3.1.13.2 Employee Benefits 19
3.1.13.3 Employment Manuals 20
3.1.13.4 Compensation 21
3.1.14 Leased Real Property 22
3.1.15 Tangible Personal Property 22
3.1.16 Intellectual Property 23
3.1.17 Other Agreements 23
3.1.19 Insurance Policies 26
3.1.20 Permits 26
3.1.21 Audits 27
3.1.22 Related Parties 29
3.1.28 Bank Accounts 33
3.1.29 Product Warranty 33
3.1.30 Inventory 33
3.1.32 Backlog 34
3.2 ESI Disclosure Schedule 36
5.3.8 Signatories to Representation Letter 55
5.3.9 Signatories to Continuity of Interest Letter 55
vii
<PAGE>
INDEX OF TERMS
Term Section Page
- ---- ------- ----
Agreement Preamble 1
AISI Preamble 1
AISI Common Stock Section 1.1 2
AISI Disclosure Schedule Section 3.1 11, 36
AISI Stock Plans Section 3.1.2 12
Cash Election Shares Section 1.3.3(b) 4
Claim Notice Section 6.5.1 59
Closing Section 1.7 9
Closing Date Section 1.7 9
Code Recital B 1
Confidentiality Agreements Section 4.1.4 42
Contracts Section 3.1.18 24
Conversion Ratio Section 1.3 3
Current Balance Sheet Section 3.1.7 14
Damages Section 6.2 57
Dissenters' Rights Section 1.5.1 8
Dissenting Shareholder Section 1.5.2 9
Dissenting Shares Section 1.5.2 8
Effective Time Section 1.1 2
Environmental Law Section 3.1.24.4 31
ERISA Section 3.1.13.2 19
ERISA Plans Section 3.1.13.2 19
Escrow Agreement Section 2.2 10
Escrowed Property Section 6.3 57
ESI Preamble 1
ESI Common Stock Section 1.1 2
ESI Disclosure Schedule Section 3.2 36
ESI SEC Reports Section 3.2.5 38
Financial Statements Section 3.1.7 14
Governmental Entity Section 3.1.4 13
Hazardous Substance Section 3.1.24.4 31
Indemnified Parties Section 6.2 57
Intellectual Property Section 3.1.16 23
Leased Real Property Section 3.1.14 22
MBCA Section 1.2 2
Merger Section 1.1 2
Merger Consideration Section 1.3 3
Merger Corp. Preamble 1
OBCA Section 1.2 2
viii
<PAGE>
INDEX OF TERMS (continued)
Term Section Page
- ---- ------- ----
Permits Section 3.1.20 26
Policies Section 3.1.19 26
Previously Leased Real Property Section 3.1.14 22
Reserves or Reserved Section 3.1.8 15
Returns Section 3.1.21.1 27
SEC Section 3.2.5 38
Subsidiary Section 8.9 64
Tangible Personal Property Section 3.1.15 22
Taxes Section 3.1.21.3 28
ix
<PAGE>
AGREEMENT
OF
REORGANIZATION AND MERGER
THIS AGREEMENT OF REORGANIZATION AND MERGER (this "Agreement")
is entered into as of May 13, 1996 among Electro Scientific Industries,
Inc, an Oregon corporation ("ESI"), Applied Intelligent Systems, Inc., a
Michigan corporation ("AISI"), and AISI Merger Corp., an Oregon corporation
("Merger Corp.").
RECITALS
A. The Boards of Directors of ESI and AISI have determined that it is
in the best interests of their respective shareholders for ESI to acquire
AISI upon the terms and subject to the conditions set forth herein.
B. It is intended that the Merger (as defined below) qualify as a
reorganization under the provisions of Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code").
AGREEMENT
In consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, the parties agree as
follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. Pursuant to the laws of the States of Michigan
and Oregon, and subject to and in accordance with the terms and conditions
of this Agreement and the Plan of Merger attached hereto as Exhibit A, AISI
shall be merged with and into Merger Corp., and the outstanding shares of
AISI Common Stock, no par value (the "AISI Common Stock") shall be
converted into shares of ESI Common Stock, without par value (the "ESI
Common Stock"), in a transaction intended to qualify as a tax-free
reorganization under Section 368(a) of the Code. AISI and Merger Corp.
shall execute Articles of Merger, to be filed with the Secretaries of State
of the States of Michigan and Oregon on the Closing Date, as defined in
Section 1.7, or as soon thereafter as practicable. The merger of AISI with
and into Merger Corp. (the "Merger") shall take effect (the "Effective
Time") upon the later of the time when the Articles of Merger are duly
filed with the Secretary of State of the State of Michigan, and the time
when the Articles of Merger are duly filed with the Corporation Division of
the Secretary of State of the State of Oregon, or at such other time as the
parties may agree upon in writing pursuant to applicable law.
1.2 Effect of Merger. At the Effective Time, AISI shall be
merged with and into Merger Corp. in the manner and with the effect provided
by the Michigan Business Corporation Act (the "MBCA") and the Oregon Business
Corporation Act (the "OBCA"), the separate corporate existence of AISI shall
cease and Merger Corp. shall be the surviving corporation. From and after the
Effective Time, the Articles of Incorporation, Bylaws, Board of Directors and
officers of Merger Corp. in effect or in office, as the case may be,
immediately before the
2
<PAGE>
Effective Time shall be the Articles of Incorporation, Bylaws, Board of
Directors and officers of the surviving corporation. The outstanding shares
of AISI Common Stock shall be converted into shares of ESI Common Stock on
the basis, terms and conditions described in Section 1.3. At the Effective
Time, the name of the surviving corporation shall become Applied
Intelligent Systems, Inc.
1.3 Merger Consideration. Each share of AISI Common Stock
outstanding immediately before the Effective Time (excluding each
Dissenting Share as defined in Section 1.5.2) shall be converted into the
right to receive the number of shares of ESI Common Stock (the "Merger
Consideration") that corresponds to a ratio (the "Conversion Ratio")
determined by dividing 3,000,000 by the sum of the total shares of AISI
Common Stock outstanding on the Closing Date plus the total number of AISI
shares subject to the Options (as defined in Section 1.3.4) on the Closing
Date. The manner and basis of converting the shares of AISI Common Stock
shall be as follows:
1.3.1 AISI Stock. Each share of AISI Common Stock which
is outstanding immediately before the Effective Time and which is not a
Dissenting Share shall, by virtue of the Merger and without any action on
the part of the holder thereof, cease to exist and be converted into the
right to receive the number of shares of ESI Common Stock that corresponds
to one multiplied by the Conversion Ratio (i.e., 1 x Conversion Ratio).
1.3.2 Stock Splits, Etc. If, between the date of this
Agreement and the Effective Time, the outstanding shares of either AISI
Common Stock or ESI Common Stock shall have been changed into a different
number of shares or a different class by reason of any reclassification,
combination, recapitalization, stock split, stock dividend, subdivision,
exchange
3
<PAGE>
of shares, or other extraordinary transaction, the Conversion Ratio shall be
adjusted proportionately.
1.3.3 Merger Corp. Stock. Each share of Common Stock of
Merger Corp. issued and outstanding immediately prior to the Effective Time
shall remain outstanding without change by virtue of the Merger.
1.3.4 Options. Except as otherwise provided in this
Section 1.3.4, the terms and provisions of the stock options held by those
AISI option holders identified in Schedule 3.1.2 (the "Options,") shall
continue in full force and effect following the Merger. By virtue of the
Merger and at the Effective Time, and without any further action on the
part of any holder thereof, each Option shall be assumed by ESI and shall
be converted into an option to purchase the whole number of shares of ESI
Common Stock corresponding to the number of shares of AISI Common Stock
which the holder of the Option would have been entitled to receive had such
holder exercised the Option in full immediately prior to the Effective Time
(whether or not such Option shall then have been exercisable), which number
of shares shall be equal to the product (rounded to the nearest whole
number) of (x) the number of shares of AISI Common Stock for which such
Option is exercisable multiplied by (y) the Conversion Ratio. The exercise
price per share shall be redetermined by dividing the per share exercise
price immediately prior to the Effective Time by the Conversion Ratio. The
term, exercisability, vesting schedule, status as an "Incentive Stock
Option" under Section 422 of the Code, if applicable, and all other terms
and conditions of the Options will to the extent permitted by law and
otherwise reasonably practicable be unchanged; each Option which is an
Incentive Stock Option shall be adjusted in accordance with the
requirements of Section 425(a) of the Code so
4
<PAGE>
as not to constitute a modification, renewal or extension of the Option
within the meaning of Section 424 of the Code. Continuous employment with
AISI shall be credited to the optionee for purposes of determining the
vesting of the number of shares of ESI Common Stock subject to exercise
under the optionee's converted Option after the Effective Time.
1.4 Surrender and Cancellation of Certificates.
1.4.1 Surrender of Certificates. After the Effective
Time, each holder of shares of AISI Common Stock outstanding immediately
prior to the Effective Time (other than Dissenting Shares), upon surrender
to ESI or its agent designated for such purpose of a certificate or
certificates representing such shares, along with a transmittal letter in
the form described in clause (ii) of Section 4.2.5 and the stock powers
described in clause (iii) of Section 4.2.5 duly endorsed in blank, shall be
entitled to receive (x) a certificate representing the number of shares of
ESI Common Stock into which such shares of AISI Common Stock shall have
been converted pursuant to the provisions of Section 1.3 less the number of
such shares determined to be Escrowed Property (as defined in Section 6.3)
and (y) subject to Section 6.3 and the provisions of the Escrow Agreement,
a certificate representing the shares of ESI Common Stock determined to be
Escrowed Property. If any certificate for shares of ESI Common Stock is to
be issued in a name other than that in which the certificate for AISI
Common Stock surrendered in exchange therefor is registered, it shall be a
condition of the issuance thereof that the certificate so surrendered shall
be properly endorsed and otherwise in proper form for transfer, and that
the person requesting such exchange pay to ESI or its agent designated for
such purpose any transfer or other taxes required, or establish to the
satisfaction of ESI or its agent that such tax has been paid or is not
payable. If any holder of AISI Common
5
<PAGE>
Stock canceled and retired in accordance with this Agreement is unable to
deliver a certificate or certificates representing such shares of the
holder, ESI, in the absence of actual notice that any shares theretofore
represented by any such certificate have been acquired by a bona fide
purchaser, shall deliver to such holder the number of shares of Common
Stock to which such holder is entitled in accordance with the provisions of
this Agreement upon the presentation of the following: (i) evidence
satisfactory to ESI (a) that such person is the owner of the shares
theretofore represented by each certificate claimed by him to be lost,
wrongfully taken or destroyed and (b) that he is the person who would be
entitled to present each such certificate for conversion pursuant to this
Agreement; and (ii) such security or indemnity as may be reasonably
requested by ESI to indemnify and hold ESI and the transfer agent harmless.
1.4.2 Option Agreements. After the Effective Time, each
holder of an Option outstanding immediately prior to the Effective Time
shall be deemed to hold an option exercisable for ESI Common Stock in
accordance with the provisions of Section 1.3.4.
1.4.3 No Fractional Shares. No certificates or scrip
evidencing fractional shares of ESI Common Stock shall be issued in the
Merger, and such fractional share interests will not entitle the owner
thereof to any rights as a shareholder of ESI. In lieu of fractional
shares, ESI shall pay each holder of shares of AISI Common Stock who would
otherwise have been entitled to a fraction of a share of ESI Common Stock
upon surrender of stock certificates an amount of cash (without interest)
determined by multiplying (a) the Average Sale Price by (b) the fractional
share interest in ESI Common Stock to which such holder would otherwise be
entitled. The "Average Sale Price" shall mean the average of the high and
low prices of ESI
6
<PAGE>
Common Stock, as reported in The Wall Street Journal, for the trading day
immediately preceding the Closing Date.
1.4.4 Cancellation. At the Effective Time, all shares of
AISI Common Stock outstanding immediately before the Effective Time shall
no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each certificate previously evidencing any
such shares shall thereafter represent only the right to receive the Merger
Consideration. The holders of such certificates previously evidencing such
shares of AISI Common Stock outstanding immediately before the Effective
Time shall cease to have any rights with respect to such shares of AISI
Common Stock, except for Dissenters Rights as provided in Section 1.5.
1.4.5 Treasury Shares. Each share of AISI Common Stock
held in the treasury of AISI immediately prior to the Effective Time shall
be canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto.
1.4.6 Escheat. Neither ESI nor Merger Corp. shall be
liable to any holder of shares of AISI Common Stock for any such shares of
ESI Common Stock (or dividends or distributions with respect thereto) or
cash delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
1.4.7 Withholding Rights. ESI shall be entitled to deduct
and withhold from the Merger Consideration such amounts as ESI is required
to deduct and withhold with respect to the making of such payment under the
Code, or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by ESI, such withheld amounts shall be treated
7
<PAGE>
for all purposes of this Agreement as having been paid by the holder of the
shares of AISI Common Stock in respect of which such deduction and
withholding was made by ESI.
1.5 Dissenters' Rights.
1.5.1 Notice. AISI shareholders desiring to dissent from
the Merger and obtain payment of the fair value of their shares of AISI
Common Stock immediately before the consummation of the Merger in lieu of
the Merger Consideration may exercise their dissenters' rights under the
provisions set forth at Sections 761 through 774 of the MBCA ("Dissenters'
Rights"). Consistent with Sections 764(2) and 766 of the MBCA, AISI shall
notify in writing each shareholder entitled to assert Dissenters' Rights
that action by written consent has been taken to approve the Merger and
shall provide each such shareholder the dissenters' notice described in
Section 766 of the MBCA. The date specified in such notice for receipt by
AISI of payment demand from any shareholder exercising rights of dissent
shall be the earliest date permitted by Section 766(d) of the MBCA.
1.5.2 Rights of Dissenting Shares. Shares of AISI Common
Stock which are issued and outstanding as of the Effective Time and held by
any shareholder who has, in accordance with Section 767 of the MBCA,
delivered a payment demand accompanied by the required certification and
deposit of shares ("Dissenting Shares") shall not be converted as described
in Section 1.3 but shall from and after the Effective Time represent only
the right to receive such consideration as may be determined to be due
under the MBCA. AISI shall give ESI prompt notice upon receipt by AISI of
any payment demand from any such shareholder of AISI (a "Dissenting
Shareholder"). AISI agrees that prior to the Effective Time, it will not,
except with prior written consent of ESI, voluntarily make any payment with
respect to, or settle
8
<PAGE>
or offer to settle, any request pursuant to the exercise of Dissenters'
Rights. Each Dissenting Shareholder who becomes entitled, pursuant to the
MBCA, to payment for his Dissenting Shares shall receive payment therefor
in accordance with the MBCA. Notwithstanding the foregoing, if any
Dissenting Shareholder shall rescind, fail to perfect or otherwise lose
such rights either before or after the Effective Time, such shareholder's
shares of AISI Common Stock shall be converted into ESI Common Stock or
cash, as of the Effective Time, in accordance with the provisions of
Section 1.3.
1.6 Stock Transfer Books. At the Effective Time, the stock
transfer books of AISI shall be closed and there shall be no further
registration of transfers of shares of AISI Common Stock thereafter on the
records of the AISI. On or after the Effective Time, any certificates for
AISI Common Stock presented to ESI or its agent for any reason shall be
converted into the Merger Consideration.
1.7 Closing. The closing of the Merger (the "Closing") shall
take place at the offices of Stoel Rives LLP, 900 SW Fifth Avenue, Suite
2300, Portland, Oregon 97204 on the Condition Completion Date (as
hereinafter defined), or on such other date and/or at such other place and
time as AISI, ESI and Merger Corp. may agree (the "Closing Date"). The
"Condition Completion Date" shall be the day on which the last of the
conditions set forth in Article V hereof shall have been fulfilled or
waived (other than those conditions which, by their terms, are to occur at
Closing).
1.8 Subsequent Actions. If, at any time after the Effective
Time, Merger Corp. shall consider or be advised that any deeds, bills of sale,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise
9
<PAGE>
in Merger Corp. its right, title or interest in, to, or under any of the
rights, properties or assets of AISI acquired or to be acquired by Merger
Corp. as a result of, or in connection with, the Merger or otherwise to
carry out this Agreement, the officers and directors of Merger Corp. shall
be authorized to execute and deliver, in the name and on behalf of AISI, or
otherwise, all such deeds, bills of sale, assignments and assurances, and
to take and do, in the name and on behalf of AISI, or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect
or confirm any and all right, title and interest in, to and under such
rights, properties or assets in Merger Corp. or otherwise to carry out the
purposes of this Agreement.
ARTICLE II
FURTHER AGREEMENTS
2.1 Noncompetition and Confidentiality Agreements. AISI shall
cause each of its employees who will become employees of Merger Corp. to sign
a noncompetition and confidentiality agreement (the "ESI Confidentiality
Agreement") substantially in the form of Exhibit B.
2.2 Escrow Agreement. Prior to or at the Closing, ESI, the
three representatives appointed to act for and on behalf of the AISI
shareholders (the "Shareholder Representatives"), and the AISI shareholders
otherwise listed as signatories thereto shall execute and deliver an Escrow
Agreement ("Escrow Agreement") substantially in the form attached as
Exhibit C, and shall cause the Escrow Agent, as such term is defined in the
Escrow Agreement, to execute the Escrow Agreement.
10
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of AISI. AISI hereby
represents and warrants to ESI and Merger Corp. that, except as
specifically set forth in Schedule 3.1 (the "AISI Disclosure Schedule") in
a numbered paragraph that corresponds to the section for which disclosure
is made:
3.1.1 Organization and Status. AISI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified and in good standing as
a foreign corporation in each jurisdiction where its properties (whether
owned, leased or operated) or its business conducted require such
qualification, except where the failure to so qualify or be in good
standing, when taken together with all such failures, would not have a
material adverse effect on AISI. AISI has all requisite corporate power and
authority to own, operate and lease its property and to carry on its
businesses as they are now being conducted. AISI has delivered to ESI
complete and accurate copies of the Amended and Restated Articles of
Incorporation ("Articles of Incorporation") and the Amended Bylaws of AISI
("Bylaws"), each as amended to the date hereof.
3.1.2 Capitalization. AISI has authorized capital stock
consisting of 10,000,000 shares of AISI Common Stock, of which 3,459,044
shares were outstanding on March 31, 1996 and options to purchase 1,199,567
shares were outstanding on March 31, 1996 under grants made pursuant to
AISI's 1989 Incentive Stock Option Plan, its 1991 Incentive Stock Option
Plan, its 1992 Incentive Stock Option Plan, and its 1995 Incentive Stock
Option Plan, and the three non-qualified stock option agreements identified
in Schedule 3.1.2 (collectively,
11
<PAGE>
the "AISI Stock Plans"). All of the outstanding shares of capital stock of
AISI have been duly authorized and are validly issued, fully paid and
nonassessable, and no shares were issued in violation of preemptive or
similar rights of any shareholder or in violation of any applicable
securities laws. Except as set forth above, there are no shares of capital
stock of AISI authorized, issued or outstanding, and, except for options
granted pursuant to the AISI Stock Plans, there are no preemptive rights or
any outstanding subscriptions, options, warrants, rights, convertible
securities or other agreements or commitments of AISI of any character
relating to the issued or unissued capital stock or other securities of
AISI. There are no outstanding obligations of AISI to repurchase, redeem or
otherwise acquire any of its outstanding shares of capital stock. The list
of shareholders and option holders attached hereto as Schedule 3.1.2 sets
forth a complete and accurate list of the shareholders and option holders
of AISI as of the date hereof, indicating the number of shares of AISI
Common Stock held by each shareholder, or subject to options in the case of
option holders, and the percentage of the shares of all the AISI Common
Stock outstanding represented by the shares so held in the case of
shareholders.
3.1.3 Corporate Authority. AISI has the corporate power
and authority and has taken all corporate action necessary to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly and validly authorized by the Board of
Directors of AISI, validly executed and delivered by AISI and, as of the
Closing Date, will have been duly and validly approved by the shareholders
of AISI. This Agreement constitutes the valid and binding obligation of
AISI, enforceable in accordance with its terms, except as enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights
12
<PAGE>
generally and except that the availability of the equitable remedy of
specific performance or injunctive relief is subject to the discretion of
the court before which any proceeding may be brought.
3.1.4 Governmental Filings. Other than (a) the filing of
Articles of Merger contemplated by Article I and (b) the HSR Filing
described in Section 4.2.4, no notices, reports or other filings are
required to be made by AISI with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by AISI from,
any domestic or foreign governmental or regulatory authority, agency,
court, commission or other entity ("Governmental Entity") in connection
with the execution and delivery of this Agreement by AISI and the
consummation by AISI of the transactions contemplated hereby.
3.1.5 Investments; Subsidiaries. All direct or indirect
investments of AISI in any corporation, partnership, association, joint
venture or other entity are listed in Schedule 3.1.5. AISI has no
subsidiaries.
3.1.6 No Adverse Consequences. Neither the execution and
delivery of this Agreement by AISI nor the consummation of the transactions
contemplated by this Agreement will (a) result in the creation or
imposition of any lien, charge, encumbrance or restriction on any of the
assets or properties of AISI, (b) violate any provision of the Articles of
Incorporation or Bylaws of AISI, (c) violate any statute, judgment, order,
injunction, decree, rule, regulation or ruling of any governmental
authority applicable to AISI, or (d) either alone or with the giving of
notice or the passage of time or both, conflict with, constitute grounds
for termination of, accelerate the performance required by, accelerate the
maturity of any indebtedness or obligation under, result in the breach of
the terms, conditions or provisions of or constitute a default under
13
<PAGE>
any mortgage, deed of trust, indenture, note, bond, lease, license, permit
or other agreement, instrument or obligation to which AISI is a party or by
which it is bound.
3.1.7 Financial Statements. AISI has furnished to ESI an
audited balance sheet of AISI as of December 31, 1995, and the related
statements of income, stockholders' equity and cash flows for the period
then ended, and the unaudited balance sheet of AISI as of March 31, 1996
(the "Current Balance Sheet") and the related statements of income and
stockholders' equity for the three months then ended, and the financial
statements delivered at or before the Closing pursuant to Section 5.3.16
(all such balance sheets and statements collectively, the "Financial
Statements"). The Financial Statements are complete and accurate in all
material respects and present fairly the financial position and operating
results of AISI as of the dates and for the periods indicated therein, and
have been prepared in accordance with generally accepted accounting
principles.
3.1.8 Undisclosed Liabilities; Returns. Except for
current liabilities which were incurred after March 31, 1996 in the
ordinary course of business and of a type and in an amount both consistent
with past practices and not material (either individually or in the
aggregate), AISI has no liability or obligation (whether absolute, accrued,
contingent or otherwise, and whether due or to become due) which is not
accrued, Reserved against, or identified in the Current Balance Sheet.
"Reserves" or "Reserved" in this Agreement shall mean the aggregate amount
of AISI reserves for the specific item or matter referred to, as the
context requires, plus the amount of the undifferentiated AISI reserve
recorded in AISI's general ledger Account No. 2390, but only to the extent
such reserves are not otherwise used in complying with any other
representation or warranty. There are no rights of return or other
14
<PAGE>
agreements between AISI and any customer which would cause any sales
reflected in the Financial Statements to fail to qualify as sales in
accordance with generally accepted accounting principles and AISI's revenue
recognition policy as reflected in the Financial Statements.
3.1.9 Absence of Certain Changes or Events. Since
December 31, 1995, there has not been:
(a) Any material adverse change in the business, results
of operations, financial condition, properties, assets or prospects of AISI;
(b) Any material damage, destruction, requisition, taking
or casualty loss, whether or not covered by insurance, of or to any of the
assets or properties of AISI;
(c) Any direct or indirect declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock,
property or any combination thereof) in respect of the AISI Common Stock,
or any direct or indirect repurchase, redemption or other acquisition by
AISI of any shares of its stock;
(d) Other than as disclosed pursuant to Section 3.1.13.4,
any increase in the rate or terms of compensation payable or to become
payable by AISI to its directors, officers or employees; any change in the
rate or terms of any bonus, insurance, pension or other employee benefit
plan, payment or arrangement made to, for or with any employees of AISI;
any special bonus or remuneration paid; any written employment contract
executed or amended; or any change in personnel policies;
(e) Any entry into any agreement, commitment or
transaction (including, without limitation, any license of intellectual
property, any borrowing, capital expenditure or capital financing, any
purchase, acquisition, sale or other disposition of assets (other than
15
<PAGE>
inventory in the ordinary course of business), any lease or sublease, any
guaranty, assumption or endorsement of payment or performance of any loan
or obligation of another, or any amendment, modification or termination of
any existing agreement, commitment or transaction) by AISI as contemplated
in this Agreement;
(f) Any change by AISI in accounting methods, principles
or practices;
(g) Any issuance or sale of any stock of AISI (other than
issuances pursuant to the exercise of options outstanding on March 31,
1996) or any issuance or granting of any option, warrant or right to
purchase any stock of AISI (other than options granted under the AISI Stock
Plans on or before March 31, 1996) or any commitment to do any of the
foregoing;
(h) Any amendment to the Articles of Incorporation or
Bylaws of AISI;
(i) Any conduct of business which is outside the ordinary
course of business or not substantially in the manner that AISI previously
conducted its business;
(j) Any encumbrance or consent to encumbrance of any
property or assets;
(k) Any pending or threatened labor disputes,
organizational activities or disturbances;
(l) Any indication from any customer of AISI which
purchased $500,000 or more of products or services from AISI in the year
ended December 31, 1995 that such customer intends to, is desirous of, or
is actively considering terminating or reducing its purchases from AISI for
any reason; or
(m) Any change not described above in the assets,
liabilities, licenses, permits or franchises of AISI, or in any agreement
to which AISI is a party or is bound, which, either individually or in the
aggregate, has had or reasonably could be expected to have a
16
<PAGE>
material adverse effect on the business, results of operations, financial
condition, properties, assets or prospects of AISI.
3.1.10 Prohibited Payments. Neither AISI nor any
shareholder, officer, director or other person or entity has, directly or
indirectly, on behalf of or with respect to the business or operations of
AISI, (a) made any payment outside the ordinary course of business to any
purchasing or selling agent or person charged with similar duties of any
entity to which AISI sells or from which AISI buys products, for the
purpose of influencing such agent or person to buy products from or sell
products to AISI; or (b) otherwise made or received any payment that was
not legal to make or receive under any applicable law or regulation of the
United States or any other country or territory; or (c) engaged in any
transaction, maintained any bank account, or used any corporate funds or
assets except for transactions, bank accounts, funds, and assets which have
been and are reflected in the normally maintained books and records of
AISI.
3.1.11 Litigation. No litigation, proceeding or
governmental investigation is pending or, to the knowledge of AISI,
threatened against or relating to AISI, its officers or directors in their
capacities as such, or any of AISI's properties or businesses.
3.1.12 Compliance with Laws; Judgments. AISI has at all
relevant times conducted its business in compliance with the provisions of
its Articles of Incorporation, Bylaws, and all applicable laws, regulations
and standards, including without limitation the United States Export
Control Act and all applicable regulations promulgated by the U.S.
Department of Health and Human Services and the Federal Communications
Commission and foreign counterparts to such laws and regulations. AISI is
not in violation of any applicable laws
17
<PAGE>
or regulations, other than violations which individually or in the
aggregate do not, and, with the passage of time will not, have a material
adverse effect on its business, financial condition, results of operations,
properties, assets or prospects. AISI is not subject to any outstanding
judgment, order, writ, injunction or decree and has not been charged with,
or threatened with a charge of, a violation of any provision of any
applicable law or regulation.
3.1.13 Employment Matters.
3.1.13.1 Labor Matters. AISI is not a party or
otherwise subject to any collective bargaining or other agreement governing
the wages, hours or terms of employment of its employees. AISI is and has
been in compliance with all applicable laws regarding employment and
employment practices, terms and conditions of employment, wages and hours
and is not and has not been engaged in any unfair labor practice. There is
no (a) unfair labor practice complaint against AISI pending before the
National Labor Relations Board or any other Governmental Entity, (b) labor
strike, slowdown or work stoppage actually occurring or, to the knowledge
of AISI, threatened against AISI, (c) representation petition respecting
the employees of AISI pending before the National Labor Relations Board or
similar agency, or (d) grievance or any arbitration proceeding pending
arising out of or under collective bargaining agreements applicable to
AISI. AISI has not experienced any primary work stoppage or other organized
work stoppage involving its employees in the past two years. AISI is not
aware of any labor strike, slowdown, or work stoppage occurring or, to the
knowledge of AISI, threatened against any of its principal suppliers that
might be expected to have a material adverse effect on the business,
financial condition, results of operations, properties, or assets of AISI.
18
<PAGE>
3.1.13.2 Employee Benefits. Schedule 3.1.13.2
lists all pension, retirement, profit sharing, deferred compensation,
bonus, commission, incentive compensation (including cash, stock and option
plans or arrangements), life insurance, health and disability insurance,
hospitalization and all other employee benefit plans or arrangements
(including, without limitation, any contracts or agreements with trustees,
insurance companies or others relating to any such employee benefit plans
or arrangements) established or maintained by AISI, and complete and
accurate copies of all those plans or arrangements have been provided to
ESI. The employee pension benefit plans (within the meaning of Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) established and maintained by AISI that are subject to ERISA
(the "ERISA Plans") are listed separately as ERISA Plans on Schedule
3.1.13.2. The ERISA Plans comply in all material respects with the
applicable requirements of ERISA. AISI has received from the Internal
Revenue Service a favorable determination for each of the ERISA Plans and
their related trusts that each of the ERISA Plans is qualified under
Section 401(a) of the Code and the related trust is tax-exempt under
Section 501(a) of the Code. There has been no event subsequent to that
determination that has adversely affected the tax qualified status of the
ERISA Plans or the exemption of the related trusts other than changes in
the Code that are not effective as of the Closing Date. None of the ERISA
Plans, its related trusts or any trustee, investment manager or
administrator thereof has engaged in a nonexempt "prohibited transaction,"
as such term is defined in Section 406 of ERISA and Section 4975 of the
Code. There are not and have not been any excess deferrals or excess
contributions under any ERISA Plan. Each ERISA Plan is and has been
operated and administered in conformity with the requirements of all
applicable laws and regulations, whether
19
<PAGE>
or not the ERISA Plan documents have been amended to reflect such
requirements. AISI has no obligation of any kind (whether under the terms
of the ERISA Plans or under any understanding with employees) to make
payments under, or to pay contributions to, any plan, agreement or other
arrangement for deferred compensation of employees, whether or not tax
qualified, including, without limitation, a single employer tax qualified
plan, a tax qualified plan of a controlled group of corporations, a
multiemployer pension plan, a "defined benefit" plan, a nonqualified
deferred compensation plan, an individual employment or compensation
agreement or a commitment to provide medical benefits to retirees.
3.1.13.3 Employment Agreements. Each employee of
AISI is an "at-will" employee and there are no written employment,
commission or compensation agreements of any kind between AISI and any of
its employees. Schedule 3.1.13.3 lists all AISI's employment or supervisory
manuals, employment or supervisory policies, and written information
generally provided to employees (such as applications or notices), and
complete and accurate copies of those manuals, policies and written
information have been provided to ESI. AISI does not have any agreements or
understandings with its employees, including without limitation any
agreements or understandings regarding compensation of any nature,
severance payments or retirement benefits, except as reflected in the items
listed in Schedules 3.1.13.2 and 3.1.13.4.
3.1.13.4 Compensation. Schedule 3.1.13.4 contains
a complete and accurate list of all current directors, officers, employees
or consultants of AISI, specifying their names and job designations, the
total amount paid or payable as cash and noncash compensation to each such
person, and the basis of such compensation, whether fixed or
20
<PAGE>
commission or a combination thereof, and the total amount of accrued
benefits (including without limitation vacation, sick or wellness pay) for
such persons as of December 31, 1995 and as of April 30, 1996. Except as
set forth in Schedules 3.1.13.2, 3.1.13.3 or the agreements described in
Section 3.1.13.5, AISI is not a party to any employment contract or
agreement and has not made any other commitment entitling any employee to
any payment in the event of termination or resignation that would
constitute a "parachute payment" within the meaning of Section 280G of the
Code or would in the aggregate exceed 100 percent of such person's annual
base cash compensation. The provisions for wages and salaries accrued on
the Current Balance Sheet are adequate for salaries and wages, including
accrued vacation pay and sick or wellness pay, and AISI has accrued on its
books and records all obligations for wages and salaries and other
compensation to its employees, including but not limited to, vacation pay
and sick or wellness pay, and all commissions and other fees payable to
agents, salesmen, and representatives.
3.1.13.5 Confidentiality and Inventions Agreements.
Each employee or consultant of AISI has previously signed a confidentiality
and invention agreement in the form or forms attached hereto as Exhibit D.
3.1.14 Title to and Condition of Real Property. AISI does
not own any real property. Schedule 3.1.14 contains a list of all real
property currently leased or occupied by AISI (the "Leased Real Property"),
including the dates of and parties to all leases and any amendments thereof
and a list of all real property previously leased or occupied by AISI (the
"Previously Leased Real Property"). To the knowledge of AISI, all Leased
Real Property (including improvements thereon) is in satisfactory condition
and repair consistent with its
21
<PAGE>
present use, and is available for immediate use in the conduct of AISI's
business. To the knowledge of AISI, neither the operations of AISI on any
Leased Real Property, nor any improvements on the Leased Real Property,
violates any applicable building or zoning code or regulation of any
governmental authority having jurisdiction. The Leased Real Property
includes all such property necessary to conduct the business of AISI.
3.1.15 Title to and Condition of Fixed Assets. Schedule
3.1.15 contains a complete and accurate list of all tangible personal
property (excluding inventory) owned or leased by AISI (the "Tangible
Personal Property"), including the dates of and parties to all leases and
any amendments thereof. AISI has good and marketable title to all of the
Tangible Personal Property listed in Schedule 3.1.15, free and clear of all
liens, mortgages, pledges, leases, restrictions and other claims and
encumbrances of any nature whatsoever. The Tangible Personal Property is in
good operating condition and repair (ordinary wear and tear excepted), is
performing satisfactorily, and is adequate for the conduct of the business
of AISI. All Tangible Personal Property and the state of maintenance
thereof are in compliance with all applicable laws and regulations.
3.1.16 Intellectual Property. AISI owns, or has a valid
license to use, all patents, trademarks, service marks, trade names,
copyrights, trade secrets, technology, know-how and other intellectual
property (the "Intellectual Property") necessary to or used in the conduct
of the business of AISI as now conducted and as proposed to be conducted.
Schedule 3.1.16 contains a complete and accurate list of all patents,
patent applications, trademarks and service marks and related applications,
trade names and copyrights owned by or licensed to AISI. Schedule 3.1.16
also contains a description of all agreements or licenses relating to the
22
<PAGE>
acquisition by or license to AISI of such Intellectual Property or under
which AISI has sold or granted a right to use any Intellectual Property.
All Intellectual Property owned by AISI is owned by it free and clear of
all liens, claims, encumbrances or adverse claims of any third party (other
than infringement claims). The conduct of AISI's business does not, to the
knowledge of AISI, conflict with or infringe upon any Intellectual Property
rights of any other person and no claims of conflict or infringement are
pending or threatened against AISI.
3.1.17 Certain Contracts and Arrangements. Schedule
3.1.17, which is organized by type of agreement, contains a complete and
accurate list of each of the following types of agreements or arrangements,
including any amendments thereto, to which AISI is a party or by which it
is bound:
(a) any mortgage, note or other instrument or agreement
relating to the borrowing of money or the incurrence of indebtedness or the
guaranty of any obligation for the borrowing of money;
(b) any contract, agreement, purchase order or
acknowledgment form for the purchase, sale, lease or other disposition of
equipment, products, materials or capital assets, or for the performance of
services (including without limitation consulting services), with respect
to which the annual aggregate dollar amount either due to or payable by
AISI exceeds $20,000;
(c) contracts or agreements for the joint performance of
work or services, and all other joint venture agreements;
(d) contracts or agreements with agents, brokers,
consignees, sales representatives or distributors relating to the sale of
products or services;
23
<PAGE>
(e) confidentiality or inventions assignment agreements
with parties other than employees of AISI; and
(f) any other contract, instrument, agreement or
obligation not described in any other Schedule which contains unfulfilled
obligations, is not terminable without payment of premium or penalty upon
30 days' notice or less and the annual amount either due to or payable by
AISI exceeds $20,000 for any single contract or $50,000 in the aggregate.
3.1.18 Status of Contracts. Each of the contracts,
agreements, commitments and instruments listed on Schedules 3.1.14, 3.1.15,
3.1.16, and 3.1.17 and the agreements described in Section 3.1.13.5
(collectively, the "Contracts") is in full force and effect and is valid,
binding and enforceable by AISI in accordance with its terms, except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought.
There is no existing material default or violation by AISI under any
Contract and no event has occurred which (whether with or without notice,
lapse of time or both) would constitute a material default of AISI under
any Contract. There is no pending or threatened proceeding which would
interfere with the quiet enjoyment of any leasehold of which AISI is lessee
or sublessee. All other parties to the Contracts have consented or prior to
the Closing will have consented (where such consent is necessary) to the
consummation of the transactions contemplated by this Agreement without
modification of the rights or obligations of AISI under any Contract.
Complete and accurate copies of all Contracts have been delivered to ESI.
AISI is not aware of any default by any other
24
<PAGE>
party to any Contract or of any event which (whether with or without
notice, lapse of time or both) would constitute a material default by any
other party with respect to obligations of that party under any Contract,
and, to the knowledge of AISI, there are no facts that exist indicating
that any of the Contracts may be totally or partially terminated or
suspended by the other parties. AISI has not granted any waiver or
forbearance with respect to any of the Contracts. AISI is not a party to,
or bound by, any Contract that AISI can reasonably foresee will result in
any material loss to AISI upon the performance thereof (including any
liability for penalties or damages, whether liquidated, direct, indirect,
incidental or consequential).
3.1.19 Insurance. Schedule 3.1.19 contains a complete and
accurate list of all policies of fire, liability, worker's compensation and
other forms of insurance insuring AISI, its officers or directors, its
assets or its operations (the "Policies"), setting forth the applicable
deductible amounts. All the Policies are valid, enforceable and in full
force and effect, all premiums with respect to the Policies covering all
periods up to and including the date as of which this representation is
being made have been paid and no notice of cancellation or termination has
been received with respect to any Policy. The Policies are sufficient for
compliance with all requirements of law and agreements to which AISI is a
party and provide insurance for the risks and in the amounts and types of
coverage usually obtained by persons using or holding similar properties in
similar businesses. There have been no claims made for insurance payment
under any of the Policies in the three years preceding the date of this
Agreement. Complete and accurate copies of the Policies and all
endorsements thereto have been delivered to ESI. AISI has not been refused
any insurance coverage and no insurance coverage has been canceled during
the three years preceding the date of this Agreement.
25
<PAGE>
3.1.20 Permits and Licenses. Schedule 3.1.20 contains a
complete and accurate list of all governmental licenses, permits,
franchises, easements and authorizations (collectively, "Permits") held by
AISI, listed by governmental entity. AISI holds, and at all times has held,
all material Permits necessary for the lawful conduct of its business
pursuant to all applicable statutes, laws, ordinances, rules and
regulations of all governmental bodies, agencies and other authorities
having jurisdiction over it or any part of its operations. AISI is in
compliance with each of the terms of the Permits listed on Schedule 3.1.20,
and there are no claims of violation by AISI of any of such Permits except
where any such failure so to comply or violation, individually or in the
aggregate with any other failures to comply or violations, either with or
without the giving of notice or the passage of time or both, would not have
a material adverse effect on the business, results of operation, financial
condition, properties, assets or prospects of AISI. Complete and accurate
copies of all Permits held by AISI have been delivered to ESI. All
governmental entities and agencies that have issued any Permits to or with
respect to AISI or its business have consented or prior to the Closing will
have consented (where such consent is necessary) to the consummation of the
transactions contemplated by this Agreement without requiring modification
of the rights or obligations of AISI under any of such Permits.
3.1.21 Taxes.
3.1.21.1 Returns. AISI has filed on a timely basis
all federal, state, foreign and other returns, reports, forms, declarations
and information returns required to be filed by it with respect to Taxes
(as defined below) which relate to the business, results of operations,
financial condition, properties or assets of AISI (collectively, the
"Returns") and
26
<PAGE>
has paid on a timely basis all Taxes shown to be due on the Returns. AISI
is not part of an affiliated group of corporations that files or has the
privilege of filing consolidated tax returns pursuant to Section 1501 of
the Code or any similar provisions of state, local or foreign law, and AISI
is not a party to any tax-sharing or tax-allocation agreement. No
extensions of time have been requested for Returns which have not been
filed except as set forth on Schedule 3.1.21. No Returns have been examined
by the applicable taxing authorities for all periods to and including the
fiscal year ended December 31, 1995 and, except as set forth on Schedule
3.1.21, AISI has not received any notice of audit and there are no
outstanding agreements or waivers extending the applicable statutory
periods of limitation for such Taxes for any period. All Returns filed are
complete and accurate in all respects and no additional Taxes are owed by
AISI with respect to the periods covered by the Returns. AISI has provided
ESI with complete and accurate copies of Returns for each of AISI's fiscal
years 1991 through 1994 and the Forms 1139 related to any loss or credit or
carryback claim for those years.
3.1.21.2 Taxes Paid or Reserved. The Reserves
reflected in the Current Balance Sheet are adequate for payment of Taxes in
respect of periods ending on or before the date of the Current Balance
Sheet. All reserves for Taxes have been determined in accordance with
generally accepted accounting principles consistently applied throughout
the periods involved and with prior periods. All Taxes which AISI has been
required to collect or withhold have been withheld or collected and, to the
extent required, have been paid to the proper taxing authority. AISI has
not elected to be treated as a consenting corporation pursuant to Section
341(f) of the Code.
27
<PAGE>
3.1.21.3 Definition. The term "Taxes" shall mean
all federal, state, local or foreign taxes, charges, fees, levies or other
assessments, including, without limitation, all net income, gross income,
gross receipts, premium, sales, use, ad valorem, transfer, franchise,
profits, license, withholding, payroll, employment, excise, estimated
severance, stamp, occupation, property or other taxes, fees, assessments or
charges of any kind whatsoever, together with any interest and any
penalties (including penalties for failure to file in accordance with
applicable information reporting requirements), and additions to tax.
3.1.22 Related Party Interests. Except as listed in
Schedule 3.1.22, no shareholder, officer or director of AISI (or any entity
owned or controlled by one or more of such parties) (a) has any interest in
any property, real or personal, tangible or intangible, used in or
pertaining to AISI's business, (b) is indebted to AISI, or (c) has any
material financial interest, direct or indirect, in any supplier or
customer of, or other outside business which has significant transactions
with AISI. True and complete copies of all agreements listed on Schedule
3.1.22 have been provided to ESI. AISI is not indebted to any of its
shareholders, directors or officers (or any entity owned or controlled by
one or more of such parties) except for amounts due under normal salary
arrangements and for reimbursement of ordinary business expenses. The
consummation of the transactions contemplated by this Agreement will not
(either alone or upon the occurrence of any act or event, or with the lapse
of time, or both) result in any payment (severance or other) becoming due
from AISI to any of its shareholders, officers, directors or employees (or
any entity owned or controlled by one or more of such parties).
3.1.23 No Powers of Attorney or Restrictions. No power
of attorney or similar authorization given by AISI is presently in effect or
outstanding. No contract or
28
<PAGE>
agreement to which AISI is a party or is bound or to which any of its
properties or assets is subject limits the freedom of AISI to compete in
any line of business or with any person. None of the employees of AISI is
obligated under any contract (including licenses, covenants or commitments
of any nature), or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of AISI or that would conflict with the
business of AISI as now conducted or proposed to be conducted.
3.1.24 Environmental Conditions.
3.1.24.1 Compliance. The business and assets of
AISI, including without limitation the Leased Real Property and the
Previously Leased Real Property (during the period of AISI's use only), are
and have been in compliance with all Environmental Laws and all Permits
required under any Environmental Law are listed separately in Schedule
3.1.20. There are no pending or, to the knowledge of AISI, threatened
claims, actions or proceedings against AISI under any Environmental Law or
related Permit. All wastes generated in connection with AISI's business are
and have been transported and disposed of off-site in compliance with all
Environmental Laws, and true and correct logs of such transportation and
disposal have been made available to ESI.
3.1.24.2 Hazardous Substances. No Hazardous
Substance has been disposed of, spilled, leaked or otherwise released on,
in, under or from the Leased Real Property or the Previously Leased Real
Property (during the period of AISI's use only) or has otherwise come to be
located in the soil or water (including surface and ground water) on or
under the Leased Real Property or the Previously Leased Real Property
(during the period of AISI's use
29
<PAGE>
only). None of the assets of AISI or the improvements on the Leased Real
Property or the Previously Leased Real Property (attributable to AISI) have
incorporated into them any asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls (including in any electrical transformer or
capacitor located on such property), or any other Hazardous Substance which
is prohibited, restricted or regulated when present in buildings,
structures, fixtures or equipment. No Hazardous Substance is or has been
generated, manufactured, treated, stored, transported, used or otherwise
handled on the Leased Real Property or the Previously Leased Real Property
(during the period of AISI's use only) or in connection with the business
of AISI. There are no underground storage tanks on the Real Property
(whether or not regulated and whether or not out of service, closed or
decommissioned), other than a septic tank previously used only for sanitary
waste, the use of which has been discontinued in compliance with Michigan
law.
3.1.24.3 Filings and Notices. AISI has timely
filed all required reports, obtained all required approvals and permits,
and generated and maintained all required data, documentation and records
under all applicable Environmental Laws. All notifications required by any
Environmental Law in respect of any discharge, release or emission,
including any notices required to be provided under applicable Michigan
law, if any, have been made within the time prescribed by such
Environmental Law, and copies of all such notifications have been provided
to ESI. No part of the Leased Real Property or, to the knowledge of AISI,
the Previously Leased Real Property is listed as a site contaminated by
Hazardous Substances pursuant to any Environmental Law.
3.1.24.4 Definitions. As used in this Agreement,
(a) "Environmental Law" means any federal, state, foreign or local statute,
ordinance or
30
<PAGE>
regulation pertaining to the protection of human health or the environment
and any applicable orders, judgments, decrees, permits, licenses or other
authorizations or mandates under such statutes, ordinances or regulations,
and (b) "Hazardous Substance" means any hazardous, toxic, radioactive or
infectious substance, material or waste as defined, listed or regulated
under any Environmental Law, and includes without limitation radioactive
material.
3.1.25 Consents and Approvals. Except as set forth in
Sections 3.1.4 and 5.2.5, no consent, approval, or authorization of, or
filing or registration with, any court, regulatory authority, governmental
body, or any other entity or person not a party to this Agreement is
required to be obtained by AISI for the consummation of the transactions
described in this Agreement.
3.1.26 Records. The books of account, minute books, stock
certificate books and stock transfer ledgers of AISI are complete and
accurate in all material respects, and there has been no transaction
involving the business or stock ownership of AISI, or action of AISI's
board of directors or shareholders, which properly should have been set
forth therein and which has not been accurately so set forth. Complete and
accurate copies of such books, records and ledgers have been made available
to ESI.
3.1.27 Receivables. Each of the receivables of AISI
(including accounts receivable, loans receivable and advances) that is
reflected in the Current Balance Sheet, and each of the receivables that
has arisen since that date, has arisen only from bona fide transactions in
the ordinary course of AISI's business and shall be fully collected when
due, or in the case of each account receivable, within 90 days after it
arose, without resort to litigation and without offset or counterclaim,
except to the extent of the normal allowance for doubtful accounts with
31
<PAGE>
respect to accounts receivable, consistent with AISI's prior practices, as
reflected in the Current Balance Sheet.
3.1.28 Bank Accounts. Schedule 3.1.28 contains a complete
and accurate list of all the banks or other financial institutions at which
AISI maintains accounts or safe deposit boxes, together with numbers of
such accounts and boxes and the names of the persons authorized to draw
thereon or permitted access thereto. All cash in such accounts is held in
demand deposits and is not subject to any restriction or limitation as to
withdrawal.
3.1.29 Product Warranties. Schedule 3.1.29 contains
AISI's standard form of product warranty, infringement indemnity and
limitation of liability provisions and a copy of each negotiated warranty,
indemnity and limitations provision that differs materially from the
standard form. AISI has not undertaken any performance obligations or made
any warranties or guarantees with respect to its products other than those
disclosed in Schedule 3.1.29, or sold any products or services without the
limitation of liability provisions disclosed in Schedule 3.1.29. The
aggregate cost to AISI to comply with its product warranties has not and is
not anticipated to exceed 2.0 percent of total revenue, as reported in
AISI's audited financial statements, for any fiscal year. All products
under warranty as of the date of this Agreement, serviced, distributed or
sold by AISI, and the delivery thereof, have been in conformity with AISI's
warranty commitments.
3.1.30 Inventories. Schedule 3.1.30 contains a true and
complete list and summary of all inventory of AISI as of March 31, 1996.
All inventories, whether finished goods, work in process or raw materials,
reflected on the Current Balance Sheet or thereafter acquired, are all
items of a quality usable or saleable in the ordinary and usual course of
AISI's
32
<PAGE>
business, except for inventory items that have been written down to an
amount not in excess of realizable market value or for which adequate
Reserves or allowances have been provided on the Current Balance Sheet. The
values at which inventories are carried reflect an inventory valuation
policy consistent with AISI's past practice and in accordance with
generally accepted accounting principles. AISI has good and marketable
title to all its inventories, free and clear of all liens, mortgages,
pledges, leases, restrictions and other claims and encumbrances of any
nature whatsoever.
3.1.31 Product Liability. AISI has not recalled any
products manufactured, serviced, distributed, leased, or sold by AISI, and
there is no reasonable basis known to AISI for any such recall on or after the
Closing Date.
3.1.32 Backlog and Customer Information. Schedule 3.1.32
shows (a) the aggregate backlog, including sales price, product cost and
gross margin, and the backlog by customer and product, for AISI as of April
30, 1996 and (b) a list of the top ten AISI customers for each of the last
two fiscal years, with aggregate annual revenue for each customer for each
year.
3.1.33 Accounting Controls. AISI maintains a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the
33
<PAGE>
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.1.34 Brokers and Finders. AISI has not incurred any
liability for any brokerage or investment banking fees, commissions or
finders' fees in connection with the Merger.
3.1.35 Reliance. AISI recognizes and agrees that,
notwithstanding any investigation by ESI, ESI is relying upon the
representations and warranties made by AISI in this Agreement.
3.1.36 Accuracy of Representations and Warranties. None
of the representations or warranties of AISI contained in this Agreement
contains or will contain any untrue statement of any material fact or omits
or misstates a material fact necessary to make the statements contained in
this Agreement not misleading. AISI knows of no fact that has resulted or
that, in the reasonable judgment of AISI may result, in any material
adverse change in AISI's business, results of operation, financial
condition, properties, assets or prospects that has not been set forth in
this Agreement.
3.1.37 Prospectus/Proxy Statement. The information
provided in writing by AISI (or its representatives) regarding AISI
specifically to be contained in the Prospectus/Proxy Statement (as defined
in Section 4.1.5) to be mailed to shareholders of ESI and AISI pursuant to
Section 4.1.5 hereof and such AISI information supplemented or reviewed by
AISI (or its representatives) without objection prior to the mailing of
such Prospectus/Proxy Statement, will be correct in all material respects
and will not omit any material fact required to be stated therein or
necessary in order to make the statements therein not misleading;
34
<PAGE>
provided, however, that no representation is made by AISI with respect to
information supplied by ESI specifically for inclusion therein or relating
to and reviewed by ESI (or its representatives) without objection. AISI
will promptly inform ESI of the happening of any event prior to the
Effective Time which would render such information regarding AISI,
incorrect in any material respect or require the amendment of the
Prospectus/Proxy Statement.
3.1.38 Continuity of Business Enterprise. AISI operates
at least one significant historic business line, or owns at least a
significant portion of its historic business assets, in each case within
the meaning of Treasury Regulation ss. 1.368-1(d).
3.2 Representations and Warranties of ESI. ESI hereby
represents and warrants to AISI that, except as specifically set forth in
Schedule 3.2 (the "ESI Disclosure Schedule") in a numbered paragraph that
corresponds to the section for which disclosure is made:
3.2.1 Organization and Status. Each of ESI and its
subsidiaries is a corporation duly organized and validly existing under the
laws of its jurisdiction of incorporation and is duly qualified and in good
standing as a foreign corporation in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by it require such
qualification, except where the failure to so qualify or be in good
standing, when taken together with all such failures, would not have a
material adverse effect on ESI. Each of ESI and its subsidiaries has all
requisite corporate power and authority to own, operate and lease its
property and to carry on its businesses as they are now being conducted.
3.2.2 Capitalization. ESI has authorized capital stock
consisting of 40,000,000 shares of Common Stock, without par value, of
which 8,636,672 shares were outstanding on February 29, 1996 and 1,000,000
shares of Preferred Stock, of which no shares
35
<PAGE>
were outstanding on February 29, 1996. All of the outstanding shares of
capital stock of ESI have been duly authorized and are validly issued,
fully paid and nonassessable, and no shares were issued in violation of
preemptive or similar rights of any shareholder. Except under the terms of
the various ESI employee or director benefit plans, or as disclosed in the
ESI SEC Reports (defined in Section 3.2.5) there are no subscriptions,
options, warrants, rights, convertible securities or other agreements or
commitments of any character obligating ESI to issue any shares of capital
stock.
3.2.3 Corporate Authority. ESI has the corporate power
and authority and has taken all corporate action necessary to execute and
deliver this Agreement and, upon receipt of the shareholder approval
contemplated in Section 4.3.3 to consummate the transactions contemplated
hereby. This Agreement has been duly and validly authorized by the Board of
Directors of ESI and duly and validly executed and delivered by ESI. This
Agreement constitutes the valid and binding obligation of ESI, enforceable
in accordance with its terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which
any proceeding may be brought.
3.2.4 Governmental Filings. Other than the filing of (a)
Articles of Merger contemplated by Article I, (b) the HSR Filing described
in Section 4.2.4, and (c) the Registration Statement described in Section
4.3.2, no notices, reports or other filings are required to be made by ESI
with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by ESI from, any Governmental Entity
in connection with
36
<PAGE>
the execution and delivery of this Agreement by ESI and the consummation by
ESI of the transactions contemplated hereby.
3.2.5 SEC Reports and Financial Statements. ESI has
heretofore furnished AISI with complete copies of all registration
statements, reports and proxy statements, including amendments thereto,
filed with the Securities and Exchange Commission (the "SEC") since May 31,
1995 and prior to the date of this Agreement (collectively, the "ESI SEC
Reports").
3.2.6 Litigation. Except as set forth in the ESI SEC
Reports, no litigation, proceeding or governmental investigation is pending
or, to the knowledge of ESI, threatened against or relating to ESI, its
officers or directors in their capacities as such or any of its
subsidiaries, or their respective properties or businesses.
3.2.7 No Adverse Consequences. Neither the execution and
delivery of this Agreement by ESI nor the consummation of the transactions
contemplated by this Agreement will (a) result in the creation or
imposition of any lien, charge, encumbrance or restriction on any of the
assets or properties of ESI or any subsidiary, (b) violate any provision of
the Articles of Incorporation or Bylaws of ESI or any subsidiary, (c) to
the knowledge of ESI, violate any statute, judgment, order, injunction,
decree, rule, regulation or ruling of any governmental authority applicable
to ESI or any subsidiary, or (d) either alone or with the giving of notice
or the passage of time or both, conflict with, constitute grounds for
termination of, accelerate the performance required by, accelerate the
maturity of any indebtedness or obligation under, result in the breach of
the terms, conditions or provisions of or constitute a default under any
mortgage, deed of trust, indenture, note, bond, lease, license, permit or
other agreement,
37
<PAGE>
instrument or obligation to which either ESI or any subsidiary is a party
or by which any of them is bound.
3.2.8 Brokers and Finders. Neither ESI nor any of its
subsidiaries has incurred any liability for any brokerage or investment
banking fees, commissions or finders' fees in connection with the Merger.
3.2.9 Prospectus/Proxy Statement. The information
regarding ESI contained in the Prospectus/Proxy Statement (as defined in
Section 4.1.5) to be mailed to ESI and AISI shareholders pursuant to
Section 4.1.5 will be correct in all material respects and will not omit
any material fact required to be stated therein or necessary in order to
make the statement therein not misleading; provided, however, that no
representation or warranty is made hereby with respect to information
contained in such Prospectus/Proxy Statement which is furnished in writing
by AISI (or its representatives) expressly for use in such Prospectus/Proxy
Statement or information relating to AISI which is reviewed by AISI with
the knowledge that it will be so used and without objecting to such use.
ESI will promptly inform AISI of the happening of any event prior to the
Effective Time which would render such information regarding ESI incorrect
in any material respect or require the amendment of the Prospectus/Proxy
Statement.
3.3 Representations and Warranties Relating to Merger Corp. ESI
and Merger Corp. hereby represent and warrant to AISI that:
3.3.1 Organization and Status. Merger Corp. is a
corporation duly organized and validly existing under the laws of the State of
Oregon. Merger Corp. does not own any properties (other than the initial cash
subscription for shares) nor has it commenced any business or operations.
38
<PAGE>
3.3.2 Capitalization. Merger Corp. has an authorized
capital stock consisting of 100 shares of Common Stock, of which 100 shares
were issued and outstanding on the date of this Agreement. All of the issued
and outstanding shares of capital stock of Merging Corp are owned by ESI.
3.3.3 Corporate Authority. Merger Corp. has the corporate
power and authority and has taken all corporate action necessary to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The Agreement has been duly and validly authorized by the Board of
Directors and sole shareholder of Merger Corp., duly and validly executed
and delivered by Merger Corp. and constitutes the valid and binding
obligation of Merger Corp., enforceable in accordance with its terms,
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought.
3.3.4 Governmental Filings. Other than (a) the filing of
Articles of Merger contemplated by Article I and (b) the HSR Filing described
in Section 4.2.4, no notices, reports or other filings are required to be made
by Merger Corp. with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by Merger Corp. from, any
Governmental Entity in connection with the execution and delivery of this
Agreement by Merger Corp. and the consummation by Merger Corp. of the
transactions contemplated hereby.
39
<PAGE>
3.3.5 Litigation. No litigation, proceeding or
governmental investigation is pending or, to the knowledge of Merger Corp.,
threatened against or relating to Merger Corp., or its officers or
directors in their capacities as such.
3.3.6 No Operations. Merger Corp. has not conducted active
operations and has no assets or liabilities other than in accordance with this
Agreement.
ARTICLE IV
COVENANTS
4.1 Mutual Covenants. AISI and ESI mutually covenant and agree
as follows:
4.1.1 Consents and Approvals. AISI and ESI each will use
its reasonable best efforts to secure, and ESI will cause Merger Corp. to
use its reasonable best efforts to secure, all consents, approvals,
licenses or permits which may be required in connection with the Merger,
and each will cooperate with the other to secure all such consents,
approvals, licenses or permits in a form mutually satisfactory to AISI and
ESI.
4.1.2 Best Efforts. Subject to the terms of this
Agreement, AISI and ESI each will use its reasonable best efforts, and ESI
will cause Merger Corp. to use its reasonable best efforts, to effectuate
the transactions contemplated hereby and to fulfill the conditions of their
respective obligations under this Agreement.
4.1.3 Publicity. Except as required by law, no party will
issue any press releases or otherwise make any public statements with
respect to the transactions contemplated hereby without the prior written
consent of ESI and AISI, in each case not to be unreasonably withheld.
40
<PAGE>
4.1.4 Confidentiality. The provisions of the
Confidentiality Agreements dated December 7, 1995 (in favor of AISI) and
March 1, 1996 (in favor of ESI) (collectively, the "Confidentiality
Agreements") shall apply to all "Confidential Information" (as defined in
the Confidentiality Agreements) obtained by any party pursuant to this
Agreement.
4.2 Covenants of AISI. AISI covenants and agrees as follows:
4.2.1 Conduct of Business. Prior to the Effective Time,
AISI will carry on its business in the ordinary and usual manner and
maintain its existing relationships with suppliers, customers, employees
and business associates, and will not, without the prior written consent of
ESI:
(a) amend its Articles of Incorporation or Bylaws;
(b) enter into any new agreements respecting an
increase in compensation or benefits payable to its officers or employees,
except that AISI may enter into indemnification agreements with its
officers and directors on terms consistent with the provisions of AISI's
Articles of Incorporation and Bylaws;
(c) split, combine, reclassify any of the
outstanding shares of its capital stock or otherwise change its authorized
capitalization;
(d) declare, set aside or pay any dividends payable
in cash, stock or property with respect to shares of its capital stock;
(e) issue, sell, pledge, dispose of or encumber any
additional shares of, or securities convertible into or exchangeable for,
or options, warrants, calls, commitments or rights of any kind to acquire,
any shares of its capital stock of any class other than pursuant to
exercise of outstanding stock options outstanding on March 31, 1996;
41
<PAGE>
(f) redeem, purchase or otherwise acquire any shares
of its capital stock, merge into or consolidate with any other corporation
or permit any other corporation to merge into or consolidate with it,
liquidate or sell or dispose of any of its assets, or close any plant or
business operation;
(g) except for short-term indebtedness and
indebtedness incurred pursuant to AISI's revolving credit agreement and
renewals, replacements and amendments thereof not in excess of the current
maximum under such credit agreement incurred in the ordinary course of
business, incur, assume or guarantee any indebtedness, or modify or repay
any existing indebtedness;
(h) enter into any transaction, make any commitment
(whether or not subject to the approval of the Board of Directors of AISI)
or modify any Contracts, except as otherwise contemplated or permitted by
this Agreement, or take or omit to take any action which could be
reasonably anticipated to have a material adverse effect on the business,
properties, financial condition or results of operations of AISI;
(i) transfer, lease, license, guarantee, sell,
mortgage, pledge, or dispose of, any property or assets (including without
limitation any intellectual property), encumber any property or assets or
incur or modify any liability, other than the sale of inventory in the
ordinary and usual course of business;
(j) authorize capital expenditures other than in the
ordinary course of business, form any subsidiary, or make any acquisition of,
or investment in, assets or stock of any other person or entity;
(k) make any tax election;
42
<PAGE>
(l) permit any insurance policy naming it as a
beneficiary or a loss payable payee to be canceled, terminated or renewed
without prior notice to ESI;
(m) change its method of accounting as in effect at
December 31, 1995, except as required by changes in generally accepted
accounting principles as concurred with by the AISI's independent auditors,
or change its fiscal year;
(n) conduct any transactions which, in the opinion
of ESI or Arthur Andersen LLP, could disqualify the Merger for pooling of
interests accounting; or
(o) authorize or enter into an agreement to do any
of the actions referred to in paragraphs (a) through (n) above.
4.2.2 Acquisition Proposals. Unless and until this
Agreement shall have been terminated pursuant to Section 7.1 or Section
7.2, AISI shall not directly, or indirectly through any officer, director,
agent, employee or representative (i) encourage, initiate or solicit, on or
after the date hereof, any inquiries or the submission of any proposals or
offers from any person relating to any merger, consolidation, sale of all
or substantially all of its assets or similar business transaction
involving AISI (each, an "Acquisition Transaction"); (ii) participate in
any negotiations regarding, furnish to any other person any information
with respect to, or otherwise assist or participate in, any attempt by any
third party to propose or offer any Acquisition Transaction; (iii) enter
into or execute any agreement relating to an Acquisition Transaction; or
(iv) make or authorize any public statement, recommendation or solicitation
in support of any Acquisition Transaction or any proposal or offer relating
to an Acquisition Transaction, in each case other than with respect to the
Merger. Notwithstanding the foregoing, nothing contained herein shall
prohibit AISI from taking the actions described above in connection with an
43
<PAGE>
unsolicited third-party proposal or offer of an Acquisition Transaction if
and to the extent that (a) the Board of Directors of AISI determines in
good faith, upon advice of legal counsel, that such action is required for
the directors of AISI to fulfill their fiduciary duties and obligations
under Michigan law and (b) prior to furnishing such information to or
entering into discussions or negotiations with such third-party, AISI
provides immediate written notice to ESI of such proposal or offer and, to
the extent not inconsistent with the fiduciary duties of AISI's officers
and directors, provides material information concerning such proposal or
offer (including proposed terms and the identity of the person or entity
making such proposal or offer) and thereafter continues to cooperate with
ESI by informing ESI of additional material facts as they arise and
furnishing to ESI any additional information furnished in connection with
such proposal or offer.
4.2.3 Investigations. AISI agrees to give ESI and its
representatives and agents full access to all its premises, books and
records and agreements and files and to cause its officers of AISI to
furnish ESI with such financial and operating data and other information
with respect to its business and properties as ESI shall from time to time
request. Without limitation of the foregoing, AISI shall permit ESI to
conduct an operations review at the plant level during which ESI shall have
access to the plant managers, sales and marketing managers, finance
officers, and technology, environmental and human resource managers of each
AISI operating facility. Any such investigations (a) shall be conducted in
such manner as not to interfere unreasonably with the operation of AISI's
business; and (b) shall not diminish any of the representations and
warranties hereunder.
44
<PAGE>
4.2.4 Antitrust Improvements Act. AISI will timely and
promptly make all filings which are required under the Antitrust
Improvements Act of 1976, as amended (the "HSR Filing"). AISI will furnish
to ESI such information and assistance as ESI may request in connection
with its preparation of filings or submissions to any governmental agency,
including, without limitation, the HSR Filing. AISI will supply ESI with
copies of all correspondence, filings or communications (or memoranda
setting forth the substance thereof) between AISI or its representatives,
on the one hand, and the Federal Trade Commission, the Antitrust Division
of the United States Department of Justice or any other governmental agency
or authority or members of their respective staffs, on the other hand, with
respect to this Agreement or the transaction contemplated hereby.
4.2.5 AISI Shareholders Approval. AISI shall obtain by
written consent of at least a majority of the holders of AISI Common Stock,
approval of this Agreement, approval of the Merger and the other
transactions contemplated hereunder, and appointment of the Shareholder
Representatives. Upon receipt from ESI of a sufficient number of copies of
the Prospectus/Proxy Statement relating to this Agreement
("Prospectus/Proxy Statement") in the form declared effective by the
Securities and Exchange Commission, AISI will immediately cause a copy of
the Prospectus/Proxy Statement to be distributed to each of its
shareholders, together with (i) a copy of the written consent to the Merger
by the holders of at least a majority of the outstanding shares of AISI's
common stock, (ii) a form of transmittal letter to be signed by each AISI
shareholder providing for, among other things, transmittal of such
shareholder's shares of AISI Common Stock to ESI's transfer agent,
agreement to indemnification provisions contained in this Agreement,
agreement to the escrow of shares of ESI Common Stock on behalf
45
<PAGE>
of such shareholder, to the extent provided for in Section 6.3, and the
appointment of the Shareholder Representatives; (iii) a form of stock power
to be endorsed in blank by each AISI Shareholder with respect to the shares
of ESI Common Stock escrowed on behalf of such shareholder; and (iv) the
Dissenters' Rights notice required by Section 766 of the MBCA to be
delivered to any shareholder who did not execute the written consent.
4.2.6 Information for Prospectus/Proxy Statement and
Registration Statement. AISI will promptly provide to ESI for inclusion
within the Prospectus/Proxy Statement and in the Registration Statement
described in Section 4.3.2, in form reasonably satisfactory to ESI, such
information concerning AISI's operations, capitalization, technology and
share ownership, and such other information as ESI may reasonably request.
4.3 Covenants of ESI. ESI covenants and agrees as follows:
4.3.1 Conduct of Business. Prior to the Effective Time,
ESI will not take or omit to take any action which could be reasonably
anticipated to have a material adverse effect on the business, properties,
financial condition or results of operations of ESI.
4.3.2 Registration Statement. ESI will promptly file with
the Securities and Exchange Commission a Registration Statement complying
in all respects with Form S-4 for the purpose of (i) obtaining proxies of
ESI shareholders for approval of the issuance of ESI Common Stock into
which the AISI Common Stock will be converted pursuant to Section 1.3 of
this Agreement and (ii) registering such shares of ESI Common Stock, and
ESI will use its best efforts to cause such Registration Statement to be
declared effective.
4.3.3 ESI Shareholder Meeting. On or about the time the
Prospectus/Proxy Statement is delivered to AISI under Section 4.2.5, ESI will
immediately cause to be duly called
46
<PAGE>
and noticed a meeting of the shareholders of ESI to be held at the earliest
practicable time, but in no event later than 45 days after such notice, for
the purpose of approving the issuance of the shares of ESI Common Stock to
be delivered to AISI shareholders pursuant to Section 1.4 of this
Agreement.
4.3.4 Listing of ESI Common Stock. ESI will promptly list
the shares of ESI Common Stock into which the AISI Common Stock will be
converted pursuant to the provisions of this Agreement in the Nasdaq
National Market System.
4.3.5 Antitrust Improvements Act. ESI will timely and
promptly make its HSR Filing. ESI will furnish to AISI such information and
assistance as AISI may request in connection with its preparation of
filings or submissions to any governmental agency, including, without
limitation, any HSR Filing under the provisions of the Antitrust
Improvements Act. ESI will supply AISI with copies of all correspondence,
filings or communications (or memoranda setting forth the substance
thereof) between it or its representatives, on the one hand, and the
Federal Trade Commission, the Antitrust Division of the United States
Department of Justice or any other governmental agency or authority or
members of their respective staffs, on the other hand, with respect to this
Agreement or the transactions contemplated hereby.
4.3.6 Issuance of Certificates. After the Effective Time,
ESI shall issue and deliver, or shall cause to be issued and delivered, in
accordance with the provisions of Article I hereto, stock certificates
representing the number of shares of ESI Common Stock to be issued in the
Merger.
4.3.7 Registration of Option Shares. ESI shall cause the
shares of ESI Common Stock issuable upon exercise of the Options (assumed
pursuant to Section 1.3.4 of this
47
<PAGE>
Agreement) to be issued pursuant to a then effective registration statement
or otherwise to be registered after the Effective Time on SEC Form S-8,
filed no later than 30 days after the Effective Time, and shall use its
best efforts to maintain the effectiveness of such registration statement
or registration statements for so long as such assumed Options remain
outstanding.
4.3.8 Directors & Officers Insurance. For a period of at
least two years following the Effective Time, ESI shall, or shall cause
Merger Corp. to, continue in effect the directors and officers insurance
policies currently maintained by AISI (or substitute policies with
substantially the same coverage and terms); provided that each AISI officer
and director covered by such policies represents and warrants that such
person has no knowledge of any claims covered by such policies. It is
intended that such insurance shall be the primary source of funding AISI's
obligation to indemnify its directors and officers against liability
arising from acts in their official capacities prior to the Effective Time.
4.4 Covenants of Merger Corp. Merger Corp. covenants and agrees
that, except as is contemplated by this Agreement, prior to the Effective
Time, Merger Corp. will not engage in any business activities or liquidate,
merge into or consolidate with any other corporation or permit any other
corporation to merge into or consolidate with it; or increase its authorized
capital stock; or issue options, rights or warrants to purchase any of its
capital stock.
ARTICLE V
CONDITIONS
5.1 Conditions to the Obligations of All Parties. The
obligations of AISI, ESI and Merger Corp. to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or before the
Closing of each of the following conditions:
48
<PAGE>
5.1.1 Regulatory Approvals. The parties shall have made
all filings and received all approvals of any governmental or regulatory
agency of competent jurisdiction necessary in order to consummate the
Merger, including without limitation, expiration or termination of the
waiting period for the HSR Filing, and each of such approvals shall be in
full force and effect at the Closing and not subject to any condition which
requires the taking or refraining from taking of any action which would
have a material adverse effect on AISI or on ESI and its subsidiaries.
5.1.2 Litigation. There shall not be in effect any order,
decree or injunction of a Federal or State court of competent jurisdiction
restraining, enjoining or prohibiting the consummation of the transactions
contemplated by this Agreement (each party agreeing to use its best
efforts, including appeals to higher courts, to have any such non-final,
appealable order, decree or injunction set aside or lifted), and no action
shall have been taken, and no statute, rule or regulation shall have been
enacted, by any state or federal government or governmental agency in the
United States which would prevent the consummation of the Merger.
5.1.3 Section 368(a)(2)(D) of the Code Requirement. The
parties will be satisfied that Merger Corp will acquire at least 90 percent
of the fair market value of the net assets and at least 70 percent of the
fair market value of the gross assets held by AISI immediately prior to the
Merger. For purposes of this condition, amounts paid by AISI to dissenters,
amounts paid by AISI to its shareholders who receive cash or other
property, assets of AISI used to pay its reorganization expenses, and all
redemptions and distributions (except for normal dividends) made by AISI
immediately preceding the Merger, will be included as assets of AISI held
immediately prior to the Merger.
49
<PAGE>
5.2 Conditions to the Obligations of AISI. The obligations of
AISI to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or before the Closing of each of the
following conditions:
5.2.1 Representations, Warranties and Covenants. The
representations and warranties of ESI and Merger Corp. contained in this
Agreement shall be correct (a) at the date of this Agreement and (b) as of
the Closing, with the same effect as though made on and as of such date,
except for representations and warranties made as of a specific date, which
representations and warranties need only be true and correct as of such
date and for changes specifically contemplated by this Agreement, and ESI
and Merger Corp. shall have performed all of their respective covenants and
obligations hereunder to be performed as of the Closing. AISI shall have
received at the Closing certificates to the foregoing effect, dated the
Closing Date, and executed on behalf of ESI by an executive officer of ESI
and on behalf of Merger Corp. by an executive officer of Merger Corp. For
purposes of affirming the accuracy of the representations and warranties of
ESI made as of the Closing, the term "ESI SEC Reports" shall be deemed to
include all registration statements, reports and proxy statements,
including all amendments thereto, filed by ESI with the SEC after the date
of this Agreement and prior to Closing.
5.2.2 No Material Adverse Change. Since February 29, 1996
there shall have been no material adverse change, or discovery of a
condition or occurrence of an event which has resulted or reasonably can be
expected to result in a material adverse change, in the business,
properties, financial condition or results of operations of ESI and its
subsidiaries taken as a whole.
50
<PAGE>
5.2.3 Opinion of Counsel. AISI shall have received from
Stoel Rives LLP, counsel to ESI, an opinion dated the Closing Date
substantially in the form of Exhibit E attached hereto.
5.2.4 Registration of Securities; Listing. The shares of
ESI Common Stock to be issued by ESI pursuant to this Agreement shall have
been registered under the Securities Act of 1933, as amended, and the
listed in the Nasdaq National Market System.
5.2.5 Shareholders' Approval; Dissenters. In accordance
with applicable provisions of the MBCA and the Articles of Incorporation
and Bylaws of AISI, the holders of at least a majority of the issued and
outstanding shares of Common Stock of AISI shall have approved this
Agreement and the Agreement of Merger and the condition set forth in
Section 5.3.7 shall have been satisfied.
5.2.6 Accountants Opinion. The condition set forth in
Section 5.3.5 shall have been satisfied.
5.3 Conditions to the Obligations of ESI and Merger Corp. The
obligations of ESI and Merger Corp. to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or before the
Closing of each of the following conditions:
5.3.1 Representations, Warranties and Covenants. The
representations and warranties of AISI contained in this Agreement shall be
correct (a) at the date of this Agreement and (b) as of the Closing Date,
with the same effect as though made on and as of such date, except for
representations and warranties made as of a specific date which
representations and warranties need only be true and correct as of such
date and for changes specifically contemplated by this Agreement and AISI
shall have performed in all material respects all of its
51
<PAGE>
covenants and obligations hereunder to be performed as of the Closing. ESI
shall have received at the Closing a certificate to the foregoing effect,
dated the Closing Date, and executed on behalf of AISI by an executive
officer of AISI.
5.3.2 Opinion of Counsel. ESI shall have received from
Brouse & McDowell, counsel to AISI, an opinion dated the Closing Date
substantially in the form of Exhibit F attached hereto. ESI also shall have
received from Brouse & McDowell an opinion satisfactory to ESI and its
counsel that the Merger will be tax free pursuant to Section 368 of the
Code.
5.3.3 Consents and Approvals. All nongovernmental
consents and approvals required to be obtained by AISI for consummation of
the Merger shall have been obtained, other than those which, if not
obtained, would not, either singly or in the aggregate, have a material
adverse effect on AISI.
5.3.4 No Material Adverse Change. Since March 31, 1996
there shall have been no material adverse change, or discovery of a
condition or occurrence of an event which has resulted or reasonably can be
expected to result in such change, in the business, properties, financial
condition or results of operations of AISI, other than changes permitted
under or contemplated by this Agreement.
5.3.5 Accountants Opinion. ESI and AISI shall have
received an opinion of Arthur Andersen LLP in form satisfactory to ESI and
AISI that the Merger may be accounted for as a pooling of interests.
5.3.6 Registration of Securities; Listing. The shares of
ESI Common Stock to be issued by ESI pursuant to this Agreement shall have
been registered under the Securities
52
<PAGE>
Act of 1933, as amended, and under the securities laws of such states as
counsel for ESI shall deem necessary or exemptions from such state
registration or qualification shall have been determined by such counsel to
be available, and shall have been listed in the Nasdaq National Market
System.
5.3.7 ESI Shareholders' Approval. At a duly called and
held meeting of the shareholders of ESI, acting in accordance with
applicable provisions of the OBCA and the Articles of Incorporation and
Bylaws of ESI, the holders of at least a majority of the issued and
outstanding shares of ESI Common Stock shall have approved the issuance of
the shares of ESI Common Stock to be delivered pursuant to Section 1.4 of
this Agreement, and the condition set forth in Section 5.2.5 shall have
been satisfied.
5.3.8 Affiliate Representation Letters. ESI shall have
received from each of the persons or entities listed on Schedule 5.3.8 a
duly executed representation letter, substantially in the form of Exhibit
G, containing certain representations and warranties with respect to the
ownership of capital stock of AISI by such person or entity and certain
representations, warranties, covenants and acknowledgments with respect to
the shares of ESI Common Stock to be acquired hereby and the transfer of
such shares.
5.3.9 Continuity of Interests Letter. ESI shall have
received from each of the persons or entities listed on Schedule 5.3.9 a
duly executed representation letter, substantially in the form of Exhibit
H, containing certain representations and warranties with respect to the
ownership of capital stock of AISI by such person or entity and certain
representations, warranties, covenants and acknowledgments with respect to
the shares of ESI Common Stock to be acquired hereby and the transfer of
such shares.
53
<PAGE>
5.3.10 Other Agreements. The ESI Confidentiality
Agreement and the Escrow Agreement to be delivered under Article II shall
have been signed and delivered by the parties to such agreements other than
ESI or Merger Corp.
5.3.11 Physical Count of Assets. As of May 31, 1996, a
physical count of all AISI tangible assets shall have been conducted to the
reasonable satisfaction of ESI and the aggregate value of the tangible
assets shown by such count shall not be less than the value for such assets
reflected on the AISI books and records as of the date of such count.
5.3.12 Tax Clearance Certificate. AISI shall deliver
to ESI a tax clearance certificate from the applicable agencies of the State
of Michigan.
5.3.13 Related Party Agreements. All agreements or
arrangements described on Schedule 3.1.22 (Related Parties), if requested by
ESI, shall have been terminated or amended to the reasonable satisfaction of
ESI.
5.3.14 Confidentiality Agreements. All employees of
AISI shall have signed a confidentiality and inventions assignment agreement
in a form reasonably satisfactory to ESI, as provided in Section 2.1.
5.3.15 Updated Financial and Other Information. ESI shall
have received (a) the unaudited balance sheet of AISI and the related
statements of income and stockholder's equity for the most recent
accounting period of AISI ended prior to the Closing Date, and (b)
schedules of accounts receivable (including an aging analysis), inventories
(organized by category), and backlog (by customer and product), in each
case as of immediately prior to Closing and in each case with an officer's
certificate as to accuracy and completeness of such schedule.
54
<PAGE>
5.3.16 Environmental Report. ESI shall have received a
Phase I environmental audit report with respect to the Leased Real
Property, prepared by an environmental audit firm selected by ESI, the
results of which audit shall be reasonably satisfactory to ESI.
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival. All representations and warranties of any party
contained in this Agreement shall survive the execution and delivery of
this Agreement and the consummation of the transactions contemplated
hereby, but shall be extinguished and be of no further force or effect nine
months after the Closing Date, except with respect to any claim for which a
Claim Notice (as defined in Section 6.4) is delivered pursuant to Section
6.4 prior to the expiration of the nine-month period. No Claim Notice shall
be effective if delivered after the time periods referred to above in this
Section 6.1.
6.2 Scope of Indemnification. From and after the Effective Time
and subject to the limitations of this Article VI, each AISI shareholder
will, pro rata and to the extent of his, her or its ESI Common Stock
delivered to the Escrow Agent pursuant to Section 6.3, indemnify and hold
harmless ESI and Merger Corp. and their respective officers, directors and
shareholders (collectively, the "Indemnified Parties") from, for and
against any such losses, costs, expenses, damages and liabilities,
including reasonable attorneys' fees (collectively, "Damages"), incurred by
an Indemnified Party by reason of or arising out of any inaccuracy in any
representation or warranty or the breach of any covenant of AISI made in
this Agreement.
55
<PAGE>
6.3 Escrow. On the Closing Date, ESI shall, on behalf of each
of the AISI shareholders, deliver to the Escrow Agent 10 percent of such
AISI shareholder's shares of the ESI Common Stock to be received by such
AISI shareholder pursuant to Section 1.3, provided, that, the shares to be
delivered on behalf of each AISI shareholder shall be rounded downward to
the nearest whole share of ESI Common Stock (such deposited shares shall be
referred to as the "Escrowed Property"). The Escrowed Property will be
deposited with the Escrow Agent pursuant to the terms of the Escrow
Agreement. The escrow and the Escrow Agreement shall terminate and the
Escrowed Property shall be distributed to the former AISI shareholders at
the earliest time provided for in the Escrow Agreement, but not later than
the first anniversary of the Closing Date.
6.4 Limitations. The liability of the AISI shareholders
pursuant to Section 6.2 shall be subject to the following limitations:
6.4.1 Minor Claims. The AISI shareholders shall not have
any liability or indemnity obligation under Section 6.2 with respect to the
first $100,000 of Damages of the Indemnified Parties. In addition, to the
extent not applied to any specific item or matter, the Reserves will be
generally available to satisfy any liability of AISI in connection with any
representation, warranty or covenant of AISI set forth in this Agreement.
6.4.2 Escrowed Property. The indemnity obligation of the
AISI shareholders under Section 6.2 shall be satisfied exclusively out of the
Escrowed Property in accordance with the Escrow Agreement.
56
<PAGE>
6.5 Claim Procedure for Indemnification. The obligations and
liabilities of the AISI shareholders in connection with claims for
indemnification for Damages by an Indemnified Party shall be subject to the
following terms and conditions:
6.5.1 Notice. The Indemnified Party shall give written
notice to the Shareholder Representatives and the Escrow Agent of its claim
for indemnification as promptly as practicable whenever the Indemnified
Party shall have determined that there are facts or circumstances which
entitle ESI to indemnification under this Article VI; provided, however,
that the failure to give a timely notice of a claim for indemnification
shall not diminish the indemnification obligations hereunder except to the
extent that the delay in giving such notice materially adversely affects
the ability of the Shareholder Representatives to mitigate Damages with
respect to any claim. The notice ("Claim Notice") shall set forth in
reasonable detail the basis for the claim, the nature of the Damages and
the amount thereof, to the extent known.
6.5.2 Response to Third Party Claim. If the Claim Notice
states that a claim has been asserted by a third party against the
Indemnified Party (a "Third Party Claim"), ESI shall undertake, conduct and
control, through counsel of its choosing, the good faith settlement or
defense of the Third Party Claim.
6.5.3 Diligent Conduct. If, within five days after
receipt by ESI from the Shareholder Representatives of written notice that
ESI is not diligently conducting the defense or attempted settlement in
good faith, ESI does not provide reasonably sufficient evidence to the
Shareholder Representatives that ESI is diligently conducting the defense
or attempting settlement in good faith, the Shareholder Representatives
shall thereafter have the right to contest, settle or compromise the Third
Party Claim.
57
<PAGE>
ARTICLE VII
TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by the mutual consent of AISI and ESI.
7.2 Termination by Either AISI or ESI. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the
Effective Time:
(a) by ESI or AISI if the Merger shall not have become
effective on or prior to October 1, 1996, provided, however, that the right
to terminate this Agreement pursuant to this Section 7.2(a) shall not be
available to any party whose breach of this Agreement has been the cause
of, or resulted in, the failure of the Merger to occur on or before such
date;
(b) by ESI or AISI if the requisite approval of the
Merger by the shareholders of AISI and the approval by ESI shareholders of
the issuance of the ESI Common Stock into which the AISI Common Stock will
be converted pursuant to Section 1.3 of this Agreement, shall not have been
obtained by September 30, 1996;
(c) by ESI or AISI if any court of competent jurisdiction
in the United States or any state shall have issued an order, judgment or
decree (other than a temporary restraining order) restraining, enjoining or
otherwise prohibiting the Merger and such order, judgment or decree shall
have become final and nonappealable;
(d) by ESI if the AISI Board of Directors shall have
withdrawn or modified in a manner adverse to ESI approval of the Merger,
this Agreement or the transactions contemplated hereby;
58
<PAGE>
(e) by ESI if AISI or any of the persons or entities
described in Section 4.2.2 of this Agreement shall have taken any of the
actions that would be proscribed by Section 4.2.2, other than actions taken
in the exercise of the fidiciary duties of AISI's Board of Directors and
satisfying all the conditions of Section 4.2.2; or
(f) by AISI if the Board of Directors of AISI determines
in good faith, upon advice of legal counsel, that such termination of this
Agreement is required for the directors of AISI to fulfill their fiduciary
duties and obligations under Michigan law.
7.3 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article VII, (i) this Agreement immediately will become void and of no
effect, except that Sections 4.1.4, 7.3, 7.4 and 8.1 will survive the event
of termination; and (ii) no party hereto (or any of its directors of
officers) shall have any liability or further obligation to any other party
to this Agreement, except as provided in Section 7.4 of this Agreement.
7.4 Termination Fees and Expenses.
(a) AISI agrees to pay ESI (provided that ESI is not then
in material breach of any representation, warranty, covenant or agreement
contained in this Agreement) promptly upon the termination of this
Agreement (or such later date as may apply in the case of (iii) below) by
wire transfer, the sum of $3 Million in immediately available funds in the
event that any of the following shall have occurred:
(i) this Agreement shall have been terminated pursuant to
Section 7.2(b) hereof on the basis of failure of approval of
the Merger by the AISI shareholders;
59
<PAGE>
(ii) this Agreement shall have been terminated pursuant to
Section 7.2(d) or Section 7.2(e) hereof; or
(iii) AISI shall have terminated the Agreement pursuant
to Section 7.2(f) hereof and shall have agreed to an
Acquisition Transaction which results in a change in the
beneficial owners of more than fifty percent (50%) of the
voting power of the capital stock of AISI within one year after
termination of this Agreement with any person other than ESI or
any of its affiliates.
(b) ESI agrees to pay AISI (provided that AISI is not
then in material breach of any representation, warranty, covenant or
agreement contained in this Agreement) promptly upon the termination of
this Agreement by wire transfer, the sum of $3 Million in immediately
available funds in the event this Agreement shall have been terminated
pursuant to Section 7.2(b) hereof on the basis of failure of approval of
the ESI shareholders of the issuance of the ESI Common Stock into which the
AISI Common Stock would be converted pursuant to Section 1.3 of this
Agreement.
(c) The right to the payment of the fees set forth in
this Section 7.3 shall be the exclusive remedy at law or in equity to which
ESI or AISI, as the case may be, shall be entitled upon termination of this
Agreement under the conditions described in Section 7.3; provided, however,
nothing in Sections 7.2 or 7.3 of this Agreement shall be deemed to limit a
party's remedies in the event of breach of this Agreement by the other
party.
60
<PAGE>
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 Payment of Expenses. Other than in the event of breach of
this Agreement by the other party, and except as provided in Section 7.3,
each party shall be responsible for the costs and expenses incurred by it
in connection with the transactions contemplated by this Agreement. The
fees to be paid in the circumstances described in Section 7.3 are intended
by the parties to compensate for expenses and other damages incurred by the
party entitled to the fee. Other than in the circumstances described in
Section 7.3, nothing in this Agreement is meant to limit the right of a
non-breaching party to obtain reimbursement of expenses and other damages,
including attorneys fees, incurred as a result breach of this Agreement by
the other party.
8.2 Entire Agreement. This Agreement, including the schedules
and the exhibits hereto, and the Confidentiality Agreements constitute the
entire agreement between the parties hereto and supersede all prior
agreements and understandings, oral and written, among the parties hereto
with respect to the subject matter hereof.
8.3 Assignment. This Agreement shall not be assignable by any
of the parties hereto without the prior written consent of each of ESI and
AISI.
8.4 Binding Effect; No Third Party Benefit. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and
their respective successors and assigns, subject to the restrictions on
assignment contained in Section 8.3. Nothing express or implied in this
Agreement is intended or shall be construed to confer upon or give to a
person, firm or
61
<PAGE>
corporation other than the parties hereto any rights or remedies under or
by reason of this Agreement or any transaction contemplated hereby.
8.5 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented at any time prior to or
at the Closing, whether before or after the votes of shareholders of AISI,
by written agreement executed and delivered by the duly authorized officers
of AISI and ESI.
8.6 Waiver of Conditions. The conditions to each of the
parties' obligations to consummate the Merger are for the sole benefit of
such party and may be waived by such party in whole or in part to the
extent permitted by applicable law; provided, however, that any waiver by a
party must be in writing.
8.7 Counterparts. For the convenience of the parties hereto,
this Agreement may be executed in any number of counterparts, each such
counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
8.8 Captions. The article, section and paragraph captions
herein are for convenience of reference only, do not constitute a part of
this Agreement and shall not be deemed to limit or otherwise affect any of
the provisions hereof.
8.9 Subsidiary. When a reference is made in this Agreement to a
subsidiary of a party, the term "subsidiary" means any corporation or other
organization, whether incorporated or unincorporated, of which at least a
majority of the securities or interests having by the terms thereof
ordinary voting power to elect a majority of the board of directors or
others performing similar functions with respect to such corporation or
other organization is directly or indirectly
62
<PAGE>
owned or controlled by such party or by any one or more of its
subsidiaries, or by such party and one or more of its subsidiaries.
8.10 Notices. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall
be in writing and shall be deemed to have been duly given if delivered
personally or mailed, certified or registered mail with postage prepaid, or
sent by telex, telegram or facsimile (in each case with evidence of
confirmed transmission) as follows:
If to AISI, to it at:
110 Parkland Plaza
Ann Arbor, Michigan 48103
Attention: President
Fax: (313) 995-2138
with copies to:
Brouse & McDowell
500 First National Tower
Akron, Ohio 44308-1471
Attention: Stanley E. Everett
Fax: (330) 253-8601
If to ESI or Merger Corp., to it at:
13900 NW Science Park Drive
Portland, Oregon 97229
Attention: President and Chief
Executive Officer
Fax: (503) 671-5698
63
<PAGE>
with copies to:
Stoel Rives LLP
900 SW Fifth Avenue
Portland, Oregon 97204
Attention: Annette M. Mulee
Fax: (503) 220-2480
or to such other person or address as any party shall specify by notice in
writing. All such notices, requests, demands, waivers and communications
shall be deemed to have been received on the date of delivery or on the
third business day after the mailing thereof.
8.11 Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oregon, exclusive of
choice of law rules, except that the provisions of this Agreement relating
to the Merger shall also be governed by the merger provisions of the MBCA.
8.12 Attorneys' Fees. If suit or action is filed by any party
to enforce the provisions of this Agreement or otherwise with respect to
the subject matter of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees as fixed by final order of
the trial court and, if any appeal is taken from the decision of the trial
court, reasonable attorneys' fees as fixed by final order of the appellate
court.
8.13 Separability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this
64
<PAGE>
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the
date first hereinabove written.
Electro Scientific Industries, Inc.
By BARRY L. HARMON
-----------------------------------------
Name: Barry L. Harmon
Title: Senior Vice President
Applied Intelligent Systems, Inc.
By JON G. EHRMANN
-----------------------------------------
Name: V.P. - Finance & CFO
Title: Jon G. Ehrmann
AISI Merger Corp.
By BARRY L. HARMON
-----------------------------------------
Name: Barry L. Harmon
Title: Senior Vice President
65
<PAGE>
EXHIBIT A
PLAN OF MERGER
MERGING
APPLIED INTELLIGENT SYSTEMS, INC.
WITH AND INTO
AISI MERGER CORP.
1. Parties. The names of the corporations proposing to merge are
Applied Intelligent Systems, Inc., a Michigan corporation ("AISI"), and
AISI Merger Corp., an Oregon corporation ("Merger Corp."), a wholly owned
subsidiary of Electro Scientific Industries, Inc., an Oregon corporation
("ESI"). The surviving corporation in the merger (the "Merger") will be
Merger Corp.
2. Terms and Conditions. Upon consummation of the Merger (the
"Effective Time"), AISI shall be merged with and into Merger Corp. in the
manner and with the effect provided by the Michigan Business Corporation
Act (the "MBCA") and the Oregon Business Corporation Act (the "OBCA"), the
separate corporate existence of AISI shall cease, and Merger Corp. shall be
the surviving corporation. The outstanding shares of AISI Common Stock
shall be converted into shares of ESI Common Stock, without par value (the
"ESI Common Stock"), or cash, on the basis, terms and conditions described
in Section 3 below.
3. Conversion of Shares. AISI has issued one class of Common Stock.
The manner and basis of converting the shares of capital stock of AISI
shall be as follows:
(a) Exchange for ESI Stock. Each of the __________ shares of
AISI Common Stock outstanding immediately before the Effective Time
(excluding shares with respect to which the holder has exercised
dissenters' rights in accordance with the MBCA, ("Dissenting Shares"))
shall by virtue of the Merger and without any action on the part of the
holder thereof, cease to exist and be converted into [the number computed
in accordance with Section 1.3 of the Merger Agreement] shares of ESI
Common Stock. In lieu of fractional shares, ESI will pay the holders of
AISI Common Stock who would be entitled to a fraction of a share of ESI
Common Stock an amount of cash (without interest) determined by multiplying
(a) the average of the high and low per share purchase prices of ESI Common
Stock on the day before the Effective Time by (b) the fractional share
interest in ESI Common Stock to which such holder would otherwise be
entitled.
(b) Treasury Shares. Each of the __________ shares of AISI
Common Stock held in the treasury of AISI and each share of AISI Common
Stock owned by any direct or
1
<PAGE>
indirect wholly owned subsidiary of AISI immediately prior to the Effective
Time shall be canceled and extinguished without any conversion thereof and
no payment shall be made with respect thereto.
4. Amendment to Articles of Incorporation. As of the Effective Time,
the Merger Corp. Articles of Incorporation shall be amended to change the
name of Merger Corp. to Applied Intelligent Systems, Inc.
2
<PAGE>
ANNEX B
SECTIONS 761 THROUGH 774 OF THE MICHIGAN BUSINESS CORPORATION ACT
(DISSENTERS' RIGHTS)
SECTION 761. As used in sections 762 to 774:
(a) "Beneficial shareholder" means the person who is a beneficial
owner of shares held by a nominee as the record shareholder.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving corporation by merger of that
issuer.
(c) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 762 and who exercises that right when and in
the manner required by sections 764 through 772.
(d) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would
be inequitable.
(e) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently
paid by the corporation on its principal bank loans or, if none, at a rate
that is fair and equitable under all the circumstances.
(f) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(g) "Shareholder" means the record or beneficial shareholder.
SECTION 762.(1) A shareholder is entitled to dissent from, and obtain
payment of the fair value of his or her shares in the event of, any of the
following corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party if shareholder approval is required for the merger by
section 703a or the articles of incorporation and the shareholder is
entitled to vote on the merger, or the corporation is a subsidiary
that is merged with its parent under section 711.
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to vote on
the sale or exchange, including a sale in dissolution but not
including a sale pursuant to court order.
(d) An amendment of the articles giving rise to a right to
dissent pursuant to section 621.
(e) A transaction giving rise to a right to dissent pursuant to
section 754.
(f) Any corporate action taken pursuant to a shareholder vote
to the extent the articles, bylaws, or a resolution of the board
provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
<PAGE>
(g) The approval of a control share acquisition giving rise to
a right to dissent pursuant to section 799.
(2) Unless otherwise provided in the articles, bylaws, or a
resolution of the board, a shareholder may not dissent from any of the
following:
(a) Any corporate action set forth in subsection (1)(a) to (e)
as to shares which are listed on a national securities exchange or
held of record by not less than 2,000 persons on the record date
fixed to determine the shareholders entitled to receive notice of and
to vote at the meeting of shareholders at which the corporate action
is to be acted upon.
(b) A transaction described in subsection (1)(a) in which
shareholders receive cash or shares that satisfy the requirements of
subdivision (a) or any combination thereof.
(c) A transaction described in subsection (1)(b) in which
shareholders receive cash or shares that satisfy the requirements of
subdivision (a) or any combination thereof.
(d) A transaction described in subsection (1)(c) which is
conducted pursuant to a plan of dissolution providing for
distribution of substantially all of the corporation's net assets to
shareholders in accordance with their respective interests within 1
year after the date of the transaction, where the transaction is for
cash or shares that satisfy the requirements of subdivision (a) or
any combination thereof.
(3) A shareholder entitled to dissent and obtain payment for his or
her shares pursuant to subsection (1)(a) to (e) may not challenge the
corporate action creating his or her entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
(4) A shareholder who exercises his or her right to dissent and seek
payment for his or her shares pursuant to subsection (1)(f) may not
challenge the corporate action creating his or her entitlement unless the
action is unlawful or fraudulent with respect to the shareholder or the
corporation.
SECTION 763.(1) A record shareholder may assert dissenters' rights as
to fewer than all the shares registered in his or her name only if he or
she dissents with respect to all shares beneficially owned by any 1 person
and notifies the corporation in writing of the name and address of each
person on whose behalf he or she asserts dissenters' rights. The rights of
a partial dissenter under this subsection are determined as if the shares
as to which he or she dissents and his or her other shares were registered
in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his or her behalf only if all of the following apply:
(a) He or she submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights.
(b) He or she does so with respect to all shares of which he or
she is the beneficial shareholder or over which he or she has power
to direct the vote.
SECTION 764.(1) If proposed corporate action creating dissenters'
rights under section 762 is submitted to a vote at a shareholders' meeting,
the meeting notice must state that shareholders are or may be entitled to
assert dissenters' rights under this act and shall be accompanied by a copy
of sections 761 to 774.
(2) If corporate action creating dissenters' rights under section 762
is taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters'
<PAGE>
rights that the action was taken and send them the dissenters' notice
described in section 766. A shareholder who consents to the corporate
action is not entitled to assert dissenters' rights.
SECTION 765.(1) If proposed corporate action creating dissenters'
rights under section 761 is submitted to a vote at a shareholders' meeting,
a shareholder who wishes to assert dissenters' rights must deliver to the
corporation before the vote is taken written notice of his or her intent to
demand payment for his or her shares if the proposed action is effectuated
and must not vote his or her shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1) is not entitled to payment for his or her shares under this act.
SECTION 766.(1) If proposed corporate action creating dissenters'
rights under section 762 is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of section 765.
(2) The dissenters' notice must be sent no later than 10 days after
the corporate action was taken, and must provide all of the following:
(a) State where the payment demand must be sent and where and
when certificates for shares represented by certificates must be
deposited.
(b) Inform holders of shares without certificates to what
extent transfer of the shares will be restricted after the payment
demand is received.
(c) Supply a form for the payment demand that includes the date
of the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the person
asserting dissenters' rights certify whether he or she acquired
beneficial ownership of the shares before the date.
(d) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30 nor more than 60
days after the date the subsection (1) notice is delivered.
SECTION 767.(1) A shareholder sent a dissenter's notice described in
section 766 must demand payment, certify whether he or she acquired
beneficial ownership of the shares before the date required to be set forth
in the dissenters' notice pursuant to section 766(2)(c), and deposit his or
her certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her share
certificates under subsection (1) retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit his or her
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his or her shares under this act.
SECTION 768.(1) The corporation may restrict the transfer of shares
without certificates from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released
under section 770.
<PAGE>
(2) The person for whom dissenters' rights are asserted as to shares
without certificates retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
SECTION 769.(1) Except as provided in section 771, within 7 days
after the proposed corporate action is taken or a payment demand is
received, whichever occurs later, the corporation shall pay each dissenter
who complied with section 767 the amount the corporation estimates to be
the fair value of his or her shares, plus accrued interest.
(2) The payment must be accompanied by all of the following:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, an
income statement for that year, a statement of changes in
shareholders' equity for that year, and if available the latest
interim financial statements.
(b) A statement of the corporation's estimate of the fair value
of the shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment
under section 772.
SECTION 770.(1) If the corporation does not take the proposed action
within 60 days after the date set for demanding payment and depositing
share certificates, the corporation shall return the deposited certificates
and release the transfer restrictions imposed on shares without
certificates.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 766 and repeat the payment demand
procedure.
SECTION 771.(1) A corporation may elect to withhold payment required
by section 769 from a dissenter unless he or she was the beneficial owner
of the shares before the date set forth in the dissenters' notice pursuant
to section 766(2)(c).
(2) To the extent the corporation elects to withhold payment under
subsection (1), after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who shall agree to accept it in
full satisfaction of his or her demand. The corporation shall send with its
offer a statement of its estimate of the fair value of the shares, an
explanation of how the interest was calculated, and a statement of the
dissenter's right to demand payment under section 772.
SECTION 772.(1) A dissenter may notify the corporation in writing of
his or her own estimate of the fair value of his or her shares and amount
of interest due, and demand payment of his or her estimate, less any
payment under section 769, or reject the corporation's offer under section
771 and demand payment of the fair value of his or her shares and interest
due, if any 1 of the following applies:
(a) The dissenter believes that the amount paid under section
769 or offered under section 771 is less than the fair value of his
or her shares or that the interest due is incorrectly calculated.
<PAGE>
(b) The corporation fails to make payment under section 769
within 60 days after the date set for demanding payment.
(c) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on shares without certificates within 60 days
after the date set for demanding payment.
(2) A dissenter waives his or her right to demand payment under this
section unless he or she notifies the corporation of his or her demand in
writing under subsection (1) within 30 days after the corporation made or
offered payment for his or her shares.
SECTION 773.(1) If a demand for payment under section 772 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand and petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not
commence the proceeding within the 60-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit
court of the county in which the corporation's principal place of business
or registered office is located. If the corporation is a foreign
corporation without a registered office or principal place of business in
this state, it shall commence the proceeding in the county in this state
where the principal place of business or registered office of the domestic
corporation whose shares are to be valued was located.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties shall be
served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) is plenary and exclusive. The court may
appoint 1 or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds the fair value of
his or her shares, plus interest, exceeds the amount paid by the
corporation or for the fair value, plus accrued interest, of his or her
after-acquired shares for which the corporation elected to withhold payment
under section 771.
SECTION 773A(1) In a proceeding brought pursuant to section 773, the
court may, pursuant to the agreement of the parties, appoint a referee
selected by the parties and subject to the approval of the court. The
referee may conduct proceedings within the state, or outside the state by
stipulation of the parties with the referee's consent, and pursuant to the
Michigan court rules. The referee shall have powers that include, but are
not limited to, the following:
(a) To hear all pretrial motions and submit proposed orders to
the court. In ruling on the pretrial motion and proposed orders, the
court shall consider only those documents, pleadings, and arguments
that were presented to the referee.
(b) To require the production of evidence, including the
production of all books, papers, documents, and writings applicable
to the proceeding, and to permit entry upon designated land or other
property in the possession or control of the corporation.
<PAGE>
(c) To rule upon the admissibility of evidence pursuant to the
Michigan rules of evidence.
(d) To place witnesses under oath and to examine witnesses.
(e) To provide for the taking of testimony by deposition.
(f) To regulate the course of the proceeding.
(g) To issue subpoenas, when a written request is made by any
of the parties, requiring the attendance and testimony of any witness
and the production of evidence including books, records,
correspondence, and documents in the possession of the witness or
under his or her control, at a hearing before the referee or at a
deposition convened pursuant to subdivision (e). In case of a refusal
to comply with a subpoena, the party on whose behalf the subpoena was
issued may file a petition in the court for an order requiring
compliance.
(2) The amount and manner of payment of the referee's compensation
shall be determined by agreement between the referee and the parties,
subject to the court's allocation of compensation between the parties at
the end of the proceeding pursuant to equitable principles, notwithstanding
section 774.
(3) The referee shall do all of the following:
(a) Make a record and reporter's transcript of the proceeding.
(b) Prepare a report, including proposed findings of fact and
conclusions of law, and a recommended judgment.
(c) File the report with the court, together with all original
exhibits and the reporter's transcript of the proceeding.
(4) Unless the court provides for a longer period, not more than 45
days after being served with notice of the filing of the report described
in subsection (3), any party may serve written objections to the report
upon the other party. Application to the court for action upon the report
and objections to the report shall be made by motion upon notice. The
court, after hearing, may adopt the report, may receive further evidence,
may modify the report, or may recommit the report to the referee with
instructions. Upon adoption of the report, judgment shall be entered in the
same manner as if the action had been tried by the court and shall be
subject to review in the same manner as any other judgment of the court.
SECTION 774.(1) The court in an appraisal proceeding commenced under
section 773 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court.
The court shall assess the costs against the corporation, except that the
court may assess costs against all or some of the dissenters, in amounts
the court finds equitable, to the extent the court finds the dissenters
acted arbitrarily, vexatiously, or not in good faith in demanding payment
under section 772.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable in
the following manner:
(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of sections 764 through 772.
<PAGE>
(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this act. (3) If
the court finds that the services of counsel for any dissenter were
of substantial
benefit to other dissenters similarly situated, and that the fees for those
services should not be assessed against the corporation, the court may
award to those counsel reasonable fees paid out of the amounts awarded the
dissenters who were benefited.
<PAGE>
P ELECTRO SCIENTIFIC INDUSTRIES, INC.
R
O Special Meeting, July 30, 1996
X
Y PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby appoints Donald R. VanLuvanee, David F. Bolender and
Larry T. Rapp, and each of them, proxies with power of substitution to vote
on behalf of the undersigned all shares that the undersigned may be
entitled to vote at the special meeting of shareholders of Electro
Scientific Industries, Inc. (the "Company") on July 30, 1996 and any
adjournments thereof, with all powers that the undersigned would possess if
personally present, with respect to the matters referred to on this proxy.
A majority of the proxies or substitutes present at the meeting may
exercise all powers granted hereby.
CHANGE OF ADDRESS
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(If you have written in the space, please
mark the corresponding box on the reverse of
this card.)
The proxies will vote the shares represented by this proxy as specified by
you on the reverse side but if no specification is made, the proxies will
vote the shares for the approval of all proposals.
SEE REVERSE SIDE
<PAGE>
Please mark your
[ X ] votes as in this
example.
1. Approval of the issuance of up to 3 million shares of the Company's
Common Stock as merger consideration to be delivered under an
Agreement of Reorganization and Merger dated as of May 13, 1996,
pursuant to which Applied Intelligent Systems, Inc. will be merged
with and into AISI Merger Corp, a wholly-owned subsidiary of the
Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Transaction of such other business as may properly come before the
meeting and any adjournments thereof.
Change of address on [ ]
reverse side
The proxies may vote in their discretion as to other matters which may come
before the meeting.
Please date and sign exactly as name is imprinted hereon, including the
designation as executor, trustee, etc., if applicable. A Corporation may
sign in its name by the president or other authorized officer. All
co-owners must sign.
PLEASE SIGN AND RETURN IMMEDIATELY
- ----------------------------------
- ----------------------------------
SIGNATURE(S) DATE
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE Prospectus/Proxy-Information Statement
Item 20. Indemnification of Directors and Officers.
Article VII of ESI's Third Restated Articles of Incorporation
indemnifies directors and officers to the fullest extent permitted by law. The
effects of Article VII may be summarized as follows:
(a) The Article grants a right of indemnification in respect
of any action, suit or proceeding (other than an action by or in the
right of ESI) against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred, provided the person concerned acted in good
faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of ESI and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of an action, suit or
proceeding by judgment, order, settlement, conviction or plea of nolo
contendere does not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of ESI, and
had reasonable cause to believe his conduct was unlawful.
(b) The Article grants a right of indemnification in respect
of any action or suit by or in the right of ESI against the expenses
(including attorneys' fees) actually and reasonably incurred if the
person concerned acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of ESI, except
that no right of indemnification will be granted regarding any claim,
issue or matter as to which such person is adjudged to be liable for
negligence or misconduct unless permitted by a court.
(c) Every person who has been wholly successful on the
merits of a controversy described in (a) or (b) above is entitled to
indemnification as a matter of right. Persons who have not been
wholly successful on the merits are not necessarily precluded from
being reimbursed by ESI for their expenses so long as (i) the Board
of Directors, by a majority vote of a quorum consisting of directors
who were not parties to the action, suit or proceeding, determines
that their conduct has met the standards required for indemnification
set out in the Oregon statutes; (ii) independent legal counsel
renders written advice that in their opinion such person has met the
standards for indemnification; (iii) the Shareholders determine that
the person has met the standards for indemnification; or (iv) the
court in which the action, suit or proceeding was pending determines
that indemnification is proper.
(d) ESI may pay expenses incurred in defending an action,
suit or proceeding in advance of the final disposition thereof upon
receipt of a satisfactory undertaking to repay in the event
indemnification is not authorized.
(e) The above paragraphs summarize the indemnification
expressly authorized by the Oregon Business Corporation Act (the
"Act"). Article VII provides for indemnification to the fullest
extent permitted by law, which is intended to provide indemnification
broader than that expressly authorized by the Act. It is unclear to
what extent Oregon law permits such broader indemnification. The
limits of lawful indemnification may ultimately be determined by the
courts.
The rights of indemnification described above are not
exclusive of any other rights of indemnification to which the persons
indemnified may be
II-1
<PAGE>
entitled under any statute, agreement, vote of shareholders or directors or
otherwise.
ESI has directors' and officers' insurance coverage which
insures directors and officers of ESI and its subsidiaries against certain
liabilities.
ESI has also entered into indemnity agreements with certain
directors and officers. While the indemnity agreements in large part
incorporate the indemnification provisions of the Act as described above,
they vary from the statute in several respects. In addition to the
indemnification expressly permitted under the statute, the agreements
provide for indemnification for settlements in derivative lawsuits and
expand coverage in proceedings involving a breach of fiduciary duty to
include judgments. The contracts also require ESI to pay expenses incurred
by an indemnitee in advance of final disposition of a suit or proceeding
upon request of the indemnitee, without regard to the indemnitee's ability
to repay the sum advanced and without prior approval of the directors,
Shareholders or court, or the receipt of an opinion of counsel. A claimant
would thus be entitled to receive advanced expenses unless action were
taken to prevent such payment. The agreements also generally shift the
presumption in favor of indemnification of the indemnitee. Partial
indemnification is also expressly authorized by the agreements.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
*2. Agreement of Reorganization and Merger
4-A. Restated Articles of Incorporation of ESI. Incorporated by
reference to Exhibit 3-A of ESI's Annual Report on Form 10-K
for the fiscal year ended May 31, 1991, File 0-12853.
4-B. Bylaws of ESI. Incorporated by reference to Exhibit 3-B of ESI's
Annual Report on Form 10-K for the fiscal year ended May 31, 1995.
4-C. ESI agrees to furnish copies of long-term debt agreements to the
Commission upon request.
4-D. Rights Agreement, dated as of May 12, 1989, between ESI and
United States National Bank of Oregon relating to rights
issued to all holders of Company Common Stock. Incorporated
by reference to Exhibit 1 to ESI's Report on Form 8-K dated
May 12, 1989.
5. Opinion of Stoel Rives LLP.
*8. Form of opinion of Brouse & McDowell.
*23-A. Consents of Independent Public Accountants.
23-B. Consent of Stoel Rives LLP. Included in Exhibit 5 to this
Registration Statement.
*23-C. Consent of Brouse & McDowell.
*24. Powers of Attorney. Included in signature pages to the originally
filed Registration Statement.
(b) Financial Statement Schedules. Not Applicable.
* Filed on June 10, 1996.
II-2
<PAGE>
Item 22. Undertakings.
1. The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a Prospectus/Proxy-Information Statement which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering Prospectus/Proxy-Information Statement will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
2. The registrant undertakes that every Prospectus/Proxy-Information
Statement (i) that is filed pursuant to paragraph (1) immediately
preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
4. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
Prospectus/Proxy-Information Statement pursuant to Items 4, 10(b) or 11
herein, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
5. The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
ESI being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
6. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Portland, State of Oregon, on June 19, 1996.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
By DONALD R. VANLUVANEE
---------------------------------
Donald R. VanLuvanee
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following
persons in the capacities indicated on this 19th day of June, 1996.
Signature Title
(1) Principal Executive, Financial
and Accounting Officer:
DONALD R. VANLUVANEE President and Chief
- ---------------------------------- Executive Officer
Donald R. VanLuvanee
BARRY L. HARMON Senior Vice President of Finance
- ---------------------------------- and Chief Financial Officer
Barry L. Harmon
(2) Directors:
DAVID F. BOLENDER* Chairman of the Board
- ----------------------------------
David F. Bolender
DOUGLAS C. STRAIN* Vice-Chairman of the Board
- ----------------------------------
Douglas C. Strain
LARRY L. HANSEN* Director
- ----------------------------------
Larry L. Hansen
W. ARTHUR PORTER* Director
- ----------------------------------
W. Arthur Porter
VERNON B. RYLES* Director
- ----------------------------------
Vernon B. Ryles
KEITH L. THOMSON* Director
- ----------------------------------
Keith L. Thomson
* By BARRY L. HARMON
---------------------------
Barry L. Harmon
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
*2. Agreement of Reorganization and Merger
4-A. Restated Articles of Incorporation of ESI. Incorporated by
reference to Exhibit 3-A of ESI's Annual Report on Form 10-K
for the fiscal year ended May 31, 1991, File No. 0-12853.
4-B. Bylaws of ESI. Incorporated by reference to Exhibit 3-B of
ESI's Annual Report on Form 10-K for the fiscal year ended
May 31, 1995.
4-C. ESI agrees to furnish copies of long-term debt agreements to
the Commission upon request.
4-D. Rights Agreement, dated as of May 12, 1989, between ESI and
United States National Bank of Oregon relating to rights
issued to all holders of Company Common Stock. Incorporated
by reference to Exhibit 1 to ESI's Report on Form 8-K dated
May 12, 1989.
5. Opinion of Stoel Rives LLP.
*8. Form of Opinion of Brouse & McDowell.
*23-A. Consents of Independent Public Accountants.
23-B. Consent of Stoel Rives LLP. Included in Exhibit 5 to this
Registration Statement.
*23-C. Consent of Brouse & McDowell.
*24. Powers of Attorney. Included in signature pages to the
originally filed Registration Statement.
* Filed on June 10, 1996.
Exhibit 5
June 20, 1996
The Board of Directors
Electro Scientific Industries, Inc.
13900 NW Science Park Drive
Portland, OR 97229
We have acted as counsel for Electro Scientific Industries, Inc. (the
"Company") in connection with the preparation and filing of a Registration
Statement on Form S-4 (the "Registration Statement") under the Securities
Act of 1933, as amended, covering up to 2,350,000 shares of Common Stock,
without par value, of the Company (the "Shares"). The Shares may be issued
pursuant to the Agreement of Reorganization and Merger dated May 13, 1996
(the "Agreement") between the Company, AISI Merger Corp. and Applied
Intelligent Systems, Inc. We have reviewed the corporate action of the
Company in connection with this matter and have examined the documents,
corporate records, and other instruments we deemed necessary for the
purposes of this opinion.
Based upon the foregoing, it is our opinion that:
(i) The Company is a corporation duly organized and validly existing
under the laws of the State of Oregon;
(ii) The Shares covered by the Registration Statement have been duly
authorized; and
(iii) The Shares, when issued in the manner described in the
Registration Statement and in accordance with the resolutions adopted by
the Board of Directors of the Company, and when consideration for the
Shares pursuant to the Agreement shall have been received by the Company,
will be legally issued, fully paid and nonassessable.
<PAGE>
The Board of Directors
Electro Scientific Industries, Inc.
June 20, 1996
Page 2
We hereby consent to the use of our name in the Registration Statement
and in the Prospectus/Proxy-Information Statement filed as a part thereof
and to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
STOEL RIVES LLP
STOEL RIVES LLP
