As filed with the Securities and Exchange Commission on November 20, 1997
Registration No. 333-36681
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Amendment No. 2
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
Stoel Rives LLP Kevin C. O'Neil
900 SW Fifth Avenue Brouse & McDowell
Portland, Oregon 97204-1268 500 First National Tower
(503) 224-3380 Akron, Ohio 44308-1471
(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. [ ]
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================
Title of Each
Class of Proposed Maximum Proposed Maximum Amount of
Securities to Amount to be Offering Price Aggregate Offering Registration
be Registered Registered (1) Per Unit(2) Price(2) Fee(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
no par value 1,200,000 shares n/a $5,981,000 $1,813
================================================================================================================
(1) Determined based upon the outstanding Common Stock of AISI and options
which may be exercised prior to the Effective Time (as defined in the
Merger Agreement), in each case subject to conversion under the Merger
Agreement.
(2) The registration fee was computed pursuant to Rule 457(f)(2), based on the
book value of shares of AISI Common Stock as of June 30, 1997.
</TABLE>
--------------------------
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
ITEM LOCATION OR HEADING IN PROSPECTUS/
NO. ITEM IN FORM S-4 INFORMATION STATEMENT
- ---- ---------------- ----------------------------------
A. INFORMATION ABOUT
THE TRANSACTION.
1. Forepart of the Registration Facing Page of Registration
Statement and Outside Front Statement; Cross-Reference Sheet
Cover Page of Prospectus/ Outside Front Cover Page of
Information Sheet...................Prospectus/Information Statement
2. Inside Front and Outside Back Available Information; Table of
Cover Pages of Contents
Prospectus/Information
Statement...........................
3. Risk Factors, Ratio of Earnings Outside Front Cover Page of
to Fixed Charges and Other Prospectus/Information Statement;
Information.........................Summary; Risk Factors; Selected
Historical and Pro Forma Financial
Information; Equivalent per Common
Share Data; Market and Market Prices
for Common Stock; The Merger
Agreement
4. Terms of the Transaction............Summary; The Merger; The Merger
Agreement; The Merger
Agreement--Conversion of Shares;
Description of ESI Capital Stock;
Comparison of Shareholder Rights
5. Pro Forma Financial Not applicable
Information.........................
6. Material Contacts With the The Merger; The Merger Agreement
Company Being Acquired..............
7. Additional Information Required Not applicable
For Reoffering by Persons and
Parties Deemed to be
Underwriters........................
8. Interests of Named Experts and Not applicable
Counsel.............................
9. Disclosure of Commission Not applicable
Position on Indemnification for
Securities Act Liabilities..........
B. INFORMATION ABOUT
REGISTRANT.
10. Information With Respect to S-3 Not applicable
Registrants.........................
11. Incorporation of Certain Not applicable
Information by Reference............
12. Information With Respect to S-2 Not applicable
or S-3 Registrants..................
13. Incorporation of Certain Not applicable
Information by Reference............
<PAGE>
14. Information With Respect to Outside Front Cover Page of
Registrants Other Than S-2 or Prospectus/Information Statement;
S-3 Registrants.....................Inside Front Cover Page of
Prospectus/Information Statement;
Summary; Risk Factors; Information
Concerning ESI; ESI Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Description of ESI Capital Stock;
ESI Consolidated Financial
Statements
C. INFORMATION ABOUT
THE COMPANY BEING
ACQUIRED.
15. Information With Respect to S-3 Not applicable
Companies...........................
16. Information With Respect to S-2 Not applicable
or S-3 Companies....................
17. Information With Respect to Outside Front Cover Page of
Companies Other Than S-2 or Prospectus/Information Statement;
S-3 Companies.......................Summary; 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, Consents AISI Written Shareholders Consent;
or Authorizations are to be The Merger; The Merger Agreement;
Solicited...........................AISI Voting Securities and Principal
Shareholders
19. Information if Proxies, Consents Information Concerning ESI
or Authorizations are not to be
Solicited in an Exchange Offer......
20. Indemnification of Officers and Comparison of Shareholder Rights;
Directors...........................Part II of the Registration
Statement
21. Exhibits and Financial Statement Financial Statements; Exhibits
Schedules...........................
22. Undertakings........................Part II of the Registration
Statement
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. APPLIED INTELLIGENT SYSTEMS, INC.
PROSPECTUS CONSENT AND
INFORMATION STATEMENT
1,200,000 Shares of Common Stock,
Without Par Value
------------------------
This Prospectus, Consent and Information Statement (the "Prospectus/
Information Statement") relates to the proposed merger (the "Merger") of
Asteroid Merger Corp. ("Merger Corp."), a wholly-owned subsidiary of Electro
Scientific Industries, Inc. ("ESI"), with and into Applied Intelligent Systems,
Inc. ("AISI") 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 September 29, 1997, 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 1,400,000 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 1,400,000 shares of ESI
Common Stock. Approximately 1,125,681 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 274,319 shares of ESI Common Stock will be
issuable upon exercise of outstanding AISI stock options.
This Prospectus/Information Statement also constitutes the Prospectus of
ESI with respect to the 1,200,000 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 _______, 1997, the closing sale
price for ESI Common Stock as reported on Nasdaq was $_____ per share.
This Prospectus/Information Statement is being delivered to the AISI
shareholders for consent and information purposes on or about _______, 1997.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY AISI SHAREHOLDERS.
------------------------
All information contained in this Prospectus/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/Information Statement
relating to ESI has been furnished by ESI and AISI is relying upon the accuracy
of that information.
This Prospectus/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.
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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
OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS/INFORMATION STATEMENT IS ________, 1997.
------------------------
No person has been authorized to give any information or to make any
representations not contained or incorporated in this Prospectus/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/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/Information Statement shall
not, under any circumstances, create any implication that the information herein
is correct as of any time subsequent to date hereof.
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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: Suite 1300, Seven World Trade Center, New York, New
York 10048; 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/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. The SEC
maintains an Internet Web site at http://www.sec.gov.
iii
<PAGE>
TABLE OF CONTENTS
FOR PROSPECTUS/INFORMATION STATEMENT
Page
SUMMARY OF PROSPECTUS/INFORMATION STATEMENT....................................1
RISK FACTORS...................................................................6
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION........................9
ESI Selected Historical Financial Information.........................9
AISI Selected Historical Financial Information.......................10
Unaudited Pro Forma Summary of Selected Financial Information........11
EQUIVALENT PER COMMON SHARE DATA..............................................12
MARKET AND MARKET PRICES FOR COMMON STOCK ....................................13
AISI SHAREHOLDERS WRITTEN CONSENT.............................................14
THE MERGER....................................................................15
DESCRIPTION..........................................................15
BACKGROUND OF THE MERGER.............................................15
REASONS FOR THE MERGER...............................................18
ESI's Reasons for the Merger................................18
AISI's Reasons for the Merger...............................19
FAIRNESS OPINION OF AISI FINANCIAL ADVISORS ..................................19
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES........................22
ACCOUNTING TREATMENT.................................................23
INTERESTS OF CERTAIN PERSONS IN THE MERGER...........................23
REGULATORY MATTERS...................................................25
NO DISSENTER RIGHTS..................................................25
THE MERGER AGREEMENT..........................................................25
EFFECTIVE TIME OF THE MERGER.........................................25
CONVERSION OF SHARES.................................................25
TREATMENT OF AISI STOCK OPTIONS......................................26
RESALE OF ESI COMMON STOCK...........................................26
AISI'S CONDUCT OF BUSINESS PENDING THE MERGER........................27
NONSOLICITATION OF ALTERNATIVE TRANSACTIONS..........................27
CORPORATE STRUCTURE AND RELATED MATTERS AFTER THE MERGER.............28
CERTAIN COVENANTS....................................................28
CONDITIONS TO THE MERGER.............................................28
INDEMNITY AND ESCROW AGREEMENT.......................................29
TERMINATION; BREAKUP FEES............................................29
FEES AND EXPENSES....................................................30
CONFIDENTIALITY......................................................30
INFORMATION CONCERNING ESI....................................................30
Business ............................................................30
Electronics Industry Overview........................................31
Overview of Markets, Products and Strategy...........................31
Sales, Marketing and Service.........................................35
Backlog ............................................................36
Research, Development and Technology.................................36
Competition..........................................................36
Manufacturing and Supply.............................................37
Employees............................................................37
Patents and Other Intellectual Property..............................37
Properties...........................................................38
Legal Proceedings....................................................38
ESI Management.......................................................38
Beneficial Ownership of Principal ESI Shareholders and Management....41
ESI Executive Compensation...........................................42
Summary Compensation Table...........................................42
ESI Options Table....................................................43
ESI Option Exercises and Fiscal Year-End Option Value Table..........44
ESI Long Term Incentive Plans--Awards in Last Fiscal Year............44
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Severance Agreements.................................................44
Performance Graph....................................................45
Compensation Committee Report on Executive Compensation..............45
Compensation Committee Interlocks and Insider Participation..........47
ESI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................47
Three Months Ended August 31, 1997 Compared to Three Months
Ended August 31, 1996 ......................................47
Fiscal Year Ended May 31, 1997 Compared to Fiscal Year Ended May 31,
1996........................................................48
Fiscal Year Ended May 31, 1996 Compared to Fiscal Year Ended May 31,
1995........................................................49
Financial Condition and Liquidity....................................49
Factors That May Affect Future Results...............................51
DESCRIPTION OF ESI CAPITAL STOCK..............................................52
Common Stock.........................................................52
Preferred Stock......................................................52
Rights Agreement.....................................................52
INFORMATION CONCERNING AISI...................................................55
Business ............................................................55
Products ............................................................56
Markets ............................................................56
Technology...........................................................56
Strategy ............................................................58
AISI MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS................59
Nine Months Ended September 30, 1997 Compared to Nine Months
Ended September 30, 1996 ...................................59
Years Ended December 31, 1994, 1995 and 1996 ........................60
Liquidity and Capital Resources .....................................62
Business Environment ................................................63
DESCRIPTION OF AISI CAPITAL STOCK.............................................64
AISI VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS.............................64
COMPARISON OF SHAREHOLDER RIGHTS..............................................66
Amendment of Certificate or Articles of Incorporation; Amendment of
Bylaws......................................................66
Special Meetings of Shareholders.....................................67
Dividends............................................................68
Capital Stock........................................................68
Dissenters' Rights...................................................68
Provisions Relating to Directors.....................................69
Anti-Takeover Statutes...............................................70
LEGAL MATTERS.................................................................72
EXPERTS .....................................................................72
SHAREHOLDER PROPOSALS.........................................................73
FINANCIAL STATEMENTS.........................................................F-1
LISTS OF ANNEXES
Annex A Agreement of Reorganization and Merger
Annex B Fairness Opinion
v
<PAGE>
SUMMARY OF PROSPECTUS/INFORMATION STATEMENT
The following is a summary of certain information contained elsewhere in
this Prospectus/Information Statement and is qualified in its entirety by
reference to the full text of this Prospectus/Information Statement and the
Annexes hereto. Shareholders are urged to read this Prospectus/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
key components used in wireless telecommunications, computers, automotive
electronics, and many other electronic products. ESI believes it is the leading
supplier of advanced laser systems used to adjust (trim) electronic circuitry
and to improve the yield of semiconductor memory devices. ESI believes it is a
significant producer of high-speed test and termination equipment used in the
high-volume production of miniature capacitors. Additionally, ESI designs and
manufactures machine vision products and electronic packaging systems for
manufacturers of printed circuit boards, 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 (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, Oregon 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 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: 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 3923 Ranchero Drive, Ann Arbor,
Michigan 48108 and its telephone number is (313) 332-7100.
Asteroid 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
located at 13900 NW Science Park Drive, Portland, Oregon 97229-5497. Its
telephone number at that address is (503) 641-4141.
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THE MERGER
As a result of the proposed Merger, Merger Corp. will be merged with and
into AISI and AISI will 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 $2.3
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 certain AISI shareholders 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."
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
articles 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 _______ 1997.
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 Antitrust Improvements Act waiting period described at
"Regulatory Matters" below; (ii) listing of up to 1,200,000 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 directors' fiduciary
duties. See "The Merger Agreement--Nonsolicitation of Alternative Transactions."
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, and
against damages related to litigation involving AISI.
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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 December 31, 1997. Under certain
termination circumstances, a breakup fee of $3 million is payable by AISI or by
ESI. See "The Merger Agreement--Termination; Breakup Fees."
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."
NO AISI DISSENTER RIGHTS
The Michigan Business Corporation Act ("MBCA") does not provide dissenters'
rights in connection with the Merger. Although the Merger Agreement originally
provided for dissenters' rights in connection with the Merger, Amendment No. 2
to the Merger Agreement deleted all references to dissenters' rights.
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. ESI believes that AISI, operating independently, would incur
significant expenses to establish offices in Europe, Japan and other locations
in the Far East in order to expand its sales and service customers. ESI
estimates that the combined companies will reduce duplicative professional fees
and personnel costs and may save between $500,000 and $1 million annually. See
"The Merger--Reasons for the Merger--ESI's Reasons for the Merger."
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
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long-term value for AISI Shareholders. See "The Merger--Reasons for the
Merger--AISI's Reasons for the Merger."
FAIRNESS OPINION OF AISI FINANCIAL ADVISOR
In its role as financial advisor to AISI, Adams, Harkness & Hill, Inc.
("AH&H") was asked to render its opinion to the AISI Board as to the fairness to
the shareholders of AISI, from a financial point of view, of the consideration
to be received by AISI in the Merger. On September 29, 1997, AH&H delivered its
oral opinion to the AISI Board that the consideration to be received by the AISI
shareholders in the Merger is fair from a financial point of view. AH&H
subsequently delivered its written opinion.
A copy of the AH&H Opinion is attached hereto as Annex B. Holders of AISI
Common Stock are urged to read the opinion in its entirety for a summary of the
assumptions made, procedures followed, other matters considered and the limits
of the review by AH&H. The summary of the AH&H Opinion set forth in this
Prospectus/Information Statement is qualified in its entirety by reference to
the full text of such opinion. The AH&H Opinion was prepared for the AISI Board,
is directed only to the fairness, as of September 29, 1997, from a financial
point of view, of the consideration to be received by the holders of AISI Common
Stock, and does not constitute a recommendation to any stockholder as to how to
vote with regard to the Merger. See "The Merger --Fairness Opinion of AISI
Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
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."
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
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effect that the Merger will qualify for pooling of interests accounting. See
"The Merger Agreement--Conditions to the Merger."
MATERIAL 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"). As
a reorganization, holders of AISI Common Stock would not recognize gain or loss
for federal income tax purposes upon receipt of ESI Common Stock solely in
exchange for their shares of AISI Common Stock, except for cash received in lieu
of fractional shares. See "The Merger--Material U.S. Federal Income Tax
Consequences."
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 terminated on October 31, 1997. See
"The Merger--Regulatory Matters."
5
<PAGE>
RISK FACTORS
The following factors should be carefully considered, in addition to the
other information presented in this Prospectus/Information Statement. This
Prospectus/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/Information Statement.
UNCERTAINTIES RELATED TO THE INTEGRATION OF NEW 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. In addition, ESI is in the process of integrating two other businesses,
Dynamotion Corp. and Chip Star Inc., which were acquired by ESI in June 1997.
Integrating three businesses will require management resources and may make it
more difficult to integrate AISI into 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 will not experience downturns in
the future or that such downturns will 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 customers to defer or
forego ordering products from ESI's existing product lines.
6
<PAGE>
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."
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
7
<PAGE>
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 70.8%, 66.9%, and 71.0% of ESI's net
sales for fiscal years ended May 31, 1995, 1996 and 1997, 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. ESI does not carry key person life insurance
on any of its key employees.
DEPENDENCE ON SUPPLIERS
Certain of the components included in ESI's systems are obtained from a
single source or a limited group of suppliers. ESI's relationship with its
suppliers is formalized by purchase orders, not long term contracts. 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."
8
<PAGE>
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 included elsewhere in this
Prospectus/Information Statement for ESI and AISI. In June 1997, ESI acquired
Chip Star, Inc., a privately-held company based in San Marcos, California in a
merger accounted for as a pooling of interests. Accordingly, all ESI financial
statements and footnotes incorporated by reference and summary selected
historical and pro forma financial information have been restated to reflect
this acquisition.
ESI Selected Historical Financial Information. The consolidated statement
of operations data set forth below for the fiscal years ended May 31, 1995, 1996
and 1997 and the consolidated balance sheet information as of May 31, 1996 and
1997 have been derived from the audited Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus/Information Statement. The
consolidated statement of operations data for the fiscal years ended May 31,
1993 and 1994 and the consolidated balance sheet information as of May 31, 1993,
1994 and 1995 are derived from audited consolidated financial statements not
included in or incorporated by reference in this Prospectus/Information
Statement. The consolidated statement of operations data for the three-month
periods ended August 31, 1996 and 1997 and the consolidated balance sheet data
as of August 31, 1997 have been derived from unaudited consolidated financial
statements of ESI included elsewhere in this Prospectus/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 three months ended August 31, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
May 31, 1998.
<TABLE>
<CAPTION>
Three Months
ESI Ended
Fiscal Year Ended May 31 August 31,
---------------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- ------- --------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Statement of
Operations Data
Net Sales $ 67,851 $ 72,550 $112,900 $166,310 $160,149 $36,199 $ 48,356
Net income (loss)(1)(2)............ $ 2,244 $ 7,740 $ 12,217 $ 17,299 $ 21,250 $ 4,603 $ (3,861)
======== ======== ======== ======== ======== ======= ========
Net income (loss) $ 0.37 $ 1.09 $ 1.49 $ 1.86 $ 2.27 $ 0.49 $ (0.39)
per share:(1)(2)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
May 31
---------------------------------------------------------------- August 31,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance (In thousands) (Unaudited)
Sheet Data
Working capital.................... $ 28,883 $ 36,148 $ 76,413 $ 94,400 $116,628 $117,561
Net property, plant and
equipment.......................... 16,696 14,662 15,699 16,821 16,404 18,120
Total assets....................... 61,161 62,997 112,921 135,458 154,813 169,297
Long-term debt..................... 4,809 200 -- -- -- --
Shareholders' equity............... 43,950 53,559 95,156 116,845 139,114 149,530
- ---------------
(1) Fiscal 1996 includes the $6.0 million in-process research and development
write-off associated with the acquisition of XRL, Inc.
(2) The three month period ended August 31, 1997 includes $11.1 million of
acquired in-process research and development and merger-related expenses
associated with the Dynamotion Corp. and Chip Star, Inc. acquisitions.
</TABLE>
AISI Selected Historical Financial Information. The income statement data
for the years ended December 31, 1994, 1995 and 1996, and the balance sheet data
at December 31, 1995 and 1996 are derived from the audited financial statements
included elsewhere in this Prospectus/Information Statement. The income
statement data for the years ended December 31, 1992 and 1993, and the balance
sheet data at December 31, 1992, 1993 and 1994, are derived from audited
financial statements not included herein. The income statement data for the nine
months ended September 30, 1996 and 1997 and the balance sheet data at September
30, 1997 are derived from unaudited financial statements that are included
elsewhere in this Prospectus/Information Statement and 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 nine months ended September 30, 1997
is not necessarily indicative of future results.
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months
AISI Ended
Fiscal Year Ended December 31, September 30,
---------------------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- --------- --------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data: (In thousands, except per share data)
Sales................................ $ 7,012 $ 10,763 $ 14,804 $ 22,579 $ 16,610 $13,530 $ 22,096
Cost of vision system sales.......... 2,356 3,506 5,337 9,959 9,943 6,842 9,749
------- -------- -------- -------- -------- ------- --------
Gross margin ........................ 4,656 7,257 9,467 12,620 6,667 6,688 12,347
------- -------- -------- -------- -------- ------- --------
Operating expenses:
Selling, service and 2,199 3,191 4,027 4,711 4,138 3,174 3,664
administrative .................
Research, development and
engineering............... 2,025 2,906 3,996 4,513 5,067 3,883 4,803
------- -------- -------- -------- -------- ------- --------
Total operating expenses........ 4,224 6,097 8,023 9,224 9,205 7,007 8,467
------- -------- -------- -------- -------- ------- --------
Operating income (loss).............. 432 1,160 1,444 3,396 (2,538) (319) 3,880
Other income (expense), net.......... (18) (67) 159(1) (95) (582) 66 77
Income (loss) before provision for
income taxes......................... 414 1,093 1,603 3,301 (3,120) (253) 3,957
Provision for income taxes........... -- 15 93 437 52 53 315
------- -------- -------- -------- -------- ------- --------
Net income (loss).................... $ 414 $ 1,078 $ 1,510 $ 2,864 ($3,172) $ (306) $ 3,642
======= ======== ======== ======== ======== ======= ========
Net income (loss) per share.......... $ 0.11 $ 0.29 $ 0.40 $ 0.70 ($0.90) ($0.09) $ 0.92
======= ======== ======== ======== ======== ======= ========
Number of shares used in
computing per share amounts.......... 3,664 3,673 3,820 4,121 3,515 3,493 3,976
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------- September 30,
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
(Unaudited)
Working capital.......................... $ 528 $ 1,252 $ 2,188 $ 4,525 $ 1,572 $ 5,482
Total assets............................. 2,765 5,057 8,286 11,675 6,980 12,889
Long-term capital lease obligations
and notes payable, including current
portion.................................. -- -- -- 289 112 315
Shareholders' equity..................... 1,484 2,583 4,210 6,794 4,156 8,006
(1) Includes $229 gain from insurance proceeds on equipment theft.
</TABLE>
Unaudited Pro Forma Summary of Selected 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.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year Ended May 31 -----------------------------
-------------------------------------- August 31, August 31,
1995 1996 1997 1997 1996
-------- -------- -------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Pro Forma Consolidated Statements
of Income
Net Sales(2)............................ $130,736 $189,440 $180,036 $ 57,119 $ 39,583
Net income (loss)(2).................... 14,780 20,407 19,459 (1,917) 3,861
Net income (loss) per share (2)......... 1.54 1.91 1.81 (0.17) 0.36
</TABLE>
<TABLE>
<CAPTION>
May 31 August 31,
-------------------------------------- ----------------------------
1995 1996 1997 1997 1996
-------- -------- -------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Pro Forma Consolidated Balance
Sheet Data
Total assets............................ $123,307 $148,532 $167,351 $ 183,076 $ 150,983
Long-term obligations, including
current portion......................... -- 80 193 170 58
(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.
(2) Net sales, net income and net income per share for fiscal 1997 does not
include the pro forma effects of the Dynamotion acquisition on June 9,
1997, which was accounted for as a purchase. Pro forma net sales, net
income and net income per share for fiscal 1997 assuming the Dynamotion
transaction had occurred as of June 1, 1996 is $192,674, $13,465 and $1.21,
respectively.
</TABLE>
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 set forth elsewhere in this Prospectus/Information
Statement, and such data are qualified in their entirety by reference thereto.
12
<PAGE>
<TABLE>
<CAPTION>
May 31 August 31,
------------------------------------- ---------------------
1995 1996 1997 1997 1996
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
ESI Common Stock(1)
Net Income (loss) per share:(2)
Historical................................. $ 1.49 $ 1.86 $ 2.27 (0.39) 0.49
Pro forma combined......................... 1.54 1.91 1.81 (0.17) 0.36
Book value per share at period-end(3):
Historical................................. 10.49 12.49 14.69 15.07
Pro forma combined......................... 9.66 11.61 13.35 13.86
AISI Common Stock(1)
Net income (loss) per share:(2)
Historical................................. 0.48 0.59 (0.46) 0.47 (0.18)
Pro forma equivalent....................... 0.47 0.58 0.55 (0.05) 0.11
Book value per share at period-end(3)
Historical................................. 1.49 2.11 1.67 2.04
Pro forma equivalent....................... 2.95 3.54 4.07 4.23
(1) Neither ESI nor AISI paid any cash dividends for any of the periods
presented.
(2) Represents the 12 months ended May 31, 1995, 1996 and 1997 and three months
ended August 31, 1996 and 1997 for ESI combined with the twelve months
ended June 30, 1995, 1996, and 1997 and three months ended August 31, 1996
and 1997 for AISI.
(3) Represents May 31, 1995, 1996 and 1997 and August 31, 1997 for ESI and June
30, 1995, 1996 and 1997 and August 31, 1997 for AISI.
</TABLE>
MARKET AND MARKET PRICES FOR COMMON STOCK
ESI Common Stock is traded on the Nasdaq National Market under the symbol
"ESIO." At August 31, 1997 there were 9,922,624 shares of Common Stock
outstanding and held by 317 record holders. 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 September 26, 1997, the last full trading
day prior to public announcement of the Merger, the last sale price for ESI
Common Stock was $56, and on _______, 1997, the most recent practicable trading
day for which quotations were available prior to the date of this
Prospectus/Information Statement, the last sale price for ESI Common Stock was
$_____. 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. The
following prices of AISI Common Stock were determined by multiplying the price
of ESI Common stock by 0.3046025, which is the Conversion Ratio calculated as of
November 14, 1997, and rounded to three places. Because AISI has ageed to not
issue any more shares of its Common Stock or stock options, the parties do not
expect the Conversion Ratio to change prior to Closing.
<TABLE>
<CAPTION>
Fiscal
Year ESI COMMON STOCK AISI COMMON STOCK
------ ---------------------- ----------------------
<S> <C> <C> <C> <C>
1995 High Low High Low
First Quarter..................................... $13-3/4 $ 8-5/8 $ 4.188 $ 2.627
Second Quarter.................................... 20-1/4 12-1/4 6.168 3.731
13
<PAGE>
Third Quarter..................................... 23-1/4 17-1/2 7.082 5.331
Fourth Quarter.................................... 29-5/8 18-3/4 9.024 5.711
1996
First Quarter..................................... 39-3/4 24-5/8 12.108 7.501
Second Quarter.................................... 41-1/2 24-1/2 12.641 7.463
Third Quarter..................................... 30-1/2 18-3/4 9.290 5.711
Fourth Quarter.................................... 28-3/4 16-3/4 8.757 5.102
1997
First Quarter..................................... 27-1/4 15-1/2 8.300 4.721
Second Quarter.................................... 26 17-1/4 9.920 5.254
Third Quarter..................................... 31-3/4 22-1/2 9.671 6.854
Fourth Quarter.................................... 39-1/4 23-3/4 11.956 7.234
1998
First Quarter..................................... 52-15/16 35 16.125 10.661
</TABLE>
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/INFORMATION STATEMENT AND THE DATE ON WHICH THE MERGER IS CONSUMMATED
AND THEREAFTER.
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. The record date for voting by AISI
shareholders on the Merger is October 10, 1997. Pursuant to applicable law, the
Merger must be completed within 60 days after the record date, and each consent
must be dated no earlier than ten days prior to the record date. Consents will
be obtained only from the five largest AISI shareholders, who hold in the
aggregate 69 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. The five AISI
shareholders who will execute the written consent, the number of shares owned by
each consenting shareholder and the percentage of all shares outstanding
represented by that ownership are as follows: (i) Morgenthaler Venture Partners
(445,967 shares; 12.1%), (ii) Morgenthaler Venture Partners II (563,009 shares;
15.3%); (iii) Michigan Strategic Fund (400,000 shares; 10.8%); (iv) State of
Michigan, Department of Treasury (626,435 shares; 17.0%); and (v) Herbert D.
Doan (509,630 shares; 13.8%). Mr. Doan is a member of the Board of Directors of
AISI; the Chairman of AISI's Board of Directors, Robert D. Pavey, is a principal
of Morgenthaler Venture Partners and Morgenthaler Venture Partners II; and
Michigan
14
<PAGE>
Strategic Fund and State of Michigan, Department of Treasury, have an
observer on AISI's Board of Directors who participates in discussions, but has
no voting power. None of the five AISI shareholders executing the written
consent is an employee of AISI, and there is no agreement, written or oral, with
any of these shareholders to induce his or its approval of the Merger. There
will be no general solicitation of consents, and this Prospectus/Information
Statement will 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 3923 Ranchero Drive, Ann Arbor, MI
48108.
THE MERGER
DESCRIPTION
Under the Merger Agreement, Asteroid Merger Corp. ("Merger Corp."), a
wholly-owned subsidiary of ESI formed for this purpose, will be merged with and
into AISI, with AISI 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 environment. During
fiscal 1996 and
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1997, ESI 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 1996, $13.2 million of systems
were sold to these eight customers. Motorola, Intel, Siemens, Samsung
Electronics, Ishikawajima-Harima Heavy Industries, Kyokuto Boeki Kaisha, Ltd.
and Japan E-M have used AISI's systems for automating a variety of manufacturing
operations. In 1996, $2.8 million of systems were sold to these seven accounts.
Based upon its knowledge and experience in the OEM vision market, AISI
believes it is 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.
ESI and AISI first considered the possibility of a combination of the two
companies in July 1995. At the time, AISI was investigating several business
options, including selling the company or conducting an initial public offering.
Later that year, AISI selected underwriters and commenced the process of going
public. However, the process was postponed in October 1995, as the shares of
other technology companies began to decline in value and the outlook for
business conditions became more uncertain.
In January 1996, AISI and ESI agreed to commence preliminary discussions
regarding the merger of AISI into ESI. Ultimately, after many meetings and
considerable due diligence, each party concluded that a merger would be mutually
beneficial; on May 13, 1996, the parties executed an Agreement of Reorganization
and Merger. However, the merger was not completed, because a major customer of
AISI reduced its order forecast, materially reducing the value of the merger to
ESI's shareholders.
In July 1997, AISI and ESI began to re-examine the possibility of effecting
a business combination between the two companies. While discussions between ESI
and AISI continued, on August 29, 1997, AISI received a proposal from Cognex
Corporation ("Cognex") to acquire AISI. Discussions then ensued between Cognex
and AISI regarding the terms of a possible business combination; the proposal
was modified several times during the course of these discussions. The existence
of these discussions and the proposed terms are subject to a Nondisclosure
Agreement dated August 29, 1997 between the parties, which generally prohibits
public
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disclosure without mutual consent until October 31, 2002. The Board of Directors
of AISI met on several occasions to consider the proposals advanced by Cognex,
and on September 12, 1997, AISI rejected the most recent proposal, because AISI
considered the price inadequate and the terms unacceptable, and AISI made a
counter-proposal. While AISI awaited a response to its counter-proposal to
Cognex, a merger offer was received from ESI.
In meetings on September 19, 26, 27 and 29, AISI's Board of Directors met
to consider the possibility of effecting a business combination with ESI and,
specifically, the terms of the ESI offer; the discussions also included full
consideration of the Cognex proposal, as if it had been modified to reflect the
terms proposed in AISI's counter-proposal. The Board of Directors of AISI
concluded that the Merger with ESI would be in the best interest of its
shareholders, primarily because of the speed and certainty with which the merger
with ESI could be completed and the potential for increase in shareholder value
following the merger. ESI's Board of Directors met to discuss the proposed
merger on September 19, 1997. After considering a number of factors, including
the ability of the combined businesses to serve customers in the electronics
industry, the potential operating and financial performance of the combined
businesses, and the extent to which AISI's business complements ESI's business,
the Board of Directors approved the Merger. On September 29, 1997, following
approval of AISI's Board of Directors, the Merger Agreement was executed by ESI
and AISI, and the signing was announced in a press release.
On October 6, 1997, Cognex issued a press release to announce that it had
made an offer to acquire AISI for approximately $105 million in a transaction
involving the exchange of shares of the common stock of Cognex for all the
outstanding shares of the common stock of AISI. While the remaining terms of
that offer are subject to the confidentiality provisions of the Nondisclosure
Agreement between AISI and Cognex, AISI's Board of Directors concluded that
accepting those terms would not be in the best interests of AISI's shareholders.
On October 8, 1997, AISI and ESI executed an amendment to their Merger
Agreement to extend the time in which to complete the merger, to remove certain
conditions to ESI's obligation to complete the Merger, including the receipt of
a fairness opinion from ESI's financial advisers, the satisfactory completion of
ESI's due diligence investigation of AISI and ESI's determination that the
Merger would be accretive to ESI.
On October 9, 1997, Cognex presented two alternative offers to acquire
AISI. The terms of those offers are subject to the Nondisclosure Agreement with
Cognex. The purchase price included as a term of each offer consisted of common
stock of Cognex having a market value less than the price set forth in the offer
that Cognex made public in its October 6, 1997 press release. Each offer was
conditioned upon Hart-Scott-Rodino approval, receipt of a fairness opinion by
Cognex from its financial advisers and the satisfactory completion of a due
diligence investigation of AISI by Cognex; in addition, each offer imposed upon
AISI onerous conditions in dealing with its major customer, Kulicke & Soffa
Industries, Inc. ("K&S"), that AISI could not meet without adversely impacting
AISI's business, financial condition and results of operations. The principal
difference in the terms of the two Cognex offers was price and the severity of
conditions imposed upon AISI in its dealings with K&S. K&S is AISI's largest
customer, and AISI at the time faced the impending expiration of its principal
agreement with K&S on October 17, 1997; AISI could not wait to agree on the
terms of a continuing relationship with K&S, until a possible transaction with
Cognex could be completed. Moreover, on October 8, 1997, prior to receiving the
Cognex offers, and in the normal course of business, AISI had agreed with K&S to
make certain changes to the principal agreement between AISI and K&S that would
not be permitted under either Cognex offer. Those changes were reflected in a
written amendment to the agreement delivered to K&S by AISI on October 8, 1997
and executed by K&S on October 13, 1997. The AISI Board met on October 10, 1997
to consider the Cognex offers and concluded that, notwithstanding the fact that
neither offer from Cognex could be considered viable, given the changes to the
K&S agreement to which AISI had agreed, the price differential would not justify
the considerable risk that the conditions to the obligation of Cognex to close
might not be satisfied. Given the relative rankings of AISI and Cognex in the
relevant industry, the AISI board concluded that there was a significant risk
that Hart-Scott-Rodino approval could not be obtained. Conversely, there
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appeared to be no problem in obtaining Hart-Scott-Rodino approval of the
proposed transaction with ESI, and in fact the waiting period before completing
the transaction with ESI has now expired. Accordingly, the AISI Board elected
not to respond to the Cognex offers. The Cognex offers expired at 4:00 p.m. on
October 10, 1997.
On October 17, 1997, following a decline in the market, Cognex made another
offer. The price consisted of Cognex common stock (again with a market value
substantially less than the price included in the offer that Cognex announced in
its press release on October 6, 1997), and the offer was no longer subject to
conditions with respect to AISI's dealings with K&S; but in every other relevant
respect the terms of the Cognex offer were identical to the terms set forth in
the Merger Agreement dated September 29, 1997 with ESI and did not reflect the
revised terms of the October 8, 1997 amendment to the Merger Agreement.
Accordingly, the obligation of Cognex to complete the transaction with AISI,
under the terms of its October 17, 1997 offer, would be subject to the receipt
of a fairness opinion from the financial advisers of Cognex, the satisfactory
completion of the due diligence investigation of AISI by Cognex and a
determination that the merger would be accretive to Cognex. In addition, and
perhaps most importantly, the merger with Cognex would be subject to
Hart-Scott-Rodino approval. The offer initially expired by its terms at 9:30
a.m. on October 20, 1997; although Cognex later communicated to AISI that the
expiration date could be ignored, AISI has received no written confirmation that
the offer continues to be outstanding. In any event, AISI's Board of Directors
met on October 20, 1997 to consider the Cognex offer. The Board agreed that
AISI's financial advisers would contact the financial advisers of Cognex to
determine if Cognex would offer more favorable terms, primarily to compensate
for the significant Hart-Scott-Rodino approval risk. Pursuant to the terms of
the Merger Agreement, ESI was notified in writing of the action that AISI was
taking. In the discussions that followed between financial advisers, Cognex
indicated that it might be willing to escrow a substantial sum that would be
paid to AISI if the merger with Cognex were not completed for any reason,
including failure to obtain Hart-Scott-Rodino approval, but Cognex has made no
firm offer in that regard and did not agree to increase the purchase price.
During the course of these discussions, AISI's Board of Directors met several
times to consider the progress of negotiations with Cognex. Finally, the Board
met on October 28, 1997 and concluded, given (i) the volatility of the market
and the attendant concern that market conditions might result in a material
adverse change in the business, financial condition and results of operations of
AISI that could preclude a business combination with ESI, Cognex or any other
person, and (ii) the absence of a firm escrow offer from Cognex or a substantial
increase in the purchase price, that it was in the best interests of AISI's
shareholders to complete the Merger with ESI at the earliest practicable date.
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
electronics industry. All electronic products are subject to markets which
demand higher performance or lower cost over time. Machine vision improves the
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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. ESI estimates that the combined companies will reduce duplicative
professional fees and personnel costs and may save between $500,000 and $1
million annually.
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:
o AISI develops and supplies high performance machine vision systems targeted
at the OEM electronics industry, providing a complement to ESI's existing
product offering and the vision requirements of ESI's customers.
o 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.
o 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.
FAIRNESS OPINION OF AISI FINANCIAL ADVISORS
In connection with the Merger, AISI retained AH&H to act as its financial
advisor. AH&H assisted in AISI's discussions and negotiations with ESI leading
up to the execution of the Merger Agreement and in the consideration by the AISI
Board of the Merger. On September 29, 1997, AH&H delivered its oral opinion to
the AISI Board that the consideration to be received by the AISI shareholders in
the Merger is fair from a financial point of view. AH&H subsequently delivered
its written opinion. Although AH&H assisted AISI in determining the amount of
consideration to be received in the Merger, the amount of consideration set
forth in the Merger Agreement was determined through negotiations between AISI
and ESI.
A copy of the AH&H Opinion is attached hereto as Annex B. Holders of AISI
Common Stock are urged to read the opinion in its entirety for a summary of the
assumptions made, procedures followed, other matters considered and the limits
of the review by AH&H. The summary of the AH&H Opinion set forth in this
Prospectus/Information Statement includes a discussion of all material financial
and comparative analyses performed by AH&H. The summary is qualified in its
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entirety by reference to the full text of such opinion. The AH&H Opinion was
prepared for the AISI Board, is directed only to the fairness, as of September
29, 1997, from a financial point of view, of the consideration to be received by
the holders of AISI Common Stock, and does not constitute a recommendation to
any stockholder as to how to vote with regard to the Merger.
In rendering its opinion, AH&H did not make or seek to obtain appraisal of
any of the assets of ESI in connection with its analyses of the valuation of ESI
or the ESI common stock. AH&H relied without independent verification upon the
accuracy and completeness of all of the financial information reviewed by it for
the purposes of its opinion. The AH&H Opinion does not constitute an opinion as
to the price at which ESI common stock will actually trade at any time. No
limitations were imposed by the AISI Board upon AH&H with respect to the
investigation made or the procedures followed by AH&H in rendering its opinion.
In rendering its opinion, AH&H, among other things: (i) analyzed certain
publicly available financial statements and other information concerning ESI;
(ii) analyzed certain internal financial statements and forecasts and other
financial and operating data concerning AISI prepared by the management of AISI;
(iii) analyzed certain forecasts and related assumptions pertaining to ESI
obtained from third party research analysts; (iv) discussed the past and current
operations and financial condition and the prospects of AISI and ESI with the
management of AISI and ESI, respectively, and analyzed the pro forma impact of
the Merger on ESI's earnings per share; (v) reviewed certain of the reported
prices and trading activity of ESI's Common Stock over the past 33 months; (vi)
compared the financial performance of ESI and certain of the prices and trading
activity of ESI's Common Stock with that of certain other comparable publicly
traded companies and their securities; (vii) reviewed the financial terms, to
the extent publicly available, of certain comparable acquisition transactions;
(viii) reviewed and discussed with the senior management of AISI the strategic
rationale for the Merger and the benefits of the Merger to AISI; (ix) reviewed a
draft of the Agreement dated as of September 29, 1997; (x) discussed with senior
management of AISI the impact of its customer concentration on its financial and
operating results; and (xi) performed such other studies, analyses and inquiries
and considered such other information as AH&H deemed relevant.
In rendering its opinion to the AISI Board, AH&H performed certain
financial and comparative analyses, with such other factors as it deemed
relevant, including, among other things:
Historical Stock Trading and Financial Statement Analysis: As part of its
analysis, AH&H reviewed and analyzed selected historical trading prices and
volumes for ESI Common Stock. In addition, AH&H reviewed and analyzed selected
annual and quarterly income statements and selected annual balance sheets for
each of AISI and ESI.
Peer Group Comparison: AH&H compared certain financial information of ESI
with a group of several publicly traded companies in the semiconductor capital
equipment/machine vision systems industry, including, but not limited to, Adept
Technology, Inc., Cognex Corporation, Cyberoptics Corporation, Medar, Inc.,
Perceptron Inc., PPT Vision, Inc., and Robotic Vision Systems, Inc. Such
financial information included, among other things, market valuation, market
value as a multiple of earnings, and market value as a multiple of revenues. In
particular, such analysis showed that on average, as of September 26, 1997,
based on the closing prices of the respective common stocks and on research
analysts' estimates as reported by First Call Corporation, this group of common
stocks traded at 34.1 times annualized 1997 estimated earnings per share and
20.2 times annualized 1998 forecasted earnings per share.
Analysis of Selected Precedent Transactions: AH&H examined selected
precedent transactions involving semiconductor capital equipment companies. In
total, AH&H reviewed and examined 33 precedent transactions involving both
publicly traded and privately held companies; recent transactions analyzed
include, but are not limited to, LAM Research Corporation's acquisition of
Ontrak Systems, Inc.; Millipore Corporation's acquisition of Tylan General; and
Applied Materials' acquisitions of Opal Inc. and Orbot Instruments. Analysis of
such 33 precedent transactions resulted in a mean transaction valuation of 30.6
times last twelve months net income and 2.0 times last twelve months revenues.
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Multiple Analysis: Using the Conversion Ratio, AH&H prepared an analysis
that reviewed the aggregate consideration to be paid to the holders of AISI
Common Stock pursuant to the Merger Agreement using the closing price of ESI
Common Stock on September 26, 1997, as a multiple of various financial operating
parameters of AISI (and assuming the Merger were not to occur), including
revenue, earnings before interest and taxes ("EBIT"), and fully-taxed net
income. Such analysis indicated that the aggregated consideration to be paid to
the holders of AISI common stock (i) as a multiple of calendar year ("CY") 1997
estimated revenue and CY 1998 projected revenue was 2.6x and 2.2x, respectively;
(ii) as a multiple of calendar year CY 1997 estimated EBIT and CY 1998 projected
EBIT was 13.0x and 10.2x, respectively; and (iii) as a multiple of calendar year
CY 1997 estimated net income and CY 1998 projected net income was 13.8x and
10.8x, respectively.
Contribution Analysis: AH&H analyzed the pro forma contribution of each ESI
and AISI to the combined company if the Merger were to be consummated. Such
analysis was based on financial data provided by the management AISI and ESI,
and equity research reports prepared independently by securities firms not
involved in the Merger. Such analysis showed that for CY 1998, AISI would
contribute approximately 14% of the revenues and earnings before interest and
taxes of the combined company.
Pro Forma Analysis of the Merger: AH&H analyzed and reviewed certain pro
forma financial information for the combined entity based on 1998 management
budgets for AISI and 1998 financial projections obtained from third party
research analysts. Without taking into account potential synergies and
redundancies based on the Merger, the analysis performed by AH&H showed that for
ESI's fiscal year 1998, the Merger was non-dilutive to ESI's earnings compared
to ESI's pre-merger earnings.
In conducting its analysis, AH&H considered the following consensus
estimates of industry analysts (all of which are publicly available) of ESI's
projected fiscal year 1998 earnings per share for the four fiscal quarters
ending August 31, 1997, November 30, 1997, February 28, 1998 and May 31, 1998,
respectively: $0.66, $0.73, $0.78 and $0.80. AH&H also considered the following
projections, provided by AISI's management, of (i) AISI's calendar year 1998
quarterly revenues: $8.6 million, $8.8 million, $8.9 million and $9.5 million
respectively; and (ii) AISI's calendar year 1998 quarterly earnings: $1.4
million, $1.7 million, $1.8 million and $2.3 million, respectively. Based on
this information, AH&H analyzed the pro forma impact of the Merger on ESI's
projected fiscal year 1998 earnings per share for the four fiscal quarters
ending August 31, 1997, November 30, 1997, February 28, 1998 and May 31, 1998 as
a $0.02 increase, $0.04 increase, $0.01 decrease and $0.01 increase,
respectively. Any other components of the companies' financial projections did
not play a significant factor in AH&H's analysis.
The Summary of the AH&H analyses set forth above does not purport to be a
complete description of the presentation by AH&H to the AISI Board. In
performing its analyses, AH&H made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of AISI and ESI. The analyses performed by AH&H are
not necessarily indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such analyses. In
addition, analyses relating to value of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
The analyses and the summary set forth above should be considered as a whole as
any consideration of only selected portions of the AH&H analyses, or of the
above summary, could create an incomplete view of the process underlying the
analyses performed by AH&H in connection with the preparation of its opinion
letter.
The AISI Board selected AH&H as its financial advisor due to its experience
in acting as a financial advisor in connection with mergers and acquisitions in
the technology industry and its familiarity with AISI and its business. Pursuant
to a letter agreement dated as of November 20, 1995 between AISI and AH&H (the
"Engagement Letter"), AISI has agreed to pay AH&H (i) a retainer fee of $50,000
and (ii) an investment banking advisory services fee based upon the selling
price of AISI in the Merger, calculated at 1% of the first $80,000,000 of
aggregate consideration to be paid either present of future, and the liabilities
to be
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assumed, and 3% of such remainder above $80,000,000. The retainer fee has been
paid to AH&H. The investment banking advisory services fee will become payable
upon the closing of the Merger. In addition, AISI has agreed to reimburse AH&H
for all of its reasonable out-of-pocket expenses up to a maximum of $25,000
without the approval of AISI, including but not limited to legal fees and travel
expenses. AISI has also agreed to indemnify and hold harmless AH&H against
certain liabilities, including liabilities under federal securities laws arising
out of, or in connection with its rendering of services under the Engagement
Letter. In the event such indemnification were not available, however, AISI has
agreed to contribute to the settlement, loss or expenses involved in the
proportion that the relevant financial interest of AISI and its stockholders
bear to AH&H's relevant financial interest.
AH&H has not provided financial advisory services except pursuant to the
Engagement Letter to AISI prior to the Merger. AH&H, as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material 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/Information Statement, all of which are subject to change. 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 the material
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 address 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, corporations, trusts, financial institutions, insurance companies,
tax-exempt organizations, or AISI shareholders who are subject to the "golden
parachute" provisions of the Code, who hold their shares as part of a "straddle"
or "conversion transaction," 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 is intended to qualify as a 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/Information Statement, will constitute a
reorganization under Section 368(a)(1)(A) and (a)(2)(E) 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
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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.
The following is a summary of the opinion that has been provided to ESI.
The opinion of counsel provides 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
share 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 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
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
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of certain shareholders of AISI Common Stock. These arrangements will terminate
on or prior to the Merger.
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 Vesting ESI Common Stock) Price $ Options
- -------- ------------------ -------------------- -------- -----------
<S> <C> <C> <C> <C>
James E. Anderson August 7, 2000 3,050 $13.11 $135,756
Stephen S. Wilson August 7, 2000 610 $13.11 $ 27,151
Donald Redding April 26, 2000 1,830 $13.11 $ 81,454
August 7, 2000 610 $13.11 $ 27,151
Jon G. Ehrmann August 7, 2000 1,220 $13.11 $ 54,302
Philip White July 7, 1999 2,669 $13.11 $118,787
Yvette Puskarich October 25, 1999 1,220 $13.11 $ 54,302
April 26, 2000 458 $13.11 $ 20,363
* 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 September 23, 1997 of $57.63 per share of ESI Common Stock, less the
aggregate exercise price under such Options.
</TABLE>
All shares of ESI Common Stock to be issued pursuant to exercise of the
AISI Options are included in the total 1,400,000 shares of ESI Common Stock to
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 $2.3
million.
The Merger Agreement provides that ESI will, or will cause the surviving
corporation to, subject to the conditions set forth in the Merger Agreement,
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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.
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 October 1, 1997. The waiting period under the HSR Act terminated on
October 31, 1997. 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.
NO DISSENTER RIGHTS
The Michigan Business Corporation Act ("MBCA") does not provide dissenters'
rights in connection with the Merger. Although the Merger Agreement originally
provided for dissenters' rights in connection with the Merger, Amendment No. 2
to the Merger Agreement deleted all references to dissenters' 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/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. ESI determined that the consideration it
was willing to pay for all of the outstanding securities of AISI was 1,400,000
shares of ESI Common Stock. This total consideration will not change. The
Conversion Ratio is determined by dividing 1,400,000 by the sum total of AISI
Common Stock outstanding plus AISI shares subject to options at Closing. The
Conversion Ratio is not expected to change because AISI has covenanted not to
issue new shares prior to Closing other than pursuant to specified outstanding
options. As with other publicly traded stocks, the market value of the ESI
Common Stock issued as consideration in the Merger fluctuates.
At the Effective Time Merger Corp. will merge with and into AISI, with AISI
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
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<PAGE>
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
Escrow Agreement 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. See "The 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.
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 $2.3 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
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
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<PAGE>
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 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 June 30, 1997; (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, 1996, 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 it 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.
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<PAGE>
CORPORATE STRUCTURE AND RELATED MATTERS AFTER THE MERGER
At the Effective Time, Merger Corp. will be merged with and into AISI. As a
result, the separate corporate existence of Merger Corp. will cease and AISI
will be the surviving corporation. From and after the Effective Time, the Board
of Directors and officers of Merger Corp. in office immediately before the
Effective Time will be the Board of Directors and officers of the surviving
corporation.
Each share of Common Stock of Merger Corp. issued and outstanding
immediately prior to the Effective Time will be converted into one share of the
surviving corporation.
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, certain AISI
shareholders 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/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, (c) to promptly list up to 1,200,000 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 stock certificates representing shares of ESI
Common Stock to be issued in the Merger, (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.
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; (e) registration of up
to 1,200,000 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
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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 a mutually agreed date; (j) delivery to ESI of
confidentiality agreements by all continuing employees; and (k) accuracy of
representations and warranties. The conditions in clauses (a), (b), (d), (e) and
(g) are conditions to the obligations of both ESI and AISI, and may be waived
(to the extent allowed by law) only by both parties. ESI must waive or be
satisfied with respect to conditions in clauses (c) (with respect to changes in
the business of AISI), (f), (h), (i), (j) and (k) (with respect to the
representations and warranties of AISI); the tax opinion required by (f) above,
dated November 18, 1997 has been delivered to ESI. AISI must waive or be
satisfied with respect to the conditions in clause (c) (with respect to changes
in the business of ESI) and (k) (with respect to the representations and
warranties of ESI). In the event of a waiver of the condition in clause (g), and
a resulting decision not to treat the Merger as a pooling of interests, a
revised Prospectus/Information Statement will be delivered to AISI shareholders
for consideration.
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 (a) any losses, costs,
expenses, damages and liabilities, including reasonable attorneys' fees
(collectively, "Damages"), incurred by ESI, Merger Corp. or the surviving
corporation 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,
and (b) any Damages (excluding, in this instance, attorneys' fees) incurred in
connection with the prosecution, defense of counterclaim or settlement of
certain litigation involving AISI.
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 (excluding claims related to representations
regarding taxes) 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 December 31, 1997 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 by December 31, 1997 ; (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 offers without providing
prior notices and
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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 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, and within one year after
termination agrees to a transaction which results in a change in the beneficial
ownership of more than 50 percent of the voting power of the capital stock of
AISI.
The Merger Agreement provides that ESI will pay a $3 million fee to AISI if
the Agreement is terminated by ESI (except in circumstances where termination by
ESI is permitted, as described above) even though all of the conditions to the
obligations of ESI and Merger Corp. have been fulfilled.
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 filing of the Prospectus/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 believes it is the leading
supplier of advanced laser systems used to adjust (trim) electronic circuitry
and to improve the yield of semiconductor memory devices. ESI believes it is a
significant producer of high-speed test and termination equipment used in the
high-volume production of miniature capacitors. Additionally, ESI designs and
manufactures machine vision products and electronic packaging systems for
manufacturers of printed circuit boards, 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 (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). In the aggregate, the foregoing customers accounted for
approximately 41.5 percent of ESI's total revenues in fiscal 1997.
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Electronics Industry Overview
The electronic content of telecommunications products, automobiles and
personal computers continues to increase. For example, automobile manufacturers
now routinely include electronic fuel ignition and other electronic systems in
place of components that in the past were predominantly mechanical. In addition,
markets for consumer-oriented electronic products such as cellular telephones,
facsimile machines, pagers, camcorders and personal computers have developed
rapidly as increasingly affordable products have been introduced. Demand for
electronics manufacturing equipment is driven by the demand for electronic
devices and circuits. Electronic components are used in virtually all electronic
products, from inexpensive consumer electronics to the most sophisticated
computers. These components are produced in very large unit volumes.
The demands upon manufacturers to supply increasing quantities of
electronic components have been accompanied by demands for increased complexity
and reduced size. As electronic products become more powerful and portable, the
devices and circuits in these products must be faster, smaller and more
reliable. To achieve these attributes of higher performance, the electronic
device manufacturers 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, which 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 termination 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 continuously 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 it is critical that each of its products provide the customer
with measurable production benefits, such as improved yield, increased
throughput, greater reliability, or increased flexibility, resulting in a high
return on investment. ESI also designs its production systems with a migration
path for system upgrade, thereby providing its customers flexibility to add
capacity or improve product performance at a reasonable incremental cost.
ESI believes it is the leading merchant equipment supplier to three
specialized markets: laser trimming, miniature capacitor testing and production
and semiconductor memory yield improvement. ESI also serves the machine vision
and 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 Delco,
Ericsson, Ford, IBM, Motorola, Nippon-Denso, KOA, Siemens, and Kyocera.
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The laser adjusts the electrical performance of an electrical product or
assembly containing many circuits. The laser removes a precise amount of
material from one or more components in the circuit 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 components in
the product is used to tune the electrical performance of the entire product to
the desired frequency specification.
ESI's systems also adjust the electrical performance of individual devices
such as film resistors, resistor networks, capacitors and hybrid circuits. Laser
trimming is required because the screening process used to manufacture resistors
cannot cost effectively deposit material precisely enough to provide consistent
electrical values. The trimming system can also be rapidly reprogrammed to trim
devices of different values.
The following chart summarizes the models, typical applications and key
features of ESI's current laser trimming products:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
ESI LASER TRIMMING PRODUCTS
Beam
Positioning Throughput Work
Resolution (trims per Area
Product Typical Application (microns) second) (inches)
<S> <C> <C> <C> <C>
Model 4300 Surface mount capacitor and 2.50 50 4 x 4
resistor trimming
Model 977 Test intensive, thick film, 1.55 50 3 x 3
functional trimming
Model 4990 Thick film functional trimming 1.27 50 3 x 3
Model 907 Chip resistor trimming 1.27 100 3 x 3
Model 4410 Thick/thin film functional 1.01 15 3 x 3
trimming
- -------------------------------------------------------------------------------------------------------
</TABLE>
Test and Production Systems for Miniature Capacitors. ESI's product offering
consists of automated test, production and handling equipment for manufacture of
miniature multi-layer ceramic capacitors (MLCCs) which are used in very large
numbers in nearly all types of electronic circuits. Large numbers of MLCCs are
used in circuits that process analog signals or operate at high frequencies such
as in video products (VCRs and camcorders), voice communication products,
wireless telecommunication products and computers. Principal customers for ESI's
MLCC test and production equipment are Kemet, Kyocera/AVX, Murata, Philips,
Samsung and TDK. In the aggregate, purchases of such systems by the foregoing
customers accounted for approximately 17.9 percent of ESI's total revenues in
fiscal 1997.
The worldwide miniature surface mount capacitor market is estimated to be
approximately $4.5 billion (240 billion units) in 1997. 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.
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Termination. MLCCs are manufactured in a lamination process, layering conductive
and insulation materials. ESI's microprocessor-based termination systems apply
conductive material to the ends of surface mountable MLCCs, permitting
connection of the device in a circuit. Chip Star, Inc., a subsidiary purchased
on June 26, 1997, produces a fully automated product line for termination of
MLCCs and capacitor arrays. These products, the CS 325A and CS 750, are capable
of processing the smallest sized (.04 x .02) parts available on the commercial
market.
Handling Tooling. ESI offers a wide range of specialized production fixtures and
tools for various stages of the manufacturing process, including a series of
patented carrier plates capable of handling up to 8,000 devices per plate for
termination application. The decreasing size and growing volumes of MLCCs
produced cause manufacturers to continuously seek new tools and fixtures to
improve throughput and handling efficiency.
The following chart summarizes the models, typical applications and key
features of ESI's current miniature capacitor test and production products:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS
Product Application Key Features
Test Systems
<S> <C> <C>
Models 16A and 18 Tests capacitance, dissipation High speed rotary tester with
factor and voltage capability throughput of up to 50,000
for small (Model 18) and medium parts/hour.
(Model 16A) size MLCCs
Models 3002 and 3001 Tests insulation resistance (IR) High speed parallel tester with
IR of MLCCs throughput of up to 50,000
parts/hour. Model 3001 IR
includes automatic bulk loading.
Model 3300 Test capacitance dissipation High speed rotary tester with
factor and voltage capability throughput of up to 180,000
for small and medium size MLCCs; parts/hour.
tests insulation resistance
Termination Systems
Models 2001 and 2020 Electrical contact attachment Microprocessor controlled
on MLCCs surface mount termination system
with throughput up to 130,000
parts/hour. Model 2020 includes
an integrated kiln.
Model 2007 Electrical contact attachment High productivity microprocessor
on MLCCs controlled surface mount
termination system with
throughput up to 470,000
parts/hour.
CS 325A Electrical contact attachment Automated termination of
on MLCCs smallest size capacitors with
throughput up to 100,000.
CS 750 Electrical contact attachment Automated termination of
on MLCC arrays smallest size capacitor arrays
with throughput up to 50,000.
Handling Tooling
Carrier Plates Plates to batch handle MLCCs for Patented composite carriers to
test and termination handle the full range of MLCC
sizes and up to 8,000 pieces per
batch.
Test Tooling Test fixtures for use with Permits precise location and
ESI systems positioning of MLCCs during the
test operation.
- --------------------------------------------------------------------------------------------------------
</TABLE>
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Memory Yield Improvement Systems. Memory yield improvement systems are used by
nearly all manufacturers of dynamic random access memories (DRAMs) to increase
production yields. Personal computers and high performance workstations are the
largest market for semiconductor memory, although photocopiers, facsimile
machines and telecommunications equipment represent products requiring
increasing amounts of memory. Customers of ESI's memory systems include Fujitsu,
LG, Hitachi, Hyundai, IBM, NEC, Samsung, Siemens, and Texas Instruments. In the
aggregate, purchases of memory yield improvement systems by the foregoing
customers accounted for approximately 21.9 percent of ESI's total revenues in
fiscal 1997.
Memory device manufacturers use a laser process that removes defective
circuit elements while programming spare elements to be replacements and thereby
salvaging a memory device. Cost reductions and demand for higher capacity memory
devices have led manufacturers to reduce the size of circuit elements while
increasing the number of circuit elements per device. This increased density in
memory devices has required leading edge semiconductor processes, resulting in
lower manufacturing yields.
The yield enhancement process begins with circuit designers adding extra or
spare elements to the memory array. During the manufacturing process each device
is tested to determine yield. When a defective element is identified, its
location or address is recorded and given to ESI's laser system to effect a
replacement or repair. The laser system positions a laser beam over connecting
links to the defective element and cuts or breaks the electrical path.
Replacements are added by programming the failed address into a new or spare
element. Redundancy is used by every significant manufacturer of DRAMs and is
increasingly being used by manufacturers of other semiconductor memory
applications, such as SRAMs, DSPs, and other logic devices.
ESI began shipments of the Model 9300 Laser Repair system in August 1996.
This system features a patented laser system technology operating at a 1.3
micron wavelength that enables manufacturers to use metal links which are
required for advanced memory devices. This system is recognized as the new
industry standard for laser repair systems.
ESI also offers the Model 1225ci and Model 9250 series systems. The Model
1225ci uses patented stage plus galvanometer beam positioning to provide
throughput benefits, a small footprint, and a high cost performance ratio. It is
used by manufacturers requiring increased capacity of four and sixteen megabit
devices. The ESI Model 9250 series provides high throughput and high reliability
for those manufacturers using poly-link materials, even for advanced memory
devices.
Vision Systems. 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 Turbo HR+ vision system is integrated in ESI's laser memory
repair systems and is also marketed independently to electronic and
semiconductor industry customers for general purpose inspection, part position
verification for manufacturing processes, wafer identification using OCR,
measurement, alignment, machine guidance and assembly verification. Customers
for ESI's vision products include Hewlett Packard and IBM. In the aggregate,
Hewlett Packard and IBM purchases of vision system products accounted for
approximately 1.9 percent of ESI's fiscal 1997 revenues.
Electronic Packaging Systems. ESI provides a cost effective method for forming
electrical connections between layers, called vias, in a multiple layer printed
circuit board. Applications in this market include new generations of integrated
circuits packages, multi chip modules, and high density circuit boards. The
primary advantage of the technology is the ability to process very small vias in
a wide variety of materials. Electronic industry materials include ceramic,
traditional glass reinforced circuit boards, copper, and new organic compounds.
Customers include Automata, Erricson, Sheldahl, Siemens and W.L. Gore. In the
aggregate, purchases of electronic packaging systems by the foregoing customers
accounted for approximately 2.2 percent of ESI's total revenues in fiscal 1997.
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In addition, IBM and Johnson-Matthey/ACI are significant customers of Dynamotion
Corp., an ESI subsidiary acquired after fiscal year 1997.
Drilling Products. The Model 5100, introduced in June 1996, is the current
product being marketed, and features the capability to drill up to 10,000
micro-vias per minute. The Model 5100 includes a proprietary laser, operating in
the ultraviolet region of the spectrum, which can cleanly cut copper and
glass-reinforcement without damaging or burning organic materials. The system
can form blind or through holes in all of the common circuit board materials and
uses a unique real-time inner layer alignment to deliver high placement
accuracy. In this way, the user can achieve the smallest pad dimensions enabling
the routing of today's emerging high density packages.
Dynamotion, a subsidiary purchased on June 9, 1997, produces
computer-controlled drilling equipment which is sold to manufacturers of printed
circuit boards (PCBs) and semiconductor packages. The drilling machines are used
to produce thousands of very small holes, sometimes as small as .004" in
diameter.
Four product lines of computer-controlled drilling equipment are produced
by Dynamotion: (1) DM 9400/9500 with a patented vacuum pre-load air bearing
guiding design for the high-dynamic stability necessary for micro-drilling; (2)
Six-PAKTM with its new innovative design (economical, accurate, compact and
extremely productive) for the commercial, high-volume PCB market; (3) Modular
Systems offer the same characteristics as the DM 9400/9500 to the prototype and
quick-turn market; and (4) Smart DrillTM with its patented vision optimization
capability offers a fast, highly accurate method of optimizing and drilling for
the most sophisticated multilayer board manufacturers.
Routing Products. Dynamotion produces computer-controlled routers which are sold
to computer manufacturers and manufacturers of PCBs. Routers are used to cut and
shape individual PCBs out of panels. Currently, the two primary machining
processes required to produce a PCB are routing and drilling. In contrast to a
drill, which makes thousands of tiny holes on a PCB, the router cuts the shape
of the PCB, the larger holes and special cavities for mounting of semiconductor
die. The computer-controlled cuts made by the router can be very complex since
the position of the cuts are pre-programmed in three axes.
Newly emerging PCB chip carrier technology creates unusual demands on the
routing process. Perfect registration of routed edges with respect to the
circuitry features and the internal layers are required to successfully produce
chip carriers. Very accurate depth control is necessary for cavity routing.
Dynamotion produces two product lines of computer controlled routers: the
SMARTTM Driller/Router and the Six-PAKTM Router Drill.
Sales, Marketing and Service
ESI sells its products worldwide through direct sales and service offices
located in or near:
Boston, Massachusetts
Dallas, Texas
Portland, Oregon
San Diego California
Santa Ana, California
Leiderdorp, Netherlands
London, United Kingdom
Munich, Germany
Nagoya, Japan
Paris, France
Seoul, Republic of Korea
Taipei, Taiwan
Tokyo, Japan
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
35
<PAGE>
with these leading manufacturers in order to meet their needs for additional
systems and to facilitate the successful development and sale of new products to
these customers.
ESI maintains service personnel wherever it has a significant installed
base and provides service anywhere its equipment is installed. New systems are
tested to ensure they meet requirements and acceptance criteria incorporated
into customer orders. ESI also offers a variety of maintenance contracts and
parts replacement programs.
ESI has an OEM contract with Advantest Ltd. to supply memory yield
improvement systems in Japan through December 31, 1997. Sales to Advantest
amounted to 9.8%, 6.5% and 6.9% of net sales for the fiscal years 1997, 1996,
and 1995. ESI has appointed Canon as its distributor for such products in Japan,
effective January 1998. ESI maintains a presence in Korea through a wholly-owned
subsidiary.
Sales outside the United States accounted for 71.0%, 66.9% and 70.8% of
ESI's net sales for fiscal years 1997, 1996 and 1995.
In fiscal years 1997 and 1996, no one customer exceeded 10% of sales. One
customer accounted for 11.9% of ESI's sales in fiscal 1995.
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 $25 million at May 31, 1997
versus $35 million at May 31, 1996 and $26 million at May 31, 1995. Backlog was
$30 million at August 31, 1997. ESI 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
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 1997, 1996,
and 1995 were $17.0 million (10.6% of net sales), $16.7 million (10.0% of net
sales), and $13.5 million (12.0% of net sales), respectively. The foregoing
figures do not include the effect of research and development expenditures
funded by the Advanced Research Projects Agency (ARPA) of the U.S. Government.
In addition, research and development expenditures for the year ended May
31, 1996 do not include the acquired in-process research and development expense
of $6.0 million incurred in connection with the purchase price allocation of
XRL, Inc.
Competition
ESI's markets are competitive. The principal competitive factors in the
industry are product performance, reliability, service and technical support,
product improvements, price, established relationships with customers and
product familiarity. ESI believes that its products compete favorably with
respect to these factors. Some of ESI's competitors have greater financial,
engineering and manufacturing resources than ESI and larger service
organizations. In addition,
36
<PAGE>
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. ESI
also competes with stand alone vision suppliers such as Cognex and Robotic
Vision Systems, and with robotics and factory automation companies, such as
Allen Bradley. There are also numerous other vision companies and captive
vendors in Japan, North America and Europe. ESI's electronic packaging systems
compete with mechanical drilling manufacturers such as Hitachi-Seiko, Excellon
and laser system provider Lumonics.
Manufacturing and Supply
ESI's laser system manufacturing operations consist of electronic
subassembly, laser production and final system assembly. Principal production
facilities are headquartered in Portland, Oregon. Miniature capacitor test and
production systems are manufactured by ESI's Palomar and Chip Star subsidiaries
near San Diego, California. Dynamotion drilling and routing products are
produced in Santa Ana, California. ESI also uses qualified manufacturers to
supply many components of its products.
ESI's laser systems use high performance computers, peripherals, lasers and
other components from various vendors. Some components used by ESI are obtained
from a single source or a limited group of suppliers. An interruption in the
supply of a particular component could require substitutions which would have a
temporary adverse impact on ESI. ESI believes it has good relationships with its
suppliers.
Employees
As of May 31, 1997, ESI employed 680 persons, including 203 in engineering,
research and development, 270 in manufacturing and 207 in marketing, sales,
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 ongoing research, development and manufacturing activities. ESI owns 42
United States patents and has applied for 19 patents in the United States. In
addition, ESI has 35 foreign patents and has applied for 40 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
37
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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.
Properties
The Company's executive and administrative offices, and principal laser
system manufacturing facilities are located in a two-building complex located on
16 acres in Sunset Science Park, in Portland, Oregon. The buildings are owned by
ESI, and contain approximately 134,000 square feet of floor space. Palomar is
located in an owned 64,000 square foot plant on ten acres of land in Escondido,
California.
In addition, approximately 15,000 square feet of industrial space is leased
in Canton, Massachusetts. The Company also leases 7,000 square feet of office
space in Portland, Oregon for its Vision Products Division, 8,000 square feet of
office and industrial space in San Marcos, California for its Chip Star
subsidiary, 30,000 square feet of office and industrial space in Santa Ana,
California for its Dynamotion subsidiary, and office and service space in
several additional locations in the United States, and in seven foreign
countries.
Legal Proceedings
On December 26, 1996, ESI filed a lawsuit against General Scanning, Inc. in
the United States District Court for the Northern District of California for
patent infringement. The complaint alleges that General Scanning is infringing
two of ESI's patents used in the Model 9300 laser repair systems (patent numbers
5,265,114 "System and Method for Selectively Laser Processing a Target Structure
of One of More Materials of a Multimaterial, Multilayer Device" and 5,473,624
"Laser System and Method for Selectively Severing Links"). ESI is seeking
damages and an injunction against further infringement. General Scanning has
filed counterclaims alleging that certain ESI patents are invalid and
unenforceable and that ESI has interfered with General Scanning's business
reputation. General Scanning is seeking damages and declaratory judgments that
the ESI patents are not infringed, are invalid and are unenforceable. ESI and
General Scanning are currently taking depositions of witnesses and supplying
requested documents to each other. The trial date for this case is expected to
be December 1998. 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.
ESI Management
The directors and executive officers of ESI as of June 30, 1997 are as
follows:
Name Age Position
---- --- ---------
Donald R. VanLuvanee(1) 53 Chief Executive Officer, President and
Director
Robert E. Belter(1) 56 Vice President
Robert C. Cimino(1) 52 Director of Human Resources
Barry L. Harmon(1) 43 Chief Financial Officer and Senior Vice
President
Jon R. Hopper(1) 37 Vice President
Jonathan C. Howell(1) 43 Vice President
Mark W. Klug(1) 58 Vice President
John R. Kurdock(1) 52 Vice President
Larry T. Rapp(1) 57 Corporate Secretary and Vice President
Joseph L. Reinhart(1) 38 Vice President
Joseph Z. Rivlin(1) 62 Vice President
Vernon R. Swearingen(1) 57 Vice President
Edward J. Swenson(1) 58 Senior Vice President
David F. Bolender 65 Director
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Keith L. Thomson 58 Director
Larry L. Hansen 68 Director
W. Arthur Porter 56 Director
Vernon B. Ryles, Jr. 59 Director
Douglas C. Strain 77 Director
- ------------------
(1) Officers are appointed annually by the Board of Directors.
Mr. VanLuvanee joined ESI in 1992 as Chief Executive Officer, President and
a Director. His term as a Director expires in 1998. From July 1991 to July 1992,
Mr. VanLuvanee was President, Chief Executive Officer and a Director at
Mechanical Technology Inc., a supplier of contract research and development
services and a manufacturer of technologically advanced equipment. From 1990 to
1991, he was President and Chief Executive Officer of BCT Spectrum, Inc., a
supplier of vacuum deposition systems. From 1984 to 1990, he was President,
Chief Operating Officer and a Director of Kulicke and Soffa Industries, Inc., a
supplier of capital equipment and consumables to the microelectronics industry.
Mr. VanLuvanee is also a Director of Micro Component Technology, Inc., a leading
manufacturer of automated test handling equipment, and FEI Company, which
designs, manufactures and markets focused ion beam workstations and both ion and
electron emitter and focusing column components.
Mr. Belter joined ESI in May, 1997 and was elected President and General
Manager of the Palomar subsidiary and a Corporate Vice President. Mr. Belter is
responsible for the ceramic capacitor production equipment business unit,
including the Palomar and Chip Star subsidiaries. Prior to joining ESI, Mr.
Belter served as a consultant to ESI in marketing and product development for
one year. Mr. Belter has extensive prior experience in the electronic component
industry, including four years as President and General Manager of Johanson
Dielectrics, and ten years as President and General Manager of Kyocera
Northwest, North American Electronic Components.
Mr. Cimino joined ESI in 1993 as Director of Human Resources. Mr. Cimino
was employed by Eastman Kodak prior to joining ESI. He held management positions
at Kodak in human resources, customer service, sales, and real estate asset
management.
Mr. Harmon joined ESI in 1992 and has served ESI in various financial
management positions. In January 1995, he was elected Chief Financial Officer
and Senior Vice President. Mr. Harmon held various financial management
positions with the Global Private Banking Group of Citibank from 1985 to 1991.
He was employed by Arthur Andersen LLP from 1976 until 1983. Mr. Harmon is a
licensed CPA.
Mr. Hopper joined ESI as a Group Vice President in the Electronic Packaging
Business Unit upon Dynamotion's merger with ESI on June 9, 1997. Previously, he
was Chairman, President and Chief Executive Officer of Dynamotion from April
1995. Mr. Hopper's experience includes several management positions in high
technology businesses during the period from 1990 to 1994.
Mr. Howell joined ESI in April 1993 as Director of MIS. In June 1995, he
was appointed Managing Director of the Vision Products Division. In September
1995, Mr. Howell was elected Vice President. Since July 1996, Mr. Howell is
responsible for ESI's technical staff and resources. Mr. Howell has extensive
management experience from Citibank, Gulf and Western and Arthur Young & Co.
Mr. Klug joined Palomar Systems, Inc. in August 1992 and in April 1993 was
elected a Corporate Vice President. Mr. Klug is responsible for the test segment
of the capacitor equipment business unit. From 1988 to 1992, Mr. Klug was Vice
President of Engineering for Symtek Systems, Inc., and between 1983 and 1988 he
held senior management positions with Kulicke and Soffa Industries, Inc.,
including Senior Vice President of U.S. Operations and Vice President of
Engineering.
Mr. Kurdock joined ESI in February 1997 as Group Vice President and General
Manager of Portland Operations. Prior to joining ESI, Mr. Kurdock served as Vice
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President of the Surface Mount Division for Universal Instruments. He has also
held senior operating positions with the Silicon Valley Group and Perkin Elmer.
Mr. Rapp joined ESI in 1966 and has served in various capacities in
engineering. In 1982 he became the Government Relations and Patent Manager. He
served as Assistant Secretary from 1988 to 1991, and in January 1992 was elected
Corporate Secretary and Legal Manager. In September 1995, Mr. Rapp was elected
Vice President.
Mr. Reinhart joined ESI in 1993 as Communications and Contracts Manager and
was promoted to Director of Business Development in April 1995. He was elected a
Vice President in September 1996. His experience includes finance, venture
funding, mergers and acquisitions and administration in high-technology
businesses.
Mr. Rivlin, who joined ESI in 1994, was elected Vice President of Sales in
February 1995. Prior to joining ESI, Mr. Rivlin was Vice President of Sales and
Service for Solbourne Computer, and President and CEO of XRL, Inc. He has held
other management positions at GenRad, Fairchild Camera and Instrument Corp., and
Veeco Instruments, Inc.
Mr. Swearingen joined ESI in November 1992 as Director of Laser Systems
Business Unit and was elected Vice President in April 1993. From 1990 to 1991,
Mr. Swearingen was President of Quantum Engineering, Inc., a project engineering
firm, and from 1988 to 1990 he held a management position with Kulicke and Soffa
Industries, Inc.
Mr. Swenson joined ESI in 1961 as a project and applications engineer. In
1970, he initiated the manufacture of computer-controlled laser systems for
trimming and scribing microcircuits. He became Manager of the Systems Business
Unit in 1978, Vice President, Advanced Development in 1979, Vice President,
Advanced Technology Division in 1985 and Senior Vice President, Advanced
Technology Group in 1987.
Mr. Bolender retired in 1991 from the position of President of the Electric
Operations Group of PacifiCorp, a diversified public utility located in
Portland, Oregon. Mr. Bolender is a Director of United States National Bank of
Oregon, Benson Industries Incorporation, and Protocol Systems, Inc. He joined
the Board of Directors in 1988 and in January 1992, Mr. Bolender became
Chairman. Mr. Bolender is a member of the Audit Committee of the Board of
Directors. Mr. Bolender's term expires in the year 2000.
Keith L. Thomson, Vice President of Intel Corporation and Oregon Site
Manager. Mr. Thomson joined Intel in 1969 and moved to the Intel, Oregon
operation in 1978. Prior to that he worked for Lockhead Missiles and Space
Corporation, and the Semiconductor Division of Fairchild Camera and Instruments.
Mr. Thomson was elected to the Board of Directors in 1994 and is the Chairman of
the Compensation Committee of the Board of Directors. Mr. Thomson's term expires
in the year 2000.
Larry L. Hansen retired in 1992 from the position of Executive Vice
President of Tylan General Inc., a manufacturer of high technology components
for industrial processes located in San Diego, California. Prior to December
1988 he was Executive Vice President and a Director of Varian Associates, Inc.,
an electronics manufacturer located in Palo Alto, California. Mr. Hansen is also
a Director of Signal Technology Corp., and Micrel, Inc. Mr. Hansen joined the
Board in 1986 and is a member of the Compensation Committee. Mr. Hansen's term
expires in 1998.
W. Arthur Porter, President of the Houston Advanced Research Center,
Adjunct Professor of Electrical Engineering at Rice University. Dr. Porter is a
Director of Stewart Information Services Corporation, and Medici Medical Group
Inc. Dr. Porter, formerly Chairman of the Board of Directors, serves as Chairman
of the Audit Committee of the Board of Directors. He joined the Board in 1980.
Mr. Porter's term expires in 1998.
Vernon B. Ryles, Jr., President and CEO of Poppers Supply Co., a
manufacturer of popcorn snacks and jobber/distributor of recreational food and
40
<PAGE>
equipment. In addition, Mr. Ryles is on the Board of Directors of Northwest Pipe
and Casing, a manufacturer of steel pipe. He is a Director and former Board
Chairman of the National Association of Concessionaires and on the Advisory
Council of the Oregon State University Agricultural Trade and Marketing Program.
Mr. Ryles joined the Board in 1995 and is a member of the Compensation
Committee. Mr. Ryles' term expires in 1999.
Douglas C. Strain, Vice Chairman of the Board of Directors, formerly
Chairman of the Board. Mr. Strain founded ESI and has been a Director since
1949. Mr. Strain is also a Director of Lattice Semiconductor Corporation. Mr.
Strain is a member of the Audit Committee of the Board of Directors. Mr.
Strain's term expires in 1999.
Beneficial Ownership of Principal ESI Shareholders and Management
The following table, which, except as otherwise noted, was prepared on the
basis of information furnished by the persons described, shows ownership of
ESI's Common Stock as of May 31, 1997, by (i) each Director, (ii) each Executive
Officer named in the summary Compensation Table, (iii) all Directors and
Executive Officers as a group, and (iv) each beneficial owner of more than five
percent of ESI's Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Approximate
Name of Beneficial Owner Beneficial Ownership(1) Percent
- ------------------------ ----------------------- -----------
<S> <C> <C>
David F. Bolender..................................... 52,141(2) *
Larry L. Hansen....................................... 10,237(3) *
Barry L. Harmon....................................... 32,949(4) *
Jonathan C. Howell.................................... 24,345(5) *
Mark W. Klug.......................................... 32,205(6) *
W. Arthur Porter...................................... 7,750(7) *
Joseph Z. Rivlin...................................... 15,401(8) *
Vernon B. Ryles, Jr................................... 250(3) *
Douglas C. Strain..................................... 168,513(9)(3) 1.8%
Keith L. Thomson...................................... 650(3) *
Donald R. VanLuvanee.................................. 89,007(10) *
18 Directors and executive officers 504,132(11) 5.3%
as a group
J & W Seligman & Co., Incorporated.................... 1,291,290(12) 13.6%
100 Park Avenue, New York, NY 10017
The Parnassus Fund.................................... 600,000(13) 6.3%
One Market, Stewart Tower, Ste 1600
San Francisco, CA 94105
EQSF Advisor Incorporated............................. 557,700(14) 5.9%
767 Third Ave, New York, NY 10017
- ------------------------
* Less than 1 percent.
(1) Shares are held directly with sole investment and voting power unless
otherwise indicated. Includes shares awarded as performance-based
restricted stock and time-based restricted stock that are subject to
forfeiture in certain circumstances.
(2) Includes 23,000 shares owned by Mr. Bolender's wife, as to which he
disclaims beneficial ownership and includes 2,203 shares that are subject
to stock options exercisable at May 31, 1997.
(3) Includes 250 shares that are subject to stock options exercisable at May
31, 1997.
41
<PAGE>
(4) Includes 15,920 shares that are subject to stock options exercisable at May
31, 1997.
(5) Includes 11,812 shares that are subject to stock options exercisable at May
31, 1997.
(6) Includes 10,599 shares that are subject to stock options exercisable at May
31, 1997.
(7) Includes 7,750 shares that are subject to stock options exercisable at May
31, 1997.
(8) Includes 5,913 shares that are subject to stock options exercisable at May
31, 1997 or exercisable within 60 days of May 31, 1997.
(9) Includes 14,297 shares owned by Mr. Strain's wife and 216 shares owned by
Douglas C. Strain and Leila Cleo Strain Charitable Remainder Trust, as to
which he disclaims beneficial ownership.
(10) Includes 64,484 shares that are subject to stock options exercisable at May
31, 1997.
(11) Includes 165,147 shares that are subject to stock options exercisable at
May 31, 1997 or exercisable within 60 days of May 31, 1997.
(12) Based solely on information provided as of February 13, 1997 in a Schedule
13G filed by the shareholder.
(13) Based solely on information provided as of February 14, 1997 in a Schedule
13G filed by the shareholder.
(14) Based solely on information provided as of February 13, 1997 in a Schedule
13G filed by the shareholder.
</TABLE>
ESI Executive Compensation
The following table shows, as to the Chief Executive Officer and each of
the next four most highly compensated executive officers of ESI, information
concerning compensation paid for services to ESI in all capacities during the
fiscal year ended May 31, 1997, as well as total compensation paid to each such
individual for ESI's two previous fiscal years (if such person was the Chief
Executive Officer or an executive officer, as the case may be, during any part
of such fiscal year):
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation -------------------------------
Fiscal ------------------------ Restricted Stock Options All Other
Name & Principal Position Year Salary Bonus (1) Awards ($) (2) Granted (#) Compensation (3)
- ------------------------- ------ -------- --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Donald R. VanLuvanee 1997 $285,000 --- $218,500 6,674 $ 2,098
Chief Executive Officer and 1996 $281,212 $235,001 --- 5,681 $ 950
President 1995 $243,892 $208,511 --- 10,750 $ 195,056(4)
Barry L. Harmon 1997 $171,250 --- $201,400 3,430 $ 2,098
Chief Financial Officer and 1996 $156,189 $107,633 --- 3,974 $ 2,022
Sr. Vice President, Finance 1995 $141,636 $ 73,297 --- 4,610 $ 1,837
Mark W. Klug 1997 $157,083 --- $191,900 3,430 $ 2,098
Vice President 1996 $150,233 $ 39,807 --- 3,974 $ 1,922
1995 $142,677 $ 59,977 --- 4,520 $ 1,923
Joseph Z. Rivlin 1997 $228,379(5) --- $ 28,500 3,430 $ 2,098
Vice President 1996 $152,424 $ 27,394 --- 3,974 $ 10,437(6)
1995 $ 72,131 $ 50,058 --- 9,840 $ 3,817(7)
Jonathan C. Howell 1997 $145,760 --- $133,000 3,430 $ 2,098
Vice President 1996 $128,881 $ 63,563 --- 3,974 $ 1,922
1995 $102,536 $ 32,926 --- 2,530 $ 1,923
- -----------------------
(1) As of August 31, 1997 bonuses for fiscal year 1997 performance had not yet
been determined.
(2) Represents the closing market price of ESI's Common Stock on the date of
grant multiplied by the number of shares awarded. Messrs. VanLuvanee,
Harmon, Klug, Rivlin and Howell were awarded 11,500, 10,600, 10,100, 1,500,
and 7,000
42
<PAGE>
restricted shares in fiscal year 1997, respectively. Each award vested for
50% of the shares on April 12, 1997 and will vest for the balance of the
shares on April 12, 1998 if the recipient remains an employee of ESI. At
May 31, 1997, Messrs. VanLuvanee, Harmon, Klug, Rivlin and Howell held
5,750, 5,300, 5,050, 750, and 3,500 unvested restricted shares,
respectively, valued at $218,500, $201,400, $191,900, $28,500, and
$133,000, respectively, based on the closing market price of ESI's Common
Stock on May 31, 1997. Performance- based restricted stock awards are not
shown above, but instead are reported in the Long-Term Incentive Plans
table below.
(3) Except as otherwise indicated, represents 401K matching contributions made
by ESI.
(4) Includes $193,200 in moving and relocation expenses.
(5) Includes $75,046 in commissions.
(6) Includes $8,172 in relocation expenses.
(7) Includes $1,437 in relocation expenses.
</TABLE>
ESI Options Table
The following table sets forth details regarding stock options granted to
the named executive officers in fiscal year 1997. In addition, there are shown
the hypothetical gains or "option spreads" that would exist for the respective
options, assuming rates of annual compound stock appreciation of 5% and 10% from
the date the options were granted over the full option term.
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Annual Rates of Stock
Price Appreciation for
Option Grants in Last Fiscal Year Option Term
- ----------------------------------------------------------------- ----------------------
% of Total
Options
Granted to Exercise
Options Employees in or Base Expiration
Name Granted(1)(#) Fiscal Year Price ($/Sh) Date 5%($) 10%($)
- ---- ------------- ------------- ------------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Donald R. VanLuvanee 6,674 3% $27.125 04/11/07 $113,850 $288,519
Barry L. Harmon 3,430 1% $27.125 04/11/07 $ 58,512 $148,280
Mark W. Klug 3,430 1% $27.125 04/11/07 $ 58,512 $148,280
Joseph Z. Rivlin 3,430 1% $27.125 04/11/07 $ 58,512 $148,280
Jonathan C. Howell 3,430 1% $27.125 04/11/07 $ 58,512 $148,280
- -------------------
(1) All options become exercisable for 25 percent of the shares covered by the
option on each of the first four anniversaries of the grant date. The grant
date for each option shown in the table above was April 11, 1997. All
options become fully exercisable upon termination of the Optionee's
employment within one year after a "change in control" of ESI as defined in
the Stock Option Plan. Unless the transaction is approved by the Board of
Directors, a "change in control" generally includes (a) the acquisition by
any person of 20 percent or more of ESI's Common Stock and (b) the election
of a new majority of ESI's directors without the approval of the incumbent
directors.
</TABLE>
43
<PAGE>
ESI Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information with respect to the named
executive officers concerning options exercised and the status of exercisable
and unexercisable options held as of May 31, 1997.
<TABLE>
<CAPTION>
Options Exercised Value of Unexercised
During Year Number of Unexercised In-the-Money Options
Ended May 31, 1997 Options at May 31, 1997 at May 31, 1997
--------------------------- ---------------------------- -----------------------------
Shares
Acquired Value
Name on Exercise Realized ($) Excisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------ --------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald R. VanLuvanee --- 0 64,484 22,551 $2,450,392 $856,938
Barry L. Harmon --- 0 15,920 11,530 $ 604,960 $438,140
Mark W. Klug --- 0 10,599 11,365 $ 402,762 $431,870
Joseph Z. Rivlin --- 0 4,426 11,639 $ 168,188 $442,282
Jonathan C. Howell --- 0 11,812 9,429 $ 448,818 $358,302
</TABLE>
ESI Long Term Incentive Plans--Awards in Last Fiscal Year
The following table sets forth information with respect to
performance-based restricted stock awards made to named executive officers in
fiscal year 1997.
<TABLE>
<CAPTION>
Performances or Other Period
Name Number of Shares Until Maturation or Payout(1)
- ---- ---------------- -----------------------------
<S> <C> <C>
Donald R. VanLuvanee..................................... 5,335 3 to 5 Years
Barry L. Harmon.......................................... 2,742 3 to 5 Years
Mark W. Klug............................................. 2,742 3 to 5 Years
Joseph Z. Rivlin......................................... 2,742 3 to 5 Years
Jonathan C. Howell....................................... 2,742 3 to 5 Years
- -------------------
(1) The base price for these awards is $27.125 per share, the closing market
price of ESI's Common stock on April 11, 1997, the date of grant. Awards
are subject to forfeiture unless (i) the market price of the Common Stock
increases at a rate in excess of 15% per year, compounded annually, over a
minimum 3-year period following the grant as measured based on the average
closing price of ESI's Common Stock during any one of the 8 fiscal quarters
of ESI between June 1, 2000 and May 31, 2002, and (ii) the award recipient
is employed by ESI at the time the performance measure is achieved.
</TABLE>
Severance Agreements
In July 1991, the Board of Directors of ESI approved ESI's entry into
severance agreements with executive officers of ESI. These agreements generally
provide for the payment upon the termination of the employee's employment by ESI
without cause or by the employee for "good reason" (as defined in the severance
agreement) within two years following a change of control of ESI of an amount
equal to three times the employee's annual salary and three years continued
coverage under life, accident and health plans. The benefit is capped as
necessary to prevent any portion of the benefit from being subject to excise
tax. Each employee is obligated under the severance agreement to remain in the
employ of ESI for a period of 270 days following a
44
<PAGE>
"potential change in control" (as defined in the severance agreements). All
executive officers of ESI have executed severance agreements.
Performance Graph
[graphic line chart depicting indexed stock price performance]
Assumes that $100.00 was invested on May 31, 1992 in Electro Scientific
Industries, Inc. (ESIO) Common Stock, the S&P 500 and the S&P High Tech Index,
and that all dividends were reinvested.
<TABLE>
<CAPTION>
ESIO Index S&P 500 Index S&P High Tech Index
----- ------ ------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
5/31/1992...................... 3.50 100.0 413.35 100.0 199.21 100.0
5/31/1993...................... 9.50 271.4 450.19 108.4 224.22 112.6
5/31/1994...................... 10.50 300.0 465.50 112.1 248.20 124.6
5/31/1995...................... 24.38 696.6 533.40 128.4 354.09 177.7
5/31/1996...................... 26.50 757.1 669.12 161.1 350.00 175.7
5/30/1997...................... 38.00 1085.7 848.28 204.2 653.99 328.3
</TABLE>
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors makes recommendations
to the Board regarding the general compensation policies for ESI, including
salaries and incentives for executive officers. The Committee also has general
authority to make option grants and other awards under ESI's 1989 Stock Option
Plan and 1996 Stock Inventive Plan. The Committee is composed of three
directors.
The Compensation Committee's executive compensation recommendations and
actions during the 1997 fiscal year were in three areas: (1) compensation
adjustments for the chief executive and other executive officers of ESI; (2) the
key employee cash incentive bonus program; and (3) the key employee long-term
incentive program.
The Compensation Committee policies for compensation of ongoing executive
officers are designed to fairly compensate ESI's executives and to provide
incentives for the officers to manage and operate ESI for long-term success. The
Compensation Committee recommends, and the Board of Directors determines based
on such recommendation, compensation for the Chief Executive Officer. The
Compensation Committee also recommends compensation levels for the remaining
executive officers of ESI based on the recommendations of the Chief Executive
Officer.
45
<PAGE>
The total compensation of the executive officers takes into account several
factors, including competitive compensation in the electronics industry,
individual experience and performance, and the performance of ESI. The Committee
does not assign a specific weight to these factors. ESI operates in marketplaces
which are global, cyclical and subject to technology shifts. The Committee's
evaluations of individual performance considers the leadership of each
individual's contribution toward achieving ESI's corporate objectives. The
objectives include: (1) adequate return on, and efficient use of, invested
capital and (2) generating positive earnings throughout the entire range of
business conditions.
The methodology used in determining salary, cash incentive bonus and
long-term incentive grants is as follows:
Target compensation for each executive is set annually by the Compensation
Committee. These targets are based on the results of periodic salary surveys of
comparable-sized companies in the electronics industries conducted by ESI's
independent compensation consultants and on the level of individual
responsibility and job complexity. ESI's target is to pay executives at the
mid-point based on the surveys.
Base salaries are determined annually for each executive officer with
reference to the target level for the individual. Salary increases are given
when warranted by individual performance and when base salary levels are
relatively low as compared to companies that compete with ESI for executive
talent to keep base salaries competitive.
The Chief Executive's base salary was $285,000 during the fiscal year,
representing no change from the prior year and a level at approximately the
mid-point of salary survey data. The Board conducted a performance review of the
President and CEO at its July 1997 meeting, concluding that performance was very
favorable.
Cash incentives in the form of cash bonuses are paid at the discretion of
the Compensation Committee to executive officers who the Committee determines
have made substantial contributions to the profits of ESI in the preceding
fiscal year. At the beginning of each fiscal year, the Board of Directors
approves the business plan for the year, including sales and pre-tax profit
goals. At the same time, the Board of Directors approves a target bonus
percentage for executive officers if the established goals are met. If the goals
are met, the Compensation Committee determines, on an individual basis, the
extent to which the officer will be awarded the target bonus. Factors considered
include individual performance, responsibility and contribution to profits. ESI
met the goals set for fiscal year 1997 and expects to pay bonuses to officers.
ESI has historically used stock options to reward senior management and to
link executive compensation to shareholder interests reflected in increases in
share value. In April 1996, ESI decided to expand the stock incentive program to
include performance-based restricted stock grants as well as stock options,
subject to shareholder approval of the new 1996 Stock Incentive Plan which was
obtained on September 20, 1996. By using a combination of annual options and
restricted stock awards, ESI intends to provide a potential level of incentive
compensation to executive officers equal to approximately 90% of competitive
levels as determined by ESI's compensation consultant, without excessive
shareholder dilution. In determining the size of option grants and restricted
stock awards, the Compensation Committee takes into account the executive's
position and job responsibilities. All options are granted at an exercise price
equal to the fair market value of the shares on the date of grant, and vest in
25 percent annual increments during the four-year period following the date of
grant. The number of options granted to executive officers in fiscal year 1997
was 35,590 including 6,674 to Donald R. VanLuvanee. The number of shares of
performance-based restricted stock granted to executive officers in fiscal year
1997, subject to shareholder approval, was 28,451 including 5,335 to Mr.
VanLuvanee.
During fiscal year 1997, ESI also made restricted stock awards to executive
officers that vest based solely on continued employment with ESI.
46
<PAGE>
These awards were made to make up for prior years in which long-term incentive
compensation award levels were significantly below competitive levels. ESI has
no plan to make additional time-based restricted stock awards to executive
officers.
Deductibility of Compensation. Section 162(m) of the Internal Revenue Code
of 1986 limits to $1,000,000 per person the amount that ESI may deduct for
compensation paid to any of its most highly compensated officers in any year.
The levels of salary and bonus generally paid by ESI do not exceed this limit.
Substantially all of the options granted under ESI's 1989 Stock Option Plan have
been Incentive Stock Options. ESI receives no tax deduction from the exercise of
an Incentive Stock Option unless the optionee disposes of the acquired shares
before satisfying certain holding periods. Under IRS regulations, the $1,000,000
cap on deductibility applies to compensation recognized by an optionee upon such
an early disposition, as well as compensation recognized upon the exercise of a
Nonstatutory Stock Option, unless the option meets certain requirements. It is
ESI's policy generally to grant options that meet the requirements of the IRS
regulations so that any such compensation recognized by an optionee will be
fully deductible. The Committee believes that the grant of Incentive Stock
Options, despite the general nondeductibility, benefits ESI by encouraging the
long-term ownership of Company stock by officers and other employees.
Performance-based restricted stock awards are also intended to be granted in
compliance with the IRS regulations so that any compensation recognized on
vesting of such awards will be fully deductible.
By the Compensation Committee: Keith L. Thomson, Chairman; Larry L. Hansen,
and Vernon B. Ryles, Jr.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Directors Keith L. Thomson, Larry L.
Hansen, and Vernon B. Ryles, Jr. No Compensation Committee member is or has been
an employee of ESI.
ESI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended August 31, 1997 Compared to Three Months Ended August 31,
1996
Revenue of $48.4 million for the quarter ended August 31, 1997 was 33.7% or
$12.2 million higher as compared to the same quarter of the prior year, and was
4.7% or $2.2 million higher than that in the prior quarter. The increase in
revenues was due to higher demand for semiconductor yield improvement and
electronic packaging equipment, coupled with an improved market for capacitor
test and termination equipment.
Gross margin for the three months ended August 31, 1997 decreased to 56.0%
from 57.2% for the same period of the prior year. Increased margins for
semiconductor yield improvement and capacitor test and termination equipment
were more than offset by a decline in margin for circuit fine tuning products
and lower margin Dynamotion products.
Selling, service and administrative expenses were $3.0 million higher for
the three months ended August 31, 1997 than for the first quarter of the prior
year. The increase is due to higher selling commissions associated with
increased sales volumes and higher incentive compensation accruals. Selling
service and administrative expenses, as a percentage of sales, decreased to
25.3% from 25.5%.
Research, development and engineering expenses for the quarter ended August
31, 1997 increased by $0.7 million as compared to the same quarter of the prior
year. Research, development and engineering expenses, as a percentage of sales,
decreased to 10.4% from 12.0% for the first quarter of
47
<PAGE>
fiscal 1997. The comparison between current year and prior year does not include
the acquired in-process research and development charge incurred in connection
with the purchase price allocation of Dynamotion, Corp. In connection with the
purchase price allocation, an analysis of the fair value of the intangible
assets acquired indicated that substantially all of the acquired intangible
assets consisted of research and development projects in process. The
development of these projects had not reached technological feasibility and the
technology has no alternative future use. In accordance with generally accepted
accounting principles, the acquired in-process research and development was
charged to expense during the quarter ended August 31, 1997. ESI currently
believes that the research and development efforts will result in commercially
feasible products in the next 24 months at an estimated additional cost of $2
million.
Net income for the quarter ended August 31, 1997, excluding $11.1 million
in transaction costs associated with the acquisitions of Dynamotion, Corp. and
Chip Star, Inc, was $6.7 million or $0.68 per share compared to $4.6 million or
$0.49 per share for the same period of the prior year. Including acquired
in-process research and development and merger related expenses, a net loss of
$(3.9) million or $(0.39) per share was recorded.
Ending backlog on August 1, 1997 was $30 million, compared to $25 million
on May 31, 1997. Customer demand in each of ESI's served markets is strong and
the products introduced over the last year continue to represent a growing
percentage of sales.
Fiscal Year Ended May 31, 1997 Compared to Fiscal Year Ended May 31, 1996
Revenue for fiscal 1997 was $160.1 million, which was 3.7% or $6.2 million
lower than for fiscal 1996. The decline was due to lower shipments of capacitor
production equipment during the first half of fiscal 1997, as customers absorbed
capacity added in the prior year, and lower sales of circuit fine tuning laser
systems throughout the year. These declines were partially offset by an increase
in laser-based electronics packaging from $4.8 to $10.8 million and smaller
increases in the sales of semiconductor memory yield improvement and vision
systems.
Gross margin of 54.4% for the year ended May 31, 1997, was slightly below
the 54.8% gross margin for fiscal 1996. The sales decline in capacitor
production equipment was the most significant factor causing the decrease in
margin. Increased sales of higher margin semiconductor yield improvement
systems, electronic packaging equipment and machine vision systems positively
affected gross margin.
Selling, service and administrative expenses were $2.6 million lower for
the year ended May 31, 1997. The decrease is a result of lower selling
commissions associated with decreased sales volumes and lower incentive
compensation. Selling, service and administrative expenses decreased as a
percentage of sales to 24.3% from 25.0% from year to year.
Research, development and engineering expenses for the year ended May 31,
1997 were $0.3 million higher than the prior year. Research, development and
engineering expenses increased as a percentage of sales to 10.6% for 1997 from
10.1% for the prior year. The comparison between spending of the current year
and the prior year does not include the acquired in-process research and
development charge of $6.0 million incurred in connection with the purchase
price allocation of XRL, Inc in fiscal 1996.
The effective tax rate of 34.6% for the year ended May 31, 1997 decreased
from 36.7% as a result of an increased benefit recognized on foreign sales.
Net income for the year ended May 31, 1997 was $21.3 million or $2.27 per
share compared to $17.3 million or $1.86 per share for the same period of the
prior year.
48
<PAGE>
Fiscal Year Ended May 31, 1996 Compared to Fiscal Year Ended May 31, 1995
Net sales increased 47.3% or $53.4 million. The increasing electronics
content, complexity and decreasing size of consumer communication devices,
automotive components and computers is directly related to the increased demand
for ESI's products. Sales of semiconductor yield improvement systems more than
doubled. The acquisition of XRL, Inc. in July 1995 contributed $18.9 million
toward the increase in semiconductor yield improvement sales. Increased volume
and a more favorable product mix of capacitor manufacturing products and circuit
fine tuning systems also contributed significantly to the revenue growth. ESI's
emerging electronic packaging business reported modest growth.
Gross margin increased from 52.8% for fiscal 1995 to 54.8% as a result of
increased volume of semiconductor yield improvement equipment sold, increased
sales of higher margin circuit fine tuning systems, and productivity
improvements in the capacitor carrier plate manufacturing process.
Selling, service and administrative expenses decreased as a percentage of
sales to 25.0% from 25.8% for fiscal 1996 compared to the same period of the
prior year. Selling, service and administrative expenses increased $12.5 million
compared to the prior year as a result of higher selling commissions, travel
associated with increased sales levels, salaries and employee incentive
compensation.
Research, development and engineering expenses increased $3.3 million for
the year ended May 31, 1996 compared to the prior year. Increased product
development efforts resulted in additional project material costs and
compensation related to new hires. Engineering costs associated with XRL also
contributed to the increase. Research, development and engineering expenses
declined as a percentage of sales to 10.1% for fiscal 1996 from 11.9% for the
prior year as sales grew faster than spending increases.
The acquired in-process research and development expense of $6.0 million
occurred in connection with the purchase price allocation of XRL, Inc. An
analysis of the fair value of intangible assets acquired indicated that
substantially all of the acquired intangible assets consisted of research and
development in process. In accordance with generally accepted accounting
principles, the acquired in-process research and development was expensed during
the first quarter ended August 31, 1995.
The effective tax rate of 36.7% for the year ended May 31, 1996 increased
from 30.1% for the prior year as a result of utilizing tax loss and credit
carryovers in fiscal 1995.
Net income for the year ended May 31, 1996 was $17.3 million or $1.86 per
share compared to $12.2 million or $1.49 per share for the prior year. Net
income per share, excluding the effect of the acquired in-process research and
development charge of $6.0 million, was $2.27 in fiscal 1996, a 52.3% increase
over the prior year.
Financial Condition and Liquidity
ESI's principal sources of liquidity are existing cash and cash equivalents
and marketable debt securities of $44.6 million, accounts receivable of $49.9
million, and a $7.0 million line of credit, none of which was outstanding at
August 31, 1997. ESI has no debt and a current ratio of 7.0:1. Working capital
increased to $117.6 million at August 31, 1997, from $116.6 million at May 31,
1997. Inventory increased by $6.1 million from the May 31, 1997 level due to
inventories acquired in the purchase of Dynamotion, Corp.
At May 31, 1997 ESI had cash, cash equivalents and marketable debt
securities of $45.7 million, accounts receivable of $50.9 million, and a $7.0
million line of credit, none of which was outstanding at May 31, 1997. ESI had
no debt and a current ratio of 8.4:1 as of May 31, 1997. Working capital
increased to $116.6 million at May 31, 1997, from $94.4 million at May 31, 1996.
Accounts receivable increased as product payment terms are longer for the
recently introduced models 9300, 5100 and 3300. Current liabilities
49
<PAGE>
decreased from May 31, 1996 due to acceleration of income tax payments and
reduced incentive compensation accruals.
In June 1997, ESI closed two mergers, Dynamotion / ATI Corp. and Chip Star,
Inc. Both of these companies operate from a single location in Southern
California and develop and sell capital equipment that is complementary to
existing ESI markets and customers. Refer to Business Environment in the Notes
to Consolidated Financial Statements for additional information.
The total consideration for both mergers was 1,047,000 shares of ESI stock.
In addition, Dynamotion debt liabilities of approximately $11.0 million were
liquidated immediately after the merger was closed with ESI's existing
resources. Debt liabilities are not expected to be used to finance future
Dynamotion working capital requirements.
Production capacity for these acquired businesses is expected to be
satisfied from existing facilities, which are leased, or their replacement.
In connection with ESI's Portland based operations, ESI is undertaking
renovations to improve space utilization and may consider the lease or purchase
of additional facilities to satisfy growth potential. The fiscal 1998 capital
expenditures are expected to increase approximately 50.0% over the level
incurred during the past three years due to these renovations and will be
satisfied with existing cash resources. ESI may acquire or invest in other
complementary businesses, product lines or technologies. These acquisitions or
investments may require additional debt or equity capital to fund such
activities.
A summary of cash flow activities is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Cash flows provided by (used in):
Operating activities $10,110 $11,815 $ 511
Investing activities 1 (13,705) (5,017) (21,537)
Financing activities 2 1,796 1,246 24,324
------------------------------------------
Increase (decrease) in cash
and cash equivalents 3 $(1,799) $ 8,044 $ 3,298
==========================================
1 Reflects the net purchase of $9.5 million, $1.1 million, and $17.0 million
in marketable debt securities during fiscal 1997, 1996, and 1995,
respectively.
2 Reflects net proceeds from stock offering in fiscal 1995.
3 Total cash and securities increased from $38.0 million on May 31, 1996 to
$45.7 million on May 31, 1997.
</TABLE>
Operating Activities: Operating activities provided $10.1 million in cash.
The increase in trade receivables of $11.6 million is due to longer product
payment terms for the recently introduced models 9300, 5100 and 3300. Collection
of receivables in June 1997 reduced this balance by approximately $10.0 million.
The decrease in accrued liabilities of $4.1 million is a function of lower
incentive compensation and an acceleration of income tax payments.
Investing Activities: Net cash of $13.7 million was used in investing
activities. ESI made purchases in the amount of $3.5 million to upgrade
computing resources and improve manufacturing capabilities by investing in
equipment that will decrease costs and improve quality. In addition, net
purchases of highly liquid marketable debt securities utilized $9.5 million.
50
<PAGE>
Financing Activities: Net cash of $1.8 million was generated from financing
activities in the form of stock option exercises and the related tax benefit.
Factors That May Affect Future Results
ESI's business depends in large part upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors,
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 cyclical
and have historically experienced periodic downturns, which often have had a
negative effect on the demand for capital equipment such as that sold by ESI.
Several large, multinational electronics companies constituted 47.1% of ESI's
fiscal 1997 sales and therefore, the loss of any of these customers would be
significant.
The market for ESI's products is characterized by rapidly changing
technology and evolving industry standards. 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 may cause customers to defer
or forego ordering products from ESI's existing product lines.
International shipments accounted for 71.0% of sales for fiscal 1997
compared to 66.9% of sales for fiscal 1996. International shipments accounted
for 55% of first quarter sales for fiscal 1998 compared to 70% for the first
quarter of fiscal 1997. ESI expects that international shipments will continue
to represent a majority of net sales in the future. As a result, a significant
portion of ESI's net sales will be subject to certain risks, including changes
in demand resulting from fluctuations in interest and currency exchange rates,
as well as factors such as government financed competition, changes in trade
policies, tariff regulations, difficulties in obtaining US export licenses and
the difficulties of staffing and managing foreign operations.
Most of ESI's sales are transacted in dollars and ESI's products are made
in the United States. Many Japanese customers pay in yen; therefore, ESI hedges
these sales transactions to mitigate currency risks. The European and Asian
sales subsidiaries' operating expenses are denominated in their respective local
currencies. These transactions represent approximately 15.6% of fiscal 1997
consolidated operating expenses, and 8.5% of total operating expenses for the
first quarter of fiscal 1998, and are equally split between Europe and Asia.
Changes in the value of the local currency, as measured in US dollars, will
commensurably increase or decrease operating expenses.
ESI believes that it has the product offerings and resources needed for
continuing success; however, future revenue and margin trends cannot be reliably
predicted and may cause ESI to adjust its operations. Factors external to ESI
can result in volatility of ESI's common stock price. Because of the foregoing
factors, recent trends should not be considered reliable indicators of future
stock prices or financial results.
Information in the Management Discussion and Analysis regarding
expectations for future product demand, customers, international shipments and
future product offerings and resources constitute forward-looking statements
that involve a number of risks and uncertainties. In addition, ESI may from time
to time issue other forward-looking statements. The following factors are among
the factors that could cause actual results to differ materially from the
forward-looking statements: general economic conditions, including their impact
on capital expenditures; business conditions in the electronics industry,
including the cyclical nature of the market for ESI's products; rapidly changing
technology and evolving industry standards; availability and continued validity
of intellectual property protection; competitive factors, including increased
competition, new product offerings by competitors and
51
<PAGE>
price pressures; availability of supplies from third party suppliers on a timely
basis and at reasonable prices; and international business conditions, including
fluctuations in interest and currency exchange rates, government financed
competition, changes in trade policies, tariff regulations, and the difficulties
of staffing and managing foreign operations. The forward-looking statements
should be considered in light of these factors.
DESCRIPTION OF ESI CAPITAL STOCK
The authorized capital stock of ESI consists of 40,000,000 shares of Common
Stock, without par value, and 1,000,000 shares of No Par Serial Preferred Stock.
Common Stock
Holders of Common Stock are entitled to one vote per share on any matter
submitted to the stockholders and do not have cumulative voting rights. The
Common Stock is not redeemable or convertible and the stockholders do not have
any preemptive right to purchase any securities to ESI. Subject to the rights of
any holders of Preferred Stock, the holders of Common Stock are entitled to
receive dividends as and when declared by the Board of Directors of ESI out of
funds legally available therefor and to share pro rate in any distribution to
stockholders. Upon dissolution or liquidation of ESI, subject to the rights of
the holders of any shares of Preferred Stock, the holders of Common Stock are
entitled to receive ratably all of the assets legally available for
distribution to stockholders. All outstanding shares of Common Stock are
fully paid and nonassessable.
ESI's Third Restated Articles of Incorporation (the "Articles of
Incorporation") require the affirmative vote of 66 2/3 percent of the shares
entitled to vote thereon in connection with the removal of any Director of ESI
without cause or any amendment to the Articles of Incorporation relating to such
requirement. ESI's Articles of Incorporation also require, in certain cases, the
affirmative vote of 66 2/3 percent of ESI's voting stock to approve a Business
Transaction between ESI (or a company controlled by or under common control with
ESI) and any person who owns 25 percent or more of ESI's voting stock (a
"Related Person") or any Business Transaction in which a Related Person has an
interest (except proportionately as a stockholder of ESI). for this purpose, a
Business Transaction is defined to include mergers, acquisitions, or sales of 15
percent or more of the assets of ESI, and other similar arrangements. The
provision is not applicable if the proposed transaction is approved by a
majority of ESI's Continuing Directors (defined as the Board of Directors as of
August 22, 1983 and certain future Board members) or if the consideration to be
received by ESI's stockholders is not less than the highest purchase price paid
for other shares acquired by the Related Person in the previous two years. These
provisions of the Articles of Incorporation may not be amended, altered,
changed, or repealed except by the affirmative vote of at least 66 2/3 percent
of ESI's voting stock.
Preferred Stock
No shares of Preferred Stock are outstanding. Such shares may be issued
from time to time at the discretion of the Board of Directors, without
stockholder approval. The Board of Directors is authorized to issue such shares
in different series and, with respect to each series, to determine the dividend
rate, the redemption provisions, conversion provisions, liquidating preferences,
and such other rights and privileges not in conflict with ESI's Articles of
Incorporation and any qualifications, limitations, or restrictions on such
shares. The Board of Directors authorized Series A No Par Preferred Stock in
connection with the adoption of a Shareholder Rights Agreement, as described
below.
Rights Agreement
On May 12, 1989, the Board of Directors of ESI declared a dividend of one
Right for each outstanding share of ESI's Common Stock to shareholders of record
at the close of business on June 23, 1989. Each Right entitles the
52
<PAGE>
registered holder to purchase from ESI one one-hundredth of a share of Series A
No Par Preferred Stock (the "Preferred Stock") at a Purchase Price of $55,
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement (the "Rights Agreement") between ESI and United States
National Bank of Oregon, as Rights Agent.
Initially, the Rights will be attached to the certificates representing
outstanding shares of Common Stock, and no separate Rights Certificates will be
distributed. The Rights will separate from the Common Stock and a Distribution
Date will occur upon the earlier of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired, or obtained the right to acquire from shareholders,
beneficial ownership of 20 percent or more of the outstanding Common Stock (the
"Stock Acquisition Date"), (ii) 10 business days following the commencement of a
tender offer or exchange offer that would result in a person or group
beneficially owning 20 percent or more of such outstanding shares of Common
Stock, or (iii) 10 business days after the Board of Directors of ESI shall
declare any person to be an Adverse Person, upon a determination that such
person, alone or together with its affiliates and associates, has become the
beneficial owner of an amount of Common Stock which the Board of Directors
determines to be substantial (which amount shall be more than 10% of the shares
of Common Stock then outstanding) and a determination by at least a majority of
the Board of Directors who are not officers of ESI, after reasonable inquiry and
investigation, including consultation with such persons as such directors shall
deem appropriate, that (a) such beneficial ownership by such person is intended
to cause ESI to repurchase the Common Stock beneficially owned by such person or
to cause pressure on ESI to take action or enter into a transaction or series of
transactions intended to provide such person with short-term financial gain
under circumstances where the Board of Directors determines that the best
long-term interests of ESI and its stockholders would not be served by taking
such action or entering into such transactions or series of transactions at that
time or (b) such beneficial ownership is causing or reasonably likely to cause a
material adverse impact (including, but not limited to, impairment of
relationships with customers or impairment of ESI's ability to maintain its
competitive position) on the business or prospects of ESI.
Until the Distribution Date, (i) the Rights will be evidenced by and will
be transferred with and only with such Common Stock certificates, (ii) new
Common Stock certificates issued after June 23, 1989 will contain a legend
incorporating the Rights Agreement by reference, and (iii) the surrender for
transfer of any certificates for Common Stock will also constitute the transfer
of the Rights associated with the Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on May 12, 1999, unless earlier redeemed by ESI as
described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution. Date, and thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only shares of Common Stock issued prior to the
Distribution Date or issued upon exercise or conversion of rights, warrants,
options or convertible securities issued prior to the Distribution Date will be
issued with Rights.
In the event that (i) the Board of Directors determines that a person is an
Adverse Person or (ii) any person acquires more than 20 percent of the Common
Stock (except pursuant to a tender offer or exchange offer approved by a
majority of the Continuing Directors of ESI as in the best interests of
shareholders), each holder of a Right shall thereafter have the right to
receive, upon exercise, shares of Common Stock of ESI (or, in certain
circumstances, cash, property or other securities of ESI) having a value equal
to two times the exercise price of the Right. However, Rights are not
exercisable following the occurrence of the event set forth in (ii) above until
such time as the Rights are no longer redeemable by ESI as set forth
53
<PAGE>
below. Notwithstanding any of the foregoing, following the occurrence of the
event set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by an
Acquiring Person will be null and void.
For example, at an exercise price of $55 per Right, each Right not owned by
the Acquiring Person or Adverse Person (or by certain related parties or
transferees) following the event set forth in the preceding paragraph would
entitle its holder to purchase $110 worth of Common Stock (or other
consideration, as noted above) for $55. Assuming that the Common Stock had a per
share value of $13.75 at such time, the holder of each valid Right would be
entitled to purchase 8 shares of Common Stock for $55.
In the event that, at any time following the Stock Acquisition Date, (i)
ESI is acquired in a merger or other business combination transaction in which
ESI is not the surviving corporation or in which the Common Stock is exchanged
for stock or other securities or property (other than a merger which follows a
tender offer or exchange offer approved by the Continuing Directors as described
in the second preceding paragraph), or (ii) 50 percent or more of ESI's assets
or earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, common stock of the acquiring company having a
value equal to two times the exercise price of the Right. The events set forth
in this paragraph and in the second preceding paragraph are referred to as the
"Triggering Events."
The Purchase Price payable, and the number of one one-hundredths of a share
of Preferred Stock or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Preferred Stock or the Common Stock, (ii) if holders of
the Preferred Stock are granted certain rights or warrants to subscribe for
Preferred Stock or convertible securities at less than the current market price
of the Preferred Stock, (iii) if holders of Common Stock are granted certain
rights or warrants to subscribe for Common Stock or convertible securities at
less than the current market price of the Common Stock, or (iv) upon the
distribution to holders of Preferred Stock or Common Stock of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price or the number
of shares of Preferred Stock issuable upon exercise of a Right will be required
until cumulative adjustments would require an increase or decrease of at least 1
percent. No fractional shares of Preferred Stock will be issued and, in lieu
thereof, an adjustment in cash will be made based on the market price of the
Preferred Stock on the last trading date prior to the date of exercise.
At any time until a determination that any person is an Adverse Person or
10 days following the Stock Acquisition Date, ESI may redeem the Rights in
whole, but not in part, at a price of $.01 per Right. Immediately upon the
action of the Board of Directors, with the concurrence of the Continuing
Directors, ordering redemption of the Rights, the Rights will terminate and the
only right of the holders of Rights will be to receive the $.01 redemption
price.
The term "Continuing Director" means a director who either was a member of
the Board of Directors of ESI immediately prior to the date of the Rights
Agreement or who subsequently became a director of ESI and whose election, or
nomination for election by ESI's shareholders, was approved by a vote of a
majority of the Continuing Directors.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of ESI, including, without limitation, the right to vote
or to receive. dividends. While the distribution of the Rights will not be
taxable to shareholders or to ESI, shareholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
54
<PAGE>
exercisable for Common Stock (or other consideration) of ESI or for common stock
of the acquiring company as set forth above.
The Preferred Stock will be non-redeemable and will rank on a parity in
respect of the preference as to dividends an the distribution of assets with all
other classes or series of ESI's preferred stock. Each share of Preferred Stock
will be entitled to an aggregate of 100 times the cash and non-cash (payable in
kind) dividends-and distributions (other than dividends and distributions
payable in Common Stock) declared on ESI's Common Stock. In the event of
liquidation, the holders of Preferred Stock will be entitled to receive a
liquidation payment in an amount equal to 100 times the payment made per share
of Common Stock, plus an amount equal to declared and unpaid dividends and
distributions thereon. In the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each share of
Preferred Stock will be entitled to receive 100 times the amount received per
share of Common Stock. The dividend and liquidation rights of the Preferred
Stock are protected by antidilution provisions. Except as otherwise provided by
law, the Preferred Stock is not entitled to vote on matters submitted to the
shareholders.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors with the concurrence of the Continuing Directors prior to the
Distribution Date. After the Distribution Date, the provisions of the Rights
Agreement may be amended by the Board with the concurrence of the Continuing
Directors in order to cure any ambiguity, to make changes which do not adversely
affect the interests of holders of Rights (excluding the interests of any
Acquiring Person), or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption may be made at such time as the Rights are not redeemable.
As long as the Rights are attached to the Common Stock, ESI will issue one
Right with each share of Common Stock that becomes outstanding on or after June
23, 1989 so that all shares of Common Stock will have attached Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire ESI on terms
not approved by the Board of Directors unless the offer is conditioned on a
substantial number of Rights being acquired. Thus, the Rights are intended to
encourage persons who may seek to acquire control of ESI to initiate such an
acquisition through negotiations with the Board of Directors. However, the
effect of the Rights may be to discourage a third party from making a partial
tender offer or otherwise attempting to obtain a substantial equity position in
the equity securities of, or seeking to obtain control of, ESI. To the extent
any potential acquirers are deterred by the Rights, the Rights may have the
effect of preserving incumbent management in office. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors, with the concurrence of a majority of the continuing Directors, since
the Rights may be redeemed for $.0l per Right by the Board of Directors, with
the concurrence of the Continuing Directors, in the circumstances described
above.
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.
55
<PAGE>
AISI technology provides a 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. Growth in the
machine vision market 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 growing. 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
less than 0.25 microns are under development. To package 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
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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. 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 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
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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.
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.
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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>
Nine Months Ended
September 30,
Year Ended December 31, (unaudited)
----------------------------------- --------------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales ................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of vision system sales............ 36.1 44.1 59.9 50.6 44.1
----- ----- ----- ----- -----
Gross profit .......................... 63.9 55.9 40.1 49.4 55.9
----- ----- ----- ----- -----
Operating expenses:
Selling, general and
administrative expenses ............... 27.2 20.9 24.9 23.5 16.6
Research, development and
engineering expenses .................. 27.0 20.0 30.5 28.3 21.7
----- ----- ----- ----- -----
Total operating expenses .............. 54.2 40.9 55.4 51.8 38.3
----- ----- ----- ----- -----
Operating income (loss) ............... 9.7 15.0 (15.3) (2.4) 17.6
Interest Income ....................... 0.1 0.1 0.7 0.6 0.4
Interest Expense ...................... (0.5) (0.3) (0.1) (0.1) (0.1)
Other income (expense) ................ 1.5 (0.2) (4.1) 0.0 0.0
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes ......................... 10.8 14.6 (18.8) (1.9) 17.9
Provision for income taxes ............ 0.6 1.9 0.3 0.4 1.4
----- ----- ----- ----- -----
Net income (loss) ..................... 10.2% 12.7% (19.1%) (2.3%) 16.5%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Sales
Sales increased 63.3% to $22.1 million in the nine months ended September
30, 1997 from $13.5 million in the nine months ended September 30, 1996. This
increase was primarily attributable to a 64.5% increase in system sales volumes.
The increase in sales volumes was partially offset by lower average sales
prices. International sales decreased to 10.6% of sales in the nine months ended
September 30, 1997 from 15.1% of sales in the nine months ended September 30,
1996.
The following table sets forth the components of AISI's sales:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1997
------- -------
(unaudited)
(in thousands)
<S> <C> <C>
Sales:
Vision system sales ........................................... $13,389 $22,023
Development funding and software sales ........................ 141 73
------- -------
Total sales............................................... $13,530 $22,096
======= =======
</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 nine months of 1997 increased $8.8 million or
87.0% over the same period of the prior year.
Development funding and software sales. Revenues recorded from development
funding and software sales during the nine months ended September 30, 1997 and
the nine months ended September 30, 1996 represent the revenues from several
sales to existing customers.
59
<PAGE>
Gross Profit. The following table sets forth AISI's vision system sales and
gross profit from vision system sales:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1997
------- -------
(unaudited)
(in thousands)
<S> <C> <C>
Vision system sales ................................................ $13,389 $22,023
Cost of vision system sales ........................................ 6,842 9,733
------- -------
Vision system gross profit ......................................... $ 6,547 $12,290
Vision system gross profit as a percentage
of vision system sales ............................................ 48.9% 55.8%
</TABLE>
Vision system gross profit as a percentage of vision system sales increased
to 55.8% in the nine months ended September 30, 1997 from 48.9% in the nine
months ended September 30, 1996. This improvement in gross profit margin is
primarily attributable to product mix issues resulting from increased shipments
of LANTERN products and decreased costs of components used in two main product
lines. AISI expects to maintain the current level of gross margin.
Research, Development and Engineering Expense
Research, development and engineering expenses increased 25.3% to $4.8
million or 21.7% of sales in the nine months ended September 30, 1997 from $3.8
million or 28.3% of sales in the nine months ended September 30, 1996. This
expense increase is attributable to an increase in engineering personnel and
increased development cost related to new products.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 15.4% to $3.7
million or 16.6% of revenues in the nine months ended September 30, 1997 from
$3.2 million or 23.5% of sales in the nine months ended September 30, 1996. This
expense increase is attributable to the accrual of a management bonus in 1997,
versus no bonus accrual in 1996.
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, 1994, 1995 and 1996
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 $7.8 million or 52.5% from 1994 to 1995, and decreased
$6.0 million or 26.4% from 1995 to 1996. The decline from 1995 to 1996 was
reflective of an industry-wide slowdown in capital equipment purchases for
semiconductor and electronics manufacturing which began in early 1996. This
slowdown began to turn around in early 1997, as evidenced by the 63.3% increase
in sales for the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996, as noted above. International sales as a
percentage of total sales declined from 27.0% in 1994 to 12.9% in 1995, and rose
to 15.0% in 1996. The amount of sales recorded from international sources has
historically been related to the level of development funding and software sales
recorded.
60
<PAGE>
The following table sets forth the components of AISI's sales:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Sales:
Vision system sales ............................................. $ 12,715 $ 22,046 $ 16,364
Development funding and software sales .......................... 2,089 533 246
-------- -------- --------
Total sales ................................................. $ 14,804 $ 22,579 $ 16,610
======== ======== ========
</TABLE>
Vision system sales. AISI's significant increase in revenues from 1994 to
1995 was due primarily to an increase in unit shipments partially offset by a
decrease in the average selling price of each unit. The decrease from 1995 to
1996 resulted from the industry-wide slowdown as discussed above. Product sales
to AISI's two largest customers rose $8.3 million from 1994 to 1995, and
declined $4.6 million from 1995 to 1996.
Development funding and software sales. Revenues from development services
and software sales in 1994 principally represents revenues recorded from
projects with two customers. In 1995 and 1996, revenues were derived from
several projects. Development funding from 1994 to 1995 decreased significantly
due to the completion of a major program in 1994. This program generated over $2
million in revenue in 1994. Product sales are AISI's primary source of revenue.
Development funding is expected to continue to vary significantly from year to
year.
Gross Profit
The following table sets forth AISI's system sales and gross profit from
system sales:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Vision system sales ............................................... $ 12,715 $ 22,046 $ 16,364
Cost of vision system sales........................................ 5,337 9,959 9,943
-------- -------- --------
Vision system gross profit ........................................ $ 7,378 $ 12,087 $ 6,421
Vision system gross profit as a percentage
of vision system revenues ........................................ 58.0% 54.8% 39.2%
</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 1994 to 1995 was
primarily attributable to increased costs on two proprietary components used on
the 3000 family of products. These products accounted for 87.9% and 87.7% of
system revenues in 1994 and 1995, respectively. In 1994, the Company also
introduced the LANTERN product family, developed to replace the 3000 product
family. This product transition had some impact upon system gross margin, as
margins on the initial production versions of the LANTERN products which were
shipped in 1994 and 1995 had lower margins than the 3000 products. Revenues
derived from the LANTERN product family accounted for 11.6% and 12.3% of system
revenues in 1994 and 1995, respectively. Vision system gross profit was also
negatively impacted by increases to warranty and inventory reserves in
anticipation of the complete crossover to LANTERN products.
The decline in vision system gross profit margins from 1995 to 1996 was
primarily attributable to a $1.2 million inventory valuation allowance recorded
for the 3000 product family of vision computers which was nearing the end of its
product life cycle. System gross profit in 1996 was also negatively impacted by
a $200,000 increase to warranty reserves due to the failure of a purchased
component part, and a less favorable product shipment mix.
61
<PAGE>
The 3000 family of vision systems accounted for 87.9%, 87.7% and 44.8% of
system revenues in 1994, 1995 and 1996, respectively. The discontinuations of
these products did not have an adverse impact on total revenue or operating
income in these years since the discontinued products were replaced with the
1994 introduction of the LANTERN family of vision computers discussed above. Nor
is the discontinuation of the 3000 product family expected to have any adverse
impact upon future revenue or results from operations. Revenues derived from the
LANTERN product family accounted for 11.6%, 12.3% and 55.0% of system revenues
in 1994, 1995 and 1996, respectively.
Research, Development and Engineering Expense
Research, development and engineering expenses increased $0.5 million or
12.9% from 1994 to 1995 and $0.5 million or 12.3% from 1995 to 1996. However,
such costs decreased as a percentage of total revenues from 27.0% in 1994 to 20%
in 1995, and increased to 30.5% in 1996. The increase in research, development
and engineering expense from 1994 to 1995, and from 1995 to 1996, was
attributable to increased staffing and component parts purchases 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.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $4.1 million, $4.7
million and $4.1 million representing 27.5%, 20.9% and 24.9% of total sales in
1994, 1995 and 1996, respectively. The increase in selling, general and
administrative expense from 1994 to 1995 was due to increased staffing and
accelerated amortization of capitalized patent and trademark costs. During 1995
the Company reviewed the carrying values of its patent intangibles. In view of
rapid technological changes in the business, management concluded these assets
were not recoverable and recorded a pre-tax expense of approximately $149,000 to
write them down. The decrease from 1995 to 1996 was due to the absence of patent
amortization in 1996 as the balance was fully amortized in 1995, and lower third
party commissions and lower increases to the allowance for doubtful accounts
both as a result of the lower level of revenue in 1996.
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 $5.5 million as of September 30, 1997. Principal sources of
liquidity at September 30, 1997 consisted of $4.2 million in cash and a lease
line availability of $1.7 million. AISI had a $3 million revolving, unsecured
line of credit under a loan agreement with a commercial bank, which expired on
September 30, 1997. Renewal of the agreement has been approved by the bank but
has not yet been executed by AISI. The renewed agreement would contain financial
covenants and restrictions relating to various matters. Net worth requirements
in the loan agreement could restrict AISI's ability to pay dividends to its
shareholders. AISI has not paid dividends at any time in the past and has no
present intention to pay dividends at any time in the foreseeable future.
Net cash provided by operating activities was $0.4 million, $3.2 million,
and $1.4 million for 1994, 1995, and 1996, respectively, and $3.8 million for
the nine months ended September 30, 1997. The increase in cash generated from
operations from 1994 to 1995 was primarily due to higher net income, and the
decrease in cash generated from operations
62
<PAGE>
from 1995 to 1996 was due to the loss experienced in 1996. The increase in cash
from 1996 to 1997 was primarily due to the operating cash flows generated by
AISI.
Net cash used for investing activities was $1.4 million, $1.2 million, and
$1.4 million in 1994, 1995 and 1996, respectively, and $0.8 million for the nine
months ended September 30, 1997. In 1994 and 1995, cash used for investing
activities consisted primarily of capital equipment purchases, primarily for
computers and manufacturing equipment. In 1996, the cash used for investing
activities consisted primarily of leasehold improvements and furniture and
fixture purchases, due to the move to a new location.
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. In 1996 the $0.2 million used for financing activities was
largely offset by the exercise of stock options, resulting in net cash used for
financing activities of $2,700. Net cash provided by financing for the first
nine months of 1997 is $0.4 million.
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.
AISI is introducing a new, single board VME vision system which is expected
to improve gross margins after successful integration by major customers. The
extent of the impact on gross margins from volume shipments of products will
depend heavily upon the product mix and timing of the completion of the
engineering process.
AISI has recently adopted an outsourcing strategy for the assembly of its
existing vision products. Currently, one contract manufacturer is 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 its contract manufacturer. 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 1997; 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:
86% of AISI's sales for the nine months ended September 30, 1997 were derived
from two OEM customers. In 1994, 1995 and 1996 AISI's
63
<PAGE>
two largest customers in each year accounted for approximately 61.4%, 76.9% and
76.5% 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. Operating results for 1996 compared to 1995 and 1997 are
evidence of the impact of such changes. Because of this uncertainty, the Company
is unable to conclude that it is more likely than not that they will realize the
benefit of the net operating loss carryforwards and therefore, the Company has
provided a full valuation allowance on its deferred tax assets related to its
net operating loss carryforward. However, the Company believes it has adequate
liquidity in place to sustain its operations in the short term.
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 September 1, 1997, there were 3,690,943 shares of AISI Common
Stock outstanding held by 273 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.
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, provided
that the the payment of any such dividends does not violate net worth
requirements in AISI's loan agreement with National Bank of Detroit. 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.
AISI VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
AISI Common Stock is the only outstanding authorized voting security of
AISI. On September 1, 1997 there were 3,690,943 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 September 1, 1997 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.
64
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership(1)(2)
Name and Address of Beneficial Owner Shares Percent
- ------------------------------------ ------- -------
<S> <C> <C>
Morgenthaler Venture Partners I (3) 445,967 12.1%
Morgenthaler Venture Partners II (3) 563,009 15.3%
700 National City Bank Building
Cleveland, Ohio 44114
State of Michigan 626,435 17.0%
Department of the Treasury
P.O. Box 15128
Lansing, Michigan 48901
Michigan Strategic Fund 400,000 10.8%
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 13.8%
P.O. Box 169
Midland, Michigan 48640
James E. Anderson (4) 184,397 4.8%
Jon G. Ehrmann (5) 113,364 3.0%
Hwei-Kai Hsi (6) 96,500 2.6%
Yvette M. Puskarich (7) 26,750 0.7%
Donald D. Redding (8) 32,833 0.9%
Philip H. White (9) 41,250 1.1%
Stephen S. Wilson (10) 138,888 3.6%
W. Dale Compton 15,000 0.4%
All executive officers and directors as a group (10 individuals)(11) 1,158,612 31.4%
(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 September
1, 1997 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 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 3,690,943 shares of AISI
Common Stock outstanding on September 1, 1997.
(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 183,733 shares issuable upon exercise of options that are
exercisable within 60 days of September 1, 1997.
(5) Includes 76,833 shares issuable upon exercise of options that are
exercisable within 60 days of September 1, 1997.
(6) Includes 64,500 shares issuable upon exercise of options that are
exercisable within 60 days of September 1, 1997.
65
<PAGE>
(7) Includes 26,750 issuable upon exercise of options that are exercisable
within 60 days of September 1, 1997.
(8) Includes 32,833 shares issuable upon exercise of options that are
exercisable within 60 days of September 1, 1997.
(9) Includes 41,250 shares issuable upon exercise of options that are
exercisable within 60 days of September 1, 1997.
(10) Includes 120,733 shares issuable upon exercise of options that are
exercisable within 60 days of September 1, 1997.
(11) Includes an aggregate of 546,632 shares issuable upon exercise of options
held by officers and directors that are exercisable within 60 days of
September 1, 1997.
</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 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
66
<PAGE>
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 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.
67
<PAGE>
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
dissenters' rights if (a) the stock affected is either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers
or (b) such shareholders receive cash or shares (or any combination thereof) and
such shares, if any, are either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers.
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.
68
<PAGE>
(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.
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
69
<PAGE>
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 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
70
<PAGE>
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 ss.ss. 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 662/3% 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 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
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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.
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, A Legal Professional
Association, 500 First National Tower, Akron, Ohio 44308-1471.
EXPERTS
The audited consolidated financial statements of ESI included in this
Prospectus/Information Statement and elsewhere in the Registration Statement
have been audited by 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.
The audited financial statements of AISI included in this
Prospectus/Information Statement and elsewhere in the Registration Statement
have been audited by 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.
72
<PAGE>
SHAREHOLDER PROPOSALS
If the Merger is consummated, shareholders of AISI will become shareholders
of ESI. ESI's 1998 annual meeting of shareholders will take place in September
1998. Any shareholder proposals to be considered for inclusion in proxy material
for ESI's annual meeting in September 1998 must have been received at the
principal executive office of ESI no later than April 13, 1998.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
APPLIED INTELLIGENT SYSTEMS, INC.
Report of Independent Public Accountants.................................F-2
Balance Sheets as of December 31, 1995 and 1996 and
September 30, 1997 (unaudited) ..........................................F-3
Statements of Operations for the years ended December 31, 1994,
1995 and 1996 and for the nine months ended September 30, 1996
(unaudited) and 1997 (unaudited).........................................F-4
Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1997 (unaudited).....................................F-5
Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996 and for the nine months ended September 30, 1996
(unaudited) and 1997 (unaudited).........................................F-6
Notes to Financial Statements............................................F-7
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Report of Independent Public Accountants................................F-17
Consolidated Balance Sheets as of May 31, 1996 and 1997
and for the three months ended August 31, 1997..........................F-18
Consolidated Statements of Income for the years ended
May 31, 1995, 1996 and 1997 and for the three months
ended August 31, 1996 and 1997..........................................F-19
Consolidated Statements of Shareholder's Equity for the
years ended May 31, 1995, 1996 and 1997 and for the
three months ended August 31, 1997......................................F-20
Consolidated Statements of Cash Flows for the years
ended May 31, 1995, 1996 and 1997 and for the three months
ended August 31, 1997...................................................F-21
Notes to Consolidated Financial Statements..............................F-23
F-1
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
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, 1996 and 1995, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applied Intelligent Systems,
Inc. as of December 31, 1996 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Ann Arbor, Michigan,
September 26, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENT SYSTEMS, INC.
BALANCE SHEETS
(in thousands)
December 31, September 30,
1995 1996 1997
-------- -------- ------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Current Assets
Cash and equivalents $ 805 $ 771 $ 4,222
Trade receivables, less allowance for doubtful
accounts of $155 and $147 at December 31, 1995
and 1996 and $162 at September 30, 1997 4,378 1,569 3,193
Inventories 4,020 1,879 2,228
Other current assets 85 138 564
-------- -------- --------
Total current assets 9,288 4,357 10,207
------- -------- --------
Property and equipment, at cost 4,637 4,791 5,484
Less - Accumulated depreciation and amortization (2,365) (2,173) (2,877)
------- ------- --------
Property and Equipment - Net 2,272 2,618 2,607
------- -------- --------
Other Assets 115 5 75
-------- -------- --------
$ 11,675 $ 6,980 $ 12,889
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of obligations under capital leases
and notes payable $ 171 $ 73 $ 157
Accounts payable 2,594 846 872
Accrued compensation 310 308 917
Deferred revenue 668 97 872
Income taxes payable 279 223 428
Accrued warranty 330 610 644
Other accrued expenses 411 628 835
-------- -------- --------
Total current liabilities 4,763 2,785 4,725
-------- -------- --------
Long Term Capital Lease Obligations and Notes Payable
118 39 158
-------- -------- --------
Stockholders' Equity
Common stock, no par value, stated value of $.01 per share,
10,000,000 shares authorized, 3,578,578 and 3,454,044 shares
issued and outstanding in 1996 and 1995, respectively 35 36 37
Additional paid-in capital 23,469 23,643 23,850
Accumulated deficit (16,351) (19,523) (15,881)
Note receivable and related accrued interest (359) -- --
-------- -------- --------
Total stockholders' equity 6,794 4,156 8,006
-------- -------- --------
$ 11,675 $ 6,980 $ 12,889
======== ======== ========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the years ended Nine months
December 31, ended September 30,
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales (unaudited)
System sales $12,715 $22,046 $16,364 $13,389 $22,023
Software and other sales 2,089 533 246 141 73
------- ------- ------- ------- -------
Total sales 14,804 22,579 16,610 13,530 22,096
Cost of system sales 5,337 9,959 9,943 6,842 9,749
------- ------- ------- ------- -------
Gross margin 9,467 12,620 6,667 6,688 12,347
Operating expenses:
Selling, general and administrative 4,027 4,711 4,138 3,174 3,664
Research, development and engineering 3,996 4,513 5,067 3,833 4,803
------- ------- ------- ------- -------
Total operating expenses 8,023 9,224 9,205 7,007 8,467
------- ------- ------- ------- -------
Operating Income (loss) 1,444 3,396 (2,538) (319) 3,880
Interest income -- 21 110 86 94
Interest expense (68) (66) (12) (9) (18)
Gain from insurance proceeds on equipment
theft 229 -- -- -- --
Other, net (2) (50) (167) (11) 1
Provision for reserve against note receivable -- -- (410) -- --
Provision for impairment of cost investment -- -- (103) -- --
------- ------- ------- ------- -------
Income (loss) before provision for income
taxes 1,603 3,301 (3,120) (253) 3,957
Provision for income taxes 93 437 52 53 315
------- ------- ------- ------- -------
Net income (loss) $ 1,510 $ 2,864 $(3,172) $ (306) $ 3,642
======= ======= ======= ======= =======
Net income (loss) per share $ .40 $ .70 $ (0.90) $ (0.09) $ 0.92
======= ======= ======= ======= =======
Weighted average number of shares used in
computing per share amounts 3,820 4,121 3,515 3,493 3,976
======= ======= ======= ======= =======
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1997 (in thousands)
Common Stock Note Total
---------------------- Additional Accumulated Receivable, Stockholders'
Shares Amount Paid-in Capital Deficit Net Equity
-------- -------- --------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1993 3,335 $ 33 $ 23,275 ($20,725) $ -- $ 2,583
Exercise of stock options 70 1 116 -- -- 117
Net Income -- -- -- 1,510 -- 1,510
-------- -------- --------- -------- -------- --------
BALANCE AT
DECEMBER 31, 1994 3,405 34 23,391 (19,215) -- 4,210
Exercise of stock options 64 1 72 -- -- 73
Grant of common stock 1 -- 6 -- -- 6
Abandonment of
common stock (16) -- -- -- -- --
Note receivable and
related accrued interest -- -- -- -- (359) (359)
Net income -- -- -- 2,864 -- 2,864
-------- -------- --------- -------- -------- --------
BALANCE AT
DECEMBER 31, 1995 3,454 35 23,469 (16,351) (359) 6,794
Exercise of stock options 124 1 173 -- -- 174
Grant of common stock -- -- 1 -- -- 1
Interest earned -- -- -- -- (21) (21)
Additional amount
loaned -- -- -- -- (30) (30)
Reserve against note
receivable -- -- -- -- 410 410
Net loss -- -- -- (3,172) -- (3,172)
-------- -------- --------- -------- -------- --------
BALANCE AT
DECEMBER 31, 1996 3,578 36 23,643 (19,523) -- 4,156
Exercise of stock options 116 1 207 -- -- 208
Interest earned on note
receivable -- -- -- -- 16 16
Reserve against interest
earned on note
receivable -- -- -- -- (16) (16)
Net Income -- -- -- 3,642 -- 3,642
-------- -------- --------- -------- -------- --------
BALANCE AT
JUNE 30, 1997
(unaudited) 3,694 $ 37 $ 23,850 ($15,881) $ 0 $ 8,006
======== ======== ========= ======== ======== ========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended Nine months
December 31, ended September 30,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,510 $ 2,864 $ (3,172) $ (306) $ 3,642
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 434 984 861 603 707
Loss on disposal of property and equipment 23 42 167 5 4
Provision for impairment of cost investment -- -- 103 -- --
Provision for reserve against note receivable -- -- 410 -- 16
Gain from insurance proceeds on equipment theft (229) -- -- -- --
Compensation expense on stock grants -- 6 1 1 --
Changes in operating assets and liabilities:
Accounts receivable (1,117) (804) 2,809 3,019 (1,624)
Inventories (929) (2,071) 2,141 915 (349)
Prepaid expenses and other assets (56) (9) (46) (179) (426)
Accounts and taxes payable, accrued expenses
and deferred revenue 777 2,217 (1,880) (2,314) 1,856
-------- -------- -------- -------- --------
Net cash provided by operating activities 413 3,229 1,394 1,744 3,826
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (1,164) (1,385) (1,380) (862) (700)
Proceeds from sale of property and equipment 11 11 6 6 --
Insurance proceeds from equipment theft 301 -- -- -- --
Proceeds from loan repayment -- 484 -- -- --
Other investment -- -- -- -- (70)
Increase in note receivable and accrued
interest (500) (309) (51) (46) (16)
-------- -------- -------- -------- --------
Net cash used in investing activities (1,352) (1,199) (1,425) (902) (786)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit 825 (1,600) (100) (100) --
Proceeds from financing of equipment -- 221 -- -- 309
Repayments of capital lease obligations -- (33) (77) (59) (106)
Proceeds from exercise of stock options and notes
payable 117 74 174 171 208
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 942 (1,338) (3) 12 411
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 3 692 (34) 854 3,451
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 110 113 805 805 771
-------- -------- -------- -------- --------
CASH AND EQUIVALENTS AT END OF
PERIOD $ 113 $ 805 $ 771 $ 1,659 $ 4,222
======== ======== ======== ======== ========
Cash paid for interest $ 58 $ 76 $ 12 $ 10 $ 18
Cash paid for income taxes $ 59 $ 170 $ 166 $ 166 $ 185
The accompanying notes are an integral part of these
financial statements.
</TABLE>
F-6
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company
Applied Intelligent Systems, Inc. (the Company) provides industrial machine
vision solutions for automated process control and visual inspection throughout
a wide range of manufacturing processes. The Company 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
The Company considers all highly liquid financial instruments purchased with
maturities of less than three months to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market.
Other Current Assets
Other current assets at September 30, 1997 included a receivable of $235,265
(unaudited) resulting from a cost reimbursement from a customer and a $135,934
(unaudited) receivable resulting from the sale of a portion of the Company's
inventory to the Company's contract manufacturer.
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 shorter. Maintenance and
repairs are expensed as incurred.
Investment
In 1992, the Company acquired an ownership interest in a Korean company for
$102,633. This investment has been accounted for using the cost method. During
1996, the Company established a valuation allowance against the entire
investment balance.
Revenue Recognition
Revenue from system sales is recognized at the point of shipment. Revenue from
software and engineering development is recognized as the Company performs the
services in accordance with the contract terms.
F-7
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (continued)
During 1993, the Company entered into a product development and sales agreement
with a Korean customer. Under the terms of the agreement, the Company provided
certain product development services and sold certain systems to the customer.
During 1994 the Company recognized revenue of $2,100,000 pursuant to this
agreement.
The Company enters into certain agreements with customers, from time to time,
which may include multiple phases and can include multiple products and/or
services. Cash may be received or billings may be made prior to the completion
of these projects, requiring the Company to defer some portion of revenue in
accordance with the provisions of Statement of Position 91-1.
Net Income (Loss) Per Share
Net income (loss) 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
The Company 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 the Company'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 the Company to concentration of
credit risk, consist principally of trade receivables. A majority of the
Company's trade receivables are derived from sales in various geographic areas
to companies within the semiconductor and electronics manufacturing industries.
The Company 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.
Fair Value of Financial Instruments
The carrying values of all financial instruments in the accompanying financial
statements approximate fair value.
F-8
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 1994 and 1995 financial statements have been reclassified
to conform with the 1996 presentation.
Newly Released Accounting Pronouncements
The Financial Accounting Standards Board has recently issued the following
pronouncements: Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share, SFAS No. 129, Disclosure of Information about Capital
Structure, SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131,
Reporting Disaggrated Information about a Business Enterprise. SFAS No. 128 and
129 are effective for periods ending after December 15, 1997. SFAS No. 130 and
131 are effective for periods beginning after December 15, 1997. SFAS No. 128
will have an impact on future earnings per share calculations as it modifies the
underlying variables in the calculation. The impact will depend on the status of
potentially dilutive securities in the future. SFAS No. 129, 130 and 131 are not
expected to have a significant impact on the Company's future financial
statements.
3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996 1997
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Raw materials $1,162,338 $1,018,110 $1,835,049
Work-in-process 2,800,781 669,162 215,548
Finished goods 56,942 191,616 177,028
---------- ---------- ----------
$4,020,061 $1,878,888 $2,227,625
========== ========== ==========
</TABLE>
Work-in-process and finished goods inventories include materials and the direct
costs of assembly.
During 1996 the Company recorded a charge against inventory of approximately
$1.2 million related to the discontinuation of two product lines which has been
included in costs of system sales in the accompanying statement of operations
for the year ended December 31, 1996.
F-9
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996 1997
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Computers and test equipment $ 3,437,575 $ 3,152,078 $ 3,688,422
Furniture and fixtures 460,757 690,172 690,269
Leasehold Improvements 339,548 528,314 663,803
Equipment under capital leases 221,257 211,829 211,829
Office equipment 177,887 209,016 229,215
----------- ----------- -----------
4,637,024 4,791,409 5,483,538
Accumulated depreciation and
amortization 2,364,621 2,172,830 2,876,272
----------- ----------- -----------
Property and equipment - net $ 2,272,403 $ 2,618,579 $ 2,607,266
=========== =========== ===========
</TABLE>
5. Stock-Based Compensation Plans
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 the Company's stockholders, as successor plans to the
Company'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 the Company'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 the Company'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. There are 650,000
shares reserved for issuance under the 1995 Plan, of which options on 579,050
shares have been granted.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation expense has been recognized. Had compensation expense for these
plans been determined consistent with FASB Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, the Company's net income (loss) and
earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
September 30,
1995 1996 1997
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Net income (loss): As Reported $ 2,864,018 $ (3,172,366) $ 3,642,397
Pro Forma 2,473,822 (3,411,994) 3,525,185
Net income (loss) per share: As Reported $.70 $(.90) $.92
Pro Forma .60 (.82) .89
</TABLE>
F-10
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
SFAS 123 requirements are not applicable to options granted prior to January 1,
1995. The above pro forma results may not be representative of that to be
expected in future years. The fair value of stock options has been determined
using the minimum value method. In applying this method, the Company assumed no
future dividends, an expected life of each option of 7.5 years and a risk-free
rate of return that is based on United States Treasury notes. Forfeitures are
recognized as they occur. The weighted average risk-free interest rate used by
the Company was approximately 6.5% and 6.0% for the years ended December 31,
1996 and 1995, respectively.
Information concerning incentive stock options for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
Number of Price Per
Shares Share
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1993 985,480 $ 1 - 4
Exercisable at December 31, 1993 684,960 $ 1 - 4
1994 Activity:
Options granted 96,500 $ 4 - 6
Options terminated (26,410) $ 1 - 4
Options exercised (62,610) $ 1 - 4
---------
Outstanding at December 31, 1994 992,960 $ 1 - 6
=========
Exercisable at December 31, 1994 728,067 $ 1 - 4
</TABLE>
F-11
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Stock-Based Compensation Plans (continued)
<TABLE>
<CAPTION>
Weighted
Price Average
Number of Per Exercise
Shares Share Price
--------- ------- ---------
<S> <C> <C> <C>
1995 Activity:
Options granted 271,200 $ 6 - 8 $ 7.54
Options terminated (24,201) $ 1 - 6 1.75
Options exercised (61,424) $ 1 - 4 1.69
---------
Outstanding at December 31, 1995 1,178,535 $ 1 - 8
=========
Exercisable at December 31, 1995 908,213 $ 1 - 8
Weighted average fair value of options
granted $ 2.66
1996 Activity:
Options granted 338,550 $ 4 - 8 $ 4.22
Options terminated (402,625) $ 1 - 8 6.39
Options exercised (114,234) $ 1 - 8 2.46
---------
Outstanding at December 31, 1996 1,000,226 $ 1 - 4
=========
Exercisable at December 31, 1996 806,462 $ 1 - 4
Weighted average fair value of options
granted $ 3.69
1997 Activity (unaudited):
Options granted 37,300 $ 4 $ 4.00
Options terminated (34,953) $ 2 - 4 $ 3.89
Options exercised (116,038) $ 1 - 4 1.79
---------
Outstanding at September 30, 1997 886,535
=========
Exercisable at September 30, 1997 726,811
Weighted average fair value of options
granted $ 1.45
</TABLE>
Related to the options outstanding at December 31, 1996, the following table
provides additional information:
<TABLE>
<CAPTION>
Weighted Average Remaining
Weighted Average Contractual Life of Options
Range Number of Shares Exercise Price Outstanding
----- ---------------- ---------------- ---------------------------
<S> <C> <C> <C>
$ 1 312,490 $ 1 2.0 years
2 298,286 2 4.0 years
4 389,450 4 8.7 years
---------
1,000,226
=========
</TABLE>
F-12
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
During 1994, 1995 and 1996 and for the nine months ended September 30, 1997,
69,860 shares, 64,424 shares, 114,234 shares and 116,038 shares (unaudited),
respectively, were issued due to the exercise of stock options, the net proceeds
of which were $116,515, $73,566, $173,933 and $207,466 (unaudited),
respectively.
Non-Qualified Stock Option Plans
The Company has granted options to certain directors of the Company 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 the
Company'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 the Company'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 15,000 shares of common stock were outstanding as of December 31,
1996. During 1996, 1995 and 1994, 10,000 options were exercised at $2 per share,
3,000 options were exercised at $1 per share, and 7,250 options were exercised
at a range of $1 to $4 per share, respectively. No non-qualified stock options
were exercised during the nine months ended September 30, 1997.
6. Income Taxes
The components of the provision for income taxes in the accompanying statements
of operations consist of the following:
<TABLE>
<CAPTION>
Nine months ended
For the years ended December 31, September 30,
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current tax expense:
Federal $ 93,200 $ 97,800 $ -- $ -- $ 121,000
State -- 338,700 52,500 52,500 194,000
Deferred tax expense 488,300 961,900 (1,079,000) (809,000) 1,277,300
Change in valuation
allowance (488,300) (961,900) 1,079,000 809,000 (1,277,300)
---------- ---------- ---------- ---------- ----------
Total provision $ 93,200 $ 436,500 $ 52,500 $ 52,500 $ 315,000
========== ========== ========== ========== ==========
</TABLE>
In 1994, 1995 and 1996, the Company's effective tax rates differ from the
Federal statutory tax rate of 34% primarily due to the change in the deferred
tax valuation allowance net of state tax expense.
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 deferred taxes are as
follows:
F-13
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996 1997
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforward $4,482,000 $4,829,300 $2,953,000
Inventory and accounts
receivable reserves 338,000 726,300 668,500
Business credit carryforward 463,200 470,000 470,000
Accrued expenses 533,600 519,000 1,059,600
Property and equipment 44,600 197,100 302,800
Alternative minimum tax credit
carryforward 135,400 157,000 162,200
Note receivable reserve -- 139,400 144,700
Other deferred tax assets -- 37,700 37,700
---------- ---------- ----------
5,996,800 7,075,800 5,798,500
Valuation allowance (5,996,800) (7,075,800) (5,798,500)
---------- ---------- ----------
Net deferred taxes $ -- $ -- $ --
========== ========== ==========
</TABLE>
The Company has assessed its past earnings history and trends, sales backlog,
budgeted sales, and the expiration dates of the carryforwards and is unable to
conclude that it is more likely than not that they will realize the benefit of
the net operating loss carryforwards. Valuation allowances of $5,996,800,
$7,075,800 and $5,798,500 (unaudited) have been recorded to reserve the related
deferred tax assets at December 31, 1995 and 1996 and September 30, 1997,
respectively.
The Company has available net operating loss carryforwards to reduce future
taxable income and general business credit carryforwards to offset future taxes
payable. As of September 30, 1997 net operating loss carryforwards of
$14,146,800 exist which expire over the period from 1999 through 2011. The
general business and alternative minimum tax credit carryforwards approximate
$632,200. The general business credits expire over the period from 1997 through
2002.
7. Significant Customers and Export Sales
Significant Customers
The following summarizes significant customers from which the Company earned 10%
or more of its annual revenues:
F-14
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Number of Percentage
Significant Significant Revenues of Total
Customers Customer (000's) Revenues
----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1997 2 A $14,694 66%
(unaudited) B 4,322 20
Year ended December 31, 1996 2 A $ 8,584 52%
B 4,127 25
Year ended December 31, 1995 2 A $12,439 55%
B 4,917 22
Year ended December 31, 1994 3 A $ 6,061 41%
B 3,029 21
C 2,100 14
</TABLE>
Export Sales
Export sales, primarily to Asia and Europe, in 1994, 1995, 1996 and the nine
months ended September 30, 1997, were approximately $4,002,000, $2,908,000,
$2,485,000 and $2,353,000 (unaudited), respectively.
8. Line of Credit
The Company had a $3,000,000 revolving unsecured bank line of credit agreement
which expired on September 30, 1997. Interest was charged at the bank's prime
rate. Renewal of the agreement has been approved by the bank, but has not yet
been executed by AISI.
The maximum amounts outstanding during 1994, 1995 and 1996 under the Company's
line of credit agreement were $1,700,000, $2,075,000 and $100,000, respectively.
The average amounts outstanding and the weighted average interest rates for
1994, 1995 and 1996 were approximately $917,000, $744,000 and $8,000, and 7.6%,
9.1% and 8.5%, respectively. No amounts were borrowed during 1997.
The line of credit agreement contained a minimum tangible net worth requirement
and provided for certain other non-financial conditions. In addition, the
Company was required to maintain working capital of not less than $750,000, and
a ratio of total liabilities to tangible net worth not to exceed 1.5 to 1.0.
9. Leases and Notes Payable
The Company has entered into noncancelable operating and capital lease
agreements for its office, engineering and manufacturing facilities and certain
equipment. The facility leases require that the Company pay for insurance,
taxes, maintenance and repairs. Rent expense under the operating leases was
approximately $512,000, $619,000, $690,000 and $517,000 (unaudited) in 1994,
1995, 1996, and the nine months ended September 30, 1997, respectively. Minimum
future rental commitments under noncancelable operating and capital leases at
December 31, 1996 are as follows:
F-15
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Capital Lease Operating
Obligations Leases
------------- ---------
<S> <C> <C>
1997 $ 78,914 $ 590,720
1998 39,874 473,288
1999 -- 465,900
2000 -- 429,547
2001 -- 435,696
Thereafter -- 2,372,748
--------- ----------
Total minimum payments 118,788 $4,767,899
========= ==========
Less amounts representing interest 6,725
---------
Total present value of minimum lease
payments at December 31, 1996 112,063
Less current portion 73,196
---------
Long-term portion $ 38,867
=========
</TABLE>
Subsequent to December 31, 1996, the Company entered into an installment note
payable to a bank to finance the purchase of certain equipment. Interest on the
note is at the bank's prime rate plus 1/2%. The outstanding balance of the note
is approximately $258,000 (unaudited) as of September 30, 1997.
10. Related Party Transactions
During 1994 the Company loaned $500,000 to an officer of the Company under the
terms of a demand note. During January 1995, the officer repaid to the Company
all of the accrued interest and $460,920 of the principal on this note. During
August 1995, the Company loaned $308,792 to an officer of the Company under the
terms of a demand note which bears interest at the Company's effective borrowing
rate. During August 1996, the Company loaned $30,000 to an officer of the
Company under the terms of a demand note which bears interest at the Company's
effective borrowing rate. The outstanding notes are secured by the officer's
options to purchase the Company's common stock. Beginning in 1996, the Company
established valuation allowances against the entire note and interest receivable
balances.
11. Employee Benefit Plan
The Company 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 the Company may make discretionary contributions
to the plan based on the gross compensation of qualified participants. The
Company made no contributions to the plan in 1994, 1995 or 1996.
12. Contingencies
The Company is party to litigation and legal proceedings arising in the ordinary
course of business. In the opinion of the Company's management, these matters
will not have a material adverse effect on the financial condition and the
results of operations of the Company.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Electro Scientific Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Electro
Scientific Industries, Inc. (an Oregon corporation) and subsidiaries as of May
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended May 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electro
Scientific Industries, Inc. and subsidiaries as of May 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended May 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
August 15, 1997
F-17
<PAGE>
<TABLE>
<CAPTION>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
----------------------- August 31,
1996 1997 1997
--------- --------- ---------
(in thousands)
CURRENT ASSETS: (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents....................................................... $ 19,600 $ 17,801 $ 14,242
Securities available for sale................................................... 18,363 27,860 30,332
--------- --------- ---------
Total cash and securities....................................................... 37,963 45,661 44,574
Trade receivables, less allowance for doubtful accounts of $314 and
$230 at May 31, 1996 and 1997 and $412 at August 31, 1997....................... 40,411 50,869 49,910
Inventories
Finished goods.................................................................. 2,979 4,322 5,655
Work-in-process................................................................. 6,188 6,757 10,229
Raw materials and purchased parts............................................... 21,906 21,772 23,064
--------- --------- ---------
Total inventories............................................................... 31,073 32,851 38,948
Deferred income taxes........................................................... 2,747 2,366 2,366
Other current assets............................................................ 819 580 1,530
--------- --------- ---------
Total current assets............................................................ 113,013 132,327 137,328
PROPERTY AND EQUIPMENT, AT COST................................................. 39,086 40,963 43,467
Less-Accumulated depreciation................................................... (22,265) (24,559) (25,347)
--------- --------- ---------
Net property and equipment.................................................. 16,821 16,404 18,120
DEFERRED INCOME TAXES........................................................... 1,137 1,042 4,042
OTHER ASSETS.................................................................... 4,487 5,040 9,807
--------- --------- ---------
$ 135,458 $ 154,813 $ 169,297
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 5,170 $ 6,494 $ 7,516
Accrued liabilities -
Payroll related........................................................... 3,792 4,126 4,338
Commissions............................................................... 1,961 2,189 2,326
Income taxes................................................................. 2,930 811 3,163
Other........................................................................ 4,484 2,001 2,424
--------- --------- ---------
Total accrued liabilities................................................. 13,167 9,127 12,251
Deferred revenue.............................................................. 276 78 --
--------- --------- ---------
Total current liabilities................................................. 18,613 15,699 19,767
SHAREHOLDERS' EQUITY
Preferred stock, without par value; 1,000 shares authorized; no shares issued... -- -- --
Common stock, without par value; 40,000 shares authorized; 9,355, 9,468 and
9,922 shares issued and outstanding at May 31, 1996 and 1997 and August 31,
1997, respectively.............................................................. 55,940 57,736 72,093
Retained earnings............................................................... 60,905 81,378 77,437
--------- --------- ---------
Total shareholders' equity 116,845 139,114 149,530
--------- --------- ---------
$ 135,458 $ 154,813 $ 169,297
========= ========= =========
The accompanying notes are an integral part of
these statements.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
Year ended May 31, August 31,
------------------------------------- -----------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 112,900 $ 166,310 $ 160,149 $ 36,199 $ 48,356
Cost of sales 53,238 75,167 73,097 15,509 21,291
--------- --------- --------- --------- ---------
Gross margin 59,662 91,143 87,052 20,690 27,065
Operating expenses:
Selling, service and administrative 29,094 41,564 38,974 9,242 12,249
Research, development and engineering 13,483 16,743 17,038 4,326 5,034
Acquired in-process research and development -- 6,000 -- -- 11,124
--------- --------- --------- --------- ---------
Total operating expenses 42,577 64,307 56,012 13,568 28,407
Operating income (loss) 17,085 26,836 31,040 7,122 (1,342)
Interest income 565 1,210 1,523 392 453
Other income (expense), net (167) (719) (75) (276) 57
--------- --------- --------- --------- ---------
Income (loss) before income taxes 17,483 27,327 32,488 7,238 (832)
Provision for income taxes 5,266 10,028 11,238 2,635 3,029
--------- --------- --------- --------- ---------
Net income (loss) $ 12,217 $ 17,299 $ 21,250 $ 4,603 $ (3,861)
========= ========= ========= ========= =========
Net income (loss) per share $ 1.49 $ 1.86 $ 2.27 $ 0.49 $ (0.39)
Weighted average number of shares used in 8,210 9,306 9,373 9,355 9,842
computing per share amounts
The accompanying notes are an integral part of
these statements.
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended May 31, 1995, 1996 and 1997
and three months ended August 31, 1997
Common Stock
-----------------------
Number Retained
of Shares Amount Earnings Total
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1994, as previously reported 6,420 $ 22,097 $ 31,450 $ 53,547
Adjustments for Chip Star, Inc. Pooling-of-Interests 700 150 (138) 12
--- ---
BALANCE AT MAY 31, 1994, adjusted 7,120 22,247 31,312 53,559
Net income -- -- 12,217 12,217
Non-employee directors stock incentive plan -- 19 -- 19
Stock plans:
Employee stock plans 241 2,104 -- 2,104
Tax benefit of stock options exercised -- 1,068 -- 1,068
Shares issued for acquisition of Chicago Laser 333 1,939 -- 1,939
Shares issued in stock offering 1,380 22,535 -- 22,535
Unrealized gain on securities -- -- 60 60
Cumulative translation adjustment -- -- 1,655 1,655
--------- --------- --------- ---------
BALANCE AT MAY 31, 1995 9,074 49,912 45,244 95,156
Net income -- -- 17,299 17,299
Stock plans:
Employee stock plans 85 706 -- 706
Tax benefit of stock options exercised -- 540 -- 540
Shares issued for acquisitions 196 4,782 -- 4,782
Unrealized loss on securities -- -- (42) (42)
Cumulative translation adjustment -- -- (1,596) (1,596)
--------- --------- --------- ---------
BALANCE AT MAY 31, 1996 9,355 55,940 60,905 116,845
Net income -- -- 21,250 21,250
Adjustment to align Chip Star, Inc. fiscal year with May 31 -- -- (325) (325)
Stock plans:
Employee stock plans 113 1,235 -- 1,235
Tax benefit of stock options exercised -- 561 -- 561
Unrealized loss on securities -- -- (19) (19)
Cumulative translation adjustment -- -- (433) (433)
--------- --------- --------- ---------
BALANCE AT MAY 31, 1997 9,468 $ 57,736 $ 81,378 $ 139,114
Net income -- -- (3,861) (3,861)
Stock plans 107 2,407 -- 2,407
Shares issued for acquisition of Dynamotion 347 11,950 -- 11,950
Cumulative translation adjustment -- -- (80) (80)
--------- --------- --------- ---------
Balance at August 31, 1997 (unaudited) 9,922 $ 72,093 $ 77,437 $ 149,530
========= ========= ========= =========
The accompanying notes are an integral part of
these statements.
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months
Year ended May 31, ended August 31,
---------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 12,217 $ 17,299 $ 21,250 $ 4,603 $ (3,861)
Adjustment to align Chip Star, Inc. fiscal year with May 31 -- -- (325) -- --
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Acquired in-process research and development and -- 6,000 -- -- 11,124
merger related expenses
Depreciation and amortization 2,646 2,803 3,109 1,034 1,186
Other non-cash charges (credits) (414) -- -- -- --
Deferred income taxes (1,626) (770) 476 -- --
Changes in operating accounts:
(Decrease) Increase in trade receivables (15,198) (6,010) (11,599) (2,276) 3,317
Increase in inventories (3,014) (3,563) (1,012) (3,102) (1,268)
Decrease (increase) in other current assets (368) 43 239 (208) (909)
(Decrease) increase in accounts payable and accrued
liabilities 6,268 (3,987) (2,028) (813) (4,040)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 511 11,815 10,110 (762) 5,549
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of XRL subsidiary, net of cash acquired (1) -- (492) -- -- --
Purchase of Chicago Laser subsidiary, net of cash (707) -- -- -- --
acquired (2)
Purchase of property and equipment (3,070) (3,755) (3,469) (683) (1,919)
Proceeds from the sale of property and equipment 648 -- -- -- --
Purchase of securities (20,950) (30,986) (42,316) (7,563) (9,972)
Proceeds from sales of securities and maturing securities 4,000 29,850 32,800 8,800 7,500
(Increase) decrease in other assets (1,458) 366 (720) 41 (145)
-------- -------- -------- -------- --------
Net cash (provided by) used in investing activities (21,537) (5,017) (13,705) 595 (4,536)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to retire debt (1,383) -- -- -- --
Repayment of Dynamotion subsidiary debt (3) -- -- -- -- (6,979)
Proceeds from secondary stock offering 22,535 -- -- -- --
Proceeds from exercise of stock options and stock plans
and related tax benefits 3,172 1,246 1,796 129 2,407
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 24,324 1,246 1,796 129 (4,572)
-------- -------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,298 8,044 (1,799) (38) (3,559)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 8,258 11,556 19,600 19,600 17,801
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,556 $ 19,600 $ 17,801 $ 19,562 $ 14,242
======== ======== ======== ======== ========
The accompanying notes are an integral part
of these statements.
</TABLE>
F-21
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
(1) Acquisition of XRL subsidiary:
Assets less liabilities acquired, net of cash acquired $ (5,073)
Issuance of common stock 4,581
----------
Net cash used to acquire business $ (492)
==========
(2) Acquisition of Chicago Laser subsidiary:
Assets less liabilities acquired, net of cash acquired $ (2,646)
Issuance of common stock 1,939
----------
Net cash used to acquire business $ (707)
==========
(3) Acquisition of Dynamotion subsidiary:
Assets less liabilities acquired, net of cash $ (11,950)
Issuance of common stock and common stock options 11,950
----------
Net cash used to acquire Dynamotion: $ 0
==========
Cash payments for interest were not significant in 1997, 1996 or 1995.
F-22
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Environment
The accompanying consolidated financial statements include the accounts of
Electro Scientific Industries, Inc. and its subsidiaries (the Company), all of
which are wholly owned. The Company designs and manufactures sophisticated
products used around the world in electronics manufacturing including: laser
manufacturing systems for semiconductor yield improvement, production and test
equipment for the manufacture of surface mount ceramic capacitors, circuit fine
tuning systems, precision laser and mechanical electronic packaging production
systems and machine vision systems. The Company serves the global electronics
market from its headquarters in Portland, Oregon and through subsidiaries
located in the United States, Europe and Asia.
Concentrations of Credit Risk
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents,
securities held for sale, trade receivables and financial instruments used in
hedging activities. The Company invests its cash in cash deposits, money market
funds, commercial paper, certificates of deposit and readily marketable debt
securities. The Company places its investments with high credit quality
financial institutions and limits the credit exposure from any one institution
or instrument. To date, the Company has not experienced losses on any of these
investments. The Company sells a significant portion of its products to a small
number of electronics manufacturers: 47.1% of fiscal 1997 revenues were derived
from ten customers. The Company's operating results could be adversely affected
if the financial condition and operations of these key customers decline.
Concentrations of Other Risks
The Company's operations involve a number of other risks and uncertainties
including but not limited to the cyclicality of the electronics market, rapidly
changing technology, international operations and hedging exposures.
Basis of Presentation
In June 1997, ESI merged with Chip Star, Inc. (Chip Star), a privately-held
company based in San Marcos, California. Chip Star provides capital equipment
for producers of surface mount ceramic capacitors. Consideration paid to Chip
Star was 700 shares of ESI stock. The merger was accounted for as a
pooling-of-interests. Accordingly, all financial statements and footnote data
have been restated. The following is a reconciliation of certain restated
amounts with amounts previously reported.
F-23
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months
Year Ended May 31, Ended
1995 1996 1997 August 31, 1996
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Sales:
ESI $108,215 $159,705 $150,159 $ 34,856
Chip Star 4,685 6,605 9,990 1,343
-------- -------- -------- --------
As restated $112,900 $166,310 $160,149 $ 36,199
Net income:
ESI $11,517 $16,082 $18,952 $ 4,347
Chip Star 700 1,217 2,298 224
-------- -------- -------- --------
As restated 12,217 17,299 $21,250 $4,603
</TABLE>
Summary of Significant Accounting Policies
Principles of Consolidation
All material intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates and such
differences could be material to the financial statements.
Reclassifications
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1995 and 1996 to conform with the 1997 presentation.
Interim Financial Information
The interim consolidated financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the management of the Company believes that the
disclosures are adequate to make the information presented not misleading.
Interim financial statements are by necessity somewhat tentative; judgments are
used to estimate interim amounts for items that are normally determinable only
on an annual basis. For example, the effective income tax rate is based on
estimates of annual amounts of taxable income, tax credits and other factors.
The interim period information included herein reflects all adjustments
which are, in the opinion of the management of the company, necessary for a fair
statement of the results of the respective interim periods. Results of
operations for interim periods are not necessarily indicative of results to be
expected for an entire year.
F-24
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Revenue Recognition
The Company generally recognizes revenue at the time of shipment.
Product Warranty
The Company generally warrants its systems for a period of up to 12 months
for material and labor to repair and service the system. A provision for the
estimated cost related to warranty is recorded upon shipment.
Research and Development
Research and development costs are expensed as incurred.
F-25
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Taxes on Income
Deferred income taxes have not been provided on unremitted earnings of
foreign subsidiaries as the Company believes any U.S. tax on such earnings would
be substantially offset by associated foreign tax credits.
Net Income Per Share
Net income per share is computed using the weighted average number of
common shares and common stock equivalents (stock options) outstanding, if
significant.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Inventories
Inventories are principally valued at standard costs which approximate the
lower of cost (first-in, first-out) or market. Costs utilized for inventory
valuation purposes include material, labor and manufacturing overhead.
Depreciation and Capitalization Policies
Depreciation is determined on the declining balance and straight-line
methods based on the following useful lives: buildings: 25 to 40 years; building
improvements: 5 to 15 years; and machinery and equipment: 3 to 10 years.
Expenditures for maintenance, repairs and minor improvements are charged to
expense. Major improvements and additions are capitalized. When property is sold
or retired, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in other expense.
Foreign Currency Translation
The Company accounts for foreign currency translation in accordance with
Statement of Financial Accounting Standards No. 52. The total cumulative
translation adjustment included in retained earnings is $(4), $429 and $2,025 at
May 31, 1997, 1996 and 1995, respectively. Foreign currency transaction losses
were $176 and $227 for the years ended May 31, 1997 and 1995, respectively, with
a gain of $380 for the year ended May 31, 1996. These amounts are included in
other expense in the accompanying Consolidated Statements of Income.
Property and Equipment
Major classes of property and equipment consist of the following:
May 31,
1996 1997
--------- ---------
Land...................................................$ 3,419 $ 3,419
Buildings and improvements............................. 13,004 13,143
Machinery and equipment................................ 22,321 24,132
Construction in progress............................... 342 269
--------- ---------
$ 39,086 $ 40,963
F-26
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Line of Credit
The Company has a short-term revolving line of credit with a large foreign
bank totaling $7,000. At the Company's option, the interest rate is either prime
or LIBOR plus 1.25 percent. There were no borrowings outstanding under the line
at anytime during fiscal 1997 or the three months ended August 31, 1997 and
subsequent to May 31, 1997 the expiration date for the line was extended to
September 1998.
Employee Benefit Plans
The Company has an employee savings plan under the provisions of section
401(k) of the Internal Revenue Code. The Company contributed $406, $462 and $334
to the plan for the years ended May 31, 1997, 1996 and 1995, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the liability method specified by SFAS 109, the deferred tax assets
and liabilities are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates for the years in which the taxes are expected to be paid.
The net deferred tax asset as of May 31, 1996 and May 31, 1997 consists of
the following tax effects relating to temporary differences and carryforwards:
May 31,
1996 1997
--------- ---------
Deferred tax assets:
Inventory valuation $ 1,129 $ 1,385
Vacation pay 560 629
Warranty costs 350 440
Accrued compensation 392 443
2,431 2,897
Tax loss and credit carryforwards 1,874 1,405
Total deferred tax assets 4,305 4,302
Deferred tax liabilities (421) (894)
--------- ---------
Net deferred tax asset $ 3,884 $ 3,408
========= =========
At May 31, 1997, there was a net operating loss carryforward of $4,015
available for U.S. federal income tax purposes. These losses were acquired as
part of the XRL acquisition and expire through 2008.
The components of income before income taxes and the provision for income
taxes are as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes:
Domestic $ 14,395 $ 25,690 $ 27,976
Foreign 3,088 1,637 4,512
-------- -------- --------
$17,483 $27,327 $32,488
======= ======= =======
F-27
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Provision for income taxes:
Current:
U.S. Federal and State $ 4,088 $ 9,371 $ 8,298
Foreign 1,736 887 1,903
-------- -------- --------
5,824 10,258 10,201
Deferred (1,626) (770) 476
Income tax effect of stock options exercised 1,068 540 561
-------- -------- --------
$ 5,266 $ 10,028 $ 11,238
======== ======== ========
</TABLE>
In accordance with SFAS 109, the tax benefit related to stock option
exercises has been recorded as an increase to Common Stock rather than a
reduction to the provision for income taxes.
A reconciliation of the provision for income taxes at the federal statutory
income tax rate to the provision for income taxes as reported is as follows:
<TABLE>
<CAPTION>
Year ended May 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Provision computed at federal statutory rate $6,119 $ 9,564 $ 11,371
Higher than U.S. tax rates in foreign jurisdictions 753 314 323
Impact of U.S. tax loss and credit carryforwards utilization (1,236) (434) --
Impact of state taxes 334 876 1,156
Benefit of foreign sales corporation (FSC) (217) (137) (1,468)
Other, net (487) (155) (144)
-------- -------- --------
$ 5,266 $ 10,028 $ 11,238
======== ======== ========
</TABLE>
Consolidated income tax payments amounted to $4,715, $8,762 and $12,276 for
the years ended May 31, 1995, 1996 and 1997, respectively.
Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued Statement
128, Earnings per Share ("SFAS 128"), superseding APB Opinion 15. SFAS 128 is
required to be adopted for periods ending after December 15, 1997. When adopted,
all prior earnings per share ("EPS") calculations will be restated to conform to
SFAS 128. The pro forma effects of applying SFAS 128 to EPS are as follows:
<TABLE>
<CAPTION>
Three months
Year ended May 31, ended August 31,
-------------------------------------- -------------------------
(unaudited)
1995 1996 1997 1996 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary EPS as reported $ 1.49 $ 1.86 $ 2.27 $ 0.49 $ (0.39)
Effect of SFAS 128 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ -------
Basic EPS as restated $ 1.49 $ 1.86 $ 2.27 $ 0.49 $ (0.39)
====== ====== ====== ====== =======
Fully diluted EPS as reported $ 1.49 $ 1.86 $ 2.27 $ 0.49 $ (0.39)
Effect of SFAS 128 (0.04) (0.04) (0.05) (0.01) 0.00
------ ------ ------ ------ -------
Diluted EPS as restated $ 1.45 $ 1.82 $ 2.22 $ 0.48 $ (0.39)
====== ====== ====== ====== =======
</TABLE>
F-28
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Commitments and Contingencies
The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. Derivatives are used to manage well
defined foreign currency risks: the Company enters into forward exchange
contracts to hedge the value of accounts receivable denominated in a foreign
currency. Foreign exchange contracts have gains and losses that are recognized
at the settlement date. At May 31, 1996 and 1997, the Company had forward
exchange contracts totaling $7,460 and $5,470, respectively. These contracts
generally mature in less than one year and the counter party is a large, widely
recognized international bank; therefore, risk of credit loss as a result of
nonperformance by the bank is minimal. The use of derivatives does not have a
significant effect on the Company's results of operations or its financial
position.
The Company leases equipment and office space under operating leases which
are non-cancelable and expire on various dates through 2002. The aggregate
minimum commitment for rentals under operating leases beyond May 31, 1997 is not
significant.
The Company is a party to various legal proceedings. Management believes
that the outcome of such proceedings will not have a material effect on the
business, financial position or results of operations of the Company.
Securities Available for Sale
The Company accounts for securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). The Company classifies its marketable
debt securities as Securities Available for Sale in the accompanying
Consolidated Balance Sheets. The fair market value of these securities at May
31, 1996 and 1997 is $18,363 and $27,860, respectively. All of the Company's
marketable debt securities are invested in high-credit quality tax advantaged
securities with maturities of less than one year from the date of purchase; the
amortized cost of these securities approximates fair market value.
During fiscal 1996 and 1997, proceeds of $29,850 and $32,800, respectively,
resulted from the sales or maturities of securities; there were no realized
gains or losses associated with these sales or maturities.
Shareholder Rights Plan
In May 1989, the Company adopted a Shareholder Rights Plan and declared a
dividend distribution of one Right for each outstanding share of Common Stock,
payable to holders of record on June 23, 1989. Under certain conditions, each
Right may be exercised to purchase 1/100 of a share of Series A No Par Preferred
Stock at a purchase price of $55, subject to adjustment. The Rights are not
presently exercisable and will only become exercisable following the occurrence
of certain specified events. If these specified events occur, each Right will be
adjusted to entitle its holder to receive, upon exercise, Common Stock (or, in
certain circumstances, other assets of the Company) having a value equal to two
times the exercise price of the Right or each Right will be adjusted to entitle
its holder to receive, upon exercise, common stock of the acquiring company
having a value equal to two times the exercise price of the Right, depending on
the circumstances. The Rights expire on May 12, 1999 and may be redeemed by the
Company for $0.01 per Right. The Rights do not have voting or dividend rights,
and until they become exercisable, have no dilutive effect on the earnings of
the Company.
Stock Plans
The Company has stock option and restricted stock grant plans for officers
and employees. During fiscal 1997, ESI recorded $475 of compensation expense
related to stock grants earned in April 1997. Awards under these
F-29
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
plans are determined by the Compensation Committee of the Board of Directors.
Stock appreciation rights may be granted in connection with options, although no
options have been granted that include stock appreciation rights. Option prices
are at fair market value at the date of the grant and all expire ten years from
the date of grant.
The Company has an employee stock purchase plan which allows qualified
employees to direct up to 15% of base pay for purchases of stock. The purchase
price for shares purchased under the Plan is the lower of 85% of the fair market
value of stock on January 8, 1997 or January 7, 1998.
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting For Stock Issued to Employees." In
1995, the Financial Accounting Standards Board released Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting For Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and was effective
beginning with the Company's 1996 fiscal year. The Company will continue to
account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, the Company has elected to provide pro forma disclosures as
required by SFAS 123.
The Company has computed, for pro forma disclosure purposes, the value of
all options granted under the stock option plan to be $16.04 and $13.26 for 1997
and 1996. The pro forma value of options granted under the employee stock
purchase plan is immaterial for both 1997 and 1996. These computations were made
using the Black-Scholes option-pricing model, as prescribed by SFAS 123, with
the following weighted average assumptions for grants in 1997 and 1996:
Risk-free interest rate 7.5%
Expected dividend yield 0%
Expected life stock option plan 7 years
Expected volatility 48.5%
The total value of options granted would be amortized on a pro rata basis
over the vesting period of the options. Options generally vest equally over four
years. If the Company had accounted for these plans in accordance with SFAS 123,
the Company's net income and net income per share would have decreased as
reflected in the following pro forma amounts:
Year ended May 31,
1996 1997
-------- --------
Net income:
As reported $ 17,299 $ 21,250
Pro forma 17,048 20,514
Net income per share:
As reported $ 1.86 $ 2.27
Pro forma 1.85 2.22
F-30
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
The following table summarizes activity in stock plans for the years ended
May 31, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended May 31,
1996 1997
----------------------------- -----------------------------
Weighted- Weighted-
Average Exercise Average Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 675 $17.61 835 $20.60
Granted............................................. 277 22.20 230 25.95
Exercised........................................... 73 9.05 93 16.47
Canceled ......................................... 44 20.35 55 20.93
------ ------ ------ ------
Options outstanding at end of year..................... 835 20.60 917 22.83
====== ====== ====== ======
Exercisable at end of year............................. 260 $15.03 355 $18.27
====== ====== ====== ======
</TABLE>
The following table sets forth the exercise price range, number of shares
outstanding at May 31, 1997, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable options by groups of similar price and
grant date:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------- ----------------------------------
Weighted-
Average
Outstanding Remaining Weighted- Exercisable Weighted-
Range of Exercise as of Contractual Life Average Exercise as of Average Exercise
Prices May 31, 1997 (Years) Price May 31, 1997 Price
<S> <C> <C> <C> <C> <C>
$ 2.63-$9.88 267 5.76 $ 8.86 217 $ 8.53
9.89-18.00 210 8.60 17.46 51 16.58
18.01-24.00 183 7.96 23.62 75 23.75
24.01-33.00 243 9.59 28.22 9 32.80
33.01-39.38 14 8.25 38.36 3 38.36
--- ---
917 8.18 $22.83 355 $18.27
=== ===
</TABLE>
Geographic Reporting
The Company operates in the capital equipment segment of the electronics
industry with geographic operations in the United States, Europe and Asia.
Transfers between geographic areas are made at prevailing market prices.
Operating income is total revenue less operating expenses. In computing
operating income, none of the following items have been added or deducted:
interest income, other expense or the provision for income taxes. Identifiable
assets are those assets of the Company that are identified with the operations
in each geographic location. Corporate assets are primarily cash and cash
equivalents and securities available for sale.
Export sales included in United States sales to unaffiliated customers for
the years ended May 31, 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Europe Asia Total
<S> <C> <C> <C>
May 31, 1995..................................... 3,889 36,605 40,494
May 31, 1996..................................... 1,926 68,192 70,118
May 31, 1997..................................... $4,282 $59,053 $63,335
</TABLE>
F-31
<PAGE>
In fiscal 1997 and 1996, there were no sales to any one customer in excess
of 10% of consolidated net sales. During fiscal 1995, one customer accounted for
11.9% of consolidated net sales.
The following data represents segment information for the years ending May
31:
<TABLE>
<CAPTION>
Adjustments
United and
1995 States Europe Asia Eliminations Consolidated
--------- ---------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 73,853 $ 15,869 $ 23,178 $ -- $ 112,900
Transfers between geographic areas 24,631 9 434 (25,074) --
--------- ---------- -------- ------------ ---------
Total revenue $ 98,484 $ 15,878 $ 23,612 $ (25,074) $ 112,900
Operating income $ 13,441 $ 791 $ 2,605 $ 248 $ 17,085
Identifiable assets at May 31, 1995 $ 84,926 $ 7,994 $ 10,922 $ (19,746) $ 84,096
Corporate assets 28,825
---------
Total assets at May 31, 1995 $ 112,921
1996
Sales to unaffiliated customers $ 125,669 $ 18,329 $ 22,312 $ -- $ 166,310
Transfers between geographic areas 28,009 8 543 (28,560) --
--------- ---------- -------- ------------ ---------
Total revenue $ 153,678 $ 18,337 $ 22,855 $ (28,560) $ 166,310
Operating income 1 $ 24,847 $ 260 $ 1,965 $ (236) $ 26,836
Identifiable assets at May 31, 1996 $ 101,397 $ 8,624 $ 8,049 $ (20,575) $ 97,495
Corporate assets 37,963
---------
Total assets at May 31, 1996 $ 135,458
1997
Sales to unaffiliated customers $ 110,318 $ 28,872 $ 20,959 $ -- $ 160,149
Transfers between geographic areas 35,986 -- 427 (36,413) --
--------- ---------- --------- ------------ ---------
Total revenue $ 146,304 $ 28,872 $ 21,386 $ (36,413) $ 160,149
Operating income $ 26,656 $ 2,899 $ 1,623 $ (138) $ 31,040
Identifiable assets at May 31, 1997 $ 96,299 $ 11,374 $ 9,480 $ (8,001) $ 109,152
Corporate assets 45,661
---------
Total assets at May 31, 1997 $ 154,813
1 Includes the $6,000 in-process research and development charge associated
with the acquisition of XRL, Inc.
</TABLE>
Acquisitions
XRL, Inc.
In July 1995, the Company acquired all of the outstanding stock of XRL,
Inc., a privately held company based in Canton, Massachusetts. XRL provides
capital equipment for semiconductor yield improvement. The purchase
consideration consisted of 179 shares of ESI stock. The transaction was
accounted for as a purchase.
In connection with the purchase price allocation, an analysis of the fair
value of the intangible assets acquired indicated that substantially all of the
acquired intangible assets consisted of research and development
F-32
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
projects in process. The development of these projects had not reached
technological feasibility and the technology has no alternative future use. In
accordance with generally accepted accounting principles, the acquired
in-process research and development of $6,000 was charged to expense during the
quarter ended August 31, 1995 and is reflected in the accompanying Consolidated
Statements of Income.
Pro forma combined income statement data for the years ended May 31, 1996
and 1995 was not materially different from results presented in the accompanying
Consolidated Statements of Income.
Subsequent Event - Dynamotion Corp.
In June 1997, ESI acquired all of the equity of Dynamotion/ATI Corp.
(Dynamotion), a publicly-held company based in Santa Ana, California. Dynamotion
provides mechanical drilling equipment for printed circuit board manufacturers.
The preliminary purchase consideration was $11,950 (347 shares of ESI stock) and
assumption of $14,352 of liabilities. The purchase consideration includes the
fair market value of all Dynamotion stock options. The purchase price allocation
includes $2,229 of goodwill which will be amortized over seven years. The
Company is still obtaining certain data related to the acquisition, and
accordingly, the purchase price allocation remains open. The transaction was
accounted for as a purchase.
In connection with the purchase price allocation, an analysis of the fair
value of the intangible assets acquired indicated that substantially all of the
acquired intangible assets consisted of research and development projects in
process. The development of these projects had not reached technological
feasibility and the technology has no alternative future use. In accordance with
generally accepted accounting principles, the acquired in-process research and
development of $9,000 will be charged to expense during the quarter ended August
31, 1997. The Company currently believes that the research and development
efforts will result in commercially feasible products in the next 24 months at
an estimated additional cost of $2,000.
Unaudited pro forma combined income statement data for the years ended May
31, 1996 and 1997 and for the three months ended August 31, 1996 are as follows:
<TABLE>
<CAPTION>
Three
months ended
Year ended August 31,
---------------------------- ------------
1996 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Sales $ 179,813 $ 172,787 $ 39,530
Income from continuing operations $ 13,915 $ 15,256 $ 3,385
Net income per share $1.44 $1.57 $0.35
</TABLE>
Quarterly Financial Information
(Unaudited)
<TABLE>
<CAPTION>
Year ended May 31, 1996 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 38,721 $ 43,089 $ 42,119 $ 42,381 $ 166,310
Gross margin 20,951 23,541 22,840 23,811 91,143
Net income 1,226/1 5,393 5,122 5,558 17,299
Net income per share $ 0.13/1 $ 0.58 $ 0.55 $ 0.60 $ 1.86
/1 Includes the $6,000 in-process research and development charge associated
with the acquisition of XRL, Inc.
</TABLE>
F-33
<PAGE>
ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year ended May 31, 1997 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 36,199 $ 37,415 $ 40,347 $ 46,188 $ 160,149
Gross margin 20,690 20,932 22,160 23,270 87,052
Net income 4,603 5,103 5,758 5,786 21,250
Net income per share $ 0.49 $ 0.55 $ 0.61 $ 0.62 $ 2.27
</TABLE>
F-34
<PAGE>
ANNEX A
AGREEMENT
OF
REORGANIZATION AND MERGER
among
Electro Scientific Industries, Inc.
an Oregon corporation,
Applied Intelligent Systems, Inc.
a Michigan corporation,
and
Asteroid Merger Corp.,
an Oregon corporation.
September 29, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
1.1 The Merger..............................................................2
1.2 Effect of Merger........................................................2
1.2.1 The Surviving Corporation......................................2
1.2.2 Directors and Officers.........................................3
1.3 Merger Consideration....................................................3
1.3.1 AISI Stock.....................................................3
1.3.2 Stock Splits, Etc..............................................4
1.3.3 Merger Corp. Stock.............................................4
1.3.4 Options........................................................5
1.4 Surrender and Cancellation of Certificates..............................6
1.4.1 Surrender of Certificates......................................6
1.4.2 Option Agreements..............................................7
1.4.3 No Fractional Shares...........................................7
1.4.4 Cancellation...................................................8
1.4.5 Treasury Shares................................................8
1.4.6 Escheat........................................................8
1.4.7 Withholding Rights.............................................8
1.5 Dissenters' Rights......................................................9
1.5.1 Notice.........................................................9
1.5.2 Rights of Dissenting Shares....................................9
1.6 Stock Transfer Books...................................................10
1.7 Closing................................................................10
1.8 Subsequent Actions.....................................................10
ARTICLE II
FURTHER AGREEMENTS
2.1 Noncompetition and Confidentiality Agreements..........................11
2.2 Escrow Agreement.......................................................11
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of AISI.................................12
3.1.1 Organization and Status.......................................12
3.1.2 Capitalization................................................12
i
<PAGE>
3.1.3 Corporate Authority...........................................13
3.1.4 Governmental Filings..........................................14
3.1.5 Investments; Subsidiaries.....................................14
3.1.6 No Adverse Consequences.......................................14
3.1.7 Financial Statements..........................................15
3.1.8 Undisclosed Liabilities; Returns..............................15
3.1.9 Absence of Certain Changes or Events..........................16
3.1.10 Prohibited Payments...........................................18
3.1.11 Litigation....................................................18
3.1.12 Compliance with Laws; Judgments...............................18
3.1.13 Employment Matters............................................19
3.1.13.1 Labor Matters........................................19
3.1.13.2 Employee Benefits....................................19
3.1.13.3 Employment Agreements................................21
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........................23
3.1.16 Intellectual Property.........................................23
3.1.17 Certain Contracts and Arrangements............................24
3.1.18 Status of Contracts...........................................25
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.................................................32
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
ii
<PAGE>
3.1.34 Brokers and Finders...........................................34
3.1.35 Reliance......................................................35
3.1.36 Accuracy of Representations and Warranties....................35
3.1.37 Prospectus/Information Statement..............................35
3.1.38 Continuity of Business Enterprise.............................36
3.1.39 1998 Forecast.................................................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..........................37
3.2.6 Litigation....................................................38
3.2.7 No Adverse Consequences.......................................38
3.2.8 Brokers and Finders...........................................38
3.2.9 Prospectus/Information Statement..............................39
3.3 Representations and Warranties Relating to Merger Corp.................39
3.3.1 Organization and Status.......................................39
3.3.2 Capitalization................................................39
3.3.3 Corporate Authority...........................................40
3.3.4 Governmental Filings..........................................40
3.3.5 Litigation....................................................40
3.3.6 No Operations.................................................40
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...............................................41
4.2 Covenants of AISI......................................................41
4.2.1 Conduct of Business...........................................42
4.2.2 Acquisition Proposals.........................................44
4.2.3 Investigations................................................45
4.2.4 Antitrust Improvements Act....................................45
4.2.5 AISI Shareholders Approval....................................46
4.2.6 Information for Prospectus/Information Statement and
Registration Statement........................................46
4.3 Covenants of ESI.......................................................46
4.3.1 Conduct of Business...........................................47
4.3.2 Registration Statement........................................47
iii
<PAGE>
4.3.3 Listing of ESI Common Stock...................................47
4.3.4 Antitrust Improvements Act....................................47
4.3.5 Issuance of Certificates......................................47
4.3.6 Registration of Option Shares.................................48
4.3.7 Directors & Officers Insurance................................48
4.4 Covenants of Merger Corp...............................................48
ARTICLE V
CONDITIONS
5.1 Conditions to the Obligations of All Parties...........................49
5.1.1 Regulatory Approvals..........................................49
5.1.2 Litigation....................................................49
5.1.3 Section 368(a)(2)(E) of the Code Requirement.........49
5.2 Conditions to the Obligations of AISI..................................50
5.2.1 Representations, Warranties and Covenants.....................50
5.2.2 No Material Adverse Change....................................51
5.2.3 Opinion of Counsel............................................51
5.2.4 Registration of Securities; Listing...........................51
5.2.5 Shareholders' Approval; Dissenters............................51
5.2.6 Accountants Opinion...........................................51
5.3 Conditions to the Obligations of ESI and Merger Corp...................52
5.3.1 Representations, Warranties and Covenants.....................52
5.3.2 Opinion of Counsel............................................52
5.3.3 Consents and Approvals........................................52
5.3.4 No Material Adverse Change; Completion of Inspection..........52
5.3.4.1 No Material Adverse Change...........................53
5.3.4.2 Completion of Investigation..........................53
5.3.5 Accountants Opinion...........................................53
5.3.6 Registration of Securities; Listing...........................53
5.3.7 Affiliate Representation Letters..............................54
5.3.8 Continuity of Interests Letter................................54
5.3.9 Other Agreements..............................................54
5.3.10 Physical Count of Assets......................................54
5.3.11 Tax Clearance Certificate.....................................55
5.3.12 Related Party Agreements......................................55
5.3.13 Confidentiality Agreements....................................55
5.3.14 Updated Financial and Other Information.......................55
5.3.15 Environmental Report..........................................55
5.3.16 Fairness Opinion..............................................55
iv
<PAGE>
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival...............................................................56
6.2 Scope of Indemnification...............................................56
6.3 Escrow.................................................................57
6.4 Limitations............................................................57
6.4.1 Minor Claims..................................................57
6.4.2 Escrowed Property.............................................57
6.5 Claim Procedure for Indemnification....................................58
6.5.1 Notice........................................................58
6.5.2 Response to Third Party Claim.................................58
6.5.3 Diligent Conduct..............................................58
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..................................60
7.4 Termination Fees.......................................................60
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 Payment of Expenses....................................................62
8.2 Entire Agreement.......................................................62
8.3 Assignment.............................................................62
8.4 Binding Effect; No Third Party Benefit.................................62
8.5 Amendment and Modification.............................................63
8.6 Waiver of Conditions...................................................63
8.7 Counterparts...........................................................63
8.8 Captions...............................................................63
8.9 Subsidiary.............................................................63
8.10 Notices................................................................64
8.11 Choice of Law..........................................................65
8.12 Attorneys' Fees........................................................65
8.13 Separability...........................................................65
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 12
3.1.2 AISI Shareholders and Option Holders 13
3.1.5 AISI Investments 14
3.1.13.2 Employee Benefits 19
3.1.13.3 Employment Manuals 21
3.1.13.4 Compensation 21
3.1.14 Leased Real Property 22
3.1.15 Tangible Personal Property 23
3.1.16 Intellectual Property 23
3.1.17 Other Agreements 24
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 32
3.1.29 Product Warranty 33
3.1.30 Inventory 33
3.1.32 Backlog 34
3.2 ESI Disclosure Schedule 36
5.3.7 Signatories to Affiliate Representation Letter 54
5.3.8 Signatories to Continuity of Interest Letter 54
vii
<PAGE>
INDEX OF TERMS
Term Section Page
- ---- ------- ----
1998 Forecast Section 3.1.39 36
Acquisition Transaction Section 4.2.2 44
Agreement Preamble 1
AISI Preamble 1
AISI Common Stock Section 1.1 2
AISI Disclosure Schedule Section 3.1 12
AISI Stock Plans Section 3.1.2 13
Cash Election Shares Section 1.3.3(b) 4
Claim Notice Section 6.5.1 58
Closing Section 1.7 10
Closing Date Section 1.7 10
Code Recital B 1
Confidentiality Agreements Section 4.1.4 41
Contracts Section 3.1.18 25
Conversion Ratio Section 1.3 3
Current Balance Sheet Section 3.1.7 15
Damages Section 6.2 56
Disclosed Litigation Section 6.2 56
Dissenters' Rights Section 1.5.1 9
Dissenting Shareholder Section 1.5.2 9
Dissenting Shares Section 1.5.2 9
Effective Time Section 1.1 2
Environmental Law Section 3.1.24.4 31
ERISA Section 3.1.13.2 20
ERISA Plans Section 3.1.13.2 20
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 15
Governmental Entity Section 3.1.4 14
Hazardous Substance Section 3.1.24.4 31
HSR Filing Section 4.2.4 45
Indemnified Parties Section 6.2 56
Intellectual Property Section 3.1.16 23
Leased Real Property Section 3.1.14 22
viii
<PAGE>
INDEX OF TERMS (continued)
Term Section Page
- ---- ------- ----
MBCA Section 1.2.1 2
Merger Section 1.1 2
Merger Consideration Section 1.3 3
Merger Corp. Preamble 1
OBCA Section 1.2 2
Permits Section 3.1.20 26
Policies Section 3.1.19 26
Previously Leased Real Property Section 3.1.14 22
Prospectus/Information Statement Section 4.2.5 46
Reserves or Reserved Section 3.1.8 15
Returns Section 3.1.21.1 27
SEC Section 3.2.5 38
Shareholder Representatives Section 2.2 11
Subsidiary Section 8.9 63
Surviving Corporation Section 1.2.1 2
Tangible Personal Property Section 3.1.15 23
Taxes Section 3.1.21.3 28
Third Party Claims Section 6.5.2 58
ix
<PAGE>
AGREEMENT
OF
REORGANIZATION AND MERGER
THIS AGREEMENT OF REORGANIZATION AND MERGER (this "Agreement") is entered
into as of September 29, 1997 among Electro Scientific Industries, Inc., an
Oregon corporation ("ESI"), Applied Intelligent Systems, Inc., a Michigan
corporation ("AISI"), and Asteroid 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:
1
<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, Merger Corp. shall be
merged with and into AISI, and the outstanding shares of AISI Common Stock, no
par value (the "AISI Common Stock") shall be converted into the right to receive
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)(1)(A) and (a)(2)(E) 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 Merger Corp. with and into AISI (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.
1.2.1 The Surviving Corporation. At the Effective Time, Merger Corp.
shall be merged with and into AISI 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 Merger Corp.
shall cease and AISI shall be the surviving corporation (the "Surviving
Corporation"). The outstanding shares of AISI Common Stock shall
2
<PAGE>
be converted into shares of ESI Common Stock, and the outstanding shares of
capital stock of Merger Corp. shall be converted into shares of capital stock of
the Surviving Corporation, all on the basis, terms and conditions described in
Section 1.3.
1.2.2 Directors and Officers. At and as of the Effective Time, the
directors and officers of the Surviving Corporation shall be as follows:
Directors
Donald R. VanLuvanee
Barry L. Harmon
Larry T. Rapp
Officers
Donald R. VanLuvanee President and Chief Executive Officer
Barry L. Harmon Vice President and Chief Financial Officer
Larry T. Rapp Secretary
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 1,400,000
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
3
<PAGE>
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 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 by virtue
of the Merger and without any action on the part of the holder thereof, cease to
exist and be converted into and become one share of common stock of the
Surviving Corporation. After the Effective Time, ESI, the sole holder of shares
of Merger Corp. common stock outstanding immediately prior to the Effective
Time, shall, upon surrender for cancellation of a certificate representing such
shares to the Surviving Corporation, be entitled to receive in exchange
therefore a certificate representing the number of shares of common stock of the
Surviving Corporation into which such shares of Merger Corp. common stock have
been converted pursuant to this Section 1.3.3. Until so surrendered, the
certificates which prior to the Merger represented shares of Merger Corp. common
stock shall be deemed, for all corporate purposes, including voting entitlement,
to evidence ownership of the shares of the Surviving Corporation common stock
into which such shares of Merger Corp. common stock shall have been converted.
4
<PAGE>
1.3.4 Options. Except as otherwise provided in this Section 1.3.4, the
terms and provisions of the stock options (the "Options") held by those AISI
option holders identified in Schedule 3.1.2 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 424(a) of the Code so
as not to constitute a modification, renewal or extension of the Option within
the meaning of Section 424(h) 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.
5
<PAGE>
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 below and stock
powers 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 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
6
<PAGE>
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. Promptly following the Closing, ESI's transfer agent shall
deliver to AISI shareholders (i) 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 of such shareholder, to the extent
provided for in Section 6.3, and the appointment of the Shareholder
Representatives (as defined in Section 2.2); and (ii) 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.
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
7
<PAGE>
"Average Sale Price" shall mean 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.
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 for all
8
<PAGE>
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 or offer to
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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, the
Surviving Corporation 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
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otherwise in the Surviving Corporation its right, title or interest in, to, or
under any of the rights, properties or assets of AISI or Merger Corp. acquired
or to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of AISI or Merger Corp. 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 Merger Corp, 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 the Surviving Corporation 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 the Surviving Corporation 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.
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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 3,581,391 shares were
outstanding on June 30, 1997 and options to purchase 1,010,210 shares were
outstanding on June 30, 1997 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, the "AISI Stock
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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 generally and except that
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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
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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, 1996, 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 June 30, 1997 (the "Current Balance
Sheet") and the related statements of income and stockholders' equity for the
six 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 June 30, 1997 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 as of June 30, 1997, 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 agreements
between AISI and any customer which would cause any sales reflected in the
Financial Statements
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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, 1996
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 inventory in the ordinary course
of business), any lease or sublease, any guaranty, assumption or
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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 June 30, 1997) 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 June
30, 1997) 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, 1996
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 material
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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 or
regulations, other than violations which individually or in the aggregate do
not, and, with the passage of time will
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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.
3.1.13.2 Employee Benefits. Schedule 3.1.13.2 lists all pension,
retirement, profit sharing, deferred compensation, bonus, commission, incentive
compensation
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(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 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
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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 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, 1996 and as of August 31,
1997. 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
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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 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.
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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 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
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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;
(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
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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 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
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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.
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,
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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 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
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examined by the applicable taxing authorities for all periods to and including
the fiscal year ended December 31, 1996 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 1996 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.
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
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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 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
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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 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.
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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 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.
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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 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
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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 June 30, 1997. 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 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,
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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 August 31, 1997 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 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.
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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/Information Statement. The information provided in
writing by AISI (or its representatives) regarding AISI specifically to be
contained in the Prospectus/Information Statement (as defined in Section 4.2.5)
to be mailed to shareholders of AISI pursuant to Section 4.2.5 hereof and such
AISI information supplemented or reviewed by AISI (or its representatives)
without objection prior to the mailing of such Prospectus/Information 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; 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/Information
Statement.
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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).
3.1.39 1998 Forecast. The AISI 1998 forecast dated September 19, 1997
(the "1998 Forecast") provided to ESI was prepared by AISI in good faith, is
based on reasonable assumptions and represents AISI's best estimate of its
future results. To the best of AISI's knowledge, no assumption underlying the
1998 Forecast has changed.
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 9,853,000 shares
were outstanding on July 15, 1997 and 1,000,000 shares of Preferred Stock, of
which no shares were outstanding on July 15, 1997. All of the outstanding shares
of capital stock of ESI have been duly authorized and are
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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 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 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
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amendments thereto, filed with the Securities and Exchange Commission (the
"SEC") since May 31, 1997 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, 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.
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3.2.9 Prospectus/Information Statement. The information regarding ESI
contained in the Prospectus/Information Statement (as defined in Section 4.2.5)
to be mailed to AISI shareholders pursuant to Section 4.2.5 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/Information Statement which
is furnished in writing by AISI (or its representatives) expressly for use in
such Prospectus/Information 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/Information 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.
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.
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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.
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.
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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.
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:
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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 June 30, 1997;
(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;
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(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;
(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;
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(m) change its method of accounting as in effect at December 31, 1996,
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 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
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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.
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,
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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 master copy of the Prospectus/Information Statement relating to this
Agreement ("Prospectus/Information Statement") in the form declared effective by
the Securities and Exchange Commission, AISI will immediately cause a copy of
the Prospectus/Information 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, and (ii) 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/Information Statement and
Registration Statement. AISI will promptly provide to ESI for inclusion within
the Prospectus/Information 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:
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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 registering the ESI Common Stock into
which the AISI Common Stock will be converted pursuant to Section 1.3, and ESI
will use its best efforts to cause such Registration Statement to be declared
effective.
4.3.3 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.
4.3.4 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.
4.3.5 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
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hereto, stock certificates representing the number of shares of ESI Common Stock
to be issued in the Merger.
4.3.6 Registration of Option Shares. ESI shall use its best efforts to
cause the shares of ESI Common Stock issuable upon exercise of the Options
(assumed pursuant to Section 1.3.4 of this 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.
4.3.7 Directors & Officers Insurance. For a period of at least two
years following the Effective Time, ESI shall, or shall cause the Surviving
Corporation 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.
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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:
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)(E) of the Code Requirement. The parties will
be satisfied that AISI will hold, after the Merger 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 Merger Corp.
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immediately prior to the Merger and will retain 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.
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 and
information statements, including all
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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 May 31, 1997 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, other than changes
permitted or contemplated by this Agreement.
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 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.
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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
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, A Legal Professional Association ("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; Completion of Inspection.
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5.3.4.1 No Material Adverse Change. Since June 30, 1997 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.
5.3.4.2 Completion of Investigation. ESI shall have completed to
its satisfaction its investigation of AISI's business, including without
limitation, the investigation referred to in Section 4.2.3, and such
investigation shall have not revealed (1) any facts or circumstances (including
those arising as a result of the acquisition contemplated hereby) that ESI
believes are reasonably likely to have a material adverse effect on the
business, properties, financial condition, or results of operations of AISI or
the 1998 Forecast, or (2) any facts or circumstances (including those arising as
a result of the acquisition contemplated hereby) indicating that the Merger is
reasonably likely to dilute ESI's earnings per share for its fiscal quarter
ending November 30, 1997 or its fiscal quarter ending February 28, 1998 or its
fiscal year ending May 31, 1998.
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 Act of 1933, as amended, and under the securities laws of
such states as counsel for ESI shall deem
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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 Affiliate Representation Letters. ESI shall have received from
each of the persons or entities listed on Schedule 5.3.7 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.
5.3.8 Continuity of Interests Letter. 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 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.
5.3.9 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.
5.3.10 Physical Count of Assets. At a mutually agreeable time, 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.
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5.3.11 Tax Clearance Certificate. AISI shall deliver to ESI a tax
clearance certificate from the applicable agencies of the State of Michigan.
5.3.12 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.
5.3.13 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.
5.3.14 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.
5.3.15 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.
5.3.16 Fairness Opinion. ESI shall have received from Alex. Brown &
Sons an opinion that the Conversion Ratio is fair, from a financial point of
view, to the holders of ESI Common Stock.
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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, Merger Corp. and the
Surviving Corporation and their respective officers, directors and shareholders
(collectively, the "Indemnified Parties") from, for and against any (a) 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, and (b) Damages (excluding, in this
instance, attorneys fees) incurred by an Indemnified Party in connection with
the prosecution, defense of counterclaim or settlement of the litigation
described in Section 3.1.11 of the Disclosure Schedule (the "Disclosed
Litigation").
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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 other than the representations
regarding taxes in Section 3.1.21.
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.
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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 and the
Disclosed Litigation.
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
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in good faith, the Shareholder Representatives shall thereafter have the right
to contest, settle or compromise the Third Party Claim.
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 November 1, 1997, 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 shall not have been obtained by November 1, 1997;
(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;
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(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;
(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
fiduciary 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
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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;
(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 by ESI (other than pursuant to Section 7.1 and 7.2)
and all conditions to the obligations of ESI and Merger Corp. in Sections 5.1
and 5.3 have been fulfilled.
(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 shall be
entitled upon termination of this Agreement under the conditions described in
Section 7.3; provided, however, nothing in
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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.
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
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this Agreement is intended or shall be construed to confer upon or give to a
person, firm or 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
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similar functions with respect to such corporation or other organization is
directly or indirectly 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:
3923 Ranchero Drive
Ann Arbor, Michigan 48108
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
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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
65
<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: Sr. Vice President
Applied Intelligent Systems, Inc.
By J.E. ANDERSON
--------------------------------------
Name: James E. Anderson
Title: President & CEO
Asteroid Merger Corp.
By BARRY L. HARMON
--------------------------------------
Name: Barry L. Harmon
Title: Sr. Vice President
66
<PAGE>
AMENDMENT NO. 1
AGREEMENT OF REORGANIZATION AND MERGER
This Amendment No. 1 to the Agreement of Reorganization and Merger, dated
September 29, 1997 (the "Agreement"), is entered into by and among Electro
Scientific Industries, Inc. ("ESI"), Applied Intelligent Systems, Inc. ("AISI")
and Asteroid Merger Corp. ("Merger Corp.") effective as of October 8, 1997.
1. Amendment of Section 1.7 (Closing). Section 1.7 of the Agreement shall
be amended to read in its entirety as follows:
"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 November 30, 1997, or
as soon as is practicable following 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)." (new language underscored)
2. Amendment of Section 7.2(a) and (b) (Termination by Either AISI or ESI).
Sections 7.2(a) and 7.2(b) of the Agreement shall be amended to read in their
entirety as follows:
"(a) by ESI or AISI if the Merger shall not have become
effective on or prior to December 31, 1997, 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 shall not have been obtained by
December 31, 1997;" (new language underscored)
3. Deletion of Section 5.3.4.2 (Completion of Investigation). Section
5.3.4.2 of the Agreement is deleted in its entirety.
<PAGE>
4. Deletion of Section 5.3.16 (Fairness Opinion). Section 5.3.16 of the
Agreement, requiring that ESI receive a fairness opinion as a condition to
Closing, is deleted in its entirety.
IN WITNESS WHEREOF, this Amendment to the Agreement has been executed by
the undersigned as of the date written above.
Electro Scientific Industries, Inc. Applied Intelligent Systems, Inc.
By: BARRY L. HARMON By: JAMES E. ANDERSON
------------------------------ ------------------------------
Name: Barry L. Harmon Name: James E. Anderson
---------------------------- ----------------------------
Title: Senior Vice President Title: President & CEO
--------------------------- ---------------------------
Asteroid Merger Corp.
By: BARRY L. HARMON
------------------------------
Name: Barry L. Harmon
----------------------------
Title: Vice President
---------------------------
<PAGE>
AMENDMENT NO. 2
AGREEMENT OF REORGANIZATION AND MERGER
This Amendment No. 2 to the Agreement of Reorganization and Merger, dated
September 29, 1997 (the "Agreement"), is entered into by and among Electro
Scientific Industries, Inc. ("ESI"), Applied Intelligent Systems, Inc. ("AISI")
and Asteroid Merger Corp. ("Merger Corp.") effective as of November 13, 1997.
In recognition of amendments made to the Michigan statutes governing
dissenters' rights following the execution of the Agreement, Section 1.5 of the
Agreement, describing dissenters' rights, is hereby deleted. In addition, all
other references to dissenters' rights in the Agreement are hereby deleted.
IN WITNESS WHEREOF, this Amendment to the Agreement has been executed by
the undersigned as of the date written above.
Electro Scientific Industries, Inc. Applied Intelligent Systems, Inc.
By: LARRY T. RAPP By: JON G. EHRMANN
------------------------------- -------------------------------
Name: Larry T. Rapp Name: Jon G. Ehrmann
------------------------- -----------------------------
Title: Vice President and Title: VP - Finance & CFO
Corporate Secretary ----------------------------
------------------------
Asteroid Merger Corp.
By: LARRY T. RAPP
-------------------------------
Name: Larry T. Rapp
-------------------------
Title: Corporate Secretary
------------------------
<PAGE>
ANNEX B
September 29, 1997
Board of Directors
Applied Intelligent Systems, Inc.
3923 Ranchero Drive
Ann Arbor, MI 48108
Attention: James Anderson - President and Chief Executive Officer
Gentlemen:
Applied Intelligent Systems, Inc. ("AISI" or the "Company") has entered into an
Agreement of Reorganization and Merger (the "Agreement") dated as of September
29, 1997, by and among the Company, Electro Scientific Industries, Inc. ("ESIO")
and Asteroid Merger Corp., a wholly-owned subsidiary of ESIO (the "Merger").
Pursuant to the Merger, we understand that each outstanding share of common
stock of AISI (the "AISI Common Stock") will be converted into and represent the
right to receive 0.305 shares of ESIO (the "Consideration"). The terms and
conditions of the Merger, and the Consideration to be received by the AISI
shareholders pursuant to the Merger, are set forth in more detail in the
Agreement.
You have asked Adams, Harkness & Hill, Inc. ("AH&H") for its opinion as to the
fairness to the current stockholders of AISI from a financial point of view of
the Consideration to be received by AISI in the Merger (the "Opinion"). AH&H, as
part of its investment banking business, is continually engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate and other
purposes.
In rendering its opinion, AH&H, among other things: (i) analyzed certain
publicly available financial statements and other information concerning ESIO;
(ii) analyzed certain internal financial statements and forecasts and other
financial and operating data concerning AISI prepared by the management of AISI;
(iii) analyzed certain forecasts and related assumptions pertaining to ESIO
obtained from third party research analysts; (iv) discussed the past and current
operations and financial condition and the prospects of AISI and ESIO with the
management of AISI and ESIO, respectively, and analyzed the pro forma impact of
the Merger on ESIO's earnings per share; (v) reviewed certain of the reported
prices and trading activity of ESIO's Common Stock over the past 33 months; (vi)
compared the financial performance of ESIO and certain of the prices and trading
activity of ESIO's Common Stock with that of certain other comparable publicly
traded companies and their securities; (vii) reviewed the financial terms, to
the extent publicly available, of certain comparable acquisition transactions;
(viii) reviewed and
<PAGE>
Applied Intelligent Systems, Inc.
September 29, 1997
Page 2
discussed with the senior management of AISI the strategic rationale for the
Merger and the benefits of the Merger to AISI; (ix) reviewed a draft of the
Agreement dated as of September 29, 1997; (x) discussed with senior management
of AISI the impact of its customer concentration on its financial and operating
results; and (xi) performed such other studies, analyses and inquiries and
considered such other information as AH&H deemed relevant.
In connection with our review, we have not independently verified any of the
foregoing information provided to us and have relied, with your consent, on its
being complete and accurate in all material respects. With respect to any
financial forecasts reviewed relating to the prospects of AISI and ESIO, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of AISI's and ESIO's management as
to the future financial performance of AISI and ESIO. Our Opinion is rendered on
the basis of securities market conditions prevailing as of the date hereof and
on the conditions and prospects, financial and otherwise, of AISI and ESIO as
known to us on the date hereof. We have not conducted, nor have we received
copies of, any independent evaluation or appraisal of any of the assets of AISI
and ESIO.
The Opinion rendered by us pursuant hereto may be referred to in the minutes of
the meetings of your Board of Directors.
You acknowledge that our Opinion and any oral advice given by us to you in
connection with our engagement are intended solely for your use in connection
with the Merger, and your evaluation of the Consideration to be received in the
Merger, but does not constitute a recommendation to any stockholder or
shareholder to approve the Merger, and you agree that, except as provided in the
preceding paragraph, no such opinion or advice shall be reproduced,
disseminated, quoted or referred to at any time, in any manner, or for any
purpose, without our prior written consent (except to the extent otherwise
required by law).
We agree that any confidential or non-public information furnished to us by you
or at your direction in connection with our rendering services hereunder will be
used solely for the purpose of performing our services hereunder and that such
information will be kept confidential by us (except to the extent otherwise
required by law).
Based on the above factors considered by AH&H and subject to the foregoing, it
is our opinion that as of the date hereof, the consideration to be received in
the Merger by AISI is fair to the stockholders of AISI from a financial point of
view.
Very truly yours,
ADAMS, HARKNESS & HILL, INC.
By: THEODORE L. STEBBINS
------------------------------
Theodore L. Stebbins
Managing Director
TLS:pal
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS/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 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.
II-1
<PAGE>
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.
2-A. Amendment No. 1 to the Agreement of Reorganization and Merger.
*2-B. Amendment No. 2 to the 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. Tax opinion of Brouse & McDowell.
10-A. ESI 1983 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10-E of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1986.
10-B. ESI 1989 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10-B of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997.
11. Statement of Calculation of Earnings Per Share.
21. Subsidiaries of the Company.
*23-A.1 Consent of Independent Public Accountants.
*23-A.2 Consent of Independent Public Accountants.
II-2
<PAGE>
23-B. Consent of Stoel Rives LLP. Included in Exhibit 5 to this
Registration Statement.
23-C. Consent of Brouse & McDowell. Included in Exhibit 8 to this
Registration Statement.
*23-D. Consent of Adams, Harkness & Hill, Inc.
24. Powers of Attorney.
* Enclosed herewith
(b) Financial Statement Schedules. Not Applicable.
Item 22. Undertakings.
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(b) That, for the purpose of determining any liability under the
Securities Act, 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.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
2. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
Prospectus/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/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.
3. The registrant undertakes that every Prospectus/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
II-3
<PAGE>
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.
4. 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.
5. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 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 November 20, 1997.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
By BARRY L. HARMON
-------------------------------------
Barry L. Harmon
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities indicated on November 20, 1997.
Signature Title
--------- -----
* /s/ Donald R. VanLuvanee President, Chief Executive
- ---------------------------------- Executive Officer and Director
Donald R. VanLuvanee (Principal Executive Officer)
/s/ Barry L. Harmon Senior Vice President of Finance
- ---------------------------------- and Chief Financial Officer
Barry L. Harmon (Principal Financial and
Accounting Officer)
* /s/ David F. Bolender Chairman of the Board
- ----------------------------------
David F. Bolender
* /s/ Douglas C. Strain Vice-Chairman of the Board
- ----------------------------------
Douglas C. Strain
* /s/ Larry L. Hansen Director
- ----------------------------------
Larry L. Hansen
* /s/ W. Arthur Porter Director
- ----------------------------------
W. Arthur Porter
* /s/ Vernon B. Ryles, Jr. Director
- ----------------------------------
Vernon B. Ryles, Jr.
* /s/ Keith L. Thomson Director
- ----------------------------------
Keith L. Thomson
*By Barry L. Harmon Director
-----------------------------
Barry L. Harmon
Attorney-In-Fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
2. Agreement of Reorganization and Merger.
2-A. Amendment No. 1 to the Agreement of Reorganization and Merger.
*2-B. Amendment No. 2 to the 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. Tax opinion of Brouse & McDowell.
10-A. ESI 1983 Stock Option Plan, as amended. Incorporated by reference
to Exhibit 10-E of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1986.
10-B. ESI 1989 Stock Option Plan, as amended. Incorporated by reference
to Exhibit 10-B of the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1997.
11. Statement of Calculation of Earnings Per Share.
21. Subsidiaries of the Company.
*23-A.1 Consent of Independent Public Accountants.
*23-A.2 Consent 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. Included in Exhibit 8 to this
Registration Statement.
*23-D. Consent of Adams, Harkness & Hill, Inc.
24. Powers of Attorney. Included in signature pages to this
Registration Statement.
* Enclosed herewith
AMENDMENT NO. 2
AGREEMENT OF REORGANIZATION AND MERGER
This Amendment No. 2 to the Agreement of Reorganization and Merger, dated
September 29, 1997 (the "Agreement"), is entered into by and among Electro
Scientific Industries, Inc. ("ESI"), Applied Intelligent Systems, Inc. ("AISI")
and Asteroid Merger Corp. ("Merger Corp.") effective as of November 13, 1997.
In recognition of amendments made to the Michigan statutes governing
dissenters' rights following the execution of the Agreement, Section 1.5 of the
Agreement, describing dissenters' rights, is hereby deleted. In addition, all
other references to dissenters' rights in the Agreement are hereby deleted.
IN WITNESS WHEREOF, this Amendment to the Agreement has been executed by
the undersigned as of the date written above.
Electro Scientific Industries, Inc. Applied Intelligent Systems, Inc.
By: LARRY T. RAPP By: JON G. EHRMANN
------------------------------- -------------------------------
Name: Larry T. Rapp Name: Jon G. Ehrmann
------------------------- -----------------------------
Title: Vice President and Title: VP - Finance & CFO
Corporate Secretary ----------------------------
------------------------
Asteroid Merger Corp.
By: LARRY T. RAPP
-------------------------------
Name: Larry T. Rapp
-------------------------
Title: Corporate Secretary
------------------------
Exhibit 5
STOEL RIVES LLP
---------------
ATTORNEYS
Standard Insurance Center
900 SW Fifth Avenue, Suite 2300
Portland, Oregon 97204-1268
Telephone (503) 224-3380
Fax (503) 220-2480
TDD (503) 221-1045
November 19, 1997
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 1,200,000 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 September 29, 1997 (the
"Agreement") between the Company, Asteroid 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.
We hereby consent to the use of our name in the Registration Statement and
in the Prospectus/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
November 18, 1997
Electro Scientific Industries, Inc.
13900 NW Science Park Drive
Portland, Oregon 97229
Gentlemen:
We have acted as counsel to Applied Intelligent Systems, Inc., a Michigan
corporation ("AISI"), in connection with the proposed acquisition of AISI by
Electro Scientific Industries, Inc., an Oregon corporation ("ESI") and in
connection with the transactions contemplated by the Agreement of Reorganization
and Merger dated September 29, 1997 ("Agreement"). The Agreement provides for
the merger of Asteroid Merger Corp., an Oregon corporation ("Merger Corp.") with
and into AISI, in a transaction whereby all of the issued and outstanding shares
of AISI will be exchanged for that number of shares of common stock of ESI
delineated in the Agreement (the "Merger").
This opinion is being furnished to you pursuant to Section 5.3.2 of the
Agreement. We define legal opinions as an expression of our professional
judgment and as such they should not be construed by you as a guarantee of a
specific outcome or result. Capitalized terms used in this opinion have the same
meanings as in the Agreement, unless otherwise defined herein. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as legal counsel to AISI in connection with the Merger. As such,
and for the purpose of rendering this opinion, we have examined and are relying
upon, without any independent investigation or review thereof, the truth and
accuracy now and at all relevant times up to and including the Effective Time of
the Merger of the statements, covenants, representations and warranties made by
the parties to the Merger in the following documents (including all schedules
and exhibits thereto):
1. The Agreement;
2. The Continuity of Interest Letters ("Continuity Letters") executed by
all AISI directors and officers and certain shareholders of AISI,
attached hereto as Exhibit A.
3. Representations made to us by AISI, Merger Corp. and ESI in a letter,
the form of which is attached hereto as Exhibit B (the "Representation
Letter");
<PAGE>
Electro Scientific Industries, Inc.
November 18, 1997
Page 2
4. The Prospectus/Consent and Information Statement on Form S-4 (File No.
333-36681) of ESI and AISI, including all amendments thereto (the
"Prospectus"); and
5. Such other instruments and documents related to the formation,
organization and operation of ESI, Merger Corp. and AISI, or to the
consummation of the Merger and the transactions contemplated thereby,
as we have deemed necessary or appropriate to review, including but
not limited to the opinion of Arthur Andersen LLP that the transaction
will be treated as a "pooling-of interests" in conformity with
generally accepted rules and regulations of the Securities and
Exchange Commission.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
A. Original documents (including signatures) are authentic, and documents
submitted to us as copies conform to the original documents.
B. Any representation or statement contained in the documents related to
the Merger made "to the knowledge of" or otherwise similarly qualified
is correct without such qualification. As to all matters in which a
person or entity making a representation contained in the documents
related to the Merger has represented that such person or entity
either is not a party to, does not have, or is not aware of, any plan,
intention, understanding or agreement, there is in fact no such plan,
intention, understanding or agreement.
C. The Merger will be consummated pursuant to the Agreement and will be
effective under the laws of the States of Michigan and Oregon ;
D. There is no plan or intention on the part of AISI stockholders in the
aggregate (a "Plan"), to engage in a sale, exchange, transfer,
reduction of risk of ownership by short sale or otherwise, or other
disposition of, directly or indirectly (a "Sale"), of shares of ESI
Common Stock to be issued to them in the Merger ("Parent Exchange
Stock") that would reduce the AISI stockholders' ownership of Parent
Exchange Stock to a number of shares having a value, as of the
Effective Time of the Merger, of less than fifty percent (50%) of the
value of all of the formerly outstanding capital stock of AISI as of
the same date ("Outstanding AISI Common Stock"). For purposes of this
representation, a Sale of Parent Exchange Stock shall be considered to
have occurred pursuant to a Plan: (i) to the extent cash is received
in lieu of a fractional share of Parent Exchange Stock, or (ii) if
such Sale occurs in a transaction that is in
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Electro Scientific Industries, Inc.
November 18, 1997
Page 3
contemplation of or related to the Merger (a "Related Transaction").
In addition, for purposes of this assumption only, shares of AISI
Common Stock with respect to which a Sale occurs in any Related
Transaction shall be considered to have been shares of Outstanding
AISI Common Stock that were then exchanged for Parent Exchange Stock
in the Merger and then disposed of pursuant to a Plan;
E. In accordance with the representations, warranties and covenants made
in the Agreement, the Continuity Letter and the Representation Letter
relating to the assets retained by AISI, the assets retained by AISI
pursuant to the Merger represents at least ninety percent (90%) of the
fair market value of the net assets and at least seventy percent (70%)
of the fair market value of the gross assets held by AISI immediately
prior to the Merger;
F. To the extent any expenses relating to the Merger (or the "plan of
reorganization" within the meaning of Treas. Reg.ss.1.368-l(e) with
respect to the Merger) are funded directly or indirectly by a party
other than the incurring party, such expenses will be within the
guidelines established in Rev. Rule. 73-54, 1973-1 C.B. 187. Neither
ESI, Merger Corp., AISI, nor any member of a Controlled Group in which
ESI or AISI is also a member is directly or indirectly funding or
guaranteeing the expenses of any AISI shareholder in connection with
the Merger and all transactions and proceedings relating thereto; and
G. Whenever in this opinion we have indicated that we are relying upon or
have assumed a particular matter, either without independent
investigation or review thereof, nothing has come to our attention
which would lead us to question the accuracy of such factual matters.
Based on our examination of the foregoing items, and subject to the assumptions,
exceptions, limitations and qualifications set forth herein, we are of the
opinion that, for United States federal income tax purposes, the Merger will
constitute a reorganization as defined in Sections 368(a)(1)(A) and (a)(2)(E) of
the Code. In such event, the following are the material United States federal
income tax consequences that will result:
(a) No gain or loss should be recognized by the holders of AISI Common
Stock upon their receipt in the Merger of the Parent Exchange Stock
(except to the extent of cash received in lieu of a fractional share
thereof) in exchange therefor;
(b) The aggregate tax basis of the Parent Exchange Stock so received in
the Merger (including any fractional share not actually received)
should be the same as the aggregate tax basis of the AISI Common Stock
surrendered in exchange therefor;
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Electro Scientific Industries, Inc.
November 18, 1997
Page 4
(c) The holding period of the Parent Exchange Stock received in the Merger
should include the period for which the AISI Common Stock surrendered
in exchange therefor was held, provided that the AISI Common Stock is
held as a capital asset at the time of the Merger;
(d) A fractional share of the Parent Exchange Stock not actually issued
pursuant to the Merger but for which cash is received in lieu thereof
should be treated as if a fractional share of Parent Exchange Stock
had been issued in the Merger and then redeemed by ESI, and an AISI
shareholder receiving such cash should generally recognize gain or
loss upon such payment equal to the difference (if any) between such
shareholder's basis in the fractional share and the amount of cash
received. Such gain or loss should be a capital gain or loss if, at
the time of the Merger, AISI Common Stock is held as a capital asset;
(e) AISI, ESI and Merger Corp. will each be deemed under Section 368(b) to
be "a party to a reorganization;"
(f) No gain or loss should be recognized by Merger Corp. upon the transfer
of all of its assets to AISI in exchange for the Parent Exchange Stock
and the assumption of Merger Corp.'s liabilities;
(g) No gain or loss should be recognized by either ESI or Merger Corp.
upon the receipt by AISI of all of the assets of Merger Corp. in
exchange for the Parent Exchange Stock and the assumption by AISI of
the liabilities of Merger Corp. as a result of the consummation of the
Merger;
(h) The basis of the assets of AISI retained in the Merger will be the
same as the basis of such assets in the hands of AISI immediately
prior to the Merger;
(i) The holding period for each asset of AISI will include the period for
which the asset was held by AISI; and
(j) The basis of AISI's stock in the hands of ESI will as a result of the
Merger be increased by an amount equal to the basis of the assets of
AISI and decreased by the sum of the amount of the liabilities of AISI
and the amount of liabilities to which the assets of AISI are subject.
In addition to the matters set forth above, this opinion is subject to the
following additional exceptions, limitations and qualifications:
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Electro Scientific Industries, Inc.
November 18, 1997
Page 5
1. This opinion represents and is based upon our judgment regarding the
application of United States federal income tax laws arising under the
Code, existing judicial decisions, administrative regulations and
published rulings and procedures. Our opinion expressly does not
address the application of any tax laws other than United States
federal income tax laws, including the tax laws of any country other
than the United States and the tax laws of any state or local
jurisdiction. Furthermore, our opinion is not binding upon the
Internal Revenue Service ("IRS") or the courts, and there is no
assurance that the IRS will not successfully assert a contrary
position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the
accuracy of the conclusions stated herein. We undertake no
responsibility to advise you of any new developments in the
application or interpretation of the United States federal income tax
laws.
2. This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code and the consequences
thereof as expressly set forth herein. It does not address any other
federal, state, local or foreign tax consequences that may result from
the Merger or any other transaction (including any transaction
undertaken in connection with the Merger). In particular, we express
no opinion regarding:
(a) whether and the extent to which any AISI shareholder who has
provided or will provide services to AISI, Merger Corp. or ESI
will have compensation income under any provision of the Code;
(b) the effects of such compensation income described in 2(a) above,
including but not limited to the effect upon the basis and
holding period of the ESI Common Stock received by any such
shareholder in the Merger;
(c) the potential application of the "golden parachute" provisions
(Sections 280G, 3121(v)(2) and 4999) of the Code, the alternative
minimum tax provisions (Sections 55, 56 and 57) of the Code or
Sections 305 and 306 of the Code, or the effect of the
classification of ESI, Merger Corp. or AISI as a collapsible
corporation within the meaning of Section 341 of the Code; and
the regulations promulgated thereunder;
(d) any consequences to ESI, Merger Corp. or AISI as a result of the
Merger relating to the survival and/or availability after the
Merger of any federal income tax attributes, including any net
operating loss carryover, after application of any provision of
the Code, as well as the regulations promulgated thereunder; and
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Electro Scientific Industries, Inc.
November 18, 1997
Page 6
(e) the tax consequences of the Merger that may be relevant to
particular shareholders of AISI, such as dealers in securities,
corporate shareholders subject to the alternative minimum tax,
foreign persons, holders of warrants, and holders of shares
acquired upon exercise of stock options or in other compensatory
transactions.
3. No opinion is expressed as to any transaction other than the Merger as
described in the Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Agreement are not
consummated in accordance with the terms of such Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we
relied are not true and accurate at all relevant times. In the event
any one of the statements, representations, warranties or assumptions
upon which we have relied to issue this opinion is incorrect, our
opinion might be adversely affected and may not be relied upon.
This opinion is furnished to you by us, as counsel to AISI, in connection with
the Agreement. Except as may be required by law, this opinion may not be filed
with or furnished to, any person, governmental entity, firm, or corporation, or
referred to, in whole or in part, in any document without our prior written
consent. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the discussion regarding this opinion that is set
forth in the Prospectus. We disclaim any undertaking to advise you of changes
which thereafter may be brought to our attention, including any change in the
law, whether by legislative or regulatory action, judicial interpretation or
otherwise, or of any change of facts as they presently exist.
Very truly yours,
Brouse & McDowell
EXHIBIT 23-A.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
Amendment No. 2 to the Form S-4 Registration Statement and related Prospectus
pertaining to Electro Scientific Industries, Inc. (ESI) of our report dated
August 15, 1997 and to all references to our Firm included in this Registration
Statement and related Prospectus.
ARTHUR ANDERSEN LLP
Portland, Oregon
November 18, 1997
EXHIBIT 23-A.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
Amendment No. 2 to the Form S-4 Registration Statement and related Prospectus,
pertaining to Applied Intelligent Systems, Inc. (AISI), of our report dated
September 26, 1997 and to all references to our firm included in or made a part
of this Registration Statement and related Prospectus.
ARTHUR ANDERSEN LLP
Ann Arbor, Michigan,
November 18, 1997
EXHIBIT 23-D
Adams, Harkness & Hill, Inc.
AH&H
November 17, 1997
Electro Scientific Industries, Inc.
13900 NW Science Park Drive
Portland, OR 97229-5497
Attention: Donald R. VanLuvanee - President and Chief Executive Officer
Gentlemen:
Pursuant to your request, we hereby consent to the use of our name and to the
summary of our opinion under the captions "SUMMARY: Fairness Opinion of AISI
Financial Advisor" and "FAIRNESS OPINION OF AISI FINANCIAL ADVISORS," and to the
reproduction of our opinion letter as Annex B to the Prospectus/Information
Statement of Electro Scientific Industries, Inc., which is made part of a
Registration Statement on Form S-4 of Electro Scientific Industries, Inc. for
the registration of 1,200,000 shares of its common stock, without par value.
Yours Truly,
ADAMS, HARKNESS & HILL, INC.
By: THEODORE L. STEBBINS
------------------------------
Theodore L. Stebbins
Managing Director
TLS:ask
60 State Street
Boston, Massachusetts 02109
(617) 371-3900
