<PAGE>
As filed with the Securities and Exchange Commission on September 30, 1997
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
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. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Title of Each Amount to be Proposed Maximum Proposed Maximum Amount of
Class of Registered (1) Offering Price Aggregate Offering Registration
Securities to Per Unit(2) Price(2) Fee(2)
be Registered
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
no par value 1,200,000 shares n/a $5,981,000 $1,813
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
(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.
--------------------------
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
NO. ITEM IN FORM S-4 PROSPECTUS/INFORMATION STATEMENT
- ---- ---------------- --------------------------------
A. INFORMATION ABOUT THE
TRANSACTION.
1. Forepart of the Registration Facing Page of Registration
Statement and Outside Front Cover Statement; Cross-Reference Sheet;
Page of Prospectus/Information Outside Front Cover Page of
Statement . . . . . . . . . . . . . Prospectus/Information Statement
2. Inside Front and Outside Back Available Information;
Cover Pages of Incorporation of Documents by
Prospectus/Information Statement. . Reference; Table of Contents
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; Comparison of
Shareholder Rights
5. Pro Forma Financial Information . . Not applicable
6. Material Contacts With The Merger; The Merger Agreement
the Company Being Acquired. . . . .
7. Additional Information Required Not applicable
For Reoffering by Persons and
Parties Deemed to be Underwriters .
8. Interests of Named Experts Not applicable
and Counsel . . . . . . . . . . . .
9. Disclosure of Commission Position Not applicable
on Indemnification for Securities
Act Liabilities . . . . . . . . . .
B. INFORMATION ABOUT REGISTRANT.
10. Information With Respect to Outside Front Cover Page of
S-3 Registrants . . . . . . . . . . Prospectus/Information Statement;
Inside Front Cover Page of
Prospectus/Information Statement;
Summary; Risk Factors;
Information Concerning ESI
<PAGE>
11. Incorporation of Certain Inside front cover page of
Information by Reference. . . . . . Prospectus/Information Statement
12. Information With Respect to S-2 Not applicable
or S-3 Registrants. . . . . . . . .
13. Incorporation of Certain Not applicable
Information by Reference. . . . . .
14. Information With Respect to Not applicable
Registrants Other Than S-2 or S-3
Registrants . . . . . . . . . . . .
C. INFORMATION ABOUT THE COMPANY
BEING ACQUIRED.
15. Information With Respect to 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 S-3 Prospectus/Information Statement;
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
or Authorizations are to be Consent; The Merger; The Merger
Solicited . . . . . . . . . . . . . Agreement; AISI Voting Securities
and Principal Shareholders
19. Information if Proxies, Consents Not Applicable
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 mailed 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.
<PAGE>
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.
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.
ii
<PAGE>
AVAILABLE INFORMATION
ESI is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files periodic reports and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements, and other information concerning ESI may be inspected
and copies may be obtained at prescribed rates at the offices of the SEC,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, as well as at the
following regional offices: 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.
ESI hereby undertakes to provide without charge to each person to whom a
copy of this Prospectus/Information Statement is delivered, upon written or oral
request to Larry T. Rapp, Vice President and Corporate Secretary, Electro
Scientific Industries, Inc. 13900 NW Science Park Drive, Portland, Oregon 97229,
(503) 641-4141, copies of any and all of the information that has been
incorporated by reference into this Prospectus/Information Statement, other than
exhibits to such information unless such exhibits are specifically incorporated
by reference therein. The information relating to ESI contained in this
Prospectus/Information Statement does not purport to be comprehensive and should
be read together with the information contained in the documents or portions of
documents incorporated by reference into this Prospectus/Information Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC are incorporated herein by
reference:
1. ESI's Annual Report on Form 10-K for the fiscal year ended May 31,
1997.
2. ESI's Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1997.
3. ESI's Current Report on Form 8-K, as amended through Amendment No. 1
on Form 8-K/A, dated June 26, 1997.
4. The description of the Common Stock contained in ESI's Registration
Statement on Form 8-A filed with the Securities and Exchange
Commission under section 12 of the Securities Exchange Act of 1934, as
amended.
iii
<PAGE>
All reports and other documents subsequently filed by ESI pursuant to
sections 13(a), 13(c), 14, and 15(d) of the Securities Exchange Act of 1934, as
amended, prior to the termination of the offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of the
filing of such reports and documents.
THIS PROSPECTUS/INFORMATION STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE
UPON REQUEST FROM LARRY T. RAPP, VICE PRESIDENT AND CORPORATE SECRETARY, ELECTRO
SCIENTIFIC INDUSTRIES, INC., 13900 NW SCIENCE PARK DRIVE, PORTLAND, OREGON
97229, PHONE: (503) 641-4141. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ______________, 1997.
iv
<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. . . . . . . . . . . . . 10
AISI Selected Historical Financial Information . . . . . . . . . . . . 11
Unaudited Pro Forma Summary of Selected Financial Information . . . . 12
EQUIVALENT PER COMMON SHARE DATA . . . . . . . . . . . . . . . . . . . . 13
AISI SHAREHOLDERS WRITTEN CONSENT. . . . . . . . . . . . . . . . . . . . 15
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . 16
Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . . . 18
ESI's Reasons for the Merger. . . . . . . . . . . . . . . . . . . . . 18
AISI's Reasons for the Merger . . . . . . . . . . . . . . . . . . . . 19
Material U.S. Federal Income Tax Consequences . . . . . . . . . . . . . 19
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . 21
Interests of Certain Persons in the Merger. . . . . . . . . . . . . . . 21
Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Dissenter Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
THE MERGER AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Effective Time of the Merger. . . . . . . . . . . . . . . . . . . . . . 24
Conversion of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 24
Treatment of AISI Stock Options . . . . . . . . . . . . . . . . . . . . 24
Resale of ESI Common Stock. . . . . . . . . . . . . . . . . . . . . . . 25
AISI's Conduct of Business Pending the Merger . . . . . . . . . . . . . 25
Nonsolicitation of Alternative Transactions . . . . . . . . . . . . . . 26
Corporate Structure and Related Matters after the Merger. . . . . . . . 26
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Conditions to the Merger. . . . . . . . . . . . . . . . . . . . . . . . 27
Indemnity and Escrow Agreement. . . . . . . . . . . . . . . . . . . . . 28
Termination; Breakup Fees . . . . . . . . . . . . . . . . . . . . . . . 28
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
INFORMATION CONCERNING ESI. . . . . . . . . . . . . . . . . . . . . . . . 30
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Electronics Industry Overview . . . . . . . . . . . . . . . . . . . . . 30
Overview of Markets, Products and Strategy. . . . . . . . . . . . . . . 31
Sales, Marketing and Service. . . . . . . . . . . . . . . . . . . . . . 35
Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Research, Development and Technology. . . . . . . . . . . . . . . . . . 36
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Manufacturing and Supply. . . . . . . . . . . . . . . . . . . . . . . . 37
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
v
<PAGE>
Patents and Other Intellectual Property . . . . . . . . . . . . . . . . 38
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
INFORMATION CONCERNING AISI . . . . . . . . . . . . . . . . . . . . . . . 39
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
AISI MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS. . . . . . 43
DESCRIPTION OF AISI CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . 48
AISI VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . 49
COMPARISON OF SHAREHOLDER RIGHTS. . . . . . . . . . . . . . . . . . . . . 50
Amendment of Certificate or Articles of Incorporation;
Amendment of Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . 51
Special Meetings of Shareholders. . . . . . . . . . . . . . . . . . . . 52
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Provisions Relating to Directors. . . . . . . . . . . . . . . . . . . . 54
Anti-Takeover Statutes. . . . . . . . . . . . . . . . . . . . . . . . . 56
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . 59
AISI FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . F-1
LISTS OF ANNEXES
Annex A Agreement of Reorganization and Merger
Annex B Michigan Dissenter Rights Statutes
vi
<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, THE ANNEXES
HERETO AND DOCUMENTS INCORPORATED BY REFERENCE HEREIN. 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
the leading 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.
1
<PAGE>
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.
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 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 October
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
2
<PAGE>
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); (v) satisfactory completion of due diligence;
(vi) the receipt by ESI and AISI of certain opinions regarding tax and
accounting matters; and (vii) receipt by ESI of an opinion regarding the
fairness, from a financial point of view, of the transaction to holders of
ESI Common Stock. 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.
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 November 1, 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."
3
<PAGE>
AISI DISSENTER RIGHTS
Any AISI shareholder who does not execute the written consent of AISI
shareholders approving the Merger has the right, pursuant to Sections 761
through 774 of the Michigan Business Corporation Act ("MBCA"), to demand payment
from AISI of the fair value of his shares in lieu of converting such shares into
ESI Common Stock. Strict compliance with the procedures set forth in the
statute is required. See "The Merger--Dissenter Rights--AISI Shareholders."
REASONS FOR THE MERGER
ESI'S REASONS FOR THE MERGER
The Merger is expected to add to ESI's ability to serve the expanding
capital equipment needs of its global, multi-national customers in the
electronics industry. The Merger also offers the possibility of achieving
operating efficiencies through elimination of duplicate efforts and avoidance of
expected investments in research and development and in sales and distribution
channels that would occur if the businesses of the two companies were not
combined. See "The Merger--Reasons for the Merger--ESI's Reasons for the
Merger."
AISI'S REASONS FOR THE MERGER
After exploring various other strategic alternatives, including an initial
public offering, AISI concluded that a sale of AISI to ESI would provide market
liquidity and would offer the greatest potential for achieving long-term value
for AISI Shareholders. See "The Merger--Reasons for the Merger--AISI's Reasons
for the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
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--
4
<PAGE>
Conversion of Shares" and "The Merger Agreement--Indemnification and Escrow
Agreement."
The other documents with the Letter of Transmittal will include stock
powers to be endorsed in blank by each AISI shareholder with respect to the
shares of ESI Common Stock to be held pursuant to the Escrow Agreement on behalf
of such shareholder.
CERTIFICATES SHOULD NOT BE SURRENDERED BY AISI SHAREHOLDERS UNTIL THE
LETTER OF TRANSMITTAL AND OTHER DOCUMENTS DESCRIBED ABOVE HAVE BEEN RECEIVED.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a pooling of interests. See
"The Merger--Accounting Treatment."
As a condition to the Merger, each of ESI and AISI will have received the
opinion of Arthur Andersen LLP, independent public accountants, to the effect
that the Merger will qualify for pooling of interests accounting. See "The
Merger Agreement--Conditions to the Merger."
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 is expected to expire on October 29,
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
6
<PAGE>
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.
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
7
<PAGE>
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 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
8
<PAGE>
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.
DEPENDENCE ON SUPPLIERS
Certain of the components included in ESI's systems are obtained from a
single source or a limited group of suppliers. Although ESI seeks to reduce
dependence on those sole and limited source suppliers, the partial or complete
loss of certain of these sources could have at least a temporary adverse effect
on ESI's results of operations and damage customer relationships. Further, a
significant increase in the price of one or more of these components could
adversely affect ESI's results of operations. See "Information Concerning
ESI--Manufacturing and Supply."
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial data presented below should be read in conjunction
with the financial statements and the notes thereto incorporated by reference
for ESI and included elsewhere in this Prospectus/Information Statement for
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
9
<PAGE>
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 incorporated by reference 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 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 also
incorporated by reference 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>
ESI Three Months
Fiscal Year Ended May 31 Ended
--------------------------------------------- ------------
August 31,
1993 1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
Consolidated
Statement of
Operations Data
<S> <C> <C> <C> <C> <C> <C> <C>
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)
per share:(1)(2) $ 0.37 $ 1.09 $ 1.49 $ 1.86 $ 2.27 $ 0.49 $ (0.39)
</TABLE>
<TABLE>
<CAPTION>
May 31 August 31,
--------------------------------------------- ----------
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ----
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data
Working capital . . . $28,883 $36,148 $ 76,413 $ 94,400 $116,628 $117,561
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
</TABLE>
- ---------------
(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.
10
<PAGE>
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 six
months ended June 30, 1996 and 1997 and the balance sheet data at June 30, 1997
are derived from unaudited financial statements that are included elsewhere in
this Prospectus/Information Statement and that include, in the opinion of
management of AISI, all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation of the information set forth
therein. The income statement data for the six months ended June 30, 1997 is
not necessarily indicative of future results.
11
<PAGE>
<TABLE>
<CAPTION>
AISI Six Months Ended
Fiscal Year Ended December 31, June 30,
------------------------------------------------ ----------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Sales. . . . . . . . . . . . . . . $7,012 $10,763 $14,804 $22,579 $16,610 $10,145 $13,422
Cost of vision system sales. . . . 2,356 3,506 5,337 9,959 9,943 5,031 5,918
------ ------- ------- -------- ------- ------- -------
Gross margin . . . . . . . . . . . 4,656 7,257 9,467 12,620 6,667 5,114 7,504
------ ------- ------- -------- ------- ------- -------
Operating expenses:
Selling, service and administrative 2,199 3,191 4,027 4,711 4,138 2,153 2,400
Research, development and
engineering. . . . . . . . . . 2,025 2,906 3,996 4,513 5,067 2,520 3,090
------ ------- ------- -------- ------- ------- -------
Total operating expenses . . . . 4,224 6,097 8,023 9,224 9,205 4,673 5,490
------ ------- ------- -------- ------- ------- -------
Operating income (loss). . . . . . 432 1,160 1,444 3,396 (2,538) 441 2,014
Other income (expense), net. . . . (18) (67) 159(1) (95) (582) 47 33
------ ------- ------- -------- ------- ------- -------
Income (loss) before provision for
income taxes . . . . . . . . . . . 414 1,093 1,603 3,301 (3,120) 488 2,047
Provision for income taxes . . . . -- 15 93 437 52 52 230
------ ------- ------- -------- ------- ------- -------
Net income (loss). . . . . . . . . $ 414 $ 1,078 $ 1,510 $ 2,864 ($3,172) $436 $1,817
------ ------- ------- -------- ------- ------- -------
------ ------- ------- -------- ------- ------- -------
Net income (loss) per share. . . . $ 0.11 $ 0.29 $ 0.40 $ 0.70 ($0.77) $0.11 $0.46
------ ------- ------- -------- ------- ------- -------
------ ------- ------- -------- ------- ------- -------
Number of shares used in computing
per share amounts. . . . . . . . . 3,664 3,673 3,820 4,121 4,139 4,154 3,965
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------------------------- --------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital . . . . . . . . . . . . . . $ 528 $1,252 $2,188 $ 4,525 $1,572 $ 3,470
Total assets. . . . . . . . . . . . . . . . 2,765 5,057 8,286 11,675 6,980 10,938
Long-term capital lease obligations and
notes payable, including current portion. . -- -- -- 289 112 359
Shareholders' equity . . . . . . . . . . . 1,484 2,583 4,210 6,794 4,156 5,981
</TABLE>
(1) Includes $229 gain from insurance proceeds on equipment theft.
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.
12
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended May 31 Three Months Ended
------------------------ ------------------
August 31,
1995 1996 1997 1997
---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Pro Forma Consolidated Statements
of Income
Net Sales(2). . . . . . . . . . . . . . . . . . . $130,736 $189,440 $180,036 $57,119
Net income (loss)(2). . . . . . . . . . . . . . . 14,780 20,407 19,459 (1,917)
Net income (loss) per share . . . . . . . . . . . 1.54 1.91 1.81 (0.17)
</TABLE>
<TABLE>
<CAPTION>
May 31 August 31,
--------------------------------- ----------
1995 1996 1997 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Pro Forma Consolidated Balance Sheet Data
Total assets. . . . . . . . . . . . . . . . . . . $123,307 $148,532 $167,351 $183,076
Long-term obligations, including
current portion . . . . . . . . . . . . . . . . -- 80 193 170
</TABLE>
(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.
EQUIVALENT PER COMMON SHARE DATA
The following table sets forth selected historical per common share data
for ESI and AISI, pro forma data per share of ESI Common Stock, and equivalent
pro forma data per share of AISI Common Stock after giving effect to the
proposed Merger on a pooling-of-interests accounting basis, assuming the Merger
had been effective during all the periods presented. The pro forma equivalent
data for AISI are based on the historical amounts per share, multiplied by the
Conversion Ratio. The data should be read in conjunction with the consolidated
financial statements and notes thereto and other financial information with
respect to ESI and AISI incorporated by reference into or set forth elsewhere in
this Prospectus/Information Statement, and such data are qualified in their
entirety by reference thereto. See "Incorporation of Certain Documents by
Reference."
13
<PAGE>
<TABLE>
<CAPTION>
May 31 August 31,
---------------------------------- ----------
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
ESI Common Stock(1)
Net Income (loss) per share:(2)
Historical. . . . . . . . . . . . . . . . . . $1.49 $1.86 $2.27 (0.39)
Pro forma combined. . . . . . . . . . . . . . 1.54 1.91 1.81 (0.17)
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
Pro forma equivalent. . . . . . . . . . . . . 0.47 0.58 0.55 (0.05)
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
</TABLE>
- ------------------------------
(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, 1997 for ESI combined with the twelve months ended June
30, 1995, 1996, and 1997 and three months ended August 31, 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.
MARKET AND MARKET PRICES
FOR COMMON STOCK
ESI Common Stock is traded on the Nasdaq National Market under the symbol
"ESIO." The information presented in the table below represents the high and
low sales prices per share for ESI Common Stock for the periods indicated.
On 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 last full trading day for which quotations were available
as of 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.
FISCAL
YEAR ESI COMMON STOCK
---- ----------------
1995 High Low
First Quarter. . . . . . . . . . . . . . . . . . . $13-3/4 $8-5/8
Second Quarter . . . . . . . . . . . . . . . . . . 20-1/4 12-1/4
Third Quarter. . . . . . . . . . . . . . . . . . . 23-1/4 17-1/2
Fourth Quarter . . . . . . . . . . . . . . . . . . 29-5/8 18-3/4
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<PAGE>
1996
First Quarter . . . . . . . . . . . . . 39-3/4 24-5/8
Second Quarter. . . . . . . . . . . . . 41-1/2 24-1/2
Third Quarter . . . . . . . . . . . . . 30-1/2 18-3/4
Fourth Quarter. . . . . . . . . . . . . 28-3/4 16-3/4
1997
First Quarter . . . . . . . . . . . . . 27-1/4 15-1/2
Second Quarter. . . . . . . . . . . . . 26 17-1/4
Third Quarter . . . . . . . . . . . . . 31-3/4 22-1/2
Fourth Quarter. . . . . . . . . . . . . 39-1/4 23-3/4
1998
First Quarter . . . . . . . . . . . . . 52-15/16 35
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. Consents will be obtained only from
the five largest AISI shareholders, who hold in the aggregate in excess of
70 percent of the outstanding shares of AISI Common Stock. All of the five
largest shareholders have voting or observer representation on the AISI board of
directors, which unanimously approved the Merger. There will be no general
solicitation of consents, and this Prospectus/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
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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 1997, ESI concentrated its efforts on
selling those products to OEM suppliers of
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<PAGE>
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.
In the OEM vision market, AISI is believed to be the second largest
supplier and has been increasing its market share. However, it is considerably
smaller than the market leader in total sales. The size of a vision supplier is
an issue for large OEM's and semiconductor companies, and it is preferable for
the supplier to be a public company.
Between 1981 to 1989, AISI received $23 million of equity funding. For
several years the shareholders had anticipated a merger or a public sale of
equity securities. These considerations, combined with the growth and
profitability of the past five years, and the desire of AISI's shareholders for
liquidity, resulted in the objective to either successfully complete an initial
public offering of the Company's stock or merge AISI into a public company
whereby significant operating synergies would be created between AISI and that
company.
In July 1995 and periodically through the remainder of the calendar year
Joseph L. Reinhart, Director of Business Development for ESI and Robert D.
Pavey, Chairman of the Board of AISI had discussions regarding the combination
of AISI and ESI. During these discussions Mr. Pavey noted that AISI was
examining several business and financial options including selling the company
and offering shares to the public. Concurrently, ESI recognized its need to
focus on developing electronic industry OEM accounts and the value of a high
performance machine vision system.
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
17
<PAGE>
AISI reduced its order forecast, materially reducing the value of the merger to
ESI's shareholders.
In July 1997, AISI and ESI re-examined the possibility of effecting a
business combination between the two companies. At the time, AISI had
received a proposal from another publicly traded company; the Board of
Directors of AISI met on several occasions to consider the proposal, and on
September 12, 1997, AISI rejected the proposal and made a counter-proposal.
While AISI awaited a response to its counter-proposal, a merger offer was
received from ESI. In meetings on September 19, 26, 27 and 29, 1997, AISI's
Board of Directors met to consider the ESI offer; the discussion also
included full consideration of the competing proposal, as 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. 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.
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
quality and increases the efficiency of electronic device production. The
strengths of greater technical resources and worldwide selling and customer
support presence will uniquely position the combined business of ESI and AISI to
enhance or add machine vision in all aspects of semiconductor fabrication and
the assembly of electronic devices. The Merger also offers the possibility of
achieving improved operating efficiencies through elimination of duplicate
efforts.
The Board of Directors of ESI believes the combined business of ESI and
AISI will have the potential to realize increased market share and improved
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<PAGE>
operating and financial performance compared to the two entities operated
independently. In addition to the above benefits, the Board of Directors of ESI
has identified the following potential benefits for ESI's shareholders:
* AISI develops and supplies high performance machine vision systems targeted
at the OEM electronics industry, providing a complement to ESI's existing
product offering and the vision requirements of ESI's customers.
* The addition of AISI to ESI will result in the combined business being
among the recognized suppliers to the machine vision market. Due to the
relative size of the machine vision market in comparison to the other
markets served by ESI, the combined business will offer ESI substantial
opportunity to increase the size of its overall business through effective
utilization of combined resources.
* The majority of AISI's revenues have been from domestic customers, whereas
the majority of ESI's revenues have been from off-shore customers. The
combined business will benefit from complementary distribution strengths.
AISI'S REASONS FOR THE MERGER
In 1995, after several years of profitability, AISI explored options to
provide market liquidity to its shareholders and increase value, including an
initial public offering and merger with a public company. AISI first opted for
a public offering, but ultimately decided against proceeding with the offering
because of customer and market uncertainty. AISI then considered merger
options, including a merger with ESI. Among the factors considered were: the
price that could be obtained for AISI's common stock; synergies between AISI and
ESI; future appreciation in the value of the stock of ESI's Common Stock; the
business, results of operations, asset quality and financial condition of ESI;
the ability to account for the Merger as a pooling of interests; the
qualification of the Merger as a tax-free reorganization; and the speed with
which the Merger could be completed. After considering all these factors, the
Board of Directors of AISI concluded that the Merger would provide the desired
market liquidity and the best prospect for increasing long-term value for AISI
shareholders.
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,
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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 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 opinion of counsel will provide that the Merger, as a tax-free
reorganization, will have the following federal income tax consequences for AISI
shareholders, AISI and ESI:
(1) No gain or loss will be recognized by the shareholders of AISI upon
the exchange of all of their AISI Common Stock for ESI Common Stock (including
any fractional share interests).
(2) Each shareholder of AISI receiving cash in lieu of a fractional share
interest in ESI Common Stock in the Merger will be treated as if such
shareholder actually received the fractional share interest and the fractional
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.
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(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 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
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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
</TABLE>
* 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.
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,
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
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specified waiting period requirements has expired. ESI and AISI each will file
notification and report forms under the HSR Act with the FTC and the Antitrust
Division on September 30, 1997. The waiting period under the HSR Act is
expected to expire on October 29, 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.
DISSENTER RIGHTS
Pursuant to Section 407 of the Michigan Business Corporation Act ("MBCA"),
it is expected that certain persons who collectively hold more than a majority
of the outstanding shares of AISI Common Stock will consent in writing to the
proposed Merger. If the Merger is consummated, MBCA Sections 761 through 774
permit any holder of AISI Common Stock who did not join in the
written consent to demand payment of the fair value of his shares of AISI Common
Stock, in lieu of receiving shares of ESI's Common Stock pursuant to the Merger.
The text of MBCA Sections 761 through 774 is attached as Annex B hereto and
incorporated herein by reference. The description of dissenters' rights
contained in this Prospectus/Information Statement is qualified in its entirety
by reference to those sections of the MBCA which are attached hereto as Annex B.
Each person entitled to dissenter's rights has received with this
Prospectus/Information Statement that certain Notice of Shareholders of Applied
Intelligent Systems, Inc., of Certain Actions Taken by Written Consent and
Section 766 Notice to Dissenting Shareholder (the "Notice"). The Notice
explains the action taken by written consent and sets forth the procedure that
must be followed by any AISI shareholder who wishes to dissent and receive
payment for his shares in lieu of ESI common stock. The Notice is accompanied
by a copy of MBCA Sections 761 through 774 and a payment demand form which must
be returned in accordance with the instructions provided in the Notice no later
than ______________, 1997.
A holder of AISI Common Stock who wishes to dissent must make a written
demand and deposit his certificates in accordance with the terms of the Notice.
The demand must include the information specified in the Notice and must be
received by AISI by the date specified above.
FAILURE TO FOLLOW THE PROCEDURE SET FORTH IN SECTIONS 761 THROUGH 774 REGARDING
DISSENTERS' RIGHTS, ATTACHED AS ANNEX B, INCLUDING WITHOUT LIMITATION TIMELY
RETURN OF THE PAYMENT DEMAND FORM AND ANY CERTIFICATES EVIDENCING OWNERSHIP OF
SHARES OF AISI COMMON STOCK, WILL CONSTITUTE A WAIVER OF SUCH RIGHTS.
THE MERGER AGREEMENT
The following paragraphs summarize, among other things, the material terms
of the Merger Agreement, which is attached hereto as Annex A and incorporated by
reference herein. Recipients of this Prospectus/Information Statement are urged
to read the Merger Agreement in its entirety for a more complete description of
the Merger.
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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. 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 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
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(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. This
restriction also applies to all other AISI shareholders receiving ESI Common
Stock in the Merger and the stock certificates for ESI Common Stock will
contain a legend about this restriction.
In addition, the "major" AISI shareholders and AISI shareholders who are
"affiliates" of AISI have agreed that they will not sell or otherwise dispose of
any shares of ESI Common Stock unless such sale or disposition is permitted
pursuant to the provisions of Rule 145 under the Securities Act, is otherwise
exempt from registration under the Securities Act, or is effected pursuant to a
registration statement under the Securities Act.
AISI'S CONDUCT OF BUSINESS PENDING THE MERGER
Pending the consummation of the Merger, AISI has agreed to carry on its
business in the ordinary and usual manner and not to take any of the following
actions without the prior written consent of ESI: (a) amend its Articles of
Incorporation or Bylaws; (b) enter into any new agreements that have the effect
of increasing compensation or benefits payable to its officers or employees,
other than indemnification agreements with its officers and 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
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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 is will not
participate in any negotiations regarding, furnish to any other person any
information with respect to, or otherwise assist or participate in, any attempt
by any third party to propose or effect any such transaction. Notwithstanding,
nothing in the Merger Agreement is intended to prohibit (i) AISI from furnishing
information to, or entering into discussions or negotiations with, any person or
entity that makes an unsolicited proposal of an Acquisition Transaction if and
to the extent that (a) the Board of Directors of AISI determines in good faith,
upon advice of legal counsel, that such action is required for the directors of
AISI to fulfill their fiduciary duties and obligations under Michigan law and
(b) prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, AISI provides immediate written notice
to ESI to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity, or (ii) the Board of
Directors of AISI from acting to withdraw or modify its approval of the Merger
following receipt of an unsolicited proposal for an Acquisition Transaction if
it determines in good faith, upon advice of legal counsel, that such action is
required for the directors of AISI to fulfill their fiduciary duties and
obligations under Michigan law.
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
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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
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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 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;
(k) satisfactory completion of ESI's due diligence; (l) accuracy of
representations and warranties; and (m) receipt by ESI of an opinion
regarding the fairness of the transaction to ESI shareholders, from a
financial point of view.
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 November 1, 1997 and if
the
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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 November 1, 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 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.
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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 the
leading 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).
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.
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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.
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:
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<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 Surface mount capacitor and resistor
4300 trimming 2.50 50 4 x 4
Model Test intensive, thick film,
977 functional trimming 1.55 50 3 x 3
Model Thick film functional trimming 1.27 50 3 x 3
4990
Model Chip resistor trimming 1.27 100 3 x 3
907
Model Thick/thin film functional trimming 1.01 15 3 x 3
4410
- ---------------------------------------------------------------------------------------------------------------------
</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.
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.
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.
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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
<S> <C> <C>
TEST SYSTEMS
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 IR Tests insulation resistance (IR) High speed parallel tester with
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.
</TABLE>
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Test Tooling Test fixtures for use with Permits precise location and
ESI systems positioning of MLCCs during the
test operation.
- -----------------------------------------------------------------------------
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, Motorola, NEC, Samsung,
Siemens, and Texas Instruments.
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.
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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, IBM, Johnson-Matthey/ACI, Sheldahl, Siemens and W.L.
Gore.
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-PAK-TM- 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 Drill-TM- 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 SMART-TM- Driller/Router and the Six-PAK-TM- Router Drill.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service offices
located in or near:
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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
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
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applications. The primary emphasis of ESI's research and development is to
advance ESI's capabilities in:
- Lasers and laser/material interaction
- High speed, sub-micron motion control systems
- Precision optics
- High speed, small parts handling
- Image processing and optical character recognition
- Real-time production line electronic measurement
- Real-time software
- 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, 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
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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 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
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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. While ESI
cannot predict the outcome of this or similar litigation or its effect upon ESI,
ESI believes that it will not have a material adverse effect on its financial
condition or results of operations.
INFORMATION CONCERNING AISI
BUSINESS
AISI was incorporated on November 12, 1975 and adopted the name Applied
Intelligent Systems, Inc. on May 28, 1982. AISI provides machine vision
solutions for automated process control and visual inspection. AISI uses
innovative technology and aggressive customer support to provide solutions which
replace the human eye on the factory floor. Today, AISI products are primarily
used in the semiconductor and electronics industries to assemble computer chips
and electronic printed circuit boards. Machine vision has become the technique
of choice in today's advanced industries, to meet the demands for increased
standards of reliability and accuracy.
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.
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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.
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This move toward devices that are denser and more complex has allowed
machine vision to emerge as a critical technology in the manufacture of
semiconductors. Machine vision enables semiconductor manufacturers to achieve
the precision necessary to produce these devices while increasing equipment
speed and lowering error rates. Machine vision pervades the manufacturing
process from wafer production through integrated circuit packaging, and is used
to control steppers, probers, dicers, die bonders, wire bonders and packaging
equipment.
The electronics assembly equipment market is growing. 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
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element for every column of pixels in an image. This architecture was designed
to be the best trade-off between cost and performance for processing images.
AISI's software approach is based upon high level cognitive functions, such as
neural networks, mathematical morphology and fuzzy logic, which are designed to
emulate human-like, feature-based processing. AISI's proprietary hardware
architecture and intelligent software approach provide the AISI system with the
flexibility to address the varying challenges confronted by machine vision
suppliers.
Higher vision application speeds are often realized if accuracy of
alignment is increased or computers become faster. High alignment accuracy is
achieved with AISI's proprietary pattern recognition software ("Vector
Correlation") and its improved automated pattern teaching algorithm, insuring
that the selected pattern is unique within the image. AISI believes that its
Vector Correlation algorithm can be up to twice as accurate in production as
typical template matching algorithms, with accuracies being largely maintained
even as the quality of the subject images degrades. AISI utilizes a unique,
massively parallel processor (MPP) architecture, because faster CPUs alone do
not solve problems presented by large amounts of data generated by machine
vision applications. The MPP's ability to simultaneously process a large number
of data provides an inherent speed benefit over comparable serial processing
systems.
Larger image sizes can be processed by AISI's MPP architecture which is
scalable and can be expanded as image sizes increase. Each time an image
doubles in size, AISI's array of processing elements can be doubled resulting in
higher throughput than serial processing.
AISI's products provide accuracy and robustness through Vector Correlation
and supporting algorithms. Vector Correlation is independent of both lighting
levels and shading, and it is more robust than other known algorithms as the
object becomes occluded and the background becomes more complex. Algorithms may
include fuzzy logic to extend robustness by allowing a defined amount of
ambiguity to enter into the algorithm.
AISI's software and hardware are optimized for the detection of defects.
Defect detection is best done by mathematical morphology. Although mathematical
morphology is too memory access intensive to be effective on a serial vision
computer, AISI's unique MPP morphology is well suited to this task and is the
result of a search for hardware that optimizes morphology. Defect analysis goes
beyond defect detection and is the determination of the cause and impact of
errors introduced in production. AISI provides defect analysis by using
intelligent neural networks to analyze image features instead of pixels. This
is the way a human would examine an image. Features might be damaged but yet
fully recognizable by a neural network or a human. Neural networks are powerful
tools for analyzing defects, but they require powerful computer hardware, such
as AISI's MPP.
STRATEGY
AISI has worked closely with its customers in developing new capabilities
for machine image recognition. AISI's strategy has been to develop standard
hardware and software products which are integrated by customers into their
industrial environment. AISI's approach is to make available the entire
software development environment, enabling customers to design and refine
applications of their own. AISI's commitment to quality support and training
has resulted in
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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.
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:
Six Months Ended
Year Ended December 31, June 30,
---------------------- ----------
(Unaudited)
------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Sales . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of vision system sales . . 36.1 44.1 59.9 49.6 44.1
------ ------ ------ ------ ------
Gross profit . . . . . . . . . 63.9 55.9 40.1 50.4 55.9
------ ------ ------ ------ ------
Operating expenses:
Selling, general and
administrative expenses . . . . 27.2 20.9 24.9 21.2 17.9
Research, development and
engineering expenses. . . . . . 27.0 20.0 30.5 24.9 23.0
------ ------ ------ ------ ------
Total operating expenses . . . 54.2 40.9 55.4 46.1 40.9
------ ------ ------ ------ ------
Operating income (loss) . . . . 9.7 15.0 (15.3) 4.3 15.0
Interest Income . . . . . . . . 0.1 0.1 0.7 0.6 0.3
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
income taxes for . . . . . . . 10.8 14.6 (18.8) 4.8 15.2
Provision for income taxes . . 0.6 1.9 0.3 0.5 1.7
------ ------ ------ ------ ------
Net income (loss) . . . . . . . 10.2% 12.7% (19.1%) 4.3% 13.5%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
SALES
Sales increased 32.3% to $13.4 million in the six months ended June 30,
1997 from $10.1 million in the six months ended June 30, 1996. This increase
was primarily attributable to a 33.4% increase in system sales volumes. The
increase in sales volumes was partially offset by lower average sales prices.
International sales decreased to 10.3% of sales in the six months ended June 30,
1997 from 15.5% of sales in the six months ended June 30, 1996.
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The following table sets forth the components of AISI's sales:
Six Months Ended
June 30,
---------
1996 1997
---- ----
(Unaudited)
(In Thousands)
Sales:
Vision system sales . . . . . . . . . . . . . . $10,005 $13,349
Development funding and software sales . . . . 140 73
------- -------
Total sales . . . . . . . . . . . . . . . . . $10,145 $13,422
------- -------
------- -------
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 six months of 1997 increased $4.0 million or
53.1% over the same period of the prior year.
DEVELOPMENT FUNDING AND SOFTWARE SALES. Revenues recorded from development
funding and software sales during the six months ended June 30, 1997 and the six
months ended June 30, 1996 represent the revenues from several sales to existing
customers.
GROSS PROFIT. The following table sets forth AISI's vision system sales
and gross profit from vision system sales:
Six Months Ended
June 30,
---------
1996 1997
---- ----
(Unaudited)
(In Thousands)
Vision system sales . . . . . . . . . . . . . . . $10,005 $13,349
Cost of vision system sales . . . . . . . . . . . 5,031 5,918
------- -------
Vision system gross profit . . . . . . . . . . . $4,974 $7,431
Vision system gross profit as a percentage
of vision system sales . . . . . . . . . . . . . 49.7% 55.7%
Vision system gross profit as a percentage of vision system sales increased
to 55.7% in the six months ended June 30, 1997 from 49.7% in the six months
ended June 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.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSE
Research, development and engineering expenses increased 22.6% to $3.09
million or 23.0% of sales in the six months ended June 30, 1997 from $2.52
million or 24.8% of sales in the six months ended June 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 11.4% to $2.4
million or 17.9% of revenues in the six months ended June 30, 1997 from $2.2
million or 21.2% of sales in the six months ended June 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.
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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 32.3% increase
in sales for the six months ended June 30, 1997 compared to the six months ended
June 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.
The following table sets forth the components of AISI's sales:
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
(In thousands)
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
------- ------- -------
------- ------- -------
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.
GROSS PROFIT
The following table sets forth AISI's system sales and gross profit from
system sales:
Year Ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
(In thousands)
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%
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.
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The decline in vision system gross profit margins from 1994 to 1995 was
attributable to increased costs on two proprietary components used on two major
product lines, and increases to inventory and warranty reserves in anticipation
of the crossover to LANTERN products.
The decline in vision system gross profit margins from 1995 to 1996 was
attributable to a $1.2 million inventory valuation allowance recorded for two
product lines near the end of their product life cycles, an increase to warranty
reserves due to the failure of a purchased component part, and product mix
issues.
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. 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 $3.5 million as of June 30, 1997. Principal
sources of liquidity at June 30, 1997 consisted of $2.5 million in cash, a
lease line availability of $1.6 million, and a $3 million revolving,
unsecured line of credit under a loan agreement with a commercial bank, which
is up for renewal September 30, 1997. The agreement contains financial
covenants and restrictions relating to various matters. As of June 30, 1997,
AISI was in compliance with such covenants and restrictions.
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Net cash provided by operating activities was $0.4 million, $3.2 million,
and $1.4 million for 1994, 1995, and 1996, respectively, and $2.1 million for
the six months ended June 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 from 1995 to 1996 was due to the loss
experienced in 1996.
Net cash used for investing activities was $1.4 million, $1.2 million, and
$1.4 million in 1994, 1995 and 1996, respectively, and $0.6 million for the six
months ended June 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
six months of 1997 is $0.3 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
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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 six months ended June 30, 1997 were derived from two
OEM customers. In 1994, 1995 and 1996 AISI's 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.
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. 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.
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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.
Beneficial
Ownership(1)(2)
Name and Address of Beneficial Owner Shares Percent
- ------------------------------------ ------ -------
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
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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.
(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.
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
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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 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.
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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.
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
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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 held of record by at least 2,000 shareholders or (b) the
holders of such stock are to receive cash or shares (or any combination thereof)
and such shares, if any, are either listed on a national securities exchange or
held of record by more than 2,000 shareholders.
Under Oregon Law, shareholders that otherwise would be entitled to
exercise dissenters' rights do not have such rights if the stock affected is
listed on a national securities exchange or is a national market system
security, but the type of consideration to be received for such stock does
not affect the availability of dissenters' rights as it does under Michigan
Law.
AISI's Common Stock is neither listed on a national securities exchange nor
as a national market system security. ESI's Common Stock is listed as a
national market system security. Except as follows, the matters with respect to
which shareholders of a Michigan corporation
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such as AISI and shareholders of an Oregon corporation such as ESI may have
dissenters' rights are generally comparable:
(i) Michigan Law contains a specific provision that affords
dissenters' rights to shareholders of an acquiring corporation concerning a
merger with or an acquisition of shares or assets of another entity where
the consideration for the merger or acquisition is to be shares of the
acquiring corporation's common stock (or convertibles) and the merger or
acquisition would have a specified substantial dilutive effect.
(ii) Dissenters' rights are available under Michigan Law, but not
under Oregon Law, for an amendment to the articles of incorporation which
either (A) materially abolishes or alters a preferential right of a
shareholder's shares having preferences, or (B) creates, alters or
abolishes a material provision or right in respect of the redemption of a
shareholder's shares or a sinking fund for the redemption or purchase of
those shares.
(iii) Dissenters' rights are available under Oregon Law, but not under
Michigan Law, for amendments to the articles of incorporation which
materially and adversely affect the rights of a shareholder's shares
because the amendment either (A) alters or abolishes a preemptive right of
the shareholder to acquire shares or other securities, or (B) reduces the
number of shares owned by the shareholder to a fraction of a share if the
fractional share so created is to be acquired for cash by the corporation.
The procedural provisions of Michigan Law and Oregon Law relating to
dissenters' rights do not differ significantly.
PROVISIONS RELATING TO DIRECTORS
NUMBER OF DIRECTORS
Under both Oregon Law and Michigan Law, a corporation must have a board of
directors consisting of at least one director. The ESI Bylaws provide that the
ESI Board must consist of at least six and no more than ten directors. Within
that range, the ESI Board has the authority to set the actual number, the
current number being set at seven. The AISI Bylaws provide that the AISI Board
must consist of at least three and no more than seven directors. Within that
range, the AISI Board has the authority to set the actual number, the current
number being set at five.
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
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elected, and no person could be elected without the support of holders of a
majority of the shares. Neither the ESI Articles nor the AISI Articles
provides for cumulative voting.
VOTING FOR DIRECTORS BY PROXY
Under both Oregon Law and Michigan Law, every shareholder entitled to vote
at an election of directors has the right to vote either in person or by proxy.
VACANCIES
Both Oregon Law and Michigan Law provide that, unless the articles of
incorporation provide otherwise, a vacancy in the board of directors (including
a vacancy created by an increase in the authorized number of directors) may be
filled by the shareholders or by the directors then in office (even though fewer
than necessary to form a quorum of the board of directors). The AISI Bylaws
provide that the directors remaining in office may temporarily fill any vacancy
on the AISI Board, but the shareholders have the authority to elect a director
to fill any vacancy temporarily filled by the AISI Board, failing which the
director appointed by the AISI Board serves until his successor is elected at an
annual or special shareholders' meeting and is qualified. The ESI Articles do
not contain a similar provision.
REMOVAL
Under both Oregon Law and Michigan Law, a director may be removed with or
without cause unless the articles of incorporation provide that directors may
be removed only for cause. Under Oregon Law, a director may be removed only
at a meeting of the shareholders called for the purpose of removing the
director, and the meeting notice must state that the purpose, or one of the
purposes, of the meeting is the removal of a director. Under the ESI
Articles, a director may be removed without cause only upon the vote of the
holders of two-thirds (2/3) of the shares entitled to vote at an election of
directors. The AISI Articles contain no provision respecting the removal of
directors.
LIMITATION ON LIABILITY
As permitted by Michigan Law, the AISI Articles provide that, to the full
extent permitted by law, AISI's directors will not be liable to AISI or its
shareholders for monetary damages for breach of fiduciary duty. Under Michigan
Law, such provision cannot eliminate or limit director liability for a breach of
the duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, distributions made in
contravention of Michigan Law, transactions from which directors receive an
improper personal benefit or any act or omission which occurred prior to the
date on which the provision became effective (April 28, 1992). This provision
would ordinarily eliminate the liability of directors for monetary damages to
AISI and its shareholders even in instances in which the directors had been
negligent or grossly negligent. The provision does not affect the ability of
AISI or its shareholders to seek equitable remedies such as injunction and does
not limit the liability of directors under federal securities laws. The ESI
Articles contain a
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provision which is in all material respects identical to the provision in
AISI's articles of incorporation, and Oregon Law is likewise similar to
Michigan Law in this respect.
ANTI-TAKEOVER STATUTES
BUSINESS COMBINATIONS
MICHIGAN. Michigan Law contains provisions ("Chapter 7A") which
provide that business combinations between a Michigan corporation and an
"interested shareholder" generally require the approval of 90% of the votes
of each class of stock entitled to be cast, and not less than two-thirds of
the votes of each class of stock entitled to be cast other than voting shares
owned by such interested shareholder. An "interested shareholder" is a
person directly or indirectly owning 10% or more of a corporation's
outstanding voting power, or an affiliate of a corporation who at any time
within two years prior to the date in question directly or indirectly owned
10% of more of such voting power. However, the requirements cited above will
not apply if (i) the corporation's board of directors approves the
transaction prior to the time the interested shareholder becomes such or (ii)
the transaction satisfies certain fairness standards (generally relating to
the amount and type of consideration to be paid), certain other conditions
are met and the interested shareholder has been such for at least five years.
Additionally, Chapter 7A does not apply to a corporation which, on the date
Chapter 7A became effective (May 29, 1984), had an existing interested
shareholder, unless the articles or by-laws of such corporation specifically
make Chapter 7A applicable or the corporation's board of directors elects by
resolution to make the corporation subject thereto (either generally or as to
specific interested shareholders or business combinations). On May 28, 1984,
AISI had one or more "interested shareholders," and therefore AISI is not
subject to Chapter 7A, although AISI's Board may, by resolution and without a
shareholder vote, cause AISI to become subject to Chapter 7A. AISI has no
present intention to elect to become subject to Chapter 7A.
OREGON. Oregon has enacted a business combination statute that is
contained in Sections 60.825 - 60.845 of the Oregon Business Corporation Act
(the "Oregon Combination Law"), which provides that any person who acquires
15% or more of a corporation's voting stock (thereby becoming an "interested
shareholder") may not engage in certain "business combinations" with the
target corporation for a period of three years following the date the person
became an interested shareholder, unless (1) the board of directors of the
corporation has approved, prior to that acquisition date, either the business
combination or the transaction that resulted in the person becoming an
interested shareholder, (2) upon consummation of the transaction that
resulted in the person becoming an interested shareholder, that person owns
at least 85% of the corporation's voting stock outstanding at the time the
transaction is commenced (excluding shares owned by persons who are both
directors and officers and shares owned by employee stock plans in which
participants do not have the right to determine confidentially whether shares
will be tendered in a tender or exchange offer), or (3) the business
combination is approved by the board of directors and authorized by the
affirmative vote (at an annual or special meeting and
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not by written consent) of at least 66 2/3% of the outstanding voting stock
not owned by the interested shareholder.
Under the Oregon Combination Law, for purposes of determining whether a
person is the "owner" of 15% or more of a corporation's voting stock, ownership
is defined broadly to include the right, directly or indirectly, to acquire the
stock or to control the voting or disposition of the stock. A "business
combination" is also defined broadly to include (1) mergers and sales or other
dispositions of 10% or more of the assets of a corporation with or to an
interested shareholder, (2) certain transactions resulting in the issuance or
transfer to the interested shareholder of any stock of the corporation or its
subsidiaries, (3) certain transactions which would result in increasing the
proportionate share of the stock of a corporation or its subsidiaries owned by
the interested shareholder, and (4) receipt by the interested shareholder of the
benefit (except proportionately as a Shareholder) of any loans, advances,
guarantees, pledges, or other financial benefits.
These restrictions placed on interested shareholders by the Oregon
Combination Law do not apply under certain circumstances, including, but not
limited to, the following: (1) if the corporation's original articles of
incorporation contain a provision expressly electing not to be governed by the
Oregon Combination Law, (2) within 90 days after April 4, 1991, the corporation,
by action of its board of directors, adopts an amendment to its bylaws expressly
electing not to be governed by the Oregon Combination Law, or (3) if the
corporation, by action of its shareholders, adopts an amendment to its bylaws or
articles of incorporation expressly electing not to be governed by the Oregon
Combination Law, provided that such an amendment is approved by the affirmative
vote of not less than a majority of the outstanding shares entitled to vote and
that such an amendment will not be effective until 12 months after its adoption
and will not apply to any business combination with a person who became an
interested shareholder at or prior to such adoption. None of these
circumstances exist with respect to ESI; accordingly, the requirements of the
Oregon Combination Law apply to ESI.
CONTROL SHARES
MICHIGAN. Michigan Law contains provisions ("Chapter 7B"), which
provide that "control shares" of a corporation acquired in a control share
acquisition have no voting rights except as granted by the shareholders of the
corporation. "Control shares" are shares which, when added to shares then owned
or controlled by a shareholder, increase such shareholder's control of voting
power above one of three thresholds: more than 20%, more than 33-1/3% or more
than 50% of the outstanding voting power of the corporation. Voting rights for
shares acquired in a control share acquisition must be approved by a majority of
the votes cast by holders of shares entitled to vote, excluding shares voted or
controlled by the acquiror and certain officers and directors. However, no such
approval is required for gifts or other transactions not involving
consideration, for a merger to which the corporation is a party, or certain
other transactions described in Chapter 7B. Submission for shareholder
consideration of a resolution to grant voting rights to control shares must be
preceded by the filing
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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 consolidated financial statements incorporated in this
Prospectus/Information Statement by reference to ESI's Annual Report on Form
10-K for the year ended May 31, 1997, and ESI's Current Report on Form 8-K,
as amended through Amendment No. 1 on Form 8-K/A dated June 26, 1997, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated their report with respect thereto, and are incorporated herein by
reference in reliance upon the authority of said firm as experts in giving
said report.
The audited financial statements of AISI included in this
Prospectus/Information 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.
58
<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.
59
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . .F-2
Balance Sheets as of December 31, 1995 and 1996 and
June 30, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . .F-3
Statements of Operations for the years ended December 31, 1994,
1995 and 1996 and for the six months ended June 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 six months ended June 30, 1997
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-5
Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996 and for the six months ended June 30, 1996 (unaudited)
and 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . .F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . .F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Applied Intelligent Systems, Inc.:
We have audited the accompanying balance sheets of Applied Intelligent Systems,
Inc. (a Michigan Corporation) as of December 31, 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.
Ann Arbor, Michigan,
September 26, 1997
/s/ Arthur Andersen LLP
F-2
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 805 $ 771 $ 2,514
Trade receivables, less allowance for doubtful
accounts of $155 and $147 at December 31, 1995
and 1996 and $147 at June 30, 1997 4,378 1,569 3,026
Inventories 4,020 1,879 2,172
Other current assets 85 138 522
-------- ------- --------
Total current assets 9,288 4,357 8,234
-------- ------- --------
Property and equipment, at cost 4,637 4,791 5,273
Less - Accumulated depreciation and amortization (2,365) (2,173) (2,644)
-------- ------- --------
Property And Equipment - Net 2,272 2,618 2,629
-------- ------- --------
Other Assets 115 5 75
-------- ------- --------
$ 11,675 $ 6,980 $ 10,938
-------- ------- --------
-------- ------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of obligations under capital
leases and notes payable $ 171 $ 73 $ 166
Accounts payable 2,594 846 1,609
Accrued compensation 310 308 623
Deferred revenue 668 97 588
Income taxes payable 279 223 405
Accrued warranty 330 610 631
Other accrued expenses 411 628 742
-------- ------- --------
Total current liabilities 4,763 2,785 4,764
-------- ------- --------
Long Term Capital Lease Obligations and Notes
Payable 118 39 193
-------- ------- --------
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 36
Additional paid-in capital 23,469 23,643 23,651
Accumulated deficit (16,351) (19,523) (17,706)
Note receivable and related accrued interest (359) -- --
-------- ------- --------
Total stockholders' equity 6,794 4,156 5,981
-------- ------- --------
$ 11,675 $ 6,980 $ 10,938
-------- ------- --------
-------- ------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For The Years Ended Six Months
December 31, Ended June 30,
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales
System sales $12,715 $22,046 $16,364 $10,005 $13,349
Software and other sales 2,089 533 246 140 73
------- ------- ------- ------- -------
Total sales 14,804 22,579 16,610 10,145 13,422
Cost of system sales 5,337 9,959 9,943 5,031 5,918
------- ------- ------- ------- -------
Gross margin 9,467 12,620 6,667 5,114 7,504
Operating expenses:
Selling, general and administrative 4,027 4,711 4,138 2,153 2,400
Research, development and engineering 3,996 4,513 5,067 2,520 3,090
------- ------- ------- ------- -------
Total operating expenses 8,023 9,224 9,205 4,673 5,490
------- ------- ------- ------- -------
Operating Income (loss) 1,444 3,396 (2,538) 441 2,014
Interest income -- 21 110 64 41
Interest expense (68) (66) (12) (7) (10)
Gain from insurance proceeds on equipment theft 229 -- -- -- --
Other, net (2) (50) (167) (10) 2
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) 488 2,047
Provision for income taxes 93 437 52 52 230
------- ------- ------- ------- -------
Net income (loss) $ 1,510 $ 2,864 ($3,172) $ 436 $ 1,817
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) per share $ .40 $ .70 $ (.77) $ .11 $ .46
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average number of shares used in
computing per share amounts 3,820 4,121 4,139 4,154 3,965
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Common Stock Note Total
------------ Additional Accumulated Receivable, Stockholders'
Shares Amount Paid-In Captial 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 3 -- 8 -- -- 8
Interest earned on note
receivable -- -- -- -- 10 10
Reserve against interest
earned on note receivable -- -- -- -- (10) (10)
Net Income -- -- -- 1,817 -- 1,817
------ ------ ------- -------- ------ ------
BALANCE AT
JUNE 30, 1997
(unaudited) 3,581 $ 36 $23.651 ($17,706) $ 0 $5,981
------ ------ ------- -------- ------ ------
------ ------ ------- -------- ------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For The Years Ended Six Months
December 31, Ended June 30,
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $1,510 $ 2,864 $ (3,172) $ 436 $ 1,817
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 434 984 861 396 471
Loss on disposal of property and equipment 23 42 167 10 2
Provision for impairment of cost investment -- -- 103 -- --
Provision for reserve against note receivable -- -- 410 -- 10
Gain from insurance proceeds on equipment theft (229) -- -- 8 --
Compensation expense on stock grants -- 6 1 -- --
Changes in operating assets and liabilities:
Accounts receivable (1,117) (804) 2,809 2,037 (1,457)
Inventories (929) (2,071) 2,141 753 (293)
Prepaid expenses and other assets (56) (9) (46) (1,945) (384)
Accounts and taxes payable, accrued expenses
and deferred revenue 777 2,217 (1,880) (993) 1,886
------- ------- ------- ------ -------
Net cash provided by operating activities 413 3,229 1,394 702 2,052
------- ------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (1,164) (1,385) (1,380) (724) (484)
Proceeds from sale of property and equipment 11 11 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) (8) (10)
------- ------- ------- ------ -------
Net cash used in investing activities (1,352) (1,199) (1,425) (732) (564)
------- ------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit 825 (1,600) (100) (100) --
Proceeds from financing of equipment -- 221 -- -- 308
Repayments of capital lease obligations -- (33) (77) (35) (61)
Proceeds from exercise of stock options and notes
payable 117 74 174 132 8
------- ------- ------- ------ -------
Net cash provided by (used in) financing
activities 942 (1,338) (3) (3) 255
------- ------- ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3 692 (34) (33) 1,743
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 110 113 805 805 771
------- ------- ------- ------ -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 113 $ 805 $ 771 $ 772 $ 2,514
------- ------- ------- ------ -------
------- ------- ------- ------ -------
Cash paid for interest $ 58 $ 76 $ 12 $ 7 $ 10
Cash paid for income taxes $ 59 $ 170 $ 166 $ 160 $ 82
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 June 30, 1997 included a receivable of $205,856
(unaudited) resulting from a cost reimbursement from a customer and a $180,809
(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.
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.
F-7
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-8
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
December 31, June 30,
1995 1996 1997
---- ---- ----
(UNAUDITED)
Raw materials $1,162,338 $1,018,110 $1,922,674
Work-in-process 2,800,781 669,162 194,855
Finished goods 56,942 191,616 54,207
---------- ---------- ----------
$4,020,061 $1,878,888 $2,171,736
---------- ---------- ----------
---------- ---------- ----------
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.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, June 30,
1995 1996 1997
---- ---- ----
(UNAUDITED)
Computers and test equipment $ 3,437,575 $ 3,152,078 $3,503,939
Furniture and fixtures 460,757 690,172 672,276
Leasehold Improvements 339,548 528,314 660,193
Equipment under capital leases 221,257 211,829 211,829
Office equipment 177,887 209,016 224,890
------------ ----------- ----------
4,637,024 4,791,409 5,273,127
Accumulated depreciation and
amortization 2,364,621 2,172,830 2,643,718
------------ ----------- ----------
Property and equipment - net $ 2,272,403 $ 2,618,579 $2,629,409
------------ ----------- ----------
------------ ----------- ----------
F-9
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 547,750
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:
June 30,
1995 1996 1997
---- ---- ----
(Unaudited)
Net income (loss): As Reported $2,864,018 $(3,172,366) $1,816,868
Pro Forma 2,473,822 (3,411,994) 1,739,300
Net income (loss)
per share: As Reported $.70 $(.77) $.46
Pro Forma .60 (.82) .44
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.
Information concerning incentive stock options for the years ended December 31,
1994, 1995 and 1996 and for the six months ended June 30, 1997 is as follows:
Number Of Price Per
Shares Share
------ -----
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
F-10
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Weighted
Price Average
Number Of Per Exercise
Shares Share Price
------ ----- -----
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 $ 3.69
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 $ 2.66
1997 ACTIVITY (UNAUDITED):
Options granted 18,050 $ 4 $ 4.00
Options terminated (20,254) $ 4 $ 4.00
Options exercised (2,812) $ 2 - 4 2.88
----------
Outstanding at June 30, 1997 995,210
----------
----------
Exercisable at June 30, 1997 822,385
Weighted average fair value of
options granted $ 1.55
During 1994, 1995 and 1996 and for the six months ended June 30, 1997, 69,860
shares, 64,424 shares, 114,234 shares and 2,812 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 $8,102
(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 six months ended June 30, 1997.
F-11
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The components of the provision for income taxes in the accompanying statements
of operations consist of the following:
<TABLE>
<CAPTION>
Six Months Ended
For The Years Ended December 31, June 30,
-------------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current tax expense:
Federal 93,200 97,800 -- -- 64,000
State -- 38,700 2,500 2,500 66,000
Deferred tax expense 88,300 61,900 ,079,000 40,000 21,200
Change in valuation
allowance (488,300) (961,900) (1,079,000) (540,000) (321,200)
------- ------- --------- ------- -------
Total provision $ 93,200 $ 436,500 $ 52,500 $ 52,500 $ 230,000
------- ------- --------- ------- -------
------- ------- --------- ------- -------
</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:
December 31, June 30,
1995 1996 1997
---- ---- ----
(Unaudited)
Deferred Tax Assets
Net operating loss carryforward 4,482,000 4,829,300 4,810,000
Inventory and accounts
receivable reserves 338,000 726,300 680,300
Business credit carryforward 463,200 470,000 470,000
Accrued expenses 533,600 519,000 770,400
Property and equipment 44,600 197,100 323,400
Alternative minimum tax credit
carryforward 135,400 157,000 162,200
Note receivable reserve -- 139,400 143,000
Other deferred tax assets -- 37,700 37,700
--------- --------- ---------
5,996,800 7,075,800 7,397,000
Valuation allowance (5,996,800) (7,075,800) (7,397,000)
--------- --------- ---------
Net deferred taxes $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
Valuation allowances of $5,996,800, $7,075,800 and $7,397,000 (unaudited)
have been recorded to reserve the deferred tax assets at December 31, 1995
and 1996 and June 30, 1997, respectively, since realization of these amounts
is questionable.
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 June 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
F-12
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
Number of Percentage
Significant Significant Revenues Of Total
Customers Customer (000'S) Revenues
----------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Six months ended June 30, 1997 2 A $8,677 65%
(unaudited) B 2,922 22
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 six
months ended June 30, 1997, were approximately $4,002,000, $2,908,000,
$2,485,000 and $1,426,000 (unaudited), respectively.
8. LINE OF CREDIT
The Company has an unsecured bank line of credit agreement expiring September
30, 1997, which provides for borrowings up to $3,000,000. Interest is charged
at the bank's prime rate.
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 contains a minimum tangible net worth requirement
and provides for certain other non-financial conditions. In addition, the
Company is 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 $367,000 (unaudited) in 1994,
1995, 1996, and the six months ended June 30, 1997, respectively. Minimum
future rental commitments under noncancelable operating and capital leases at
December 31, 1996 are as follows:
F-13
<PAGE>
APPLIED INTELLIGENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Captial Lease Operating
Obligations Leases
------------- --------
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
---------
---------
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 $283,000 (unaudited) as of June 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. During 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-14
<PAGE>
ANNEX A
AGREEMENT
OF
REORGANIZATION AND MERGER
AMONG
ELECTRO SCIENTIFIC INDUSTRIES, INC.
AN OREGON CORPORATION,
APPLIED INTELLIGENT SYSTEMS, INC.
A MICHIGAN CORPORATION,
AND
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
3.1.3 Corporate Authority............................................13
i
<PAGE>
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
3.1.34 Brokers and Finders.........................................34
3.1.35 Reliance....................................................35
ii
<PAGE>
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
4.3.3 Listing of ESI Common Stock....................................47
4.3.4 Antitrust Improvements Act.....................................47
4.3.5 Issuance of Certificates.......................................47
iii
<PAGE>
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......................................54
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
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival.................................................................56
6.2 Scope of Indemnification.................................................56
6.3 Escrow...................................................................57
iv
<PAGE>
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
MBCA Section 1.2.1 2
viii
<PAGE>
INDEX OF TERMS (continued)
Term Section Page
- ---- ------- ----
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
2
<PAGE>
Stock shall 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
3
<PAGE>
converted into the right to receive the number of shares of ESI Common Stock
that corresponds to one MULTIPLIED BY the Conversion Ratio (I.E., 1 x Conversion
Ratio).
1.3.2 STOCK SPLITS, ETC. If, between the date of this
Agreement and the Effective Time, the outstanding shares of either AISI Common
Stock or ESI Common Stock shall have been changed into a different number of
shares or a different class by reason of any reclassification, combination,
recapitalization, stock split, stock dividend, subdivision, exchange 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
6
<PAGE>
satisfactory to ESI (a) that such person is the owner of the shares
theretofore represented by each certificate claimed by him to be lost,
wrongfully taken or destroyed and (b) that he is the person who would be
entitled to present each such certificate for conversion pursuant to this
Agreement; and (ii) such security or indemnity as may be reasonably requested
by ESI to indemnify and hold ESI and the transfer agent harmless. 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
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fractional share interest in ESI Common Stock to which such holder would
otherwise be entitled. The "Average Sale Price" shall mean the average of
the high and low prices of ESI 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.
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To the extent that amounts are so withheld by ESI, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid by
the holder of the shares of AISI Common Stock in respect of which such
deduction and withholding was made by ESI.
1.5 DISSENTERS' RIGHTS.
1.5.1 NOTICE. AISI shareholders desiring to dissent from
the Merger and obtain payment of the fair value of their shares of AISI
Common Stock immediately before the consummation of the Merger in lieu of the
Merger Consideration may exercise their dissenters' rights under the
provisions set forth at Sections 761 through 774 of the MBCA ("Dissenters'
Rights"). Consistent with Sections 764(2) and 766 of the MBCA, AISI shall
notify in writing each shareholder entitled to assert Dissenters' Rights that
action by written consent has been taken to approve the Merger and shall
provide each such shareholder the dissenters' notice described in Section 766
of the MBCA. The date specified in such notice for receipt by AISI of
payment demand from any shareholder exercising rights of dissent shall be the
earliest date permitted by Section 766(d) of the MBCA.
1.5.2 RIGHTS OF DISSENTING SHARES. Shares of AISI Common
Stock which are issued and outstanding as of the Effective Time and held by any
shareholder who has, in accordance with Section 767 of the MBCA, delivered a
payment demand accompanied by the required certification and deposit of shares
("Dissenting Shares") shall not be converted as described in Section 1.3 but
shall from and after the Effective Time represent only the right to receive such
consideration as may be determined to be due under the MBCA. AISI shall give
ESI prompt notice upon receipt by AISI of any payment demand from any such
shareholder of AISI (a "Dissenting Shareholder"). AISI agrees that prior to the
Effective Time, it will not, except
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with prior written consent of ESI, voluntarily make any payment with respect
to, or settle or offer to settle, any request pursuant to the exercise of
Dissenters' Rights. Each Dissenting Shareholder who becomes entitled,
pursuant to the MBCA, to payment for his Dissenting Shares shall receive
payment therefor in accordance with the MBCA. Notwithstanding the foregoing,
if any Dissenting Shareholder shall rescind, fail to perfect or otherwise
lose such rights either before or after the Effective Time, such
shareholder's shares of AISI Common Stock shall be converted into ESI Common
Stock or cash, as of the Effective Time, in accordance with the provisions of
Section 1.3.
1.6 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer
books of AISI shall be closed and there shall be no further registration of
transfers of shares of AISI Common Stock thereafter on the records of the AISI.
On or after the Effective Time, any certificates for AISI Common Stock presented
to ESI or its agent for any reason shall be converted into the Merger
Consideration.
1.7 CLOSING. The closing of the Merger (the "Closing") shall take
place at the offices of Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300,
Portland, Oregon 97204 on the Condition Completion Date (as hereinafter
defined), or on such other date and/or at such other place and time as AISI, ESI
and Merger Corp. may agree (the "Closing Date"). The "Condition Completion
Date" shall be the day on which the last of the conditions set forth in Article
V hereof shall have been fulfilled or waived (other than those conditions which,
by their terms, are to occur at Closing).
1.8 SUBSEQUENT ACTIONS. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or
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any other actions or things are necessary or desirable to vest, perfect or
confirm of record or 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
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Stock Plans"). All of the outstanding shares of capital stock of AISI have
been duly authorized and are validly issued, fully paid and nonassessable,
and no shares were issued in violation of preemptive or similar rights of any
shareholder or in violation of any applicable securities laws. Except as set
forth above, there are no shares of capital stock of AISI authorized, issued
or outstanding, and, except for options granted pursuant to the AISI Stock
Plans, there are no preemptive rights or any outstanding subscriptions,
options, warrants, rights, convertible securities or other agreements or
commitments of AISI of any character relating to the issued or unissued
capital stock or other securities of AISI. There are no outstanding
obligations of AISI to repurchase, redeem or otherwise acquire any of its
outstanding shares of capital stock. The list of shareholders and option
holders attached hereto as SCHEDULE 3.1.2 sets forth a complete and accurate
list of the shareholders and option holders of AISI as of the date hereof,
indicating the number of shares of AISI Common Stock held by each
shareholder, or subject to options in the case of option holders, and the
percentage of the shares of all the AISI Common Stock outstanding represented
by the shares so held in the case of shareholders.
3.1.3 CORPORATE AUTHORITY. AISI has the corporate power and
authority and has taken all corporate action necessary to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Board of Directors of
AISI, validly executed and delivered by AISI and, as of the Closing Date, will
have been duly and validly approved by the shareholders of AISI. This Agreement
constitutes the valid and binding obligation of AISI, enforceable in accordance
with its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights 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
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payments under, or to pay contributions to, any plan, agreement or other
arrangement for deferred compensation of employees, whether or not tax
qualified, including, without limitation, a single employer tax qualified
plan, a tax qualified plan of a controlled group of corporations, a
multiemployer pension plan, a "defined benefit" plan, a nonqualified deferred
compensation plan, an individual employment or compensation agreement or a
commitment to provide medical benefits to retirees.
3.1.13.3 EMPLOYMENT AGREEMENTS. Each employee of AISI is
an "at-will" employee and there are no written employment, commission or
compensation agreements of any kind between AISI and any of its employees.
SCHEDULE 3.1.13.3 lists all AISI's employment or supervisory manuals, employment
or supervisory policies, and written information generally provided to employees
(such as applications or notices), and complete and accurate copies of those
manuals, policies and written information have been provided to ESI. AISI does
not have any agreements or understandings with its employees, including without
limitation any agreements or understandings regarding compensation of any
nature, severance payments or retirement benefits, except as reflected in the
items listed in SCHEDULES 3.1.13.2 and 3.1.13.4.
3.1.13.4 COMPENSATION. SCHEDULE 3.1.13.4 contains a
complete and accurate list of all current directors, officers, employees or
consultants of AISI, specifying their names and job designations, the total
amount paid or payable as cash and noncash compensation to each such person,
and the basis of such compensation, whether fixed or 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
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3.1.13.5, AISI is not a party to any employment contract or agreement and has
not made any other commitment entitling any employee to any payment in the
event of termination or resignation that would constitute a "parachute
payment" within the meaning of Section 280G of the Code or would in the
aggregate exceed 100 percent of such person's annual base cash compensation.
The provisions for wages and salaries accrued on the Current Balance Sheet
are adequate for salaries and wages, including accrued vacation pay and sick
or wellness pay, and AISI has accrued on its books and records all
obligations for wages and salaries and other compensation to its employees,
including but not limited to, vacation pay and sick or wellness pay, and all
commissions and other fees payable to agents, salesmen, and representatives.
3.1.13.5 CONFIDENTIALITY AND INVENTIONS AGREEMENTS. Each
employee or consultant of AISI has previously signed a confidentiality and
invention agreement in the form or forms attached hereto as EXHIBIT D.
3.1.14 TITLE TO AND CONDITION OF REAL PROPERTY. AISI does
not own any real property. SCHEDULE 3.1.14 contains a list of all real
property currently leased or occupied by AISI (the "Leased Real Property"),
including the dates of and parties to all leases and any amendments thereof
and a list of all real property previously leased or occupied by AISI (the
"Previously Leased Real Property"). To the knowledge of AISI, all Leased
Real Property (including improvements thereon) is in satisfactory condition
and repair consistent with its 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
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authority having jurisdiction. The Leased Real Property includes all such
property necessary to conduct the business of AISI.
3.1.15 TITLE TO AND CONDITION OF FIXED ASSETS. SCHEDULE
3.1.15 contains a complete and accurate list of all tangible personal property
(excluding inventory) owned or leased by AISI (the "Tangible Personal
Property"), including the dates of and parties to all leases and any amendments
thereof. AISI has good and marketable title to all of the Tangible Personal
Property listed in SCHEDULE 3.1.15, free and clear of all liens, mortgages,
pledges, leases, restrictions and other claims and encumbrances of any nature
whatsoever. The Tangible Personal Property is in good operating condition and
repair (ordinary wear and tear excepted), is performing satisfactorily, and is
adequate for the conduct of the business of AISI. All Tangible Personal
Property and the state of maintenance thereof are in compliance with all
applicable laws and regulations.
3.1.16 INTELLECTUAL PROPERTY. AISI owns, or has a valid
license to use, all patents, trademarks, service marks, trade names,
copyrights, trade secrets, technology, know-how and other intellectual
property (the "Intellectual Property") necessary to or used in the conduct of
the business of AISI as now conducted and as proposed to be conducted.
SCHEDULE 3.1.16 contains a complete and accurate list of all patents, patent
applications, trademarks and service marks and related applications, trade
names and copyrights owned by or licensed to AISI. SCHEDULE 3.1.16 also
contains a description of all agreements or licenses relating to the
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
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infringement claims). The conduct of AISI's business does not, to the knowledge
of AISI, conflict with or infringe upon any Intellectual Property rights of any
other person and no claims of conflict or infringement are pending or threatened
against AISI.
3.1.17 CERTAIN CONTRACTS AND ARRANGEMENTS. SCHEDULE 3.1.17,
which is organized by type of agreement, contains a complete and accurate list
of each of the following types of agreements or arrangements, including any
amendments thereto, to which AISI is a party or by which it is bound:
(a) any mortgage, note or other instrument or agreement relating
to the borrowing of money or the incurrence of indebtedness or the guaranty of
any obligation for the borrowing of money;
(b) any contract, agreement, purchase order or acknowledgment
form for the purchase, sale, lease or other disposition of equipment, products,
materials or capital assets, or for the performance of services (including
without limitation consulting services), with respect to which the annual
aggregate dollar amount either due to or payable by AISI exceeds $20,000;
(c) contracts or agreements for the joint performance of work or
services, and all other joint venture agreements;
(d) contracts or agreements with agents, brokers, consignees,
sales representatives or distributors relating to the sale of products or
services;
(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
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with respect to any of the Contracts. AISI is not a party to, or bound by,
any Contract that AISI can reasonably foresee will result in any material
loss to AISI upon the performance thereof (including any liability for
penalties or damages, whether liquidated, direct, indirect, incidental or
consequential).
3.1.19 INSURANCE. SCHEDULE 3.1.19 contains a complete and
accurate list of all policies of fire, liability, worker's compensation and
other forms of insurance insuring AISI, its officers or directors, its assets or
its operations (the "Policies"), setting forth the applicable deductible
amounts. All the Policies are valid, enforceable and in full force and effect,
all premiums with respect to the Policies covering all periods up to and
including the date as of which this representation is being made have been paid
and no notice of cancellation or termination has been received with respect to
any Policy. The Policies are sufficient for compliance with all requirements of
law and agreements to which AISI is a party and provide insurance for the risks
and in the amounts and types of coverage usually obtained by persons using or
holding similar properties in similar businesses. There have been no claims
made for insurance payment under any of the Policies in the three years
preceding the date of this Agreement. Complete and accurate copies of the
Policies and all endorsements thereto have been delivered to ESI. AISI has not
been refused any insurance coverage and no insurance coverage has been canceled
during the three years preceding the date of this Agreement.
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
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whatsoever, together with any interest and any penalties (including penalties
for failure to file in accordance with applicable information reporting
requirements), and additions to tax.
3.1.22 RELATED PARTY INTERESTS. Except as listed in SCHEDULE
3.1.22, no shareholder, officer or director of AISI (or any entity owned or
controlled by one or more of such parties) (a) has any interest in any property,
real or personal, tangible or intangible, used in or pertaining to AISI's
business, (b) is indebted to AISI, or (c) has any material financial interest,
direct or indirect, in any supplier or customer of, or other outside business
which has significant transactions with AISI. True and complete copies of all
agreements listed on SCHEDULE 3.1.22 have been provided to ESI. AISI is not
indebted to any of its shareholders, directors or officers (or any entity owned
or controlled by one or more of such parties) except for amounts due under
normal salary arrangements and for reimbursement of ordinary business expenses.
The consummation of the transactions contemplated by this Agreement will not
(either alone or upon the occurrence of any act or event, or with the lapse of
time, or both) result in any payment (severance or other) becoming due from AISI
to any of its shareholders, officers, directors or employees (or any entity
owned or controlled by one or more of such parties).
3.1.23 NO POWERS OF ATTORNEY OR RESTRICTIONS. No power of
attorney or similar authorization given by AISI is presently in effect or
outstanding. No contract or 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
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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.
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 Section 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
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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
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.
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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 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
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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.
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.
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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.
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
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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.
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 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.
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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.
5.3.11 TAX CLEARANCE CERTIFICATE. AISI shall deliver to ESI a
tax clearance certificate from the applicable agencies of the State of Michigan.
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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)
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by wire transfer, the sum of $3 Million in immediately available funds in the
event that any of the following shall have occurred:
(i) this Agreement shall have been terminated pursuant to
Section 7.2(b) hereof on the basis of failure of approval of the
Merger by the AISI shareholders;
(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
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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
-----------------------------------------------
Name:
Title:
Applied Intelligent Systems, Inc.
By
-----------------------------------------------
Name:
Title:
Asteroid Merger Corp.
By
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Name:
Title:
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ANNEX B
MICHIGAN BUSINESS CORPORATION ACT
SECTIONS 761 THROUGH 744
CHAPTER 7. CORPORATE COMBINATIONS AND DISPOSITIONS
450.1761. Definitions
Sec. 761. As used in sections 762 to 774:
(a) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving corporation by merger of that
issuer.
(c) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 762 and who exercises that right when and in
the manner required by sections 764 through 772.
(d) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(e) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
(f) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
(g) "Shareholder" means the record or beneficial shareholder.
450.1762. Shareholder's right to dissent, fair value of shares; exceptions
to right to dissent
Sec. 762. (1) A shareholder is entitled to dissent from, and obtain
payment of the fair value of his or her shares in the event of, any of the
following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by section 703a or the
articles of incorporation and the shareholder is entitled to vote on the
merger, or the corporation is a subsidiary that is merged with its parent
under section 711.
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is
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entitled to vote on the sale or exchange, including a sale in dissolution but
not including a sale pursuant to court order.
(d) An amendment of the articles giving rise to a right to dissent
pursuant to section 621.
(e) A transaction giving rise to a right to dissent pursuant to
section 754.
(f) Any corporate action taken pursuant to a shareholder vote to the
extent the articles, bylaws, or a resolution of the board provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(g) The approval of a control share acquisition giving rise to a right
to dissent pursuant to section 799.
(2) Unless otherwise provided in the articles, bylaws, or a resolution
of the board, a shareholder may not dissent from any of the following:
(a) Any corporate action set forth in subsection (1)(a) to (e) as to
shares which are listed on a national securities exchange or held of record
by not less than 2,000 persons on the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting of
shareholders at which the corporate action is to be acted upon.
(b) A transaction described in subsection (1)(a) in which shareholders
receive cash or shares that satisfy the requirements of subdivision (a) or
any combination thereof.
(c) A transaction described in subsection (1)(b) in which shareholders
receive cash or shares that satisfy the requirements of subdivision (a) or
any combination thereof.
(d) A transaction described in subsection (1)(c) which is conducted
pursuant to a plan of dissolution providing for distribution of substantially
all of the corporation's net assets to shareholders in accordance with their
respective interests within 1 year after the date of the transaction, where
the transaction is for cash or shares that satisfy the requirements of
subdivision (a) or any combination thereof.
(3) A shareholder entitled to dissent and obtain payment for his or her
shares pursuant to subsection (1)(a) to (e) may not challenge the corporate
action creating his or her entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(4) A shareholder who exercises his or her right to dissent and seek
payment for his or her shares pursuant to subsection (1)(f) may not challenge
the corporate action creating his or her entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
450.1763. Dissenters' rights; partial dissenter, beneficial shareholder
Sec. 763. (1) A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his or her name only if he or she
dissents with respect to all shares beneficially owned by any 1 person and
notifies the corporation in writing of the name and address of each person on
whose behalf he or she asserts dissenters rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which he
or she dissents and his or her other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his or her behalf only if all of the following apply:
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(a) He or she submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights.
(b) He or she does so with respect to all shares of which he or she is the
beneficial shareholder or over which he or she has power to direct the vote.
450.1764. Corporate action creating dissenters' rights; vote at
shareholders' meeting, notice; action taken without shareholder
vote notice
Sec. 764. (1) If proposed corporate action creating dissenters' rights
under section 762 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this act and shall be accompanied by a copy of sections 761 to 774.
(2) If corporate action creating dissenters' rights under section 762 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in section 766. A shareholder
who consents to the corporate action is not entitled to assert dissenters'
rights.
450.1765. Shareholder asserting dissenter rights; written notice of intent
to demand payment for shares, submission prior to vote at
shareholder meeting
Sec. 765. (1) If proposed corporate action creating dissenters' rights
under section 761 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights must deliver to the
corporation before the vote is taken written notice of his or her intent to
demand payment for his or her shares if the proposed action is effectuated and
must not vote his or her shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
is not entitled to payment for his or her shares under this act.
450.1766. Delivery of written dissenters notice by corporation; notice
contents
Sec. 766. (1) If proposed corporate action creating dissenters' rights
under section 762 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of section 765.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken, and must provide all of the following:
(a) State where the payment demand must be sent and where and when
certificates for shares represented by certificates must be deposited.
(b) Inform holders of shares without certificates to what extent transfer
of the shares will be restricted after the payment demand is received.
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(c) Supply a form for the payment demand that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether he or she acquired beneficial ownership of the shares before the
date.
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) notice is delivered.
450.1767. Shareholders sent dissenter's notice; demand for payment,
certification of beneficial ownership date, deposit of
certificates; rights retained; failure to demand payment
Sec. 767. (1) A shareholder sent a dissenter's notice described in
section 766 must demand payment, certify whether he or she acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to section 766(2)(c), and deposit his or her
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her share
certificates under subsection (1) retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit his or her share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his or her shares under this act.
450.1768. Transfer of shares without certificates, restriction; rights
retained
Sec. 768. (1) The corporation may restrict the transfer of shares without
certificates from the date the demand for their payment is received until the
proposed corporate action is taken or the restrictions released under
section 770.
(2) The person for whom dissenters' rights are asserted as to shares
without certificates retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
450.1769. Payment to dissenters of estimated fair value of shares plus
accrued interest; accompanying information
Sec. 769. (1) Except as provided in section 771, within 7 days after the
proposed corporate action is taken or a payment demand is received, whichever
occurs later, the corporation shall pay each dissenter who complied with
section 767 the amount the corporation estimates to be the fair value of his or
her shares, plus accrued interest.
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(2) The payment must be accompanied by all of the following:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for that
year, a statement of changes in shareholders' equity for that year, and if
available the latest interim financial statements.
(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under
section 772.
450.1770. Failure of corporation to take proposed action; return of
certificates, release of transfer restrictions; taking action
after return and release, new dissenter's notice
Sec. 770. (1) If the corporation does not take the proposed action within
60 days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on shares without certificates.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 766 and repeat the payment demand procedure.
450.1771. Election by corporation to withhold payment from certain
dissenters; estimate of fair value of shares, offer of payment,
statement
Sec. 771. (1) A corporation may elect to withhold payment required by
section 769 from a dissenter unless he or she was the beneficial owner of the
shares before the date set forth in the dissenters' notice pursuant to
section 766(2)(c).
(2) To the extent the corporation elects to withhold payment under
subsection (1), after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall offer to pay this
amount to each dissenter who shall agree to accept it in full satisfaction of
his or her demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under
section 772.
450.1772. Estimate of fair value, written notice; demand for payment,
conditions; waiver of right to demand payment
Sec. 772. (1) A dissenter may notify the corporation in writing of his or
her own estimate of the fair value of his or her shares and amount of interest
due, and demand payment of his or her estimate, less any payment under
section 769, or reject the corporation's offer under section 771 and demand
payment of the fair value of his or her shares and interest due, if any 1 of the
following applies:
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(a) The dissenter believes that the amount paid under section 769 or
offered under section 771 is less than the fair value of his or her shares or
that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under section 769 within 60 days
after the date set for demanding payment.
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on shares without certificates within 60 days after the date set for demanding
payment.
(2) A dissenter waives his or her right to demand payment under this
section unless he or she notifies the corporation of his or her demand in
writing under subsection (1) within 30 days after the corporation made or
offered payment for his or her shares.
450.1773. Unsettled demand for payment, appraisal proceedings;
commencement, parties, jurisdiction, appraisers, discovery
rights, judgment amount
Sec. 773. (1) If a demand for payment under section 772 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding
within the 60-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the country in which the corporation's principal place of business or registered
office is located. If the corporation is a foreign corporation without a
registered office or principal place of business in this state, it shall
commence the proceeding in the county in this state where the principal place of
business or registered office of the domestic corporation whose shares are to be
valued was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) is plenary and exclusive. The court may appoint 1 or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his or her
shares, plus interest, exceeds the amount paid by the corporation or for the
fair value, plus accrued interest, of his or her after-acquired shares for which
the corporation elected to withhold payments under section 771.
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450.1773a. Appointment of referee to conduct proceedings; powers and
duties
Sec. 773a. (1) In a proceeding brought pursuant to section 773, the court
may, pursuant to the agreement of the parties, appoint a referee selected by the
parties and subject to the approval of the court. The referee may conduct
proceedings within the state, or outside the state by stipulation of the parties
with the referee's consent, and pursuant to the Michigan court rules. The
referee shall have powers that include, but are not limited to, the following:
(a) To hear all pretrial motions and submit proposed orders to the court.
In ruling on the pretrial motion and proposed orders, the court shall consider
only those documents, pleadings, and arguments that were presented to the
referee.
(b) To require the production of evidence, including the production of all
books, papers, documents, and writings applicable to the proceeding, and to
permit entry upon designated land or other property in the possession or control
of the corporation.
(c) To rule upon the admissibility of evidence pursuant to the Michigan
rules of evidence.
(d) To place witnesses under oath and to examine witnesses.
(e) To provide for the taking of testimony by deposition.
(f) To regulate the course of the proceeding.
(g) To issue subpoenas, when a written request is made by any of the
parties, requiring the attendance and testimony of any witness and the
production of evidence including books, records, correspondence, and documents
in the possession of the witness or under his or her control, at a hearing
before the referee or at a deposition convened pursuant to subdivision (e). In
case of a refusal to comply with a subpoena, the party on whose behalf the
subpoena was issued may file a petition in the court for an order requiring
compliance.
(2) The amount and manner of payment of the referee's compensation shall
be determined by agreement between the referee and the parties, subject to the
court's allocation of compensation between the parties at the end of the
proceeding pursuant to equitable principles, notwithstanding section 774.
(3) The referee shall do all of the following:
(a) Make a record and reporter's transcript of the proceeding.
(b) Prepare a report, including proposed findings of fact and conclusions
of law, and a recommended judgment.
(c) File the report with the court, together with all original exhibits
and the reporter's transcript of the proceeding.
(4) Unless the court provides for a longer period, not more than 45 days
after being served with notice of the filing of the report described in
subsection (3), any party may serve written objections to the report upon the
other party. Application to the court for action upon the report and objections
to the report shall be made by motion upon notice. The court, after hearing,
may adopt the report, may receive further evidence, may modify the report, or
may recommit the report to the referee with instructions. Upon adoption of the
report, judgment shall be entered in the same manner as if the action had been
tried by the court and shall be subject to review in the same manner as any
other judgment of the court.
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450.1774. Appraisal proceeding; determination of costs, assessment of
costs, fees and expenses
Sec. 774. (1) The court in an appraisal proceeding commenced under
section 773 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under section 772.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable in the
following manner:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of sections 764 through 772.
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this act.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to those counsel reasonable fees paid out of the amounts awarded the
dissenters who were benefited.
<PAGE>
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.
II-1
<PAGE>
ESI has directors' and officers' insurance coverage which insures
directors and officers of ESI and its subsidiaries against certain liabilities.
ESI has also entered into indemnity agreements with certain directors
and officers. While the indemnity agreements in large part incorporate the
indemnification provisions of the Act as described above, they vary from the
statute in several respects. In addition to the indemnification expressly
permitted under the statute, the agreements provide for indemnification for
settlements in derivative lawsuits and expand coverage in proceedings involving
a breach of fiduciary duty to include judgments. The contracts also require ESI
to pay expenses incurred by an indemnitee in advance of final disposition of a
suit or proceeding upon request of the indemnitee, without regard to the
indemnitee's ability to repay the sum advanced and without prior approval of the
directors, Shareholders or court, or the receipt of an opinion of counsel. A
claimant would thus be entitled to receive advanced expenses unless action were
taken to prevent such payment. The agreements also generally shift the
presumption in favor of indemnification of the indemnitee. Partial
indemnification is also expressly authorized by the agreements.
Item 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
2. Agreement of Reorganization and Merger
4-A. Restated Articles of Incorporation of ESI. Incorporated by reference
to Exhibit 3-A of ESI's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991, File 0-12853.
4-B. Bylaws of ESI. Incorporated by reference to Exhibit 3-B of ESI's
Annual Report on Form 10-K for the fiscal year ended May 31, 1995.
4-C. ESI agrees to furnish copies of long-term debt agreements to the
Commission upon request.
4-D. Rights Agreement, dated as of May 12, 1989, between ESI and United
States National Bank of Oregon relating to rights issued to all
holders of Company Common Stock. Incorporated by reference to Exhibit
1 to ESI's Report on Form 8-K dated May 12, 1989.
*5. Opinion of Stoel Rives LLP.
II-2
<PAGE>
8. Form of tax opinion of Brouse & McDowell.
23-A. Consents of Independent Public Accountants.
23-B. Consent of Stoel Rives LLP. Included in Exhibit 5 to this
Registration Statement.
23-C. Consent of Brouse & McDowell.
24. Powers of Attorney. Included in signature pages to this Registration
Statement.
(b) Financial Statement Schedules. Not Applicable.
* To be filed by amendment
Item 22. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a Prospectus/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.
2. 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 amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
4. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Information
Statement pursuant to Items 4, 10(b) or 11 herein, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
5. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
6. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Portland, State of
Oregon, on September 29, 1997.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
By /s/ Donald R. Vanluvanee
--------------------------------------
Donald R. VanLuvanee
President and Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Donald R. VanLuvanee, Barry L.
Harmon or Larry T. Rapp, and each of them (with full power to each of them to
act alone), his true and lawful attorneys-in-fact and agents for him and on his
behalf and in his name, place and stead, and in any and all capacities, to sign
one or more Form S-4 Registration Statements under the Securities Act of 1933,
prepared in connection with the conversion and/or sale of Common Stock of
Electro Scientific Industries, Inc., and any and all amendments (including
post-effective amendments) and to file the same, with exhibits and any and all
other documents filed with respect thereto, with the Securities and Exchange
Commission (or any other governmental or regulatory authority), granting unto
said attorneys, and each of them, full power and authority to do and to perform
each and every act and thing requisite and necessary to be done and about the
premises in order to effectuate the same as fully to all intents and purposes as
he himself might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on this 29th day of September, 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
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- ------- --------------------
2. Agreement of Reorganization and Merger
4-A. Restated Articles of Incorporation of ESI. Incorporated by reference
to Exhibit 3-A of ESI's Annual Report on Form 10-K for the fiscal year
ended May 31, 1991, File No. 0-12853.
4-B. Bylaws of ESI. Incorporated by reference to Exhibit 3-B of ESI's
Annual Report on Form 10-K for the fiscal year ended May 31, 1995.
4-C. ESI agrees to furnish copies of long-term debt agreements to the
Commission upon request.
4-D. Rights Agreement, dated as of May 12, 1989, between ESI and United
States National Bank of Oregon relating to rights issued to all
holders of Company Common Stock. Incorporated by reference to Exhibit
1 to ESI's Report on Form 8-K dated May 12, 1989.
*5. Opinion of Stoel Rives LLP.
8. Form of tax Opinion of Brouse & McDowell.
23-A. Consents of Independent Public Accountants.
23-B. Consent of Stoel Rives LLP. Included in Exhibit 5 to this
Registration Statement.
23-C. Consent of Brouse & McDowell.
24. Powers of Attorney. Included in signature pages to this Registration
Statement.
* To be filed by amendment
The following Exhibits and Schedules to Agreement of Reorganization and
Merger have been omitted. The Company agrees to furnish supplementally upon
request.
EXHIBITS
A - Plan of Merger
B - From of ESI Confidentiality Agreement
C - Form of Escrow Agreement
D - Form(s) of Confidentially and Inventions Agreements
E - Form of Counsel Opinion of ESI
F - Form of Counsel Opinion of AISI
G - Form of Affiliate Representation Letter
H - Form of Continuity of Interests Letter
Schedules
3.1 AISI Disclosure Schedule
3.1.2 AISI Shareholders and Option Holders
3.1.5 AISI Investments
3.1.13.2 Employee Benefits
3.1.13.3 Employment Manuals
3.1.13.4 Compensation
3.1.14 Leased Real Property
3.1.15 Tangible Personal Property
3.1.16 Intellectual Property
3.1.17 Other Agreements
3.1.19 Insurance Policies
3.1.20 Permits
3.1.21 Audits
3.1.22 Related parties
3.1.28 Bank Accounts
3.1.29 Product Warranty
3.1.30 Inventory
3.1.32 Backlog
3.2 ESI Disclosure Schedule
5.3.7 Signatories to Affiliate Representation Letter
5.3.8 Signatories to Continuity of Interest Letter
<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
3.1.3 Corporate Authority............................................13
i
<PAGE>
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
3.1.34 Brokers and Finders.........................................34
3.1.35 Reliance....................................................35
ii
<PAGE>
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
4.3.3 Listing of ESI Common Stock....................................47
4.3.4 Antitrust Improvements Act.....................................47
4.3.5 Issuance of Certificates.......................................47
iii
<PAGE>
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......................................54
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
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival.................................................................56
6.2 Scope of Indemnification.................................................56
6.3 Escrow...................................................................57
iv
<PAGE>
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
MBCA Section 1.2.1 2
viii
<PAGE>
INDEX OF TERMS (continued)
Term Section Page
- ---- ------- ----
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
2
<PAGE>
Stock shall 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
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converted into the right to receive the number of shares of ESI Common Stock
that corresponds to one MULTIPLIED BY the Conversion Ratio (I.E., 1 x Conversion
Ratio).
1.3.2 STOCK SPLITS, ETC. If, between the date of this
Agreement and the Effective Time, the outstanding shares of either AISI Common
Stock or ESI Common Stock shall have been changed into a different number of
shares or a different class by reason of any reclassification, combination,
recapitalization, stock split, stock dividend, subdivision, exchange 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.
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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.
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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
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satisfactory to ESI (a) that such person is the owner of the shares
theretofore represented by each certificate claimed by him to be lost,
wrongfully taken or destroyed and (b) that he is the person who would be
entitled to present each such certificate for conversion pursuant to this
Agreement; and (ii) such security or indemnity as may be reasonably requested
by ESI to indemnify and hold ESI and the transfer agent harmless. 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
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fractional share interest in ESI Common Stock to which such holder would
otherwise be entitled. The "Average Sale Price" shall mean the average of
the high and low prices of ESI 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.
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To the extent that amounts are so withheld by ESI, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid by
the holder of the shares of AISI Common Stock in respect of which such
deduction and withholding was made by ESI.
1.5 DISSENTERS' RIGHTS.
1.5.1 NOTICE. AISI shareholders desiring to dissent from
the Merger and obtain payment of the fair value of their shares of AISI
Common Stock immediately before the consummation of the Merger in lieu of the
Merger Consideration may exercise their dissenters' rights under the
provisions set forth at Sections 761 through 774 of the MBCA ("Dissenters'
Rights"). Consistent with Sections 764(2) and 766 of the MBCA, AISI shall
notify in writing each shareholder entitled to assert Dissenters' Rights that
action by written consent has been taken to approve the Merger and shall
provide each such shareholder the dissenters' notice described in Section 766
of the MBCA. The date specified in such notice for receipt by AISI of
payment demand from any shareholder exercising rights of dissent shall be the
earliest date permitted by Section 766(d) of the MBCA.
1.5.2 RIGHTS OF DISSENTING SHARES. Shares of AISI Common
Stock which are issued and outstanding as of the Effective Time and held by any
shareholder who has, in accordance with Section 767 of the MBCA, delivered a
payment demand accompanied by the required certification and deposit of shares
("Dissenting Shares") shall not be converted as described in Section 1.3 but
shall from and after the Effective Time represent only the right to receive such
consideration as may be determined to be due under the MBCA. AISI shall give
ESI prompt notice upon receipt by AISI of any payment demand from any such
shareholder of AISI (a "Dissenting Shareholder"). AISI agrees that prior to the
Effective Time, it will not, except
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with prior written consent of ESI, voluntarily make any payment with respect
to, or settle or offer to settle, any request pursuant to the exercise of
Dissenters' Rights. Each Dissenting Shareholder who becomes entitled,
pursuant to the MBCA, to payment for his Dissenting Shares shall receive
payment therefor in accordance with the MBCA. Notwithstanding the foregoing,
if any Dissenting Shareholder shall rescind, fail to perfect or otherwise
lose such rights either before or after the Effective Time, such
shareholder's shares of AISI Common Stock shall be converted into ESI Common
Stock or cash, as of the Effective Time, in accordance with the provisions of
Section 1.3.
1.6 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer
books of AISI shall be closed and there shall be no further registration of
transfers of shares of AISI Common Stock thereafter on the records of the AISI.
On or after the Effective Time, any certificates for AISI Common Stock presented
to ESI or its agent for any reason shall be converted into the Merger
Consideration.
1.7 CLOSING. The closing of the Merger (the "Closing") shall take
place at the offices of Stoel Rives LLP, 900 SW Fifth Avenue, Suite 2300,
Portland, Oregon 97204 on the Condition Completion Date (as hereinafter
defined), or on such other date and/or at such other place and time as AISI, ESI
and Merger Corp. may agree (the "Closing Date"). The "Condition Completion
Date" shall be the day on which the last of the conditions set forth in Article
V hereof shall have been fulfilled or waived (other than those conditions which,
by their terms, are to occur at Closing).
1.8 SUBSEQUENT ACTIONS. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or
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any other actions or things are necessary or desirable to vest, perfect or
confirm of record or 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
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Stock Plans"). All of the outstanding shares of capital stock of AISI have
been duly authorized and are validly issued, fully paid and nonassessable,
and no shares were issued in violation of preemptive or similar rights of any
shareholder or in violation of any applicable securities laws. Except as set
forth above, there are no shares of capital stock of AISI authorized, issued
or outstanding, and, except for options granted pursuant to the AISI Stock
Plans, there are no preemptive rights or any outstanding subscriptions,
options, warrants, rights, convertible securities or other agreements or
commitments of AISI of any character relating to the issued or unissued
capital stock or other securities of AISI. There are no outstanding
obligations of AISI to repurchase, redeem or otherwise acquire any of its
outstanding shares of capital stock. The list of shareholders and option
holders attached hereto as SCHEDULE 3.1.2 sets forth a complete and accurate
list of the shareholders and option holders of AISI as of the date hereof,
indicating the number of shares of AISI Common Stock held by each
shareholder, or subject to options in the case of option holders, and the
percentage of the shares of all the AISI Common Stock outstanding represented
by the shares so held in the case of shareholders.
3.1.3 CORPORATE AUTHORITY. AISI has the corporate power and
authority and has taken all corporate action necessary to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Board of Directors of
AISI, validly executed and delivered by AISI and, as of the Closing Date, will
have been duly and validly approved by the shareholders of AISI. This Agreement
constitutes the valid and binding obligation of AISI, enforceable in accordance
with its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights 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
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payments under, or to pay contributions to, any plan, agreement or other
arrangement for deferred compensation of employees, whether or not tax
qualified, including, without limitation, a single employer tax qualified
plan, a tax qualified plan of a controlled group of corporations, a
multiemployer pension plan, a "defined benefit" plan, a nonqualified deferred
compensation plan, an individual employment or compensation agreement or a
commitment to provide medical benefits to retirees.
3.1.13.3 EMPLOYMENT AGREEMENTS. Each employee of AISI is
an "at-will" employee and there are no written employment, commission or
compensation agreements of any kind between AISI and any of its employees.
SCHEDULE 3.1.13.3 lists all AISI's employment or supervisory manuals, employment
or supervisory policies, and written information generally provided to employees
(such as applications or notices), and complete and accurate copies of those
manuals, policies and written information have been provided to ESI. AISI does
not have any agreements or understandings with its employees, including without
limitation any agreements or understandings regarding compensation of any
nature, severance payments or retirement benefits, except as reflected in the
items listed in SCHEDULES 3.1.13.2 and 3.1.13.4.
3.1.13.4 COMPENSATION. SCHEDULE 3.1.13.4 contains a
complete and accurate list of all current directors, officers, employees or
consultants of AISI, specifying their names and job designations, the total
amount paid or payable as cash and noncash compensation to each such person,
and the basis of such compensation, whether fixed or 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
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3.1.13.5, AISI is not a party to any employment contract or agreement and has
not made any other commitment entitling any employee to any payment in the
event of termination or resignation that would constitute a "parachute
payment" within the meaning of Section 280G of the Code or would in the
aggregate exceed 100 percent of such person's annual base cash compensation.
The provisions for wages and salaries accrued on the Current Balance Sheet
are adequate for salaries and wages, including accrued vacation pay and sick
or wellness pay, and AISI has accrued on its books and records all
obligations for wages and salaries and other compensation to its employees,
including but not limited to, vacation pay and sick or wellness pay, and all
commissions and other fees payable to agents, salesmen, and representatives.
3.1.13.5 CONFIDENTIALITY AND INVENTIONS AGREEMENTS. Each
employee or consultant of AISI has previously signed a confidentiality and
invention agreement in the form or forms attached hereto as EXHIBIT D.
3.1.14 TITLE TO AND CONDITION OF REAL PROPERTY. AISI does
not own any real property. SCHEDULE 3.1.14 contains a list of all real
property currently leased or occupied by AISI (the "Leased Real Property"),
including the dates of and parties to all leases and any amendments thereof
and a list of all real property previously leased or occupied by AISI (the
"Previously Leased Real Property"). To the knowledge of AISI, all Leased
Real Property (including improvements thereon) is in satisfactory condition
and repair consistent with its 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
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authority having jurisdiction. The Leased Real Property includes all such
property necessary to conduct the business of AISI.
3.1.15 TITLE TO AND CONDITION OF FIXED ASSETS. SCHEDULE
3.1.15 contains a complete and accurate list of all tangible personal property
(excluding inventory) owned or leased by AISI (the "Tangible Personal
Property"), including the dates of and parties to all leases and any amendments
thereof. AISI has good and marketable title to all of the Tangible Personal
Property listed in SCHEDULE 3.1.15, free and clear of all liens, mortgages,
pledges, leases, restrictions and other claims and encumbrances of any nature
whatsoever. The Tangible Personal Property is in good operating condition and
repair (ordinary wear and tear excepted), is performing satisfactorily, and is
adequate for the conduct of the business of AISI. All Tangible Personal
Property and the state of maintenance thereof are in compliance with all
applicable laws and regulations.
3.1.16 INTELLECTUAL PROPERTY. AISI owns, or has a valid
license to use, all patents, trademarks, service marks, trade names,
copyrights, trade secrets, technology, know-how and other intellectual
property (the "Intellectual Property") necessary to or used in the conduct of
the business of AISI as now conducted and as proposed to be conducted.
SCHEDULE 3.1.16 contains a complete and accurate list of all patents, patent
applications, trademarks and service marks and related applications, trade
names and copyrights owned by or licensed to AISI. SCHEDULE 3.1.16 also
contains a description of all agreements or licenses relating to the
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
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infringement claims). The conduct of AISI's business does not, to the knowledge
of AISI, conflict with or infringe upon any Intellectual Property rights of any
other person and no claims of conflict or infringement are pending or threatened
against AISI.
3.1.17 CERTAIN CONTRACTS AND ARRANGEMENTS. SCHEDULE 3.1.17,
which is organized by type of agreement, contains a complete and accurate list
of each of the following types of agreements or arrangements, including any
amendments thereto, to which AISI is a party or by which it is bound:
(a) any mortgage, note or other instrument or agreement relating
to the borrowing of money or the incurrence of indebtedness or the guaranty of
any obligation for the borrowing of money;
(b) any contract, agreement, purchase order or acknowledgment
form for the purchase, sale, lease or other disposition of equipment, products,
materials or capital assets, or for the performance of services (including
without limitation consulting services), with respect to which the annual
aggregate dollar amount either due to or payable by AISI exceeds $20,000;
(c) contracts or agreements for the joint performance of work or
services, and all other joint venture agreements;
(d) contracts or agreements with agents, brokers, consignees,
sales representatives or distributors relating to the sale of products or
services;
(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
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with respect to any of the Contracts. AISI is not a party to, or bound by,
any Contract that AISI can reasonably foresee will result in any material
loss to AISI upon the performance thereof (including any liability for
penalties or damages, whether liquidated, direct, indirect, incidental or
consequential).
3.1.19 INSURANCE. SCHEDULE 3.1.19 contains a complete and
accurate list of all policies of fire, liability, worker's compensation and
other forms of insurance insuring AISI, its officers or directors, its assets or
its operations (the "Policies"), setting forth the applicable deductible
amounts. All the Policies are valid, enforceable and in full force and effect,
all premiums with respect to the Policies covering all periods up to and
including the date as of which this representation is being made have been paid
and no notice of cancellation or termination has been received with respect to
any Policy. The Policies are sufficient for compliance with all requirements of
law and agreements to which AISI is a party and provide insurance for the risks
and in the amounts and types of coverage usually obtained by persons using or
holding similar properties in similar businesses. There have been no claims
made for insurance payment under any of the Policies in the three years
preceding the date of this Agreement. Complete and accurate copies of the
Policies and all endorsements thereto have been delivered to ESI. AISI has not
been refused any insurance coverage and no insurance coverage has been canceled
during the three years preceding the date of this Agreement.
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
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whatsoever, together with any interest and any penalties (including penalties
for failure to file in accordance with applicable information reporting
requirements), and additions to tax.
3.1.22 RELATED PARTY INTERESTS. Except as listed in SCHEDULE
3.1.22, no shareholder, officer or director of AISI (or any entity owned or
controlled by one or more of such parties) (a) has any interest in any property,
real or personal, tangible or intangible, used in or pertaining to AISI's
business, (b) is indebted to AISI, or (c) has any material financial interest,
direct or indirect, in any supplier or customer of, or other outside business
which has significant transactions with AISI. True and complete copies of all
agreements listed on SCHEDULE 3.1.22 have been provided to ESI. AISI is not
indebted to any of its shareholders, directors or officers (or any entity owned
or controlled by one or more of such parties) except for amounts due under
normal salary arrangements and for reimbursement of ordinary business expenses.
The consummation of the transactions contemplated by this Agreement will not
(either alone or upon the occurrence of any act or event, or with the lapse of
time, or both) result in any payment (severance or other) becoming due from AISI
to any of its shareholders, officers, directors or employees (or any entity
owned or controlled by one or more of such parties).
3.1.23 NO POWERS OF ATTORNEY OR RESTRICTIONS. No power of
attorney or similar authorization given by AISI is presently in effect or
outstanding. No contract or 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
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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.
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 Section 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
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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
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.
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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 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
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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.
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.
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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.
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
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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.
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 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.
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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.
5.3.11 TAX CLEARANCE CERTIFICATE. AISI shall deliver to ESI a
tax clearance certificate from the applicable agencies of the State of Michigan.
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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)
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by wire transfer, the sum of $3 Million in immediately available funds in the
event that any of the following shall have occurred:
(i) this Agreement shall have been terminated pursuant to
Section 7.2(b) hereof on the basis of failure of approval of the
Merger by the AISI shareholders;
(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
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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
-----------------------------------------------
Name:
Title:
Applied Intelligent Systems, Inc.
By
-----------------------------------------------
Name:
Title:
Asteroid Merger Corp.
By
-----------------------------------------------
Name:
Title:
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[___________, 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 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 (or
will examine on or prior to the Closing of the Merger) and are relying (or
will rely) 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. Representations made by certain shareholders of AISI in paragraphs
numbered 1 and 2 in the Continuity of Interest Letters attached hereto as
Exhibit A ("CONTINUITY LETTER");
3. Representations made to us by AISI, Merger Corp. and ESI in a
letter attached hereto as Exhibit B ("REPRESENTATION LETTER");
4. The Prospectus/Consent and Information Statement on Form S-4 (File
No. 333-______) of
<PAGE>
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 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. Section 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
<PAGE>
AISI shareholder in connection with the Merger and all transactions and
proceedings relating thereto; and
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;
(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
<PAGE>
(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:
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
(e) the tax consequences of the Merger that may be relevant to
particular shareholders of
<PAGE>
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 by us, as counsel to AISI, to you and solely
for your benefit in connection with the Agreement. This opinion may not
otherwise be relied upon or, except as may be required by law, 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. Except as otherwise may be noted, the information set forth herein
is as of the date hereof. 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
<PAGE>
EXHIBIT A
CONTINUITY OF INTEREST LETTERS
<PAGE>
EXHIBIT B
REPRESENTATION LETTER
<PAGE>
EXHIBIT 23-A
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form S-4 Registration Statement and related Prospectus, Consent and
Information Statement of our report dated September 26, 1997 pertaining to
Applied Intelligent Systems, Inc. and to all references to our firm included
in this Registration Statement and related Prospectus, Consent and
Information Statement.
ARTHUR ANDERSEN LLP
Ann Arbor, Michigan
September 29, 1997
<PAGE>
EXHIBIT 23-A
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form S-4 Registration Statement and related Prospectus
pertaining to Electro Scientific Industries, Inc., (the Company) of our
reports dated (1) July 3, 1997 included in the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1997 and (2) August 14, 1997
included in the Company's Current Report on Form 8-K/A relating to the
acquisition of Chip Star, Inc. and to all references to our Firm included in
this Registration Statement and related Prospectus.
Arthur Andersen LLP
Portland, Oregon
September 29, 1997
<PAGE>
CONSENT OF BROUSE & MCDOWELL
We hereby consent to the inclusion of the form of our tax opinion as
Exhibit 8 to the Registration Statement on Form S-4 of Electro Scientific
Industries, Inc. and to the reference to our firm under the captions "Certain
U.S. Federal Income Tax Consequences" and "Legal Matters" in the
Prospectus/Consent and Information Statement comprising a part of the
Registration Statement.
BROUSE & MCDOWELL
/s/ Brouse & McDowell
Dated: September 29, 1997
