As filed with the Securities and Exchange Commission on April 1, 1997
Registration No. 333-20847
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ELECTRO SCIENTIFIC INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
OREGON 3630 93-0370304
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Industrial Identification No.)
organization) Classification Number)
13900 NW SCIENCE PARK DRIVE
PORTLAND, OREGON 97229
(503) 641-4141
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
---------------
DONALD R. VANLUVANEE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELECTRO SCIENTIFIC INDUSTRIES, INC.
13900 NW SCIENCE PARK DRIVE
PORTLAND, OR 97229-5497
(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 SCOTT N. LESLIE
STOEL RIVES LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP
900 SW FIFTH AVENUE 695 TOWN CENTER DRIVE
PORTLAND, OR 97204-1268 COSTA MESA, CA 92626-1924
(503) 224-3380 (714) 668-6200
(503) 220-2480 (FAX) (714) 979-1921 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes
effective and all other conditions to the merger (the "Merger") of
Dynamotion/ATI Corp. ("Dynamotion") with and into a subsidiary of the
Registrant pursuant to the Agreement of Reorganization and Merger
described in the enclosed Proxy Statement/Prospectus have been
satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
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CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
ITEM LOCATION OR HEADING IN PROXY
NO. ITEM IN FORM S-4 STATEMENT/PROSPECTUS
---- ---------------- --------------------
<S> <C> <C>
A. INFORMATION ABOUT THE
TRANSACTION.
1. Forepart of the Registration Statement and Outside Facing Page of Registration Statement; Cross-
Front Cover Page of Proxy Statement/Prospectus..... Reference Sheet; Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of Proxy Available Information; Incorporation of Documents by
Statement/Prospectus............................... Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges Outside Front Cover Page of Proxy
and Other Information.............................. Statement/Prospectus; Summary; Risk Factors;
Selected Historical 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.................... Unaudited Pro Forma Summary of Selected Financial
Data
6. Material Contacts With the Company Being The Merger; The Merger Agreement
Acquired...........................................
7. Additional Information Required For Reoffering by Not applicable
Persons and Parties Deemed to be Underwriters......
8. Interests of Named Experts and Counsel............. Not applicable
9. Disclosure of Commission Position on Not applicable
Indemnification for Securities Act Liabilities.....
B. INFORMATION ABOUT REGISTRANT.
10. Information With Respect to S-3 Registrants........ Outside Front Cover Page of Proxy
Statement/Prospectus; Inside Front Cover Page of
Proxy Statement/Prospectus; Summary; Risk Factors;
Information Concerning ESI
11. Incorporation of Certain Information by Reference.. Inside front cover page of Proxy Statement/Prospectus
12. Information With Respect to S-2 or S-3 Registrants. Not applicable
13. Incorporation of Certain Information by Reference.. Not applicable
14. Information With Respect to Registrants Other Than Not applicable
S-2 or S-3 Registrants.............................
C. INFORMATION ABOUT THE COMPANY
BEING ACQUIRED.
15. Information With Respect to S-3 Companies.......... Not applicable
16. Information With Respect to S-2 or S-3 Companies... Not applicable
</TABLE>
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<TABLE>
<CAPTION>
ITEM LOCATION OR HEADING IN PROXY
NO. ITEM IN FORM S-4 STATEMENT/PROSPECTUS
---- ---------------- --------------------
<S> <C> <C>
17. Information With Respect to Companies Other Than Outside Front Cover Page of Proxy Statement/
S-2 or S-3 Companies............................... Prospectus; Summary; Unaudited Pro Forma Summary
of Selected Financial Data; Dynamotion Management's
Discussion and Analysis of Financial Results;
Information Concerning Dynamotion; Dynamotion
Financial Statements
D. VOTING AND MANAGEMENT
INFORMATION.
18. Information if Proxies, Consents or Authorizations Outside Front Cover Page of Proxy Statement/
are to be Solicited................................ Prospectus; Summary; The Merger; The Merger
Agreement; Dynamotion's Voting Securities and
Principal Shareholders
19. Information if Proxies, Consents or Authorizations Not Applicable
are not to be Solicited in an Exchange Offer.......
20. Indemnification of Officers and Directors.......... Comparison of Shareholder Rights; Part II of the
Registration Statement
21. Exhibits and Financial Statement Schedules......... Financial Statements; Exhibits
22. Undertakings....................................... Part II of the Registration Statement
</TABLE>
<PAGE>
PRELIMINARY COPY
[LOGO]
DYNAMOTION/ATI CORP.
1639 East Edinger Avenue
Santa Ana, California 92705
April __, 1997
Dear Dynamotion Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Dynamotion/ATI Corp. (the "Special Meeting"), which will be held at
_____________, _____________, California, on May __, 1997, commencing at 8:00
a.m. local time.
At the Special Meeting, you will be asked to consider and vote on: (i) a
proposal to approve and adopt the Agreement of Reorganization and Merger (the
"Merger Agreement") dated as of January 24, 1997 entered into by Dynamotion/ATI
Corp. ("Dynamotion"), Electro Scientific Industries, Inc. ("ESI"), Dynamotion
Merger Corp., a wholly-owned subsidiary of ESI ("Merger Corp."), and certain key
shareholders of Dynamotion, to approve and adopt the related Plan of Merger
("Plan of Merger"), and to approve the merger of Dynamotion with and into Merger
Corp. (the "Merger") pursuant to the Merger Agreement and the Plan of Merger
(the foregoing proposal is hereinafter referred to as the "Merger Proposal");
(ii) a proposal to amend Dynamotion's Certificate of Incorporation (the
"Certificate") to provide that if the Merger Proposal is approved and the Merger
occurs, immediately before the consummation of the Merger, each share of the
outstanding Class A Non-Cumulative Redeemable Convertible Preferred Shares of
Dynamotion, par value $0.01 per share ("Class A Stock"), will automatically
convert into (a) 1.05 Common Shares of Dynamotion, par value $0.04 per share
("Dynamotion Common Stock"), and (b) cash in the amount of $0.10 representing
the redemption price for the two Class A Redeemable Common Stock Purchase
Warrants ("Z Warrants") that would have been issued with respect to such share
of Class A Stock under the existing conversion provisions of the Certificate
(the foregoing proposal is hereinafter referred to as the "Class A Conversion
Proposal"); and (iii) a proposal to amend Dynamotion's Certificate to provide
that if the Merger Proposal is approved and the Merger occurs, immediately
before the consummation of the Merger, each share of the outstanding Class B
Cumulative Convertible Preferred Shares of Dynamotion, par value $0.01 per share
("Class B Stock"), will automatically convert into (a) 0.990904 of a share of
Dynamotion Common Stock, and (b) cash in an amount equal to the accrued
dividends that the holder of such share of Class B Stock will be entitled to on
such share of Class B Stock as of the date the automatic conversion occurs (the
foregoing proposal is hereinafter referred to as the "Class B Conversion
Proposal;" the Class A Conversion Proposal and Class B Conversion Proposal are
hereinafter referred to collectively as the "Conversion Proposals").
If the Conversion Proposals are not approved, the Merger will not occur;
the approval of the Conversion Proposals is an essential condition precedent to
the Merger. If the Merger Proposal and the Conversion Proposals are approved and
become effective, Dynamotion will be merged with and into Merger Corp., a
wholly-owned subsidiary of ESI formed for this purpose, with Merger Corp.
continuing as the surviving corporation, and each share of Dynamotion
<PAGE>
Common Stock will be converted into the right to receive a fraction of a share
of Common Stock, no par value, of ESI, determined in accordance with a
conversion ratio formula specified in the Merger Agreement. If the Merger
Proposal and Conversion Proposals are approved by Dynamotion's shareholders at
the Special Meeting and the other conditions necessary to consummate the Merger
are satisfied, ESI and Dynamotion expect that it will take between seven and 14
days to complete the Merger. Accordingly, the Merger is expected to be
consummated on or about May __, 1997, or as soon thereafter as practicable after
satisfaction of all necessary closing conditions.
The purpose of the Conversion Proposals is to simplify the capital
structure of Dynamotion by providing for the conversion of all outstanding
shares of Class A Stock and Class B Stock into Dynamotion Common Stock
immediately before the Merger takes effect. In addition, the conversion of all
outstanding shares of Class A Stock into Dynamotion Common Stock will fulfill a
condition necessary to enable Dynamotion to redeem all outstanding Z Warrants.
Accordingly, after the automatic conversion of the Class A Stock into Dynamotion
Common Stock immediately before the Merger pursuant to the Conversion Proposals,
Dynamotion will redeem all of the outstanding Z Warrants in accordance with
their terms.
After careful consideration, your Board of Directors has unanimously
approved the Merger Proposal and the Conversion Proposals and has concluded that
they are in the best interests of Dynamotion and its shareholders. Your Board of
Directors unanimously recommends a vote in favor of approving and adopting the
Merger Proposal and the Conversion Proposals.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement/Prospectus relating to the actions to
be taken by Dynamotion Shareholders at the Special Meeting and a proxy. The
Proxy Statement/Prospectus more fully describes the proposed Merger and
information about Dynamotion and ESI. Please read it carefully.
We hope that you will be able to attend the Special Meeting in person.
However, whether or not you plan to attend the Special Meeting, please complete,
sign, and date your proxy and return it in the enclosed envelope. If you attend
the Special Meeting, you may vote in person if you wish, even though you have
previously returned your proxy. It is important that your shares be represented
and voted at the Special Meeting.
Sincerely,
Santa Ana, California Jon R. Hopper
April __, 1997 Chairman, President and
Chief Executive Officer
<PAGE>
PRELIMINARY COPY
DYNAMOTION/ATI CORP.
1639 East Edinger Avenue
Santa Ana, California 92705
---------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY __. 1997
---------------------------------------------------
TO: SHAREHOLDERS OF DYNAMOTION/ATI CORP.
A special meeting of the shareholders of Dynamotion/ATI Corp., a New York
corporation ("Dynamotion"), will be held at 8:00 a.m. local time, on May __,
1997, at ____________, ____________, California (the "Special Meeting") for the
following purposes:
1. To consider, approve and adopt an Agreement of Reorganization and
Merger (the "Merger Agreement"), dated as of January 24, 1997, among
Dynamotion, Electro Scientific Industries, Inc. ("ESI"), Dynamotion
Merger Corp., a wholly-owned subsidiary of ESI ("Merger Corp."), and
certain key shareholders of Dynamotion, to approve and adopt the
related Plan of Merger ("Plan of Merger"), and to approve the proposed
merger of Dynamotion and Merger Corp. (the "Merger"). In the proposed
Merger, Dynamotion will be merged with and into Merger Corp., with
Merger Corp. continuing as the surviving corporation, and each Common
Share, par value $0.04 per share, of Dynamotion ("Dynamotion Common
Stock"), will be converted into the right to receive a fraction of a
share of Common Stock, no par value, of ESI, determined in accordance
with a conversion ratio formula specified in the Merger Agreement.
Copies of the Merger Agreement and the Plan of Merger are attached as
Annex A and Annex B, respectively, to the Proxy Statement/Prospectus
accompanying this Notice. Proposal 1 is hereinafter referred to as the
"Merger Proposal."
2. To consider, approve, and adopt a proposal to amend Dynamotion's
Certificate of Incorporation (the "Certificate") to provide that if
the Merger Proposal is approved and the Merger occurs, immediately
before the consummation of the Merger, each share of the outstanding
Class A Non-Cumulative Redeemable Convertible Preferred Shares of
Dynamotion, par value $0.01 per share ("Class A Stock"), will
automatically convert into (a) 1.05 shares of Dynamotion Common Stock,
and (b) cash in the amount of $0.10 representing the redemption price
for the two Class A Redeemable Common Stock Purchase Warrants ("Z
Warrants") that would have been issued with respect to such share of
Class A Stock under the existing conversion provisions of the
Certificate. Proposal 2 is hereinafter referred to as the "Class A
Conversion Proposal."
3. To consider, approve, and adopt a proposal to amend Dynamotion's
Certificate to provide that if the Merger Proposal is approved and the
Merger occurs, immediately before the consummation of the Merger, each
share of the outstanding Class B
<PAGE>
Cumulative Convertible Preferred Shares of Dynamotion, par value $0.01
per share ("Class B Stock"), will automatically convert into (a)
0.990904 of a share of Dynamotion Common Stock, and (b) cash in an
amount equal to the accrued dividends that the holder of such share of
Class B Stock will be entitled to on such share of Class B Stock as of
the date the automatic conversion occurs. Proposal 3 is hereinafter
referred to as the "Class B Conversion Proposal, and Proposals 2 and 3
are hereinafter referred to collectively as the "Conversion
Proposals".
4. To consider and transact such other business as may properly come
before the Special Meeting or any postponements or adjournments
thereof.
This Notice of Special Meeting of Shareholders is being issued at the
direction of the Board of Directors of Dynamotion. If the Merger Proposal and
the Conversion Proposals are approved and adopted by the shareholders, and the
actions proposed to be taken pursuant to the Merger Proposal and the Conversion
Proposals are taken, shareholders fulfilling the requirements of Section 623 of
the New York Business Corporation Law (the "NYBCL") may be entitled to receive
payment for their shares of Dynamotion Common Stock as set forth in Section 623
of the NYBCL. A copy of Section 623 of the NYBCL is attached as Annex D to the
accompanying Proxy Statement/Prospectus. Please review it carefully.
The Board of Directors has fixed the close of business on April __, 1997
as the record date for the determination of the holders of Dynamotion capital
stock entitled to notice of, and to vote at, the Special Meeting. Accordingly,
only shareholders of record at the close of business on such date are entitled
to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof.
Details of the proposed transactions and other important information
concerning Dynamotion and ESI are more fully described in the accompanying Proxy
Statement/ Prospectus. Please give this material your careful attention.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN,
DATE AND MAIL PROMPTLY THE ENCLOSED PROXY WHICH IS BEING SOLICITED ON BEHALF OF
THE DYNAMOTION BOARD OF DIRECTORS. A RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES, IS ENCLOSED FOR THAT PURPOSE.
You may revoke your proxy in the manner described in the accompanying Proxy
Statement/Prospectus at any time before it has been voted at the Special
Meeting. Any shareholder attending the Special Meeting may vote in person even
if he or she has returned a proxy.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
MERGER PROPOSAL AND THE CONVERSION PROPOSALS.
By Order of the Board of Directors
Santa Ana, California Jon R. Hopper
April __, 1997 Chairman, President and
Chief Executive Officer
<PAGE>
PRELIMINARY COPY
---------------------------------------------
ELECTRO SCIENTIFIC INDUSTRIES, INC.
Prospectus for
Up To 577,778 Shares of ESI Common Stock,
Without Par Value
--------------------------------------------
DYNAMOTION/ATI CORP.
Proxy Statement for Special Meeting
of Shareholders to be held on
May __, 1997
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") and
accompanying annexes are being furnished to the shareholders of Dynamotion/ATI
Corp., a New York corporation ("Dynamotion") in connection with the solicitation
of proxies by the Board of Directors of Dynamotion for use at the Special
Meeting of Shareholders of Dynamotion to be held on May __, 1997 at 8:00
a.m. at ____________________, __________________, California, and at any and
all adjournments or postponements thereof (the "Special Meeting").
This Proxy Statement/Prospectus relates to (i) a proposal to merge (the
"Merger") Dynamotion with and into Dynamotion Merger Corp. ("Merger Corp."), a
wholly-owned subsidiary of Electro Scientific Industries, Inc. ("ESI") formed
for this purpose, with Merger Corp. continuing as the surviving corporation, in
accordance with the terms of an Agreement (continued on following page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY DYNAMOTION SHAREHOLDERS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is April __, 1997.
------------------------
<PAGE>
(continued from previous page)
of Reorganization and Merger (the "Merger Agreement") dated as of January 24,
1997, among ESI, Dynamotion, Merger Corp., and certain key shareholders (the
"Key Shareholders") of Dynamotion and the related Plan of Merger (the "Plan of
Merger") (the foregoing proposal is hereinafter referred to as the "Merger
Proposal"); (ii) a proposal to amend Dynamotion's Certificate of Incorporation
(the "Certificate") to provide that if the Merger Proposal is approved and the
Merger occurs, immediately before the consummation of the Merger, each share of
the outstanding Class A Non-Cumulative Redeemable Convertible Preferred Shares
of Dynamotion, par value $0.01 per share ("Class A Stock"), will automatically
convert into (a) 1.05 Common Shares of Dynamotion, par value $0.04 per share
("Dynamotion Common Stock"),and (b) cash in the amount of $0.10 representing the
redemption price for the two Class A Redeemable Common Stock Purchase Warrants
("Z Warrants") that would have been issued with respect to such share of Class A
Stock under the existing conversion provisions of the Certificate (the foregoing
proposal is hereinafter referred to as the "Class A Conversion Proposal"); and
(iii) a proposal to amend Dynamotion's Certificate to provide that if the Merger
Proposal is approved and the Merger occurs, immediately before the consummation
of the Merger, each share of the outstanding Class B Cumulative Convertible
Preferred Shares of Dynamotion, par value $0.01 per share ("Class B Stock"),
will automatically convert into (a) 0.990904 of a share of Dynamotion Common
Stock, and (b) cash in an amount equal to the accrued dividends that the holder
of such share of Class B Stock will be entitled to on such share of Class B
Stock as of the date the automatic conversion occurs (the foregoing proposal is
hereinafter referred to as the "Class B Conversion Proposal;" the Class A
Conversion Proposal and the Class B Conversion Proposal are hereinafter referred
to collectively as the "Conversion Proposals").
In the proposed Merger, each outstanding share of Dynamotion Common Stock
will be converted into and represent the right to receive a fraction of a share
of Common Stock, no par value, of ESI ("ESI Common Stock") that corresponds to a
ratio (the "Conversion Ratio") determined by dividing: (a) the "Conversion Ratio
Numerator", which will be determined on the date of the closing for the Merger
Agreement (the "Closing Date") by dividing $13,000,000 by the average of the
high and low sales prices ("Average Price") for ESI Common Stock on each of the
five trading days immediately preceding the day before the Closing Date, by (b)
the "Conversion Ratio Denominator," which will equal the number of shares of
Dynamotion Common Stock outstanding immediately before the Effective Time (after
giving effect to the conversion of the Class A Stock and the Class B Stock into
Dynamotion Common Stock), plus the number of shares of Dynamotion Common Stock
that are issuable upon the exercise of Z Warrants for which holders of Z
Warrants have given exercise notices by 5:00 p.m., New York time, on the Closing
Date (which date will also be the "Redemption Date," as that term is defined in
the Z Warrants). Cash in lieu of certain fractional shares will be paid to each
former Dynamotion shareholder who would otherwise be entitled to receive a
fractional share of ESI Common Stock after giving effect to the conversion of
all of such shareholder's shares of Dynamotion Common Stock into ESI Common
Stock pursuant to the Merger.
To effect the Merger, ESI will issue shares of ESI Common Stock based on
the Average Price. The actual number of shares will be determined by dividing
$13,000,000 by the Average Price. Because neither the Average Price nor the
number of outstanding shares of Dynamotion Common Stock used to calculate the
Conversion Ratio will be determined until the Closing Date, Dynamotion
shareholders will not know the actual fraction of a share of ESI Common Stock
that they will receive for each of their shares of Dynamotion Common Stock when
they vote on the Merger at the Special Meeting. For a table with example
calculations of Conversion Ratios
<PAGE>
based on various assumed per-share Average Prices of ESI Common Stock, see
"Market and Market Prices for ESI Common Stock and Dynamotion Securities." See
"The Merger Agreement -- Conversion of Shares" for a further discussion of the
conversion of shares of Dynamotion Common Stock into shares of ESI Common Stock
in the Merger.
This Proxy Statement/Prospectus also constitutes the Prospectus of ESI with
respect to the 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 April __, 1997, the closing sale price for ESI
Common Stock as reported on Nasdaq was $_____ per share.
All information contained in this Proxy Statement/Prospectus relating to
Dynamotion has been furnished by Dynamotion, and ESI is relying upon the
accuracy of that information. All information contained in this Proxy
Statement/Prospectus relating to ESI and Merger Corp. has been furnished by ESI,
and Dynamotion is relying upon the accuracy of that information.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the shareholders of Dynamotion on or about April __,
1997.
This Proxy Statement/Prospectus includes a discussion of the anticipated
future performance of ESI after the Merger, including possible cost savings and
other financial consequences of the proposed Merger. This discussion is based on
assumptions that are inherently uncertain, including without limitation factors
related to general economic and competitive conditions. Accordingly, actual
future results or values may vary significantly from such estimates.
No person has been authorized to give any information or to make any
representations not contained or incorporated in this Proxy Statement/Prospectus
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 Dynamotion or by ESI. This Proxy Statement/Prospectus 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 Proxy Statement/Prospectus shall not,
under any circumstances, create any implication that the information herein is
correct as of any time subsequent to the date hereof.
<PAGE>
TABLE OF CONTENTS
FOR PROXY STATEMENT/PROSPECTUS
AVAILABLE INFORMATION.........................................................1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................1
SUMMARY OF PROXY STATEMENT/PROSPECTUS.........................................2
The Companies.............................................................2
Electro Scientific Industries, Inc...................................2
Dynamotion/ATI Corp..................................................2
Dynamotion Merger Corp...............................................3
The Merger................................................................3
Effective Time of the Merger..............................................5
Conditions to the Merger..................................................5
Nonsolicitation Obligation................................................5
Indemnity and Escrow Agreement........................................... 5
Termination; Termination Fee..............................................6
The Dynamotion Special Shareholders' Meeting..............................6
Matters to be Considered at the Special Meeting......................6
Time, Place, and Date................................................6
Record Date; Shareholders Entitled to Vote; Voting Agreement.........6
Vote Required To Approve the Merger Proposal.........................7
Vote Required to Approve and Adopt the Conversion Proposals..........7
Appraisal Rights..........................................................8
Reasons for the Merger....................................................8
ESI's Reasons for the Merger.........................................8
Dynamotion's Reasons for the Merger..................................8
Interests of Certain Persons in the Merger................................9
Surrender of Certificates.................................................9
Accounting Treatment.....................................................10
Material Federal Income Tax Consequences.................................10
The Conversion Proposals............................................10
The Merger..........................................................10
RISK FACTORS.................................................................12
Uncertainties Related to the Integration of Dynamotion's Business........12
Uncertainties Related to Combined Operations after the Merger............12
No Fairness Opinion Obtained in Connection With the Merger...............12
Electronics Industry Downturns May Adversely Affect Operating Results....13
Rapid Technological Change; Dependence on New Product Introduction
and Product Enhancements.......................................13
Variability of Quarterly Operating Results...............................13
Competition..............................................................14
Patents and Other Intellectual Property..................................14
Fluctuations in International Sales and Currency Exchange Rates
Can Adversely Affect Results........................................15
<PAGE>
Dependence on Key Employees..............................................15
Dependence on Suppliers..................................................15
SELECTED HISTORICAL FINANCIAL INFORMATION....................................16
ESI's Selected Historical Financial Information.....................16
Dynamotion's Selected Historical Financial Information..............18
EQUIVALENT PER COMMON SHARE DATA.............................................20
UNAUDITED PRO FORMA SUMMARY OF SELECTED FINANCIAL DATA.......................21
MARKET AND MARKET PRICES
FOR ESI COMMON STOCK AND DYNAMOTION SECURITIES...........................22
THE DYNAMOTION SPECIAL SHAREHOLDERS' MEETING.................................27
General; Date, Time and Place of Meeting.................................27
Matters to Be Considered at the Special Meeting..........................27
The Merger Proposal.................................................27
The Conversion Proposals............................................27
Record Date; Voting at the Special Meeting; Vote Required;
Voting Agreement.......................................................28
Vote Required To Approve the Merger Proposal........................28
Vote Required to Approve and Adopt the Conversion Proposals.........29
Voting Agreements...................................................29
Proxies..................................................................29
THE MERGER...................................................................31
Description..............................................................31
Background of the Merger.................................................31
Reasons for the Merger...................................................32
General ...........................................................32
Dynamotion's Reasons for the Merger.................................33
ESI's Reasons for the Merger........................................35
Regulatory Approval......................................................36
Material U.S. Federal Income Tax Consequences............................36
The Conversion Proposals............................................37
The Merger..........................................................37
Accounting Treatment.....................................................38
Interests of Certain Persons in the Merger...............................38
Appraisal Rights.........................................................39
THE MERGER AGREEMENT.........................................................42
Effective Time of the Merger.............................................42
Conversion of Shares.....................................................42
Treatment of Dynamotion Stock Options....................................43
Resale of ESI Common Stock by the Key Shareholders.......................43
Dynamotion's Conduct of Business Pending the Merger......................44
Nonsolicitation of Alternative Transactions..............................45
Corporate Structure and Related Matters after the Merger.................45
Certain Covenants........................................................46
<PAGE>
Conditions to the Merger.................................................46
Indemnity and Escrow Agreement...........................................47
Termination; Termination Fee.............................................48
Fees and Expenses........................................................48
Confidentiality..........................................................48
RELATED AGREEMENTS...........................................................48
Voting Agreements........................................................49
Pledge and Escrow Agreement..............................................49
Standstill Agreement.....................................................49
Termination of Agreements Relating to Z Warrants and
Underwriters' Warrants..............................................49
Noncompetition Agreement.................................................49
Employee Agreements......................................................49
AMENDMENT OF THE DYNAMOTION CERTIFICATE OF INCORPORATION
(THE CONVERSION PROPOSALS)...............................................50
Description of the Proposed Amendments...................................50
Conversion Formulas for the Class A Stock and Class B Stock..............51
Effect of the Conversion Proposals on Z Warrants.........................52
Consequences of the Conversion Proposals to Existing Holders of Class A
Stock and Class B Stock.............................................52
Purpose and Effect.......................................................53
Consequences of Failure to Approve the Conversion Proposals..............53
INFORMATION CONCERNING ESI...................................................54
Business ................................................................54
Electronics Industry Overview............................................54
Overview of Markets, Products and Strategy...............................55
Sales, Marketing and Service.............................................59
Backlog ................................................................60
Research, Development and Technology.....................................60
Competition..............................................................61
Manufacturing and Supply.................................................62
Employees................................................................62
Patents and Other Intellectual Property..................................62
Legal Proceedings........................................................63
INFORMATION CONCERNING DYNAMOTION............................................63
General ................................................................63
Recent Developments......................................................63
Products ................................................................64
Customers................................................................66
Sales and Marketing......................................................66
Competition..............................................................66
Intellectual Property....................................................66
Manufacturing............................................................67
Research and Development.................................................67
Employees................................................................67
Properties...............................................................67
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Legal Proceedings........................................................68
Information Concerning Security Ownership of Certain Beneficial Owners
and Management......................................................69
DYNAMOTION MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL RESULTS........................................71
General..................................................................71
Years Ended December 31, 1995 and 1996...................................72
Years Ended December 31, 1994 and 1995...................................75
Liquidity and Capital Resources..........................................77
COMPARISON OF SHAREHOLDER RIGHTS.............................................80
Amendment of Articles of Incorporation..............................80
Amendment of Bylaws.................................................81
Special Meeting of Shareholders.....................................81
Dividends...........................................................82
Capital Stock.......................................................82
Dissenters' Rights..................................................83
Provisions Relating to Directors....................................83
Indemnification of Directors, Officers and Employees................85
Anti-Takeover Statutes..............................................87
LEGAL MATTERS................................................................92
EXPERTS ....................................................................92
SHAREHOLDER PROPOSALS........................................................92
INDEX TO DYNAMOTION'S FINANCIAL STATEMENTS..................................F-1
LISTS OF ANNEXES
ANNEX A AGREEMENT OF REORGANIZATION AND MERGER
ANNEX B PLAN OF MERGER
ANNEX C PROPOSED AMENDMENTS TO DYNAMOTION'S CERTIFICATE OF INCORPORATION TO
MODIFY THE TERMS OF DYNAMOTION'S CLASS A NONCUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED SHARES, $0.01 PER SHARE PAR VALUE AND
DYNAMOTION'S CLASS B CUMULATIVE CONVERTIBLE PREFERRED SHARES, $0.01
PER SHARE PAR VALUE ANNEX D SECTION 623 OF THE NEW YORK BUSINESS
CORPORATION LAW
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AVAILABLE INFORMATION
ESI and Dynamotion are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith file periodic reports and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements,
and other information concerning ESI and Dynamotion 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: 7 World Trade Center, Suite 1300, New York, New York 10048,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, California 90036. The SEC maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
and information statements, and other information regarding registrants that
file electronically with the SEC. 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 Proxy Statement/Prospectus. This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. For further information, reference is made
to the Registration Statement and the exhibits thereto, which are available for
inspection at no fee at the public reference section of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549.
ESI hereby undertakes to provide without charge to each person to whom a
copy of this Proxy Statement/Prospectus 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 Proxy Statement/Prospectus, other than
exhibits to such information unless such exhibits are specifically incorporated
by reference therein. The information relating to ESI contained in this Proxy
Statement/Prospectus 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 Proxy Statement/Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by ESI with the SEC are incorporated herein
by reference:
1. ESI's Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
2. ESI's Quarterly Reports on Form 10-Q for the fiscal quarters ended
August 31, 1996 and November 30, 1996.
3. The description of the Common Stock contained in ESI's Registration
Statement on Form 8-A, as amended, filed with the SEC under section 12
of the Exchange Act.
All reports and other documents subsequently filed by ESI pursuant to
sections 13(a), 13(c), 14, and 15(d) of the Exchange Act before 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 PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT 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 APRIL __, 1997.
<PAGE>
SUMMARY OF PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and is qualified in its entirety by reference to
the full text of this Proxy Statement/Prospectus, the Annexes hereto and
documents incorporated by reference herein. Shareholders are urged to read this
Proxy Statement/Prospectus and the accompanying Annexes in their entirety. See
"Risk Factors" for certain information that should be considered by the
shareholders of Dynamotion.
THE COMPANIES
Electro Scientific Industries, Inc.
Electro Scientific Industries, Inc. ("ESI") provides electronics
manufacturers with production equipment for the manufacture of 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 produces high-speed test and handling
equipment used in the high-volume production of miniature capacitors.
Additionally, ESI designs and manufactures machine vision products and laser
electronic packaging systems for manufacturers of electronics products,
including drilling micro-vias in printed circuit boards. ESI's products are
designed to enable manufacturers to reduce production costs, increase yields and
improve the quality of their products. ESI's customers include manufacturers of:
wireless telecommunication products (Ericsson and Motorola); automotive
electronics (Delco, Ford, Nippon-Denso and Siemens); miniature capacitors
(Kemet, Kyocera/AVX, Murata, Philips, and Samsung) and semiconductor memory
devices (Fujitsu, Hitachi, Hyundai, IBM, Samsung and Texas Instruments).
Ericsson, Motorola, Delco, Ford, Nippon-Denso, Siemens, Kemet, Kyocera/AVX,
Murata, Philips, Samsung, Fujitsu, Hitachi, Hyundai, IBM, and Texas Instruments
together accounted for 35.7% of ESI's total consolidated revenue for the fiscal
year ended May 31, 1996, and for 42.1% of ESI's total consolidated revenue for
the six months ended November 30, 1996. See "Information Concerning ESI."
ESI's executive offices are located at 13900 NW Science Park Drive,
Portland, OR 97229 and its telephone number is (503) 641-4141.
Dynamotion/ATI Corp.
Dynamotion/ATI Corp. ("Dynamotion") develops, manufactures and markets
computer numerical control drilling and routing machines for the production of
high density multi-layer circuit boards and semiconductor packages. Dynamotion
offers a complete line of various machine sizes and configurations to satisfy
the needs of both high-tech and commercial circuit boards manufacturers. See
"Information Concerning Dynamotion."
Dynamotion's executive offices are located at 1639 East Edinger Avenue,
Santa Ana, California 92705 and its telephone number is (714) 541-4818.
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Dynamotion Merger Corp.
Dynamotion Merger Corp. ("Merger Corp.") was recently organized by ESI for
the purpose of effecting the acquisition of Dynamotion. 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 between Dynamotion and Merger Corp. (the
"Merger"), Dynamotion will be merged with and into Merger Corp., a wholly-owned
subsidiary of ESI formed for this purpose, with Merger Corp. continuing as the
surviving corporation. Each share of the outstanding Common Shares of
Dynamotion, par value $0.04 per share ("Dynamotion Common Stock") will be
converted into the right to receive a fraction of a share of ESI Common Stock
determined in accordance with the "Conversion Ratio," which will be calculated
by reference to a formula specified in the Agreement of Reorganization and
Merger (the "Merger Agreement") dated as of January 24, 1997 among ESI,
Dynamotion, Merger Corp., and certain key shareholders of Dynamotion (the "Key
Shareholders"). 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 options to purchase Dynamotion
Common Stock issued under Dynamotion's employee, officer, and director stock
option plans, as well as certain option agreements between Dynamotion and
current or former officers and directors (collectively, the "Options") will
continue in full force and effect following the Merger. At the time the Merger
becomes effective (the "Effective Time"), each Option will be converted into an
option to purchase ESI Common Stock after giving effect to the Conversion Ratio.
The exercise price per share of each Option immediately after the Merger will
also be determined based upon the Conversion Ratio. The term, exercisability,
vesting schedule, status as an "Incentive Stock Option" under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), if applicable, and all
other terms and conditions of each Option will to the extent permitted by law
and otherwise reasonably practicable be unchanged. See "The Merger
Agreement--Treatment of Dynamotion Stock Options."
Shares of ESI Common Stock received by the Key Shareholders in the Merger
will be subject to certain resale restrictions under agreements signed by the
Key Shareholders. See "The Merger Agreement--Resale of ESI Common Stock by the
Key Shareholders" and "Related Agreements--Standstill Agreement."
The Merger Agreement also provides that, as a precondition to the Merger,
the shareholders of Dynamotion must approve proposals to amend Dynamotion's
current Certificate of Incorporation (the "Certificate") to provide that if the
Merger occurs, immediately before the consummation of the Merger: (i) each share
of the outstanding Class A Non-Cumulative Redeemable Convertible Preferred
Shares of Dynamotion, par value $0.01 per share ("Class A Stock"), will
automatically convert into (a) 1.05 shares of Dynamotion Common Stock, and
(b) cash in the amount of $0.10 representing the redemption price for the two
Class A
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Redeemable Common Stock Purchase Warrants ("Z Warrants") that would have been
issued with respect to such share of Class A Stock under the existing conversion
provisions of the Certificate (the foregoing proposal is hereinafter referred to
as the "Class A Conversion Proposal"); and (ii) each share of the outstanding
Class B Cumulative Convertible Preferred Shares of Dynamotion, par value $0.01
per share ("Class B Stock"), will automatically convert into (a) 0.990904 of a
share of Dynamotion Common Stock, and (b) cash in an amount equal to the accrued
dividends that the holder of such share of Class B Stock will be entitled to on
such share of Class B Stock as of the date the automatic conversion occurs (the
foregoing proposal is hereinafter referred to as the "Class B Conversion
Proposal;" the Class A Conversion Proposal and Class B Conversion Proposal are
hereinafter referred to collectively as the "Conversion Proposals"). The number
of shares of Dynamotion Common Stock into which each share of Class A Stock will
convert under the Class A Conversion Proposal (i.e., 1.05) is based upon the
number of shares of Dynamotion Common Stock into which each share of Class A
Stock is currently convertible under the terms of the Certificate, taking into
account adjustments made to the conversion ratio for the Class A Stock since the
time of its issuance as provided in the Certificate. The number of shares of
Dynamotion Common Stock into which each share of Class B Stock will convert
under the Class B Conversion Proposal (i.e., 0.990904) is based upon the number
of shares of Dynamotion Common Stock into which each share of Class B Stock is
currently convertible under the terms of the Certificate, adjusted downward
pursuant to a contractual agreement between Dynamotion and the holders of the
Class B Stock. The proposal to approve the Merger (the "Merger Proposal") and
the Conversion Proposals will all be submitted to Dynamotion's shareholders at
the special meeting of Dynamotion's shareholders (the "Special Meeting") held to
consider and vote on the Merger Proposal and the Conversion Proposals. See "The
Dynamotion Special Shareholders' Meeting--Matters To Be Considered at the
Special Meeting--The Conversion Proposals" and "Amendment to the Dynamotion
Certificate of Incorporation (The Conversion Proposals)."
The value of the ESI Common Stock to be issued to the holders of Dynamotion
Common Stock upon consummation of the Merger will be $13,000,000. In determining
that such consideration (the "Merger Consideration") is fair to the shareholders
of Dynamotion, Dynamotion's Board of Directors (the "Dynamotion Board")
considered, among other things, the following material factors: (1)(a) the
strategic options possibly available to Dynamotion, (b) a belief that the Merger
Consideration provides additional value to Dynamotion's shareholders since the
shareholders are to receive shares of ESI Common Stock in the Merger, and (c)
the current industry, economic and market conditions relative to Dynamotion's
competitive position in the market; (2) information concerning Dynamotion's
financial performance and condition, and Dynamotion's business operations and
prospects; (3) information concerning ESI's financial performance and condition,
and ESI's operations, prospects and management; (4) a review of Dynamotion's
recent stock prices, and a review of ESI's recent stock prices; (5) the fact
that the Merger Consideration offers the shareholders of Dynamotion (a) an
opportunity to receive fair value for their investment in Dynamotion in the form
of ESI Common Stock and (b) increased liquidity and a stabilized trading market
since the ESI Common Stock to be issued in the Merger will be traded on the
Nasdaq National Market; and (6) the belief that the process used by Dynamotion
to evaluate acquisition proposals provides a reasonable basis to conclude that
the Merger Consideration represents fair value to the shareholders. See "The
Merger--Reasons for the Merger--Dynamotion's Reasons for the Merger."
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In arriving at its valuation of the outstanding capital stock of
Dynamotion, ESI's Board of Directors relied primarily on the market price for
Dynamotion Common Stock and ESI's assessment of the long-term potential of ESI
and Dynamotion operating as a combined enterprise. See "The Merger--Reasons for
the Merger--ESI's Reasons for the Merger." Dynamotion's Common Stock has been
publicly traded since July 1993, and until January 1997 was listed on the Nasdaq
SmallCap Market. The Merger Consideration, valued at $13,000,000, represented a
small premium over the stock market's valuation of Dynamotion. Neither the
Dynamotion Board nor ESI's Board of Directors obtained any outside appraisals or
reports in deciding to approve the Merger. See "Risk Factors--No Fairness
Opinion Obtained in Connection With the Merger."
EFFECTIVE TIME OF THE MERGER
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, the parties thereto will deliver a
Certificate of Merger to the Department of State of the State of New York for
filing. The Effective Time of the Merger will be after the Certificate of Merger
is filed by the Department of State of the State of New York at the time
specified in the Plan of Merger. See "The Merger Agreement--Effective Time of
the Merger."
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction of a number of
conditions, including but not limited to (i) approval of the Merger Proposal and
the Conversion Proposals by Dynamotion's shareholders; (ii) the effective
registration under the Securities Act of 1933, as amended (the "Securities Act")
of shares of ESI Common Stock to be issued in connection with the Merger, and
the listing of those shares on 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 execution and delivery of additional
agreements (employee confidentiality agreements from Dynamotion's employees, a
Pledge and Escrow Agreement covering some of the shares of ESI Common Stock to
be received by the Key Shareholders in the Merger, a Noncompetition Agreement
from a key Dynamotion executive, and standstill agreements and representation
letters from Key Shareholders) and documents related to the Merger; and (v) the
continuing accuracy of the parties' 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). See "The Merger Agreement--Conditions to the
Merger."
NONSOLICITATION OBLIGATION
Dynamotion has agreed that it will not encourage, initiate, or solicit
alternative acquisition proposals, subject to the exercise of the fiduciary
duties of Dynamotion's directors. 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 the Key Shareholders against damages resulting from breach of
representations, warranties and covenants of Dynamotion or the Key Shareholders
contained in the Merger Agreement.
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Pursuant to a pledge and escrow agreement (the "Escrow Agreement"),
$1,500,000 worth of shares of ESI Common Stock to be received in the Merger by
the Key Shareholders 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.
Three persons will be appointed to act on behalf of the Key Shareholders in
connection with the Escrow (the "Key Shareholder Representatives") and will be
additional signatories to the Escrow Agreement. See "The Merger
Agreement--Indemnity and Escrow Agreement" and "Related Agreements--Pledge and
Escrow Agreement."
TERMINATION; TERMINATION FEE
The Merger Agreement may be terminated and the Merger may be abandoned
before the Effective Time under the circumstances specified in the Merger
Agreement, including: (i) by mutual written agreement of ESI and Dynamotion;
(ii) by either ESI or Dynamotion if the Merger is prohibited or restrained by
final court order or decree or if Dynamotion's shareholders do not approve the
Merger by May 31, 1997; (iii) by ESI if the Dynamotion Board withdraws or
modifies its approval of the Merger; or (iv) by Dynamotion if the Dynamotion
Board determines in good faith that termination is necessary fulfill the
directors' fiduciary duties. The Merger Agreement will also terminate
automatically if the Merger has not occurred on or before June 15, 1997. Under
certain circumstances, a termination fee of $1,000,000 is payable by Dynamotion
to ESI. See "The Merger Agreement-- Termination; Termination Fee."
THE DYNAMOTION SPECIAL SHAREHOLDERS' MEETING
Matters to be Considered at the Special Meeting
At the Special Meeting, the shareholders of Dynamotion will be asked to
consider and vote upon proposals (i) to approve and adopt the Merger Proposal;
(ii) to approve and adopt the Conversion Proposals; and (iii) to transact any
other business that may properly come before the Special Meeting or any
adjournments or postponements thereof. See "The Dynamotion Special Shareholders'
Meeting--Matters To Be Considered at the Special Meeting."
If the Conversion Proposals and the Merger Proposal are approved by
Dynamotion's shareholders, Dynamotion will redeem all outstanding Z Warrants
according to their terms before the Merger becomes effective. See "The
Dynamotion Special Shareholders' Meeting-- Matters To Be Considered at the
Special Meeting--The Conversion Proposals" and "Amendment of the Dynamotion
Certificate of Incorporation (The Conversion Proposals)--Effect of the
Conversion Proposals on Z Warrants."
Time, Place, and Date
The Special Meeting will be held at 8:00 a.m. local time, on May __,
1997, at _____________, _____________, California.
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Record Date; Shareholders Entitled to Vote; Voting Agreement
The Dynamotion Board has set April __, 1997 as the record date for the
Special Meeting (the "Record Date"). Only holders of record of: (i) Dynamotion
Common Stock, (ii) Class A Stock, and (iii) Class B Stock on the Record Date
will be entitled to notice of and to vote at the Special Meeting. At the close
of business on the Record Date there were ____________ shares of Dynamotion
Common Stock outstanding, held by approximately ___ holders of record;
____________ shares of Class A Stock outstanding, held by approximately ___
holders of record; and ____________ shares of Class B Stock outstanding, held by
approximately ___ holders of record. (The Dynamotion Common Stock, Class A
Stock, and Class B Stock are collectively referred to herein as the "Dynamotion
Voting Securities.")
As of the Record Date, directors and officers of Dynamotion and their
affiliates may be deemed to be beneficial owners of approximately ____% of the
outstanding shares of Dynamotion Common Stock, approximately ____% of the
outstanding shares of Class A Stock, and approximately ____% of the outstanding
shares of Class B Stock, which together represent approximately ____% of all of
the outstanding shares of Dynamotion Voting Securities.
As of the Record Date, two shareholders of Dynamotion (Dynamotion
Investment L.L.C., which is an affiliate of two directors of Dynamotion, and
Wojciech Kosmowski, who is an officer and director of Dynamotion) who together
may be deemed to be the beneficial owners of approximately ____% of the
outstanding shares of Dynamotion Common Stock, approximately ____% of the
outstanding shares of Class A Stock, and approximately ____% of the outstanding
shares of Class B Stock (which together represent approximately ____% of the all
outstanding shares of Dynamotion Voting Securities) have agreed with ESI to vote
their Dynamotion Voting Securities in favor of the Merger Proposal and the
Conversion Proposals. See "Related Agreements--Voting Agreements."
Vote Required To Approve the Merger Proposal
To approve and adopt the Merger Proposal, the affirmative vote at the
Special Meeting (in person or by proxy) of the following shareholders is
required: (i) two-thirds of the combined voting power of all outstanding
Dynamotion Voting Securities, voting together, and (ii) a majority of all
outstanding Class B Stock, voting as a class.
Vote Required to Approve and Adopt the Conversion Proposals
To approve and adopt the Class A Conversion Proposal, the affirmative vote
at the Special Meeting (in person or by proxy) of the following shareholders is
required: (i) a majority of the combined voting power of all outstanding
Dynamotion Voting Securities, voting together, and (ii) a majority of all
outstanding Class A Stock, voting as a class.
To approve and adopt the Class B Conversion Proposal, the affirmative vote
at the Special Meeting (in person or by proxy) of the following shareholders is
required: (i) a majority of the combined voting power of all outstanding
Dynamotion Voting Securities, voting together, and (ii) a majority of all
outstanding Class B Stock, voting as a class.
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APPRAISAL RIGHTS
If the Conversion Proposals and Merger Proposal are approved and adopted
and the Merger is consummated, Dynamotion Shareholders who object in writing to
the Merger Proposal before the vote has been taken with respect to the Merger
Proposal at the Special Meeting and who otherwise comply with the requirements
of Section 623 of the New York Business Corporation Law (the "NYBCL") may be
entitled to receive payment for their shares of Dynamotion Common Stock as set
forth in Section 623 of the NYBCL. See "The Merger--Appraisal Rights."
REASONS FOR THE MERGER
ESI's Reasons for the Merger
The Merger is expected to add to ESI's ability to serve the expanding
capital equipment needs of its global, multi-national customers in the
electronics industry. The Merger also offers the possibility of achieving
increased operating efficiencies through elimination of duplicate efforts and
avoidance of expected investments in research and development and in sales and
distribution channels.
Currently, ESI and Dynamotion maintain separate corporate administrative,
selling, and research functions that can be combined after the Merger. ESI's
liquidity and capital resources are significantly greater than Dynamotion's.
These resources can be used to enhance Dynamotion's credibility and
attractiveness to vendors and customers alike. As a result, ESI believes that
the cost of certain materials used to manufacture Dynamotion products can be
reduced, uniform selling terms can be created on a global basis, operating
expenses related to duplicative administrative, selling, and research functions
can be eliminated, and, through the repayment of debt upon closing the Merger,
charges related to financing can be reduced.
Over time, these anticipated changes are expected to improve the return on
Dynamotion's sales to an amount approximating ESI's average return on sales. See
"The Merger--Reasons for the Merger--ESI's Reasons for the Merger."
Dynamotion's Reasons for the Merger
The Dynamotion Board believes that the Merger Proposal, including the
Merger Consideration, is fair to, and in the best interests of, Dynamotion and
its shareholders. Accordingly, the Dynamotion Board unanimously approved the
Merger Agreement, the Plan of Merger and the transactions and proposals
contemplated thereby, and voted to recommend to Dynamotion's shareholders that
they vote FOR the approval of the Merger Proposal and the transactions and
proposals contemplated thereby. In making the foregoing decisions, the
Dynamotion Board considered, among other things, the following material factors:
(1)(a) the strategic options possibly available to Dynamotion, (b) a belief that
the Merger provides additional value to Dynamotion's shareholders since the
shareholders are to receive shares of ESI Common Stock in the Merger, and (c)
the current industry, economic and market conditions relative to Dynamotion's
competitive position in the market; (2) information concerning Dynamotion's
financial performance and condition, and Dynamotion's business operations and
prospects; (3) information concerning ESI's financial performance and condition,
and ESI's operations, prospects and management; (4) a review of Dynamotion's
recent stock prices, and
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a review of ESI's recent stock prices; (5) the fact that the Merger offers the
shareholders of Dynamotion (a) an opportunity to receive fair value for their
investment in Dynamotion in the form of ESI Common Stock and (b) increased
liquidity and a stabilized trading market; and (6) the belief that the process
used by Dynamotion to evaluate acquisition proposals provides a reasonable basis
to conclude that the Merger Consideration represents fair value to the
shareholders. See "The Merger--Reasons for the Merger--Dynamotion's Reasons for
the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain options granted to officers, directors and employees of Dynamotion
under Dynamotion's various stock option plans and agreements (whether or not
currently exercisable) will, pursuant to their terms, be exercisable during the
thirty-day period before the consummation of the Merger, and certain other of
such options (whether or not currently exercisable) will, pursuant to their
terms, become fully exercisable upon consummation of the Merger.
If the Merger Proposal is approved and the Merger occurs, Dynamotion
Investment L.L.C. will receive the accrued dividends on its Class B Stock as
provided in the Class B Conversion Proposal. In addition, upon consummation of
the Merger, Dynamotion Investment L.L.C. will receive from Dynamotion
reimbursement of certain out-of-pocket expenses related to its investment in
Dynamotion, and Emptor Management L.L.C. (an affiliate of Dynamotion Investment
L.L.C.) will receive from Dynamotion certain consulting fees and reimbursement
of certain out-of-pocket expenses related thereto. Keith Hightower and Ted Walsh
(both directors of Dynamotion) are affiliates of Dynamotion Investment L.L.C.
and Emptor Management L.L.C.
Jon Hopper (an officer and director of Dynamotion) and Wojciech Kosmowski
(an officer and director of Dynamotion) will, following the Merger, continue to
be employed by the surviving corporation pursuant to the terms of their current
employment agreements (with certain amendments reflecting their new positions
with the surviving corporation). SEMCO International, LLC, a company of which
Les Barkley (a director of Dynamotion) is the principal, will, following the
Merger, continue to provide consulting services to the surviving corporation
pursuant to the terms of its current consulting agreement. 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 Dynamotion Common Stock as of the Effective Time for use in surrendering
their stock certificates in exchange for certificates representing shares of ESI
Common Stock and a cash payment in lieu of certain fractional shares. Holders of
certificates for shares of Class A Stock and Class B Stock will also be able to
exchange their preferred stock certificates directly for shares of ESI Common
Stock, which certificates will be treated as certificates for Dynamotion Common
Stock after giving effect to the conversion contemplated by the Conversion
Proposals. See "The Merger Agreement--Conversion of Shares."
9
<PAGE>
CERTIFICATES SHOULD NOT BE SURRENDERED BY DYNAMOTION 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 purchase. See "The
Merger--Accounting Treatment."
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The Conversion Proposals
The Conversion Proposals are intended to qualify as a recapitalization
within the meaning of Code Section 368(a)(1)(E). If the Conversion Proposals
qualify as a recapitalization, or if the Conversion Proposals are considered a
component of a tax-free reorganization transaction, then the following tax
consequences will result: A holder of Class A Stock receiving Dynamotion Common
Stock upon conversion of the Class A Stock immediately prior to the Merger will
not recognize gain or loss with respect to the receipt of Dynamotion Common
Stock upon such conversion. Income may be recognized, however, to the extent of
cash received by the holder of Class A Stock in lieu of Z Warrants. In addition,
a holder of Z Warrants may recognize gain upon receipt of cash in redemption of
the Z Warrants. Gain upon redemption of Z Warrants will be taxable as capital
gain, assuming that the Z Warrants are capital assets in the hands of the
holder. A holder of Class B Stock receiving Dynamotion Common Stock upon
conversion of the Class B Stock immediately prior to the Merger will not
recognize gain or loss with respect to the receipt of Dynamotion Common Stock
upon such conversion. The cash received by a holder of Class B Stock in payment
of accrued and unpaid dividends will be a dividend, taxable as ordinary income
to the extent of Dynamotion's current or accumulated earnings and profits.
If the Conversion Proposals do not constitute a recapitalization and are
not considered to be a component of a tax-free reorganization, a holder of Class
A Stock or Class B Stock will recognize gain or loss upon receipt of Dynamotion
Common Stock measured by the difference between the value of the Dynamotion
Common Stock received and the holder's adjusted tax basis in the Class A Stock
or Class B Stock surrendered therefor. Income upon receipt of cash in lieu of Z
Warrants or in payment of accrued and unpaid dividends will be recognized as
described above.
The Merger
The Merger is intended to qualify as a reorganization within the meaning of
Code Section 368(a). If the Merger qualifies as a reorganization, it will have
the following federal income tax consequences for Dynamotion shareholders,
Dynamotion, and ESI:
(1) No gain or loss will be recognized by Dynamotion's shareholders upon
receipt of ESI Common Stock solely in exchange for their shares of Dynamotion
Common Stock.
10
<PAGE>
(2) Each Dynamotion shareholder receiving cash in lieu of a fractional
share interest in ESI Common Stock in the Merger will be treated as if such
shareholder had actually received the fractional share interest and as if the
fractional share interest were subsequently redeemed by ESI. The cash to be
received by each such shareholder will be treated as if it were 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 such shareholder's basis
in the fractional share interest.
(3) The tax basis of ESI Common Stock to be received by a Dynamotion
shareholder in the Merger solely in exchange for Dynamotion Common Stock
(including any fractional share interest to which such shareholder may be
entitled) will be the same as the basis of the Dynamotion Common Stock
surrendered therefor.
(4) The holding period of ESI Common Stock to be received by a Dynamotion
shareholder in the Merger solely in exchange for Dynamotion Common Stock
(including any fractional share interest to which such shareholder may be
entitled) will include the period during which the Dynamotion Common Stock
surrendered therefor was held by such Dynamotion shareholder.
(5) If a Dynamotion shareholder dissents to the transaction and receives
solely cash in exchange for such shareholder's Dynamotion Common Stock, that
cash will be treated as having been received as a distribution in redemption of
such shareholder's Dynamotion Common Stock, subject to the provisions and
limitations of Section 302 of the Code.
(6) No gain or loss will be recognized by Dynamotion upon transfer of
substantially all of its assets to Merger Corp. in exchange for ESI Common
Stock.
(7) No gain or loss will be recognized by either ESI or Merger Corp. upon
the acquisition by Merger Corp. of substantially all of the assets of Dynamotion
in exchange for ESI Common Stock.
If the Merger does not constitute a reorganization, (1) a holder of
Dynamotion Common Stock will recognize gain or loss upon receipt of ESI Common
Stock measured by the difference between the value of the ESI Common Stock
received and the holder's adjusted tax basis in the Dynamotion Common Stock
surrendered therefor, (2) Dynamotion will recognize gain or loss measured by the
difference between its basis in the assets transferred to Merger Corp. and the
value of the ESI Common Stock transferred in consideration therefor, and (3)
Merger Corp. may recognize gain equal to the value of the ESI Common Stock
distributed in the Merger. See "The Merger--Material U.S. Federal Income
Tax Consequences."
11
<PAGE>
RISK FACTORS
The following factors should be carefully considered, in addition to the
other information presented in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus 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 Proxy Statement/Prospectus.
UNCERTAINTIES RELATED TO THE INTEGRATION OF DYNAMOTION'S BUSINESS
The successful combination of companies in the high technology industry may
be more difficult to accomplish than in other industries. There can be no
assurance that ESI will be successful in integrating its own distribution
channels with those of Dynamotion, that ESI will be successful in coordinating
the activities of the Dynamotion and ESI sales forces or in selling Dynamotion's
products to ESI's customer base, in integrating Dynamotion into ESI's management
information systems or integrating Dynamotion's technology so that it can be
fully utilized by ESI. There can be no assurance that ESI can effectively
integrate Dynamotion into ESI's operations.
UNCERTAINTIES RELATED TO COMBINED OPERATIONS AFTER THE MERGER
While the acquisition of Dynamotion 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 Dynamotion, 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.
NO FAIRNESS OPINION OBTAINED IN CONNECTION WITH THE MERGER
Neither Dynamotion nor ESI obtained a fairness opinion from a financial
advisor or an investment banker concerning the terms of the Merger. After
careful consideration, the Dynamotion Board determined, based upon a variety of
factors, that the Merger Proposal is fair to, and in the best interests of,
Dynamotion and its shareholders. The Dynamotion Board discussed at length the
question of whether Dynamotion should obtain a fairness opinion from a
third-party financial advisor or investment banker in connection with its
evaluation of the Merger Proposal. In light of the costs associated with
obtaining such a fairness opinion, Dynamotion's current financial condition, the
experience of members of the Dynamotion Board in making valuation determinations
and the factors considered in the Dynamotion Board's determination of the
fairness of the Merger Proposal, the Dynamotion Board concluded that it would
not obtain a fairness opinion in connection with the evaluation of the Merger
Proposal. See "The Merger--Reasons for the Merger--Dynamotion's Reasons for the
Merger." ESI's Board of Directors relied on analyses prepared by ESI management
to ensure that the terms of the Merger are fair to ESI's shareholders. Due to
the costs of obtaining a fairness opinion and in light of the fact that the
acquisition of Dynamotion is not material with respect to ESI's financial
position, ESI did not obtain a fairness opinion with respect to the terms of the
Merger.
12
<PAGE>
ELECTRONICS INDUSTRY DOWNTURNS MAY ADVERSELY AFFECT OPERATING RESULTS
ESI's business depends in large part upon the capital expenditures of
manufacturers of electronic devices, including miniature capacitors and
semiconductor memory devices, and circuits used in wireless telecommunications
equipment, including pagers and cellular phones, automotive electronics, and
computers. The markets for products manufactured by ESI's customers are highly
cyclical and have historically experienced periodic downturns, which often have
had a severe effect on the demand for capital equipment such as that sold by
ESI. There is no assurance that these markets would not experience downturns in
the future or that such downturns would not have a material adverse effect on
ESI's operating results.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND PRODUCT
ENHANCEMENTS
The market for ESI's products is characterized by rapidly changing
technology and evolving industry standards. There can be no assurance that ESI's
current technology base will continue to address current and evolving customer
needs. ESI believes that its future success will depend on its ability to
develop and manufacture new products and product enhancements and to introduce
them successfully into the market. Failure to do so in a timely fashion could
harm ESI's competitive position. The announcements or introductions of new
products by ESI or its competitors may adversely affect ESI's operating results,
since these announcements or introductions may cause 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.
13
<PAGE>
The need for continued expenditures for research and development, capital
equipment and worldwide customer service and support would make it difficult for
ESI to reduce its expenses in a particular quarter if ESI's sales goals for such
quarter are not met. Accordingly, there can be no assurance that ESI will not
sustain losses in future quarters.
COMPETITION
The electronics capital equipment industry is highly competitive. In each
of the markets it serves, ESI faces substantial competition from established
competitors, some of which have greater financial, engineering, manufacturing
and marketing resources than ESI. In addition, many of ESI's customers have the
potential to compete with 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 indemnification from
ESI for any damages and expenses resulting from this matter. One of
14
<PAGE>
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 54.7%, 70.9%, 66.8% and 75.8% of ESI's
net sales for fiscal years ended May 31, 1994, 1995, and 1996 and the six months
ended November 30, 1996, respectively. ESI expects that international sales will
continue to represent a significant percentage of net sales in the future. As a
result, a significant portion of ESI's sales will be subject to certain risks,
including changes in demand resulting from fluctuations in interest and currency
exchange rates, as well as by factors such as the risk of government financed
competition, changes in trade policies, tariff regulations, difficulties in
obtaining U.S. export licenses and the difficulties of staffing and managing
foreign operations. See "Information Concerning ESI--Sales, Marketing and
Service."
DEPENDENCE ON KEY EMPLOYEES
The future success of ESI is dependent, in part, on its ability to retain
certain key personnel. ESI also needs to attract additional skilled personnel in
many areas of its business to continue to grow. There can be no assurance that
ESI will be able to retain its existing personnel or attract additional
qualified employees in the future.
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."
15
<PAGE>
SELECTED HISTORICAL 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 Proxy Statement/Prospectus for
Dynamotion.
ESI's Selected Historical Financial Information. The consolidated statement
of operations data set forth below for the fiscal years ended May 31, 1994, 1995
and 1996 and the consolidated balance sheet information as of May 31, 1995 and
1996 have been derived from the audited Consolidated Financial Statements and
Notes thereto incorporated by reference in this Proxy Statement/Prospectus. The
consolidated statement of operations data for the fiscal years ended May 31,
1992 and 1993 and the consolidated balance sheet information as of May 31, 1992,
1993 and 1994 are derived from audited consolidated financial statements not
incorporated by reference in this Proxy Statement/Prospectus. The consolidated
statement of operations data for the six-month periods ended November 30, 1995
and November 30, 1996 and the consolidated balance sheet data as of November 30,
1996 have been derived from unaudited consolidated financial statements of ESI
also incorporated by reference in this Proxy Statement/Prospectus. 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
six months ended November 30, 1996 are not necessarily indicative of the results
that may be expected for the entire fiscal year ending May 31, 1997.
<TABLE>
<CAPTION>
ESI
SIX MONTHS ENDED
FISCAL YEAR ENDED MAY 31 NOVEMBER 30, NOVEMBER 30,
---------------------------------------------------------- --------------------------
1992 1993 1994(1) 1995 1996 1995 1996
------- ------- ------- ------- -------- ------- -------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Net Sales
Laser systems and service.... $30,134 $36,742 $41,985 $66,045 $108,577 $48,927 $50,953
Capacitor manufacturing
equipment.................... 18,206 20,393 23,961 39,115 47,531 26,134 15,820
Vision systems............... 1,523 2,736 2,562 3,055 3,597 1,750 3,184
Divested product lines....... 8,307 7,980 4,042 -- -- -- --
------- ------- ------- ------- -------- ------- -------
Total........................ 58,170 67,851 72,550 108,215 159,705 76,811 69,957
Cost of sales.................... 33,308 36,141 35,838 51,413 72,754 35,490 30,750
------- ------- ------- ------- -------- ------- -------
Gross margin..................... 24,862 31,710 36,712 56,802 86,951 41,321 39,207
Operating expenses:
Selling, service and
administrative............... 22,070 19,189 20,049 27,635 39,858 19,170 17,538
Research, development and
engineering.................. 9,224 9,027 8,235 13,108 16,243 8,019 8,283
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
ESI
SIX MONTHS ENDED
FISCAL YEAR ENDED MAY 31 NOVEMBER 30, NOVEMBER 30,
---------------------------------------------------------- --------------------------
1992 1993 1994(1) 1995 1996 1995 1996
------- ------- ------- ------- -------- ------- -------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Acquired in-process research
and development(2)........... -- -- -- -- 6,000 6,000 --
------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 31,294 28,216 28,284 40,743 62,101 33,189 25,821
------- ------- ------- ------- ------- ------ -------
Operating income (loss).......... (6,432) 3,494 8,428 16,059 24,850 8,132 13,386
Interest income (expense) ....... (964) (771) (557) 565 1,185 586 715
Other income (expense)........... 533 (108) 2,081 (167) (719) (144) (243)
------- ------- ------- ------- ------- -------- -------
Income (loss) before income
taxes............................ (6,863) 2,615 9,952 16,457 25,316 8,574 13,858
Provision (benefit) for income
taxes............................ (741) 371 2,078 4,940 9,234 3,153 4,892
-------- ------- ------- ------- ------- ------ -------
Net income (loss)................ $ (6,122) $ 2,244 $ 7,874 $11,517 $16,082 $5,421 $ 8,966
======== ======= ======= ======= ======= ====== =======
Net income (loss) per share...... $ (1.00) $ 0.37 $ 1.23 $ 1.53 $ 1.87 $0.63 $ 1.04
======== ======= ======= ======= ======= ===== =======
Number of shares used in
computing per share amounts 6,095 6,146 6,414 7,510 8,606 8,575 8,662
======== ======= ======= ======= ======= ====== =======
ESI
MAY 31, NOVEMBER 30,
---------------------------------------------------------------- ------------
1992 1993 1994 1995 1996 1996
------- ------- ------- -------- -------- -------
CONSOLIDATED BALANCE SHEET (In thousands) (UNAUDITED)
DATA
Working capital............... $23,739 $28,883 $36,247 $ 74,419 $ 94,038 $103,396
Total assets.................. 58,536 61,161 62,366 110,598 132,525 139,315
Long-term debt, including
current portion............... 7,496 7,126 768 -- -- --
Shareholders' equity(3)....... 41,533 43,950 53,547 94,444 114,916 124,022
- ---------------
(1) During the second quarter of fiscal year 1994, ESI sold the product lines
and certain assets of the MSI Material Division of its wholly-owned
subsidiary Palomar Systems, Inc., to Ferro Corporation of Cleveland, Ohio.
The proceeds of $4,000,000 were received in cash and the funds were used to
reduce the current portion of long term debt and other short term debt. A
gain of $2,100,000 from the sale of these product lines was reflected in
other income.
(2) For the six months ended November 30, 1995, the acquired in-process
research and development expense of $6,000,000 was incurred in connection
with the purchase price of XRL, Inc. ESI obtained an appraisal of the
intangible assets which indicated that substantially all of the acquired
intangible assets consisted of research and development in process. In
accordance with generally accepted accounting principles, the acquired
in-process research and development was expensed during the first quarter
ended August 31, 1995.
(3) ESI has not paid cash dividends for any of the periods presented.
</TABLE>
17
<PAGE>
Dynamotion's 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 Proxy Statement/Prospectus. The
balance sheet data at December 31, 1994 is derived from audited financial
statements not included herein.
<TABLE>
<CAPTION>
DYNAMOTION
FISCAL YEARS ENDED DECEMBER 31,
------------------------------------------
1994(1) 1995(1) 1996
---------- ---------- ----------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C>
REVENUES $ 15,934 $ 20,512 $ 16,214
COSTS AND EXPENSES:
Cost of sales......................... 10,536 17,075 12,992
Selling, general and
administrative expenses............. 3,321 4,473 4,516
Research and development
expenses............................ 1,424 1,464 1,729
Amortization of intangible assets..... 788 791 417
Loss on sale of division and
assets (2)(3)....................... -- -- 575
Goodwill write-off.................... -- 3,517 --
---------- ---------- ----------
Total costs and expenses............ 16,069 27,320 20,229
---------- ---------- ----------
(LOSS) FROM OPERATIONS.................. (135) (6,808) (4,015)
INTEREST EXPENSE, NET................... (325) (614) (750)
---------- ---------- ----------
(Loss) from continuing operations
before income tax benefit............ (460) (7,422) (4,765)
Income tax benefit...................... 150 264 --
---------- ---------- ----------
(Loss) from continuing
operations........................... (310) (7,158) (4,765)
Loss from Discontinued Operations....... (2,770) (170) --
---------- ---------- ----------
NET (LOSS).............................. $ (3,080) $ (7,328) $ (4,765)
========== ========== ==========
NET LOSS PER COMMON
SHARE:
(Primary and fully dilutive)
Income (loss) from continuing
operations.......................... $ (.68) $ (4.43) $ (1.82)
Loss from discontinued
operations.......................... $ (2.30) $ (.10) $ --
---------- ---------- ----------
Net (Loss)............................. $ (2.98) $ (4.53) $ (1.82)
========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES USED IN COMPUTATION:
Primary and fully dilutive.............. 1,204 1,728 2,731
========== ========== ==========
18
<PAGE>
DECEMBER 31,
------------------------------------------
1994(1) 1995(1) 1996
---------- ---------- ----------
BALANCE SHEET DATA: (In thousands)
Working capital (deficit)............... $ 705 $ 73 $ (4,725)
Total assets............................ $ 19,110 $ 15,104 $ 13,090
Long-term debt.......................... $ 566 $ 3,053 $ 466
Shareholders' equity (deficit).......... $ 8,910 $ 1,736 $ (898)
- ------------
(1) On December 29, 1995, Dynamotion completed a one-for-four reverse stock
split, including an increase of Dynamotion's common stock par value from
$.01 per share to $.04 per share. Dynamotion's prior year financial
statements (including earnings per share disclosures) have been adjusted to
reflect the effect of the reverse stock split.
(2) Dynamotion sold substantially all of the assets associated with its
Production Machine Control ("PMC") division on September 30, 1996 to
Dynamotion's largest supplier (the "Buyer"). The purchase price for the
assets consisted of (a) $1,000,000 ($300,000 receivable and the $700,000
balance was applied to $1.2 million of outstanding trade payables due the
Buyer) and (b) the value of certain assumed liabilities. The $300,000
receivable was paid in full in October 1996. In addition, Dynamotion agreed
to pay on or before December 31, 1996 the remaining $500,000 in outstanding
trade payables due to the Buyer. As of the date of this Proxy
Statement/Prospectus, Dynamotion has not paid nor has the Buyer made demand
for payment. See Note 1 to Notes to Dynamotion's Financial Statements for
pro forma financial information.
(3) On August 20, 1996 Dynamotion sold substantially all of the assets (other
than finished goods) associated with its ATI router product line to
Advanced Technologies, Inc. ("Purchaser"). The purchase price for the
assets consisted of (a) $1,100,000 ($300,000 paid in cash which was applied
to Dynamotion's term loan balance under the New Debt Facility with the
balance of the purchase price paid by delivery to Dynamotion of a $800,000
promissory note (the "Note")) and (b) the value of certain assumed
liabilities. Principal under the Note is payable monthly at a rate equal to
15% of Purchaser's monthly gross revenue and interest at prime is payable
quarterly with all unpaid principal and unpaid accrued interest due on
December 31, 1997. Pursuant to the terms of a Finished Goods Agreement (the
"Agreement"), the finished goods associated with Dynamotion's ATI router
product line were to be sold to the Purchaser. Such finished goods were
transferred to the Purchaser as its customers agreed to purchase the
finished goods. No revenues were recognized on these transfers. The
Purchaser agreed, subject to certain conditions, to acquire on December 31,
1996 all finished goods not sold to its customers on or before such date.
Payment for these finished goods was to be made through June 30, 1997.
Pursuant to the terms of the Agreement, a receivable from Purchaser for
$329,000 was recorded at December 31, 1996 resulting in a loss of
approximately $76,000. See Note 1 to Notes to Dynamotion's Financial
Statements for pro forma financial information.
Purchaser's obligation under the Note and the Agreement are secured by (i)
a second priority security interest in all of Purchaser's assets and (ii) a
second priority lien in all of the outstanding stock of Purchaser (which
lien on such stock can be foreclosed upon only in the event of fraud or
malfeasance). On January 3, 1997, Dynamotion accepted a $500,000 cash
payment in full satisfaction of the Note. Dynamotion negotiated this
settlement to fund cash flow needs and has charged fourth quarter 1996
earnings for the $300,000 discount. In addition, Dynamotion is currently in
negotiations with Purchaser to accelerate all amounts due and owing to
Dynamotion, and Dynamotion estimates that this will result in a discount of
approximately $230,000, which has been recorded at December 31, 1996. See
Note 1 to Notes to Dynamotion's Financial Statements.
</TABLE>
19
<PAGE>
EQUIVALENT PER COMMON SHARE DATA
The following table sets forth selected historical per common share data
for ESI and Dynamotion, unaudited pro forma data per share of ESI Common Stock,
and equivalent unaudited pro forma data per share of Dynamotion Common Stock
after giving effect to the proposed Merger on a purchase accounting basis. The
pro forma equivalent data for Dynamotion are based on the historical amounts per
share, multiplied by the Conversion Ratio (computed in accordance with the
assumptions described in footnote 4). The data should be read in conjunction
with the consolidated financial statements and notes thereto and other financial
information with respect to ESI and Dynamotion incorporated by reference into or
set forth elsewhere in this Proxy Statement/Prospectus, and such data are
qualified in their entirety by reference thereto. See "Incorporation of Certain
Documents by Reference."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MAY 31, 1996 NOVEMBER 30, 1996
-------------- -----------------
ESI COMMON STOCK(1)
<S> <C> <C>
Income per share from continuing operations:(2)
Historical................................................. $1.87 $1.04
Pro forma combined(6)...................................... $1.43 $0.76
Book value per share at period-end(3):
Historical................................................. $13.28 $14.30
Pro forma combined(6)...................................... $12.90 $13.77
DYNAMOTION COMMON STOCK(1)
Income (loss) per share from continuing operations:(2)
Historical................................................. $(0.94) $(0.80)
Pro forma equivalent (4)................................... $0.10 $0.05
Book value (deficit) per share at period-end(3)
Historical................................................. $0.35 $(0.08)
Pro forma equivalent(5).................................... $0.90 $0.96
- ------------------
(1) ESI has not declared or paid any cash dividends for any of the periods
presented, nor has Dynamotion declared or paid any cash dividends on the
Dynamotion Common Stock for any of the periods presented.
(2) Represents the 12 months ended May 31 and six months ended November 30,
1996 for ESI combined with the twelve months ended June 30, 1996 and six
months ended September 30, 1996 for Dynamotion.
(3) Included for specified periods (as of May 31 and November 30, 1996 for ESI
and as of June 30, 1996 and September 30, 1996 for Dynamotion) in
accordance with SEC rules.
(4) The Dynamotion Common Stock pro forma equivalent information was derived by
applying an assumed Conversion Ratio of 0.0697, which was computed as
follows: The Conversion Ratio Numerator was based on the Average Price for
ESI Common Stock for the five trading days from February 24, 1997 to
February 28, 1997, which equaled $29.2125. This Average Price of $29.2125
was divided into $13,000,000 to arrive at a Conversion Ratio Numerator of
445,014.9765. The Conversion Ratio Denominator was based on 6,387,770
shares of Dynamotion Common Stock, which equals the total number of shares
of Dynamotion Common Stock outstanding on January 15, 1997 plus the number
of additional shares of Dynamotion Common Stock that would have been
outstanding on January 15, 1997 if: (i) all Class A Stock and Class B Stock
outstanding on that date had been converted to Dynamotion Common Stock in
accordance with the Conversion Proposals; and (ii) a warrant to purchase
330,302 shares of Dynamotion Common Stock outstanding on January 15, 1997
had been exercised in accordance with its
20
<PAGE>
terms. Dividing the Conversion Ratio Numerator by the Conversion Ratio
Denominator results in a Conversion Ratio of 0.0697. The Conversion Ratio
used to derive the pro forma equivalent information is only an example. The
actual Conversion Ratio used at the Effective Time of the Merger will be
determined based on average high and low sales prices for ESI Common Stock
on the five trading days immediately preceding the day before the Closing
for the Merger transaction and the number of shares of Dynamotion Common
Stock outstanding immediately before the Merger.
(5) The transaction terms contemplate all Class A Stock and Class B Stock will
convert to Dynamotion Common Stock immediately before the consummation of
the Merger.
(6) Adjusted for the pro-forma effects of the sale of the PMC division and ATI
router product line by Dynamotion in August and September 1996.
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA SUMMARY OF SELECTED FINANCIAL DATA(1)
Year Ended Six Months Ended
May 31, 1996 November 30, 1996
------------ -----------------
(in thousands)
<S> <C> <C>
Net sales (2)(4)......................................... $ 173,208 $ 75,607
Income from continuing operations (2)(4)................. 12,982 6,896
Total assets (2)(5)...................................... 148,525 153,333
Long term obligations, excluding current portion (3)(5).. 739 565
- ----------------
(1) This table provides historical pro forma combined selected financial data
for ESI in accordance with SEC rules. Required per share pro forma
information is provided on a separate table.
(2) Adjusted for the pro-forma effects of the sale of the PMC division and ATI
router product line by Dynamotion in August and September 1996.
(3) Excludes Dynamotion Class B Stock which will be converted to Dynamotion
Common Stock before the merger.
(4) See footnote (2) to the Equivalent Per Common Share Data table on page 20.
(5) See footnote (3) to the Equivalent Per Common Share Data table on page 20.
</TABLE>
21
<PAGE>
MARKET AND MARKET PRICES
FOR ESI COMMON STOCK AND DYNAMOTION SECURITIES
ESI Common Stock is traded on the Nasdaq National Market under the symbol
"ESIO." The following table sets forth for the periods indicated the quarterly
high and low sales prices per share for the ESI Common Stock.
<TABLE>
<CAPTION>
Fiscal ESI
Year(1) COMMON STOCK
- -------- ---------------------
High Low
<S> <C> <C>
1995 ------ ------
First Quarter......................................... 13-3/4 8-5/8
Second Quarter........................................ 20-1/4 12-1/4
Third Quarter......................................... 23-1/4 17-1/2
Fourth Quarter........................................ 29-5/8 18-3/4
1996
First Quarter......................................... 39-3/4 24-5/8
Second Quarter........................................ 41-1/2 24-1/2
Third Quarter......................................... 30-1/2 18-3/4
Fourth Quarter........................................ 28-3/4 16-3/4
1997
First Quarter......................................... 27-1/4 15-1/2
Second Quarter........................................ 26 17-1/4
Third Quarter ........................................ 30-3/4 22-1/2
- -----------------
(1) ESI's fiscal year begins on June 1 and ends on May 31.
</TABLE>
ESI has not paid any cash dividends on ESI Common Stock during the last
five fiscal years. ESI intends to retain its earnings for its business and does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future.
22
<PAGE>
Until January 17, 1997, the Dynamotion Common Stock, the Z Warrants and the
Class A Stock were traded on the Nasdaq SmallCap Market System under the symbol
"DYMO." See "Information Concerning Dynamotion--Recent Developments."
Additionally, the Dynamotion Common Stock, the Z Warrants and the Class A Stock
are traded on the Boston Stock Exchange and the Nasdaq electronic bulletin
board. The following table sets forth for the periods indicated the range of
high and low bid quotations for the Dynamotion Common Stock, the Z Warrants and
the Class A Stock as quoted on the Nasdaq SmallCap Market System. Such
quotations give retroactive effect to the one for four reverse stock split,
which occurred on December 29, 1995, and reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Dynamotion
Common Stock Z Warrants Class A Stock
Fiscal ------------------------- --------------------------- ----------------------------
Year(1) High Low High Low High Low
- --------------------- --------- ---------- --------- ----------- ----------- -----------
1994
- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter 6-3/4 4-1/4 5/8 3/8 3-27/32 1-31/32
Second Quarter 5 3-3/4 3/8 2/16 2-45/64 1-31/32
Third Quarter 5 3-3/4 5/16 1/8 2-1/2 1-49/64
Fourth Quarter 4-1/2 3 1/2 1/4 2-1/2 1-29/64
1995
- ----
First Quarter 4 2 3/16 1/8 2-3/16 1-11/32
Second Quarter 2-1/2 1 1/8 1/32 1-49/64 5/16
Third Quarter 3 1-1/2 1/16 1/32 1-9/16 23/64
Fourth Quarter 2-3/4 1 1/32 N/A 1-9/64 27/64
1996
- ----
First Quarter 2-7/8 1 N/A N/A 2-7/8 3/4
Second Quarter 3-1/8 1-5/16 5/16 1/16 3-1/4 1-3/4
Third Quarter 2-1/2 1-7/16 5/16 3/32 2-3/4 1-7/16
Fourth Quarter 2-7/16 1-1/16 5/16 3/32 2-7/8 1-1/2
- ---------------
(1) Dynamotion's fiscal year begins on January 1 and ends on December 31.
</TABLE>
Dynamotion has never paid any cash dividends on Dynamotion Common Stock and
has no intention of paying cash dividends on the Dynamotion Common Stock in the
foreseeable future. Pursuant to the Loan Agreement between Dynamotion and its
bank, Dynamotion may not, without prior written consent of the bank unless
certain conditions are met, make any distribution or declare or pay any dividend
in cash on any class of Dynamotion stock. Additionally, Dynamotion's Restated
Certificate of Incorporation prohibits the declaration or payment of dividends
on the Dynamotion Common Stock or any stock of Dynamotion ranking junior to the
Class A Stock if full dividends on the Class A Stock have not been declared and
paid or set aside for payment. In April 1996, Dynamotion paid on the Class A
Stock a dividend in shares of Dynamotion Common Stock, but has not paid any cash
dividends on the Class A Stock. See "The Dynamotion Special Shareholders'
Meeting--The Conversion Proposal" for a description of a payment to be made on
the Class B Stock if the Merger occurs.
23
<PAGE>
The number of holders of record of ESI Common Stock and Dynamotion Common
Stock on April __, 1997 were approximately _____ and _____, respectively. The
number of holders of record of Dynamotion Class A Stock and Dynamotion Z
Warrants on April __, 1997 were approximately _____ and _____, respectively.
The following table sets forth the high, low and closing sale prices as
reported on Nasdaq of the ESI Common Stock and on the Nasdaq bulletin board for
Dynamotion Common Stock on January 20, 1997. The public announcement of the
Merger Agreement occurred before the opening of trading on January 21, 1997.
<TABLE>
<CAPTION>
DYNAMOTION
ESI DYNAMOTION(1) EQUIVALENT(2)
-------- ---------- -------------
<S> <C> <C> <C>
High.................................... $ 29.875 $ 1.50 $ 2.08
Low..................................... $ 28.00 $ 1.50 $ 1.95
Closing................................. $ 28.75 $ 1.50 $ 2.00
- ---------------
(1) Changes in the market price for Dynamotion Common Stock will not affect the
Conversion Ratio and the corresponding fraction of a share of ESI Common
Stock that Dynamotion shareholders will receive in the Merger for each of
their shares of Dynamotion Common Stock. Only changes in the number of
shares of Dynamotion Common Stock outstanding and the market price for ESI
Common Stock will affect the Conversion Ratio.
(2) The Dynamotion equivalent market value is computed by multiplying the high,
low and closing market price per share of ESI Common Stock by the
Conversion Ratio computed as follows: The Conversion Ratio Numerator was
based on an Average Price for ESI Common Stock for the five trading days
from February 24, 1997 to February 28, 1997, which equaled $29.2125. This
Average Price of $29.2125 was divided into $13,000,000 to arrive at a
Conversion Ratio Numerator of 445,014.9765. The Conversion Ratio
Denominator was based on 6,387,770 shares of Dynamotion Common Stock, which
equals the total number of shares of Dynamotion Common Stock outstanding on
January 15, 1997 plus the number of additional shares of Dynamotion Common
Stock that would have been outstanding on January 15, 1997 if: (i) all
Class A Stock and Class B Stock outstanding on that date had been converted
to Dynamotion Common Stock in accordance with the Conversion Proposals; and
(ii) a warrant to purchase 330,302 shares of Dynamotion Common Stock
outstanding on January 15, 1997 had been exercised in accordance with its
terms. Dividing the Conversion Ratio Numerator by the Conversion Ratio
Denominator results in a Conversion Ratio of 0.0697. THE CONVERSION RATIO
USED TO CALCULATE THE DYNAMOTION EQUIVALENT DATA IN THE ABOVE TABLE IS AN
EXAMPLE ONLY. THE ULTIMATE CONVERSION RATIO AND RESULTING NUMBER OF SHARES
OF ESI COMMON STOCK TO BE ISSUED TO DYNAMOTION SHAREHOLDERS IN THE MERGER
MAY BE DIFFERENT DEPENDING ON THE AVERAGE HIGH AND LOW SALES PRICES FOR ESI
COMMON STOCK ON THE FIVE TRADING DAYS IMMEDIATELY PRECEDING THE DAY BEFORE
THE CLOSING FOR THE MERGER TRANSACTION AND THE NUMBER OF SHARES OF
DYNAMOTION COMMON STOCK OUTSTANDING IMMEDIATELY BEFORE THE MERGER. Because
the actual Conversion Ratio used in the Merger will not be determined until
immediately before the Merger occurs, Dynamotion shareholders will not know
the actual fraction of a share of ESI Common Stock they will receive for
each of their shares of Dynamotion Common Stock when they vote on the
Merger Proposal at the Special Meeting.
</TABLE>
ESI and Dynamotion expect that the steps necessary to complete the Merger
after Dynamotion's shareholders approve it will take between seven and 14 days,
and so they anticipate that, if the Merger Proposals and Conversion Proposals
are approved and the other conditions necessary to consummate the Merger are
satisfied, the Merger will become effective sometime in the two weeks following
the Special Meeting. The Conversion Ratio will be
24
<PAGE>
affected by changes in the market price for ESI Common Stock, including changes
in the market price for ESI Common Stock between the Special Meeting date and
the Effective Time of the Merger. If the market price for ESI Common Stock
rises, the Conversion Ratio will be lower and Dynamotion shareholders will
receive a smaller fraction of a share of ESI Common Stock for each of their
shares of Dynamotion Common Stock than they would have received had the ESI
Common Stock price remained constant or fallen. If the market price for ESI
Common Stock falls, the Conversion Ratio will be higher and Dynamotion
shareholders will receive a larger fraction of a share of ESI Common Stock for
each of their shares of Dynamotion Common Stock than they would have received
had the ESI Common Stock price remained constant or risen. Historically, the
market price for ESI Common Stock has been volatile. Therefore, the market price
for ESI Common Stock could drop or rise significantly between the date this
Proxy Statement/Prospectus is distributed to Dynamotion's shareholders and the
Special Meeting, and between the date of the Special Meeting and the date of the
Merger. Significant increases or decreases in the market price for ESI Common
Stock will result in corresponding decreases or increases in the Conversion
Ratio. Factors that affect the volatility of the market price for ESI Common
Stock include general conditions affecting the economy and United States stock
markets, factors affecting technology companies and the electronics industry,
ESI's ability to continue to offer innovative manufacturing products to its
customers, the financial viability and success of ESI's customers, and ESI's
ability to compete effectively with other suppliers of electronics manufacturing
capital equipment. See "Risk Factors--Electronics Industry Downturns May
Adversely Affect Operating Results;--Rapid Technological Change; Dependence on
New Product Introductions and Product Enhancements;--Variability of Quarterly
Operating Results;--Competition; and--Patents and Other Intellectual Property."
The following table sets forth a range of example Conversion Ratios that
result from using a Conversion Ratio Numerator based on various assumed
per-share prices for ESI Common Stock and a constant Conversion Ratio
Denominator of 6,387,770 outstanding shares of Dynamotion Common Stock. The
Conversion Ratio will be the fraction of a share of ESI Common Stock to which
Dynamotion shareholders will be entitled upon conversion of each of their shares
of Dynamotion Common Stock into ESI Common Stock when the Merger takes effect.
The computations below are examples only, and do not indicate the actual
Conversion Ratio that will apply in the Merger. The actual Conversion Ratio will
be determined immediately before the Effective Time of the Merger using the
average high and low sales prices for ESI Common Stock on the five trading days
immediately preceding the day before the Closing for the Merger transaction and
the number of shares of Dynamotion Common Stock outstanding immediately before
the Effective Time of the Merger.
<TABLE>
<CAPTION>
ASSUMED AVERAGE PER-SHARE PRICE RESULTING DYNAMOTION
FOR ESI COMMON STOCK (1) CONVERSION RATIO EQUIVALENT(1)
- ------------------------------- ---------------- -----------
<S> <C> <C>
$30.750................................... 0.0662 $2.035
$23.125................................... 0.0880 $2.035
$15.500................................... 0.1313 $2.035
- ---------------
(1) $30.750 is the highest market price for ESI Common Stock during the first
three quarters of ESI's 1997 fiscal year; $23.125 represents the mid-point
between the highest and lowest market prices for ESI Common Stock during
the first three quarters of ESI's 1997 fiscal year; and $15.500 is the
lowest market price for ESI Common Stock during the first three quarters of
ESI's 1997 fiscal year. The Dynamotion Equivalent was computed by
multiplying the assumed average per-share price for ESI Common Stock by the
Conversion Ratio.
</TABLE>
25
<PAGE>
The last reported sale prices for ESI Common Stock reported on Nasdaq on
_____________, was ____________. Dynamotion Common Stock was traded on the
Nasdaq SmallCap Market System until January 17, 1997, on which date it was
de-listed. Dynamotion Common Stock has since been traded on the Nasdaq bulletin
board. The last reported sale price for Dynamotion Common Stock on the Nasdaq
bulletin board on __________ was __________.
DYNAMOTION 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 PROXY
STATEMENT/PROSPECTUS AND THE DATE ON WHICH THE MERGER IS CONSUMMATED AND
THEREAFTER.
26
<PAGE>
THE DYNAMOTION SPECIAL SHAREHOLDERS' MEETING
GENERAL; DATE, TIME AND PLACE OF MEETING
This Proxy Statement/Prospectus is being furnished to holders of Dynamotion
Voting Securities in connection with the solicitation of proxies by the
Dynamotion Board for use at the Special Meeting to be held on May __, 1997 at
8:00 a.m., or at any adjournments or postponements thereof, for the purposes set
forth herein and in the accompanying Notice of Special Meeting of Shareholders
of Dynamotion.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
The Merger Proposal
At the Special Meeting, in addition to considering and voting upon the
Conversion Proposals, Dynamotion's shareholders will be asked to consider and
vote on a proposal to approve and adopt the Merger Agreement and the Plan of
Merger, and to approve the Merger (the foregoing proposal is hereinafter
referred to as the "Merger Proposal"). If the Merger Proposal is adopted and
approved by the requisite percentages of the Dynamotion Voting Securities and
the Merger is consummated, each outstanding share of Dynamotion Common Stock
will be converted into the right to receive a fraction of a share of ESI Common
Stock determined in accordance with the Conversion Ratio as specified in the
Merger Agreement.
The foregoing description of the Merger Proposal is qualified in its
entirety by reference to the Merger Agreement attached as Annex A and the
proposed Plan of Merger attached as Annex B.
For tax consequences of the Merger Proposal, see "The Merger--Material U.S.
Federal Income Tax Consequences--The Merger."
The Conversion Proposals
At the Special Meeting, in addition to considering and voting upon approval
and adoption of the Merger Proposal, Dynamotion's shareholders will be asked to
consider and vote upon (i) a proposal to amend the Certificate to provide that
if the Merger Proposal is approved and the Merger occurs, immediately before the
consummation of the Merger, each of the outstanding shares of Class A Stock will
automatically convert into (a) 1.05 shares of Dynamotion Common Stock and (b)
cash in the amount of $0.10 representing the redemption price for the two Z
Warrants that would have been issued with respect to such share of Class A Stock
under the existing conversion provisions of the Certificate (the foregoing
proposal is hereinafter referred to as the "Class A Conversion Proposal"), and
(ii) a proposal to amend the Certificate to provide that if the Merger Proposal
is approved and the Merger occurs, immediately before the consummation of the
Merger, each of the outstanding shares of Class B Stock will automatically
convert into (a) 0.990904 of a share of Dynamotion Common Stock, and (b) cash in
an amount equal to the accrued dividends that the holder of such share of Class
B Stock will be entitled to on such share of Class B Stock as of the date the
automatic conversion occurs (the foregoing proposal is hereinafter referred to
as the "Class B Conversion Proposal;" the Class A Conversion Proposal and the
Class B Conversion Proposal are hereinafter referred to collectively as the
"Conversion Proposals"). If the Conversion Proposals are not approved, the
Merger will not be consummated.
27
<PAGE>
The purpose of the Conversion Proposals is to simplify the capital
structure of Dynamotion before the Merger takes effect, and to make it possible
for Dynamotion to redeem all outstanding Z Warrants before the Merger occurs. If
adopted and approved by holders of the requisite percentages of the Dynamotion
Voting Securities, the Conversion Proposals will result in the conversion of all
outstanding Class A Stock and Class B Stock into Dynamotion Common Stock
immediately before the Merger. The conversion of all outstanding shares of Class
A Stock into shares of Dynamotion Common Stock will fulfill a condition
necessary to enable Dynamotion to redeem all outstanding Z Warrants. If the
Conversion Proposals are adopted and approved and the Merger is consummated,
Dynamotion will redeem all outstanding Z Warrants according to their terms
before the Merger takes effect.
The foregoing description of the Conversion Proposals is qualified in its
entirety by reference to the proposed amendments to Dynamotion's Certificate of
Incorporation contained in the Certificate of Amendment attached as Annex C.
For tax consequences of the Conversion Proposals, see "The Merger--Material
U.S. Federal Income Tax Consequences--The Conversion Proposals."
THE DYNAMOTION BOARD HAS DETERMINED THAT THE MERGER PROPOSAL AND THE CONVERSION
PROPOSALS ARE ADVISABLE AND IN THE BEST INTERESTS OF DYNAMOTION AND DYNAMOTION'S
SHAREHOLDERS, HAS UNANIMOUSLY APPROVED THE MERGER PROPOSAL AND THE CONVERSION
PROPOSALS AND RECOMMENDS THAT DYNAMOTION'S SHAREHOLDERS VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER PROPOSAL AND THE CONVERSION PROPOSALS.
RECORD DATE; VOTING AT THE SPECIAL MEETING; VOTE REQUIRED; VOTING AGREEMENT
The Dynamotion Board has fixed April __, 1997 as the Record Date for the
determination of the shareholders of Dynamotion entitled to notice of and to
vote at the Dynamotion Special Meeting. Only holders of record of Dynamotion
Common Stock, Class A Stock, and Class B Stock on the Record Date will be
entitled to notice of and to vote at the Special Meeting. As of the Record Date,
(i) there were ________ shares of Dynamotion Common Stock outstanding and
entitled to vote, ________ shares of Class A Stock outstanding and entitled to
vote, and ________ shares of Class B Stock outstanding and entitled to vote and
(ii) there were approximately ________ holders of Dynamotion Common Stock,
approximately ________ holders of Class A Stock and approximately ________
holders of Class B Stock. Each record holder of Dynamotion Common Stock on the
record date is entitled to cast one vote per share, exercisable in person or by
properly executed proxy, on each matter properly submitted for the vote of the
holders of Dynamotion Common Stock at the Special Meeting. Each record holder of
Class A Stock on the record date is entitled to cast 1.05 votes per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the holders of Class A Stock at the Special Meeting.
Each record holder of Class B Stock on the record date is entitled to cast
0.990904 votes per share, exercisable in person or by properly executed proxy,
on each matter properly submitted for the vote of the holders of Class B Stock
at the Special Meeting.
Vote Required To Approve the Merger Proposal
To approve and adopt the Merger Proposal, the affirmative vote at the
Special Meeting (in person or by proxy) of the following shareholders is
required: (i) two-thirds of the combined
28
<PAGE>
voting power of all outstanding Dynamotion Voting Securities, voting together,
and (ii) a majority of all outstanding Class B Stock, voting as a class.
Vote Required to Approve and Adopt the Conversion Proposals
To approve and adopt the Class A Conversion Proposal, the affirmative vote
at the Special Meeting (in person or by proxy) of the following shareholders is
required: (i) a majority of the combined voting power of all outstanding
Dynamotion Voting Securities, voting together, and (ii) a majority of all
outstanding Class A Stock, voting as a class.
To approve and adopt the Class B Conversion Proposal, the affirmative vote
at the Special Meeting (in person or by proxy) of the following shareholders is
required: (i) a majority of the combined voting power of all outstanding
Dynamotion Voting Securities, voting together, and (ii) a majority of all
outstanding Class B Stock, voting as a class.
ABSTENTIONS AND BROKER NON-VOTES WILL NOT BE COUNTED, BUT WILL HAVE THE
PRACTICAL EFFECT OF A VOTE AGAINST THE MERGER PROPOSAL AND THE CONVERSION
PROPOSALS SINCE THEY REPRESENT ONE LESS VOTE FOR APPROVAL.
As of the Record Date, directors and officers of Dynamotion and their
affiliates may be deemed to be beneficial owners of approximately ____% of the
outstanding shares of Dynamotion Common Stock, approximately ____% of the
outstanding shares of Class A Stock, and approximately ____% of the outstanding
shares of Class B Stock, which together represent approximately ____% of all of
the outstanding shares of Dynamotion Voting Securities.
Voting Agreements
As of the Record Date, two shareholders of Dynamotion (Dynamotion
Investment L.L.C., which is an affiliate of two directors of Dynamotion, and
Wojciech Kosmowski, who is an officer and director of Dynamotion) who together
may be deemed to be the beneficial owners of approximately ____% of the
outstanding shares of Dynamotion Common Stock, approximately ____% of the
outstanding shares of Class A Stock, and approximately ____% of the outstanding
shares of Class B Stock (which together represent approximately ____% of the all
outstanding shares of Dynamotion Voting Securities) have agreed with ESI that
they will vote or direct the vote of all shares of Dynamotion Voting Securities
over which they have voting control in favor of approval and adoption of the
Merger Proposal and the Conversion Proposals. See "Related Agreements--Voting
Agreements."
PROXIES
This Proxy Statement/Prospectus is being furnished to holders of Dynamotion
Voting Securities in connection with the solicitation of proxies by and on
behalf of the Dynamotion Board for use at the Special Meeting.
All shares of Dynamotion Voting Securities that are entitled to vote and
are represented at the Special Meeting by properly executed proxies received
before or at the Special Meeting and not duly and timely revoked, will be voted
at the Special Meeting in accordance with the instructions indicated on such
proxies. If no instructions are indicated, such proxies will be voted FOR
adoption and approval of the Merger Proposal and the Conversion Proposals.
29
<PAGE>
If any other matters are properly presented for consideration at the
Special Meeting (or any adjournments or postponements thereof), including, among
other things, consideration of a motion to adjourn or postpone the Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the enclosed
forms of proxy and voting thereunder will have discretion to vote on such
matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Dynamotion at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of Dynamotion before taking the vote at the
Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to Dynamotion/ATI Corp., 1639 E. Edinger
Ave., Santa Ana, CA 92705, Attention: Corporate Secretary, or hand-delivered to
the Corporate Secretary of Dynamotion at or before taking the vote at the
Special Meeting.
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers, and employees of Dynamotion in person or by telephone,
telegram, or other means of communication. Such directors, officers, and
employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements will also be made with custodians, nominees, and fiduciaries for
forwarding proxy solicitation materials to beneficial owners of shares held of
record by such custodians, nominees, and fiduciaries, and Dynamotion will
reimburse such custodians, nominees, and fiduciaries for reasonable expenses
incurred in connection therewith.
30
<PAGE>
THE MERGER
DESCRIPTION
On January 15, 1997, the Dynamotion Board of Directors unanimously approved
and voted to recommend that holders of Dynamotion Voting Securities approve and
adopt the Merger of Dynamotion with and into Merger Corp., a wholly-owned
subsidiary of ESI formed for this purpose, with Merger Corp. continuing as the
surviving corporation, pursuant to the terms of the Merger Agreement and the
Plan of Merger. Immediately before the Effective Time, all outstanding Class A
Stock and Class B Stock will be converted into Dynamotion Common Stock in
accordance with the Conversion Proposals. Under the Merger Agreement, at the
Effective Time, each outstanding share of Dynamotion Common Stock will be
converted into the right to receive a fraction of a share of ESI Common Stock
determined in accordance with the Conversion Ratio.
BACKGROUND OF THE MERGER
ESI has conducted research activity on the machining of printed circuit
boards and semiconductor devices by laser for many years. In 1994, ESI formed
its Electronic Packaging business unit and, in 1995, ESI introduced its Model
5000 laser drilling system product to specifically serve the printed circuit
board market. ESI has developed a number of such products for the electronics
and semiconductor industries over the past two decades.
The trends described in the Electronics Industry Overview on page 54
create the need for increasing volume of complex printed circuit boards and
semiconductor devices. The increasing complexity of such boards and devices are
expected to continue to challenge manufacturing processes. Dynamotion has
focused on building relationships with technology leaders in the printed circuit
board industry. By selectively concentrating on these innovative customers,
Dynamotion has sought to develop products that facilitate the production of
complex circuit boards.
In 1993, the current business of Dynamotion was acquired by Dynamotion
(then named Cybernetics Products, Inc.). At the time of such acquisition,
Dynamotion consisted of several other businesses, all of which have been sold.
Dynamotion sought capital and management resources at the time of the
acquisition. Since the acquisition in 1993, Dynamotion has incurred large losses
due to continuing financial and market difficulties. Despite significant
infusions of capital and a change in management in 1995, business results have
not been positive.
The printed circuit board industry is experiencing consolidation and the
formation of multi-national entities. The management of ESI and Dynamotion
believe that these companies will require a combination of technical innovation
and global support, as well as assurance that their capital equipment suppliers
have the financial and managerial capability to survive over the long term.
In the autumn of 1995, Mr. Joseph L. Reinhart, ESI's Vice President of
Business Development, contacted Mr. Jon Hopper, President and CEO of Dynamotion,
to discuss the business plans of Dynamotion and ESI. From November 1995 through
July 1996, there were several meetings between Donald R. VanLuvanee, President
and CEO of ESI, Barry L. Harmon, Sr. Vice President and CFO of ESI, Bruce
Goldwater, Director of ESI's Electronic Packaging Business Unit, Mr. Reinhart
and Wojciech Kosmowski, Dynamotion's Sr. Vice President and Chief Technical
Officer, and Mr. Hopper. Those meetings included general discussions of
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business trends and the various strengths and weaknesses of both companies'
product offerings. ESI's Board of Directors (the "ESI Board") was kept informed
of the nature and progress of these discussions during regularly scheduled
meetings in April and September of 1996.
During October, November, and December 1996, representatives of both
companies visited each other's offices to investigate the possibility of a
merger of the companies. Several members of the Dynamotion Board participated in
these visits.
On November 8, 1996, Mr. Harmon telephoned Mr. Hopper and made a verbal
proposal for terms of the Merger related to the purchase price, treatment of
outstanding options, the escrow securing Dynamotion's representations and
warranties, form of consideration, and timing.
After consulting with the Dynamotion Board of Directors, on November 18,
1996, Mr. Hopper proposed certain changes to the Merger timing and form of
consideration. ESI ultimately agreed to these changes.
ESI and Dynamotion management held several face-to-face meetings to discuss
the Merger and to supply ESI with the detailed financial and business
information necessary to complete its due diligence. Throughout 1996, Mr. Hopper
updated the Dynamotion Board with respect to the nature of these discussions,
including the November 1996 proposal to pursue a merger agreement.
On January 3, 1997, Messrs. Hopper and Harmon, accompanied by legal
counsel, a Dynamotion consultant, and Mr. Keith Hightower (a member of
Dynamotion's Board of Directors), met to review a draft of the Merger Agreement.
At this meeting, most of the details of the Merger Agreement were agreed to by
both parties. The terms of the escrow securing the indemnification obligation
for Dynamotion's representations and warranties and the standstill obligation of
the Key Shareholders were among the significant issues negotiated at the January
3 meeting.
On January 10, 1997, the ESI Board met to review the offer made by ESI and
the findings of ESI's due diligence. The ESI Board unanimously approved the
proposed Merger and instructed its officers to sign the Merger Agreement and
cause the filing of all necessary documents to allow Dynamotion's shareholders
to vote on the Merger Proposal and the Conversion Proposals. On January 13,
1997, the Dynamotion Board met to consider the Merger Agreement, the Plan of
Merger and the transactions and proposals contemplated thereby, and on January
15, 1997, the Dynamotion Board approved the Merger Agreement and the Plan of
Merger. See "Reasons for the Merger--Dynamotion's Reasons for the Merger" below.
As of January 24, 1997, the Merger Agreement was executed by Dynamotion, ESI,
Merger Corp. and the Key Shareholders.
REASONS FOR THE MERGER
General
The terms of the Merger, through which Dynamotion will merge into a
wholly-owned subsidiary of ESI, were carefully considered by the Boards of
Directors of each company and are believed to be fair to their respective
shareholders. The Merger Agreement is the result of arm's length negotiations
and represents consideration of many factors, including a judgment as
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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 Dynamotion and ESI believe that the activities
of the companies are compatible. The Merger is expected to enhance the product
development potential of the combined companies and provide opportunities to
capitalize on the combined entities' global distribution.
Dynamotion's Reasons for the Merger
The Dynamotion Board believes that the Merger Proposal, including the
Merger Consideration, is fair to, and in the best interests of, Dynamotion and
its shareholders. Accordingly, at a meeting held on January 13, 1997, the
Dynamotion Board considered the Merger Agreement, the Plan of Merger and the
transactions and proposals contemplated thereby, and at a meeting held on
January 15, 1997, unanimously approved the Merger Agreement and the Plan of
Merger and voted to recommend to Dynamotion's shareholders that they vote FOR
the approval of the Merger Proposal and the transactions and proposals
contemplated thereby.
In deciding to approve the Merger Proposal and to recommend its approval by
Dynamotion's shareholders, the Dynamotion Board considered, among other things,
the following material factors:
(1)(a) the strategic options possibly available to Dynamotion,
including refinancing/restructuring its current debt and continuing its
current operations, conducting a secondary offering, obtaining other
additional financing, amending the terms of existing securities, entering
into strategic alliances and/or selling the assets, (b) a belief that the
Merger, by providing ESI with a strategic opportunity to enhance its
competitive position in the market, provides additional value to
Dynamotion's shareholders since the shareholders are to receive shares of
ESI Common Stock in the Merger, and (c) the current industry, economic and
market conditions relative to Dynamotion's competitive position in the
market. The Dynamotion Board also considered Dynamotion's projected future
value absent the Merger, particularly Dynamotion's limited ability to
respond to changes in the printed circuit board industry.
(2) Information concerning Dynamotion's financial performance and
condition, and Dynamotion's business operations and prospects, including
Dynamotion's recent losses and cash flow difficulties, and estimated 1997
capital requirements associated with new orders obtained by Dynamotion. See
"Dynamotion Management's Discussion and Analysis of Financial Results" and
"Information Concerning Dynamotion."
(3) Information concerning ESI's financial performance and condition,
and ESI's operations, prospects and management. See "Selected Historical
Financial Information-- ESI Historical Financial Information" and
"Information Concerning ESI."
(4) A review of Dynamotion's recent stock prices and a review of ESI's
recent stock prices. See "Market and Market Prices For ESI Common Stock and
Dynamotion Securities."
(5) The fact that the Merger offers the shareholders of Dynamotion (a)
an opportunity to receive fair value (in light of Dynamotion's current and
prospective financial condition) for their investment in Dynamotion in the
form of ESI Common
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Stock and (b) increased liquidity and a stabilized trading market given
that the ESI Common Stock to be issued in the Merger will be traded on the
Nasdaq National Market, subject to the Key Shareholders being subject to
the Standstill Agreement. See "Market and Market Prices for ESI Common
Stock and Dynamotion Securities" and "Related Agreements--Standstill
Agreement."
(6) The belief of the Dynamotion Board that the process used by
Dynamotion to evaluate and explore informal third party acquisition
proposals provides a reasonable basis to conclude that the consideration to
be received by Dynamotion's shareholders as a result of the Merger
represents fair value to the shareholders.
(7) The proposed terms and structure of the Merger as set forth in the
Merger Agreement which the Dynamotion Board believes are fair and
reasonable to the shareholders of Dynamotion. In this regard, the
Dynamotion Board also considered the ability of Dynamotion to terminate the
Merger Agreement upon the occurrence or non-occurrence of certain events.
See "The Merger Agreement--Conditions to the Merger."
(8) A review of the terms of the Merger Agreement that could have an
impact on third-party proposals for alternative acquisition transactions,
including (a) a $1,000,000 termination fee payable by Dynamotion to ESI
under certain circumstances and (b) the agreement of Dynamotion not to
directly or indirectly encourage, initiate, solicit or negotiate with
respect to any "Acquisition Transaction" other than the Merger, unless, in
the event of an unsolicited proposal, the Dynamotion Board determines in
good faith, upon advice of legal counsel, that such action is required for
the members of the Dynamotion Board to fulfill their fiduciary duties and
obligations under New York law. See "The Merger Agreement--Termination;
Termination Fee" and "The Merger Agreement--Nonsolicitation of Alternative
Transactions."
During the meeting on January 13, 1997, the Dynamotion Board discussed at
length the question of whether Dynamotion should obtain a fairness opinion from
a financial advisor or investment banker in connection with its evaluation of
the Merger Proposal. Members of the Dynamotion Board considered, among other
things, the costs associated with obtaining such a fairness opinion,
Dynamotion's current financial condition, including its cash flow difficulties,
the experience of members of the Dynamotion Board in making valuation
determinations and the material factors referenced above that were considered by
the Dynamotion Board in determining that the Merger Proposal is fair to, and in
the best interests of, Dynamotion and its shareholders. After some deliberation,
the Dynamotion Board concluded that it would not obtain a fairness opinion in
connection with the evaluation of the Merger Proposal.
In October 1995, certain members of the Dynamotion Board and Dynamotion's
management engaged in discussions with a third party regarding an informal
acquisition proposal made by the third party. In January 1996, a subsequent
meeting was held to continue the October 1995 discussion. In November 1996,
certain members of the Dynamotion Board and Dynamotion's management traveled to
the third party's facility to discuss further the informal acquisition proposal.
The third party was unwilling to make an offer in the range of the price being
offered by ESI. Consequently, discussions with the third party were terminated.
Based upon the exploration and evaluation of the informal acquisition proposal
and the material factors referenced above that were considered by the Dynamotion
Board in determining that the Merger Proposal is fair to, and in the best
interests of, Dynamotion and its shareholders, the Dynamotion Board decided not
to solicit other formal bids.
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ESI's Reasons for the Merger
ESI expects that the Merger will add to ESI's ability to serve the
expanding capital equipment needs of the printed circuit board industry. Through
the Merger, ESI hopes to develop greater technical resources and world-wide
selling and customer support that will uniquely position the combined businesses
of Dynamotion and ESI to develop and enhance laser and mechanical drilling
solutions for the most complex products produced.
In deciding to pursue the Merger with Dynamotion, the ESI Board did not use
financial projections provided by Dynamotion. Instead, the ESI Board and ESI's
management analyzed market data concerning the overall demand for printed
circuit boards and integrated circuit packaging and used internally developed
assumptions concerning selling prices, costs of purchased materials, and
operating expenses. Third-party market projections are not readily available for
drilling equipment alone because many market participants are private entities
and/or conduct drilling operations at divisional levels. Because specific
drilling equipment market data were not available, ESI evaluated the printed
circuit board and integrated circuit packaging markets as a whole to develop its
projections concerning demand for drilling equipment. Based on its review of
market analyses and forecasts, ESI believes that the trend is towards greater
expenditures for printed circuit boards and integrated circuit packaging and
that producers of printed circuit boards and integrated circuit packaging will
need the ability to increase the number of holes drilled in printed circuit
boards and integrated circuit packaging. The demand for more holes will require
smaller and more technically complex drilling, and therefore greater drill
positional accuracy. ESI believes that Dynamotion's technologies can help it
respond to these market forces.
The Merger also offers the possibility of achieving increased operating
efficiencies through elimination of duplicate functions and avoidance of
expected duplicate investments in research and development and in sales and
distribution channels.
Currently, ESI and Dynamotion maintain separate corporate administrative,
selling, and research functions that can be combined after the Merger. ESI's
liquidity and capital resources are significantly greater than those of
Dynamotion. These resources can be used to enhance Dynamotion's credibility and
attractiveness to vendors and customers alike. As a result, ESI believes that
the cost of certain materials used to manufacture Dynamotion products can be
reduced, uniform selling terms can be created on a global basis, operating
expenses related to duplicative administrative, selling, and research functions
can be eliminated, and, through the repayment of debt upon closing the Merger,
charges related to financing will be eliminated.
Over time, these anticipated changes are expected to improve the return on
Dynamotion's sales to an amount approximating ESI's average return on sales. The
ESI Board also believes the combined businesses have the potential to realize
increased market share and improve the operating and financial performance
compared to the two entities operating independently, even though Dynamotion
incurred large losses in 1995 and 1996.
The ESI Board considered Dynamotion's recent losses in evaluating the
proposed Merger and determined to go forward with the Merger in light of ESI's
management performance over the past five years. Specifically, ESI's management
team took ESI from a $6 million loss in fiscal 1992 to profitability in each of
the last four fiscal years. Moreover, ESI purchased two complementary companies
that had no operating income in 1994 and 1995. Through elimination of duplicate
expenditures, changes in operating tactics and through ESI's management, ESI
currently generates a 19% operating margin with a sales increase of almost 200%
since 1992,
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even though during the past three fiscal years it has been integrating the
previously unprofitable businesses acquired in 1994 and 1995.
The ESI Board's consideration of the Merger transaction included an
understanding of the intended actions of ESI's management to bring Dynamotion to
profitability. The ESI Board believes that the type of corrective actions needed
to improve Dynamotion's operating results are similar in nature to those used to
improve in ESI's operating income from fiscal 1992 to 1996.
REGULATORY APPROVAL
Neither ESI nor Dynamotion believes that the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, apply to the
Merger.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences of the Conversion Proposals and the Merger that are generally
applicable to ESI, Merger Corp., Dynamotion and holders of Dynamotion stock.
This discussion is based on current provisions of the Code, existing regulations
thereunder (including final, temporary, or proposed regulations), and current
administrative rulings and court decisions as of the date of this Proxy
Statement/Prospectus, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences summarized.
Neither ESI nor Dynamotion has requested or will request a ruling from the
Internal Revenue Service with regard to any of the federal income tax
consequences of the Conversion Proposals or the Merger.
The following discussion is intended only as a summary of the material U.S.
federal income tax consequences of the Conversion Proposals and 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 U.S. federal income
tax considerations that may be relevant to particular Dynamotion shareholders in
light of their particular circumstances, such as corporations, trusts, dealers
in securities, financial institutions, insurance companies, tax-exempt
organizations, or Dynamotion 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.
This discussion also does not address the effects of the Conversion
Proposals and the Merger on holders of Dynamotion Options. In addition, the
discussion does not address the tax consequences of the Conversion Proposals and
the Merger under foreign, state, or local tax laws or the tax consequences of
transactions effectuated before or after the Merger (whether or not such
transactions are in connection with the Merger), including without limitation
transactions in which shares of Dynamotion Common Stock are acquired or shares
of ESI Common Stock are disposed of. This discussion assumes that the Dynamotion
shareholders hold their Dynamotion stock as capital assets within the meaning of
Section 1221 of the Code.
EACH DYNAMOTION SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE CONVERSION PROPOSALS AND
THE MERGER, INCLUDING THE
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APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL, AND OTHER TAX LAWS.
The Conversion Proposals
The Conversion Proposals are intended to qualify as a recapitalization
within the meaning of Code Section 368(a)(1)(E). If the Conversion Proposals
qualify as a recapitalization, or if the Conversion Proposals are considered a
component of a tax-free reorganization transaction, then the following tax
consequences will result: A holder of Class A Stock receiving Dynamotion Common
Stock upon conversion of the Class A Stock immediately prior to the Merger will
not recognize gain or loss with respect to the receipt of Dynamotion Common
Stock upon such conversion. Income may be recognized, however, to the extent of
cash received by the holder of Class A Stock in lieu of Z Warrants. In addition,
a holder of Z Warrants may recognize gain upon receipt of cash in redemption of
the Z Warrants. Gain upon redemption of Z Warrants will be taxable as capital
gain, assuming that the Z Warrants are capital assets in the hands of the
holder. A holder of Class B Stock receiving Dynamotion Common Stock upon
conversion of the Class B Stock immediately prior to the Merger will not
recognize gain or loss with respect to the receipt of Dynamotion Common Stock
upon such conversion. The cash received by a holder of Class B Stock in payment
of accrued and unpaid dividends will be a dividend, taxable as ordinary income
to the extent of Dynamotion's current or accumulated earnings and profits.
If the Conversion Proposals do not constitute a recapitalization and are
not considered to be a component of a tax-free reorganization, a holder of Class
A Stock or Class B Stock will recognize gain or loss upon receipt of Dynamotion
Common Stock measured by the difference between the value of the Dynamotion
Common Stock received and the holder's adjusted tax basis in the Class A Stock
or Class B Stock surrendered therefor. Income upon receipt of cash in lieu of Z
Warrants or in payment of accrued and unpaid dividends will be recognized as
described above.
The Merger
The Merger is intended to qualify as a reorganization within the meaning of
Code Section 368(a). If the Merger qualifies as a reorganization, it will have
the following federal income tax consequences for Dynamotion shareholders,
Dynamotion, and ESI:
(1) No gain or loss will be recognized by Dynamotion's shareholders upon
receipt of ESI Common Stock solely in exchange for their shares of Dynamotion
Common Stock.
(2) Each Dynamotion shareholder receiving cash in lieu of a fractional
share interest in ESI Common Stock in the Merger will be treated as if such
shareholder had actually received the fractional share interest and as if the
fractional share interest were subsequently redeemed by ESI. The cash to be
received by each such shareholder will be treated as if it were 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 such shareholder's basis
in the fractional share interest.
(3) The tax basis of ESI Common Stock to be received by a Dynamotion
shareholder in the Merger solely in exchange for Dynamotion Common Stock
(including any fractional share interest to which such shareholder may be
entitled) will be the same as the basis of the Dynamotion Common Stock
surrendered therefor.
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(4) The holding period of ESI Common Stock to be received by a Dynamotion
shareholder in the Merger solely in exchange for Dynamotion Common Stock
(including any fractional share interest to which such shareholder may be
entitled) will include the period during which the Dynamotion Common Stock
surrendered therefor was held by such Dynamotion shareholder.
(5) If a Dynamotion shareholder dissents to the transaction and receives
solely cash in exchange for such shareholder's Dynamotion Common Stock, that
cash will be treated as having been received as a distribution in redemption of
such shareholder's Dynamotion Common Stock, subject to the provisions and
limitations of Section 302 of the Code.
(6) No gain or loss will be recognized by Dynamotion upon transfer of
substantially all of its assets to Merger Corp. in exchange for ESI Common
Stock.
(7) No gain or loss will be recognized by either ESI or Merger Corp. upon
the acquisition by Merger Corp. of substantially all of the assets of Dynamotion
in exchange for ESI Common Stock.
If the Merger does not constitute a reorganization, (1) a holder of
Dynamotion Common Stock will recognize gain or loss upon receipt of ESI Common
Stock measured by the difference between the value of the ESI Common Stock
received and the holder's adjusted tax basis in the Dynamotion Common Stock
surrendered therefor, (2) Dynamotion will recognize gain or loss measured by the
difference between its basis in the assets transferred to Merger Corp. and the
value of the ESI Common Stock transferred in consideration therefor, and (3)
Merger Corp. may recognize gain equal to the value of the ESI Common Stock
distributed in the Merger.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for using the purchase method of
accounting. As such, the costs of acquiring Dynamotion will be allocated to the
assets and liabilities acquired using estimated fair values. ESI is in the
process of obtaining an appraisal covering the fair value of Dynamotion's
in-process research and development. It is anticipated that a substantial
portion of the purchase price will be recorded as in-process research and
development in accordance with applicable accounting rules. Because the
technological feasibility of the in-process technology, which has no alternative
future use, has not currently been established, the in-process research and
development will be required to be expensed immediately.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
All the options granted under Dynamotion's 1991 Stock Option Plan (whether
or not currently exercisable) will, pursuant to their terms, be exercisable
during the thirty-day period before the consummation of the Merger. All the
options granted under Dynamotion's 1995 Executive Stock Option Plan and 1995
Comprehensive Stock Option Plan will, pursuant to their terms, become fully
exercisable upon consummation of the Merger. Jon Hopper (Dynamotion's President,
CEO, CFO and Chairman of the Board) holds options covering 72,500 shares of
Dynamotion Common Stock granted pursuant to Dynamotion's 1995 Executive Stock
Option Plan, 36,250 of which are already exercisable and the remaining 36,250 of
which will become exercisable upon consummation of the Merger. Wojciech
Kosmowski (an officer and member of the Dynamotion Board) holds (a) options
covering 62,500 shares of Dynamotion Common Stock granted pursuant to
Dynamotion's 1995 Executive Stock Option Plan, 15,625 of which are already
exercisable and the remaining 46,875 of which will become exercisable upon
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consummation of the Merger, (b) options covering 62,500 shares of Dynamotion
Common Stock granted pursuant to Dynamotion's 1995 Comprehensive Stock Option
Plan, 15,625 of which are already exercisable and the remaining 46,875 of which
will become exercisable upon consummation of the Merger and (c) options covering
26,250 shares of Dynamotion Common Stock granted pursuant to Dynamotion's 1991
Stock Option Plan, 19,688 of which are already exercisable and the remaining
6,562 of which will be exercisable during the thirty-day period before the
consummation of the Merger. SEMCO International, LLC ("SEMCO"), a company of
which Les Barkley (a member of the Dynamotion Board) is the principal, holds
options covering 80,000 shares of Dynamotion Common Stock granted outside of
Dynamotion's stock option plans, 20,000 of which are already exercisable and the
remaining 60,000 of which will become, pursuant to the terms of the options,
exercisable upon consummation of the Merger.
If the Merger Proposal is approved and the Merger occurs, Dynamotion
Investment L.L.C. will, immediately before consummation of the Merger and as
provided in the Class B Conversion Proposal, receive cash in an amount equal to
the 8% accrued dividends that it is then entitled to on its Class B Stock. Such
accrued dividends are estimated to total $189,054 as of April 20, 1997. In
addition, upon consummation of the Merger, Dynamotion Investment L.L.C. will
receive from Dynamotion cash reimbursement of certain out-of-pocket expenses
related to its investment in Dynamotion, and Emptor Management L.L.C. (an
affiliate of Dynamotion Investment L.L.C.) will receive from Dynamotion in cash
certain consulting fees based upon Dynamotion's net revenues payable pursuant to
the terms of a consulting agreement with Dynamotion (estimated to be $46,000)
and reimbursement of certain out-of-pocket expenses related to such agreement.
Keith Hightower and Ted Walsh, both members of the Dynamotion Board, are
affiliates of Dynamotion Investment L.L.C. and Emptor Management L.L.C.
Both Jon Hopper (Dynamotion's President, CEO, CFO and Chairman of the
Board) and Wojciech Kosmowski (an officer and member of the Dynamotion Board)
will, following the Merger, continue to be employed by the surviving corporation
pursuant to the terms of their respective current Dynamotion employment
agreement (with such amendments as are necessary to properly reflect their new
positions with the surviving corporation). SEMCO, a company of which Les Barkley
(a member of the Dynamotion Board) is a principal, will, following the Merger,
continue to provide consulting services to the surviving corporation pursuant to
the terms of its current consulting agreement.
APPRAISAL RIGHTS
Any holder of Dynamotion Voting Securities who wishes to dissent from the
Merger must vote against the Merger Proposal at the Special Meeting and comply
with the provisions of the NYBCL for dissenting shareholders who wish to
exercise statutory "appraisal rights." Shareholders ("Dissenting Holders") who
object to the Merger and whose shares ("Dissenting Shares") are "adversely
affected," as that term is defined pursuant to the NYBCL, would be entitled to
receive payment of the "fair value" of the Dissenting Shares if the Dissenting
Holders comply with Section 623 of the NYBCL.
Section 623 requires a Dissenting Holder who wishes to enforce his or her
statutory appraisal rights to file with Dynamotion a written objection to the
Merger Proposal before the Special Meeting, or at the Special Meeting but before
the vote on the Merger Proposal is taken. Such written objection should be
addressed to Michael Henton, Secretary, Dynamotion/ATI Corp., 1639 East Edinger
Avenue, Santa Ana, CA 92705. The objection must include a notice of the
Dissenting Holder's election to dissent, the Dissenting Holder's name and
residence address, the number and class of Dissenting Shares and a demand for
payment of the fair value
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of shares if the Merger Proposal is adopted and becomes effective. A Dissenting
Holder may not dissent as to less than all of the shares of Voting Dynamotion
Securities owned by such holder.
WRITTEN OBJECTION MUST BE IN ADDITION TO AND SEPARATE FROM ANY VOTE AGAINST
THE MERGER PROPOSAL. NEITHER A VOTE AGAINST THE MERGER PROPOSAL, A PROXY
DIRECTING SUCH A VOTE NOR AN ABSTENTION WILL SATISFY THE REQUIREMENT THAT
WRITTEN OBJECTION BE DELIVERED BEFORE THE MERGER PROPOSAL IS SUBMITTED TO THE
SHAREHOLDERS AT THE SPECIAL MEETING.
It is not necessary for a Dissenting Holder to vote at the Special Meeting.
However, if such Dissenting Holder does vote, such Dissenting Holder cannot seek
payment of the "fair value" of the Dissenting Shares if such Dissenting Holder
votes in favor of the Merger Proposal. At the Effective Time, a Dissenting
Holder will cease to have any of the rights of a holder except the right to be
paid the fair value of such holder's Dissenting Shares. A notice of election to
dissent may be withdrawn without Dynamotion's consent at any time before the
Dissenting Holder's acceptance in writing of an offer made by Dynamotion to pay
for the Dissenting Shares, but in no event later than 60 days from the Effective
Time (unless Dynamotion fails to make the offer referred to below in a timely
manner, in which event the deadline for withdrawal of the notice of election
shall be extended until 60 days from the date the offer is made). Upon
expiration of such time, withdrawal of a notice of election will require the
written consent of Dynamotion. Withdrawal of a notice of election must be
accompanied by the return to Dynamotion of any advance payment made by
Dynamotion to the Dissenting Holder.
Section 623 of the NYBCL requires that within one month after the filing of
the notice of election to dissent, the Dissenting Holder must submit the
certificates representing the Dissenting Shares to the Secretary of Dynamotion
at the address set forth above, or to Dynamotion's transfer agent, American
Stock Transfer and Trust Company, who will make a conspicuous notation thereon
regarding the dissent and return the certificates to the Dissenting Holder or
person who submitted such certificates on the Dissenting Holder's behalf. Any
Dissenting Holder who fails to submit such holder's certificates for notation
shall, at the option of Dynamotion exercised by written notice to such
Dissenting Holder, lose any appraisal rights such Dissenting Holder may have
unless a court, for good cause shown, shall otherwise direct.
Within 15 days after the expiration of the period within which holders may
file notices of election to dissent, or within 15 days after the Effective Time,
whichever is later (but in no event later than 90 days from the date the
shareholders' voted to authorize the Merger), Dynamotion is required to make a
written offer to each Dissenting Holder to pay for such holder's Dissenting
Shares at a specified price which Dynamotion considers to be the fair value of
such shares. After the Effective Time, such offer must be accompanied by: (i)
advance payment equal to 80% of the amount of such offer to each Dissenting
Holder who has submitted certificates representing the Dissenting Shares to
Dynamotion, or (ii) as to each Dissenting Holder who has not yet submitted such
certificates, a statement that such advance payment will be made by Dynamotion
promptly upon submission of such certificates. If the Merger is not effective at
the time of the making of the offer, such advance payment or statement must be
sent to each holder entitled thereto forthwith upon effectiveness of the Merger.
If Dynamotion fails to make such offer within such 15-day period, or if it
makes the offer and any Dissenting Holder fails to agree with Dynamotion within
the 30-day period thereafter upon the price to be paid for the Dissenting
Shares, Dynamotion is required to institute a judicial proceeding to determine
the rights of Dissenting Holders and to fix the fair value of the
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Dissenting Shares within 20 days after the expiration of the applicable period.
All Dissenting Holders, except such Dissenting Holders who have agreed with
Dynamotion upon the price to be paid for the Dissenting Shares, shall be made
parties to such proceeding. If Dynamotion fails to institute such a judicial
proceeding, any Dissenting Holder may institute a judicial proceeding for the
same purpose not later than 30 days after the expiration of such 20-day period.
If such proceeding is not instituted within such 30-day period, all statutory
appraisal rights of the Dissenting Holders shall be lost unless the court, for
good cause shown, directs otherwise. In any such judicial proceeding, the court
will determine, if requested, whether each Dissenting Holder is entitled to
receive payment for the Dissenting Shares and, if so, the amount of the fair
value of such Dissenting Shares.
Each party to any proceeding instituted pursuant to Section 623 of the
NYBCL must bear its own costs and expenses except that the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and fees
incurred by Dynamotion against any or all of the Dissenting Holders who are
parties to the proceeding if the court finds that their refusal to accept
Dynamotion's offer was arbitrary, vexatious or otherwise not in good faith. The
court may, in its discretion, apportion and assess against Dynamotion all or any
part of the costs, expenses and fees incurred by any or all of the Dissenting
Holders who are parties to the proceeding if the court finds any of the
following: (i) that the fair value of the Dissenting Shares as determined
materially exceeds the amount which Dynamotion offered to pay; (ii) that no
offer or required advance payment was made by Dynamotion; (iii) that Dynamotion
failed to institute the special proceeding referred to above within the period
specified therefor; or (iv) that the action of Dynamotion in complying with its
obligations as provided in Section 623 of the NYBCL was arbitrary, vexatious or
otherwise not in good faith.
The full text of Section 623 of the NYBCL is set forth as Annex D to this
Proxy Statement and the above summary is qualified in its entirety by reference
to Annex D.
FAILURE TO FOLLOW THE PROCEDURE SET FORTH IN SECTION 623 OF THE NYBCL REGARDING
DISSENTERS' RIGHTS, ATTACHED AS ANNEX D, INCLUDING WITHOUT LIMITATION TIMELY
RETURN OF THE PAYMENT DEMAND FORM AND ANY CERTIFICATES EVIDENCING OWNERSHIP OF
SHARES OF DYNAMOTION STOCK, WILL CONSTITUTE A WAIVER OF SUCH RIGHTS.
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THE MERGER AGREEMENT
The following discussion summarizes, among other things, the material terms
of the Merger Agreement, which is attached hereto as Annex A and incorporated by
reference herein. The following discussion is qualified in its entirely by
reference to the Merger Agreement, and recipients of this Proxy
Statement/Prospectus are urged to read the Merger Agreement in its entirety for
a more complete description of the Merger.
EFFECTIVE TIME OF THE MERGER
The closing of the Merger Agreement will take place on the date on which
the last of the conditions set forth in the Merger Agreement is satisfied or
waived, or such other date as the parties thereto may agree (the "Closing
Date"). On or as promptly as practicable after the Closing Date, the parties
thereto will deliver a Certificate of Merger to the Department of State of the
State of New York for filing. The Merger will become effective (the "Effective
Time") after the Certificate of Merger is filed by the Department of State of
the State of New York at the time specified in the Plan of Merger.
CONVERSION OF SHARES
At the Effective Time, each outstanding share of Dynamotion Common Stock
will be converted into the right to receive a fraction of a share of ESI Common
Stock determined in accordance with the Conversion Ratio, the calculation of
which is described below. Dynamotion will merge with and into Merger Corp., with
Merger Corp. continuing as the surviving corporation. First Chicago Trust
Company of New York has been designated as the transfer agent ("Transfer Agent")
in the Merger.
The Conversion Ratio will be calculated on the Closing Date by dividing:
(a) the "Conversion Ratio Numerator" which will equal the quotient of
$13,000,000 divided by the Average Price for ESI Common Stock, by (b) the
"Conversion Ratio Denominator," which will equal the number of shares of
Dynamotion Common Stock outstanding immediately before the Effective Time (after
giving effect to the conversion of the Class A Stock and the Class B Stock into
Dynamotion Common Stock), plus the number of shares of Dynamotion Common Stock
that are issuable upon the exercise of Z Warrants for which holders of Z
Warrants have given exercise notices by 5:00 p.m., New York time, on the Closing
Date (which date will also be the "Redemption Date," as that term is defined in
the Z Warrants).
The consummation of the Merger is conditioned upon Dynamotion's
shareholders approving the Conversion Proposals and the Conversion Proposals
taking effect. The purpose of the Conversion Proposals is to simplify the
capital structure of Dynamotion before the Merger takes effect, and to make it
possible for Dynamotion to redeem all outstanding Z Warrants before the Merger
takes effect. The Conversion Proposals are described further under the heading
"Amendment of the Dynamotion Certificate of Incorporation (the Conversion
Proposals)" herein.
As promptly as practicable after the Effective Time, ESI will cause the
Transfer Agent to mail to each Dynamotion shareholder who is a shareholder of
record as of the Effective Time, transmittal material for use in exchanging
certificates of Dynamotion Common Stock for certificates of ESI Common Stock.
Holders of certificates for Class A Stock and Class B Stock will also be able to
exchange their preferred stock certificates directly for ESI Common Stock, which
certificates will be treated as certificates for Dynamotion Common Stock after
giving
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effect to the conversion contemplated by the Conversion Proposals. The
transmittal materials will contain information and instructions with respect to
the surrender of Dynamotion Common Stock certificates (and certificates for
Class A Stock and Class B Stock converted into Dynamotion Common Stock pursuant
to the Conversion Proposals) in exchange for new certificates representing ESI
Common Stock and cash in payment for any fractional shares resulting from the
exchange.
DYNAMOTION SHAREHOLDERS SHOULD NOT SURRENDER ANY DYNAMOTION 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, cash in lieu of certain fractional shares will be paid to each former
Dynamotion shareholder who would otherwise be entitled to receive a fractional
share of ESI Common Stock after giving effect to the conversion of all of such
shareholder's shares of Dynamotion Common Stock into ESI Common Stock pursuant
to the Merger. The amount of cash will be rounded to the nearest whole cent and
will be equal to the product of the applicable fraction multiplied by the
Average Price. For this purpose "Average Price" means the average of the high
and low sales prices for shares of ESI Common Stock, as reported in The Wall
Street Journal, for each of the five trading days immediately preceding the day
before the Closing Date.
TREATMENT OF DYNAMOTION 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
converted into an option to purchase the whole number of shares of ESI Common
Stock corresponding to the number of shares of Dynamotion Common Stock which the
holder of the Option would have been entitled to receive had such holder
exercised the Option in full immediately before the Effective Time (whether or
not such Option would then have been exercisable), which number of shares will
be equal to the product of (x) the number of shares of Dynamotion Common Stock
for which such Option is exercisable immediately before the Effective Time
multiplied by (y) the Conversion Ratio. The exercise price per share for each
Option after the Effective Time will be determined by dividing the Option's per
share exercise price immediately before 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 each Option will to the extent permitted by law and otherwise
reasonably practicable be unchanged; each Option that 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. An optionee's continuous
employment with Dynamotion before the Effective Time will be given credit for
purposes of the vesting of the shares of ESI Common Stock subject to exercise
under the optionee's converted Option after the Effective Time.
RESALE OF ESI COMMON STOCK BY THE KEY SHAREHOLDERS
One of the conditions to ESI's obligations under the Merger Agreement is
that the Key Shareholders will have delivered agreements that they will not,
among other things, sell, assign, or otherwise transfer their interest in the
shares of ESI Common Stock they receive in the Merger for a period of 18 months
following the Effective Time with respect to part of such
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shares and 12 months following the Effective Time with respect to the remaining
shares. See "Related Agreements--Standstill Agreement."
Another condition is that certain affiliates of Dynamotion agree 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 pursuant to an effective registration statement under the Securities
Act.
DYNAMOTION'S CONDUCT OF BUSINESS PENDING THE MERGER
Between the execution of the Merger Agreement the Effective Time,
Dynamotion has agreed to carry on its business in the ordinary and usual manner
and to use all reasonable efforts to maintain its existing relationships with
suppliers, customers, employees, and business associates. Dynamotion has also
agreed that, except with respect to matters specifically disclosed to ESI on a
schedule to the Merger Agreement or as specifically permitted in the Merger
Agreement, it will not, without ESI's prior written consent: (i) amend its
Certificate of Incorporation or Bylaws except to effect the Conversion
Proposals; (ii) enter into any new agreements that have the effect of increasing
compensation or benefits payable to its officers or employees; (iii) change its
authorized capitalization; (iv) declare, set aside, or pay any dividends; (v)
issue, sell, create, pledge, dispose of, or encumber any additional shares of
its capital stock of any class, or any securities convertible into or
exchangeable for, or options, warrants, calls, stock appreciation or similar
rights, or other commitments or rights of any kind with respect to, any shares
of its capital stock of any class or any phantom stock other than pursuant to
the exercise of Options or outstanding warrants or pursuant to the conversion of
Class A Stock or Class B Stock; (vi) redeem, purchase, or otherwise acquire any
shares of its capital stock, merge into or consolidate with any other
corporation, permit any other corporation to merge into or consolidate with it,
liquidate, sell, or dispose of any of its assets (other than inventory sold in
the ordinary course of business), or close any plant or business operation;
(vii) incur, assume, or guarantee any indebtedness, or modify or repay any
existing indebtedness; (viii) enter into any transaction, make any commitment
(whether or not subject to the approval of the Dynamotion Board) or modify any
existing contracts, except as permitted by the Merger Agreement or in the
ordinary course of business not exceeding $25,000 for any single transaction,
commitment or contract, or take or omit to take any action that is reasonably
likely to have a material adverse effect on the business, properties, financial
condition, or results of operations of Dynamotion; (ix) 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 course of business or liabilities incurred in the ordinary course
of business and less than $25,000 singly; (x) 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;
(xi) make any tax election; (xii) permit any insurance policy naming it as a
beneficiary or a loss payable payee to be canceled, terminated, or renewed;
(xiii) change its method of accounting as in effect at December 31, 1995, except
as required by changes in generally accepted accounting principles as concurred
with by Dynamotion's independent auditors, or change its fiscal year; or (xiv)
authorize or enter into an agreement to do any of the actions referred to in
clauses (i) through (xiii) above.
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NONSOLICITATION OF ALTERNATIVE TRANSACTIONS
Dynamotion 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
Dynamotion (each, an "Acquisition Transaction") other than the Merger.
Dynamotion has further agreed that it will not participate in any negotiations
regarding, furnish to any other person any information with respect to, or
otherwise assist or participate in, any attempt by any third party to propose or
effect any Acquisition Transaction. Dynamotion also will not enter into or
execute any agreement relating to an Acquisition Transaction or make or
authorize any public statement, recommendation, or solicitation in support of an
Acquisition Transaction. Notwithstanding the foregoing, nothing in the Merger
Agreement will prohibit Dynamotion 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 (i)
the Dynamotion Board determines in good faith, upon advice of legal counsel,
that such action is required for the directors of Dynamotion to fulfill their
fiduciary duties and obligations under New York law and (ii) before furnishing
such information to, or entering into discussions or negotiations with, such
person or entity, Dynamotion provides prompt written notice to ESI to the effect
that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity.
CORPORATE STRUCTURE AND RELATED MATTERS AFTER THE MERGER
At the Effective Time, Dynamotion will be merged with and into Merger Corp.
As a result, the separate corporate existence of Dynamotion will cease and
Merger Corp. will be the surviving corporation. From and after the Effective
Time, the Certificate of Incorporation, Bylaws, Board of Directors and officers
of Merger Corp. in effect or in office, as the case may be, immediately before
the Effective Time will be the Certificate of Incorporation, Bylaws, Board of
Directors and officers of the surviving corporation, except that the Certificate
of Incorporation of Merger Corp. will be amended to change the name of the
surviving corporation to "Dynamotion, Inc."
Each share of Common Stock of Merger Corp. issued and outstanding
immediately before the Effective Time will remain outstanding without change by
virtue of the Merger.
Before or at the closing for the Merger Agreement (the "Closing"),
Dynamotion will cause each of its employees who will become employees of the
surviving corporation to sign a confidentiality and inventions assignment
agreement in the form signed by ESI's employees, except in the case of employees
of Dynamotion who are located in California, whose confidentiality and
inventions assignment agreements will not contain certain noncompetition
provisions not permitted under California law. See "Related Agreements--Employee
Agreements."
Before or at the Closing, ESI, the Key Shareholders and the Key Shareholder
Representatives will execute the Escrow Agreement and will cause an Escrow Agent
to also execute the Escrow Agreement. At the Effective Time $1,500,000 worth of
shares of ESI Common Stock that otherwise would be delivered to the Key
Shareholders as consideration for the Merger 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" and "Related Agreements--Pledge and Escrow Agreement."
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CERTAIN COVENANTS
The Merger Agreement contains mutual covenants of ESI, Dynamotion, Merger
Corp., and the Key Shareholders to use all reasonable 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 and
nonsolicitation of alternative transactions described above (see "The Merger
Agreement--Dynamotion's Conduct of Business Pending the Merger" and "The Merger
Agreement--Nonsolicitation of Alternative Transactions"), Dynamotion also
covenants to (i) give ESI and its agents reasonable access to Dynamotion and its
book and records; (ii) subject to their fiduciary duties, recommend the approval
of the Merger Proposal and the Conversion Proposals to the shareholders of
Dynamotion; (iii) use all reasonable efforts to effect the transactions
contemplated by the Conversion Proposals and to redeem the Z Warrants before the
Effective Time; (iv) provide information in connection with the preparation of
this Proxy Statement/Prospectus; (v) ensure that Dynamotion does not default
with respect to certain convertible debt obligations (except where the issuer of
such convertible debt has agreed in writing not to convert it into Dynamotion
Common Stock for a period of time); and (vi) use all reasonable efforts to
secure any consents required in connection with the Merger from governmental
entities that have issued permits to Dynamotion and from other persons or
entities who are parties to contracts with Dynamotion.
ESI covenants to (i) take necessary actions in connection with the filing
and effectiveness of this Registration Statement; (ii) promptly list the shares
of ESI Common Stock to be issued in the Merger on the Nasdaq National Market
System; (iii) after the Effective Time, issue certificates for the shares of ESI
Common Stock to be issued in connection with the Merger; (iv) reserve and
register on SEC Form S-8 the ESI Common Stock issuable upon exercise of the
Options; and (v) cause the Certificate of Incorporation of Merger Corp. to
include provisions for the indemnification of Dynamotion's current and former
officers and directors and not cause the removal or the material and adverse
modification of any such provision for a period of five years following the
Effective Time.
Merger Corp. covenants to not engage in any corporate activity other than
the Merger and other transactions contemplated by the Merger Agreement, to
maintain its corporate existence and capital structure from the time the Merger
Agreement is signed through the Effective Time, and to refrain from removing or
materially and adversely modifying any provisions relating to the
indemnification of Dynamotion's current and former officers and directors for a
period of five years following the Effective Time.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction of various
conditions, including (i) the receipt of all necessary regulatory approvals and
third-party consents and the completion of all necessary filings with
governmental authorities; (ii) the continuing accuracy of the representations
and warranties of the parties contained in the Merger Agreement and the
performance of the parties' respective covenants; (iii) the absence of any
order, decree, or injunction that would prevent consummation of the Merger; (iv)
the absence of any material adverse change in the businesses of ESI or
Dynamotion; (v) Dynamotion shareholder approval of the Merger Proposal and the
Conversion Proposals, with less than 20 percent of the voting power of
Dynamotion qualifying for dissenter's rights under the NYBCL; (vi) the
registration of shares of ESI Common Stock to be issued in connection with the
Merger under the Securities Act of 1933 and the listing of such shares on the
Nasdaq National Market System; (vii) the
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delivery to ESI and Merger Corp. of specified documents and agreements relating
to: (a) the Escrow, (b) employee confidentiality and inventions assignment from
Dynamotion employees continuing as employees of Merger Corp. after the Merger,
(c) representations, warranties, and covenants by the Key Shareholders and by
Dynamotion affiliates with respect to the shares of ESI Common Stock to be
acquired by such persons or entities; and (d) noncompetition covenants of a
certain executive officer of Dynamotion; (viii) redemption of the Z Warrants
immediately before the Effective Time following conversion of the Class A Stock
and Class B Stock; (ix) the exercise before the Record Date for the Special
Meeting of outstanding warrants to purchase Dynamotion Common Stock held by
certain holders of Class B Stock; (x) the termination of certain warrants to
purchase Class A Stock or Dynamotion Common Stock issued to the underwriters in
connection with the initial public offering of the Class A Stock; (xi) the
termination of certain warrants issued to the holders of Class B Stock relating
to the exercise of Z Warrants; (xii) the termination or modification to ESI's
reasonable satisfaction of certain of Dynamotion's agreements identified by ESI;
(xiii) the absence of any default by Dynamotion with respect to certain
convertible debt of Dynamotion, or the receipt of an agreement from the issuers
of the convertible debt not to convert such debt into Dynamotion Common Stock
for a period of time; (xiv) the filing by the Department of State of the State
of New York of amendments to Dynamotion's Certificate to effect the Conversion
Proposals; (xv) ESI's receipt of a satisfactory environmental report concerning
Dynamotion's properties; (xvi) ESI' receipt of a satisfactory appraisal
concerning the value of Dynamotion's in-process research and development; and
(xvii) ESI's receipt of satisfactory updated financial information and updated
Merger Agreement schedules concerning Dynamotion.
INDEMNITY AND ESCROW AGREEMENT
The Merger Agreement provides that (i) the Key Shareholders, severally and
pro rata to the extent of each Key Shareholder's contribution to the $1,500,000
worth of shares of ESI Common Stock deposited with the Escrow Agent, will
indemnify ESI and Merger Corp. for and against any losses, costs, expenses,
damages, and liabilities, including reasonable attorneys' fees (collectively,
"Damages") incurred by ESI or Merger Corp. by reason of or arising out of any
inaccuracy in any representation or warranty or the breach of any covenant of
Dynamotion made in the Merger Agreement and (ii) each Key Shareholder to the
extent of his, her or its contribution to the ESI Common Stock deposited with
the Escrow Agent will indemnify ESI and Merger Corp. for and against any damages
incurred by ESI or Merger Corp. by reason of or arising out of any inaccuracy in
any representation or warranty or the breach of any covenant of such Key
Shareholder made in the Merger Agreement. The shares of ESI Common Stock subject
to the indemnity obligations 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 18 months following the Effective Time. No payment obligation arises under
the indemnity provisions unless and until an aggregate of more than $275,000
worth of claims have been made under the Merger Agreement, after which all
claims, including the first $275,000's worth, are subject to the Merger
Agreement's indemnity provisions.
The Escrow will terminate 18 months after the Effective Time if no claims
are pending. If claims are pending at the end of the 18-month period, the shares
of ESI Common Stock not subject to claims will be released from the Escrow, and
the Escrow will remain in effect as to the shares of ESI Common Stock which are
subject to claims until such claims are resolved.
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TERMINATION; TERMINATION FEE
The Merger Agreement may be terminated and the Merger may be abandoned
before the Effective Time: (i) by mutual written agreement of ESI and
Dynamotion; (ii) by either ESI or Dynamotion if the Merger is prohibited or
restrained by court order or decree or if Dynamotion's shareholders do not
approve the Merger by May 31, 1997; (iii) by ESI if the Dynamotion Board
withdraws or modifies its approval of the Merger in a manner adverse to ESI or
if Dynamotion or any officer, director, employee, agent, or representative of
Dynamotion violates the Merger Agreement's provisions concerning nonsolicitation
of Acquisition Transactions; or (iv) by Dynamotion if the Dynamotion Board
determines in good faith that termination is necessary fulfill the Dynamotion
directors' fiduciary duties. The Merger Agreement will also terminate
automatically if the Merger has not occurred on or before June 15, 1997, but
automatic termination of the Merger Agreement will not limit the liability of
any party whose breach of the Merger Agreement has been the cause of, or
resulted in, the failure of the Merger to occur on or before June 15, 1997.
Dynamotion will pay a $1,000,000 termination fee to ESI if the Merger
Agreement is terminated by Dynamotion (other than by reason of the failure of
conditions precedent to Dynamotion's obligation to consummate the Merger or
pursuant to the exercise of the fiduciary duties of the Dynamotion Board) and
within one year after that termination Dynamotion agrees to an Acquisition
Transaction with any person other than ESI or any ESI affiliate and the
Acquisition Transaction results in a change in the beneficial owners of more
than fifty percent (50%) of the voting power of the capital stock of Dynamotion.
FEES AND EXPENSES
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 Dynamotion's attorneys'
fees, incurred in connection with the printing and filing of the Proxy
Statement/Prospectus, the related Registration Statement on Form S-4, and any
amendments or supplements thereto.
CONFIDENTIALITY
Each party to the Merger Agreement has agreed to keep confidential,
pursuant to a mutual Confidentiality Agreement dated December 4, 1996 between
Dynamotion and ESI (the "Confidentiality Agreement"), 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 Agreement contains terms restricting the disclosure and use of
confidential information exchanged between the two parties in evaluating the
Merger and otherwise.
RELATED AGREEMENTS
The following discussion summarizes, among other things, the material terms
of certain agreements relating to the Merger Agreement.
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VOTING AGREEMENTS
Two shareholders of Dynamotion (Dynamotion Investment L.L.C., which is an
affiliate of two directors of Dynamotion, and Wojciech Kosmowski, who is an
officer and director of Dynamotion) have entered into Voting Agreements with ESI
providing that such shareholders will vote all of their shares of Dynamotion
Voting Securities in favor of the Merger Proposal and the Conversion Proposals.
PLEDGE AND ESCROW AGREEMENT
If the Merger is consummated, the Key Shareholders will enter into a Pledge
and Escrow Agreement with ESI providing that the Key Shareholders will pledge
and deposit with an escrow agent $1,500,000 worth of shares of ESI Common Stock
to be issued to such Key Shareholders in connection with the Merger (such
shares, the "Escrow Shares"). The Escrow Shares will be held in escrow to secure
the performance of the indemnity obligations of the Key Shareholders under the
Merger Agreement. The escrow will terminate 18 months after the Effective Time
of the Merger if no claims are pending. If claims are pending at the end of the
18 month period, the shares of ESI Common Stock not subject to claims will be
released from the escrow and the escrow will remain in effect as to the shares
of ESI Common Stock subject to claims until such claims are resolved.
STANDSTILL AGREEMENT
If the Merger is consummated, the Key Shareholders will enter into
Standstill Agreements with ESI and Merger Corp. providing that such Key
Shareholders will not offer, sell, agree to sell or otherwise transfer any
shares of ESI Common Stock received by such shareholders in connection with the
Merger for a period of 18 months following the Effective Time of the Merger with
respect to some of such shares of ESI Common Stock, and a period of 12 months
following the Effective Time of the Merger with respect to the remaining shares
of such ESI Common Stock.
TERMINATION OF AGREEMENTS RELATING TO Z WARRANTS AND UNDERWRITERS' WARRANTS
At or before the Closing for the Merger Agreement, Dynamotion and certain
Key Shareholders will terminate an agreement dated March 29, 1996, relating to
the exercise of Z Warrants. In addition, Dynamotion will request certain
underwriters holding warrants to purchase shares of Class A Stock or Dynamotion
Common Stock to agree to the termination of such warrants.
NONCOMPETITION AGREEMENT
A certain shareholder of Dynamotion who is also an executive officer of
Dynamotion will enter into a Noncompetition Agreement with ESI and Merger Corp.
providing that such shareholder will not compete with or interfere with the
business of ESI and Merger Corp. for a period of five years after the Effective
Time of the Merger.
EMPLOYEE AGREEMENTS
Each of Dynamotion's employees who will become an employee of Merger Corp.
will be requested to sign an agreement providing that such employee will not use
or disclose certain confidential information of the company and that such
employee will assign to the company all
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proprietary rights in inventions developed in connection with his or her
employment. In addition, each such agreement for employees located outside of
California will provide that such employee will not compete with ESI or Merger
Corp. for a period of one year after termination of employment.
AMENDMENT OF THE DYNAMOTION CERTIFICATE OF INCORPORATION
(THE CONVERSION PROPOSALS)
DESCRIPTION OF THE PROPOSED AMENDMENTS
On January 15, 1997, the Dynamotion Board of Directors unanimously approved
and voted to recommend that holders of Dynamotion Voting Securities approve a
proposed amendment to (i) Section 4.9 of Article "FOURTH" of the Dynamotion
Certificate of Incorporation (the "Certificate") pertaining to the Class A Stock
which would provide that if the Merger Proposal is approved and the Merger
occurs, immediately before the consummation of the Merger, each of the
outstanding shares of Class A Stock will automatically convert into (a) 1.05
shares of Dynamotion Common Stock and (b) cash in the amount of $0.10
representing the redemption price for the two Z Warrants that would have been
issued with respect to such share of Class A Stock under the existing conversion
provisions of the Certificate; and (ii) Section 4.9 of Article "FOURTH" of the
Certificate pertaining to the Class B Stock which would provide that if the
Merger Proposal is approved and the Merger occurs, immediately before the
consummation of the Merger, each of the outstanding shares of Class B Stock will
automatically convert into (a) 0.990904 of a share of Dynamotion Common Stock
and (b) cash in an amount equal to the accrued dividends that the holder of such
share of Class B Stock will be entitled to on such share of Class B Stock as of
the date the automatic conversion occurs. In this Proxy Statement/Prospectus,
the proposed amendment to the Class A Stock is referred to as the "Class A
Conversion Proposal", the proposed amendment to the Class B Stock is referred to
as the "Class B Conversion Proposal", and the proposed amendments to the Class A
Stock and the Class B Stock are referred to collectively as the "Conversion
Proposals."
Specifically, Section 4.9 of Article "FOURTH" of the Certificate pertaining
to the Class A Stock and Section 4.9 of Article "FOURTH" of the Certificate
pertaining to the Class B Stock are proposed to be amended and restated as set
forth in the proposed Certificate of Amendment to Dynamotion's Certificate of
Incorporation attached as Annex C. For comparison, Section 4.9 of Article
"FOURTH" of the Certificate pertaining to the Class A Stock as in effect before
implementation of the Class A Conversion Proposal provides as follows:
"If, at any time or from time to time, there shall be a
capital reorganization of Junior Stock (other than a
subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Section 4), a merger
or consolidation of the Corporation with or into another
corporation, or the sale of all or substantially all of the
Corporation's property and assets to any other person, then,
as a part of such reorganization, merger, consolidation or
sale, provision shall be made by the Corporation so that the
holders of shares of Class A Preferred Stock shall
thereafter be entitled to receive, upon conversion of such
shares of Class A Preferred Stock, the number of shares of
stock or other securities or property of the Corporation, or
of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of shares of Common
Stock deliverable upon
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conversion of such shares of Class A Preferred Stock would
have been entitled on such capital reorganization, merger,
consolidation or sale. In any such case, appropriate
adjustment shall also be made in the application of the
provisions of this Section 4.9 with respect to the rights of
the holders of shares of Class A Preferred Stock after the
reorganization, merger, consolidation or sale to the end
that the provisions of this Section 4 (including adjustment
of the Conversion Denominator then in effect for each share
of Class A Preferred Stock, and the number of shares
issuable upon conversion of shares of Class A Preferred
Stock) shall be applicable after that event in a manner as
nearly equivalent as may be practicable."
Similarly, Section 4.9 of Article "FOURTH" of the Certificate
pertaining to the Class B Stock as in effect before implementation of the Class
B Conversion Proposal provides as follows:
"If, at any time or from time to time, there shall be a
capital reorganization of the Common Shares (other than
a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this
Section 4), a merger or consolidation of the
Corporation with or into another Person, or a
Disposition of all or substantially all of the
Corporation's property to any Person, then, as a part
of such reorganization, merger, consolidation or
Disposition, provision shall be made by the Corporation
so that each holder of Class B Preferred Shares shall
thereafter be entitled to receive, upon conversion
thereof, the number of shares of capital stock or other
securities or property of the Corporation or of the
successor Person resulting from such merger or
consolidation or the Person to whom such Disposition
was made, receivable by a holder of the number of
shares of Common Shares into which such Class B
Preferred Shares would have been converted immediately
prior to such capital reorganization, merger,
consolidation or Disposition, together with any
distribution of any kind on such shares of capital
stock or other securities made during the period from
such transaction to and including the date of
conversion of such Class B Preferred Shares. In any
such case, appropriate provisions shall also be made
with respect to the rights of the holders of Class B
Preferred Shares after such reorganization, merger,
consolidation or Disposition to the end that the
provisions of this Section 4 (including adjustment of
the Class B Conversion Denominator then in effect and
the amount and kind of shares of capital stock or
securities or other property issuable upon conversion
of Class B Preferred Shares) shall be applicable after
that event in a manner as nearly equivalent as may be
practicable to their application prior thereto."
CONVERSION FORMULAS FOR THE CLASS A STOCK AND CLASS B STOCK
The Conversion Proposals are intended to provide for the conversion of
each share of Class A Stock and Class B Stock into Dynamotion Common Stock
immediately before the
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Merger based on the respective conversion formulas for Class A Stock and Class B
Stock as set forth in the Certificate as in effect before the Conversion
Proposals.
With respect to Class A Stock, the conversion formula in the Certificate
provides that each share of Class A Stock is convertible into (i) shares of
Dynamotion Common Stock at the "Class A Conversion Ratio" and (ii) two Z
Warrants. Dynamotion calculated the "Class A Conversion Ratio" to be 1.05 after
giving effect to certain adjustment provisions in the Certificate. Accordingly,
the Class A Conversion Proposal provides that each share of Class A Stock will
be converted directly into 1.05 shares of Dynamotion Common Stock and cash in
the amount of $0.10. The receipt of cash is designed to compensate the holders
of Class A Stock as though two Z Warrants were issued upon conversion of each
share of Class A Stock and subsequently redeemed before the Merger. See
"Amendment of the Dynamotion Certificate of Incorporation (The Conversion
Proposals)--Effect of the Conversion Proposals on Z Warrants."
With respect to the Class B Stock, the conversion formula in the
Certificate provides that each share of Class B Stock is convertible into shares
of Dynamotion Common Stock at the "Class B Conversion Ratio." Dynamotion
calculated the "Class B Conversion Ratio" to be 0.990904 after giving effect to
certain adjustment provisions in the Certificate. In addition, the Certificate
provides for the payment of accrued and unpaid dividends on the Class B Stock
upon the conversion of the Class B Stock into Dynamotion Common Stock.
Accordingly, the Class B Conversion Proposal provides that each share of Class B
Stock will be converted directly into 0.990904 of a share of Dynamotion Common
Stock and cash in an amount equal to the accrued and unpaid dividends on the
Class B Stock. Such dividends have accrued at the rate of $0.08 per share since
March 20, 1996, and Dynamotion estimates that such dividends will be $189,054 in
the aggregate based on an assumed conversion date of April 20, 1997.
EFFECT OF THE CONVERSION PROPOSALS ON Z WARRANTS
Dynamotion is currently a party to a Warrant Agreement dated as of July 19,
1993, with American Stock Transfer & Trust Company (the "Z Warrant Agreement").
Pursuant to the Z Warrant Agreement, each outstanding Z Warrant entitles the
holder thereof to purchase 0.6941 shares of Dynamotion Common Stock at a
purchase price of $4.37 per share. However, the Z Warrant Agreement provides
that Dynamotion is entitled to redeem outstanding Z Warrants at a price of $0.05
per warrant if, among other things, at least 90% of the shares of Class A Stock
have been converted into Dynamotion Common Stock by the holders thereof. If the
Class A Conversion Proposal is approved and the Merger is effected, 100% of the
Class A Stock will be converted into Dynamotion Common Stock. In connection
with, and as a precondition to, the Merger, all outstanding Z Warrants (issued
to former holders of Class A Stock who previously converted their shares into
Dynamotion Common Stock and Z Warrants) will be redeemed by Dynamotion at $0.05
per warrant pursuant to the Z Warrant Agreement.
CONSEQUENCES OF THE CONVERSION PROPOSALS TO EXISTING HOLDERS OF CLASS A STOCK
AND CLASS B STOCK
As of January 15, 1997, the capitalization of Dynamotion includes 2,843,791
shares of Dynamotion Common Stock outstanding, 937,279 shares of Class A Stock
outstanding, and 2,250,000 shares of Class B Stock outstanding. After January
15, 1997, but before the Record Date, 330,302 shares of Dynamotion Common Stock
were issued upon the exercise of a warrant by a certain holder of Class B.
Stock. If the Conversion Proposals are approved and the Merger is effected,
immediately before the consummation of the Merger, (i) each outstanding share of
Class A Stock will be converted into 1.05 shares of Dynamotion Common Stock,
resulting in
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the conversion of the 937,279 shares of Class A Stock outstanding into 984,143
shares of Dynamotion Common Stock, and (ii) each outstanding share of Class B
Stock will be converted into 0.990904 shares of Dynamotion Common Stock,
resulting in the conversion of the 2,250,000 shares of Class B Stock outstanding
into 2,229,534 shares of Dynamotion Common Stock. Accordingly, upon the
effectiveness of the Conversion Proposals immediately before the Merger, the
total number of shares of Dynamotion Common Stock outstanding will be increased
from 3,174,093 shares to 6,387,770.
The calculation set forth in the foregoing paragraph is an example only and
is based on the capitalization of Dynamotion as of January 15, 1997. The actual
number of shares of Dynamotion stock outstanding before and after the Conversion
Proposals are effected may be different based on events that occur between
January 15, 1997 and the Effective Date.
For a discussion of certain tax consequences of the Conversion Proposals,
see "The Merger--Material U.S. Federal Income Tax Consequences."
PURPOSE AND EFFECT
The purpose of the Conversion Proposals is to simplify the capital
structure of Dynamotion before the Merger takes effect. If the Conversion
Proposals are approved, all holders of Class A Stock and Class B Stock will
receive shares of Dynamotion Common Stock and will participate in the Merger
solely as holders of Dynamotion Common Stock. (See "The Merger--Appraisal
Rights" and "The Merger Agreement--Conversion of Shares").
CONSEQUENCES OF FAILURE TO APPROVE THE CONVERSION PROPOSALS
If the Conversion Proposals are not approved, the Merger will not occur;
the approval of the Conversion Proposals is an essential condition precedent to
the Merger transaction.
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INFORMATION CONCERNING ESI
BUSINESS
ESI provides electronics manufacturers with production equipment for the
manufacture of 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 improve the yield of
semiconductor memory devices and to adjust (trim) electronic circuitry. ESI
believes it is the leading producer of high-speed test and handling equipment
used in the high-volume production of miniature capacitors. Additionally, ESI
designs and manufactures machine vision products and laser manufacturing systems
for producers of electronic interconnect products including printed circuit
boards and semiconductor packages. ESI's products are designed to enable
manufacturers to reduce production costs, increase yields and improve the
quality of their products. ESI's customers include manufacturers of: wireless
telecommunication products (Ericsson and Motorola); automotive electronics
(Delco, Ford, Nippon-Denso and Siemens); miniature capacitors (Kemet,
Kyocera/AVX, Murata, Philips, and Samsung) and semiconductor memory devices
(Fujitsu, Hitachi, Hyundai, IBM, Samsung, and Texas Instruments). Ericsson,
Motorola, Delco, Ford, Nippon-Denso, Siemens, Kemet, Kyocera/AVX, Murata,
Philips, Samsung, Fujitsu, Hitachi, Hyundai, IBM, and Texas Instruments together
accounted for 35.7% of ESI's total consolidated revenue for the fiscal year
ended May 31, 1996, and for 42.1% of ESI's total consolidated revenue for the
six months ended November 30, 1996.
ELECTRONICS INDUSTRY OVERVIEW
The electronic content of telecommunications products, automobiles and
personal computers continues to increase substantially. For example, automobile
manufacturers now routinely include electronic ignition, anti-lock brakes,
electronic fuel injection and other electronic systems in place of components
that in the past were predominantly mechanical. In addition, new markets for
consumer-oriented electronic products such as cellular telephones, facsimile
machines, pagers, camcorders and personal computers have developed rapidly as
increasingly affordable products have been introduced.
Demand for electronics manufacturing equipment is driven by the demand for
electronic devices and circuits. Electronic 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 demand for increased product
complexity, reduced size, and ever decreasing price. As electronic products
become more powerful and portable, the devices in these products must be faster,
smaller and more reliable. To achieve these attributes of higher performance,
the electronic device manufacturers use finer device geometries, increase
densities, and tune the devices to precise electrical values. Manufacturers of
cellular telephones, for example, must use miniaturized circuits to accommodate
the size limitations of the finished product. These circuits must also operate
within precise frequency specifications, typically requiring component values
with less than 0.5 percent tolerance, in order for the existing cellular
frequency bands to accommodate the expanding number of cellular users without
interchannel interference.
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As electronic device densities and performance demands have increased, the
manufacturers of capacitors and resistors that are basic components of assembled
electronic devices have been compelled to reduce size and to improve performance
of these individual components. The increasing miniaturization of these
components makes production, testing and handling difficult.
In addition to quantity, size and performance demands, a trend throughout
the electronics industry is cost reduction. The highly competitive markets for
electronic products create cost limitations at the consumer level, and result in
cost pressure on component manufacturers. The manufacturers seek to reduce
device costs by improving throughput, yield and quality in device production.
OVERVIEW OF MARKETS, PRODUCTS AND STRATEGY
Pagers, cellular telephones, personal computers and automotive electronics
represent the largest end-market applications for electronic devices and
circuits that are produced using ESI's systems. ESI's customers also serve a
wide range of other electronic applications.
ESI believes that it is critical that each of its products provide the
customer with measurable production benefits, such as improved yield of good
product, 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 upgrades, thereby providing its
customers flexibility to add capacity or improve product performance at a
reasonable incremental cost.
ESI believes it is a leading merchant equipment supplier to the laser
trimmingand semiconductor memory repair markets. ESI also serves the miniature
capacitor test and production, machine vision, and laser electronic packaging
markets.
LASER TRIMMING SYSTEMS. ESI's laser trimming systems are used to tune the
precise frequency of electronic circuits that receive and transmit signals in
pagers, cellular telephones and other wireless devices. ESI's laser trimming
systems are also used to tune automotive electronic assemblies such as engine
control circuits.
ESI's laser systems are used by manufacturers supplying the
telecommunications, automotive, and consumer markets. Customers include Delco,
Ericsson, Ford, IBM, Nippon-Denso, Philips, Siemens, Sumitomo and Vishay
Intertechnology.
The laser system adjusts the electrical performance of an electrical
product or assembly containing many circuits. The system removes a precise
amount of material from one or more circuits to achieve the desired electrical
specification for the entire product. This process is called "functional
trimming," and is performed while the product or assembly is under power. For
example, in pagers, laser trimming of a few selected circuits in the product is
used to tune the electrical performance of the entire product to the desired
frequency specification.
ESI's systems also adjust the electrical performance of individual devices
such as film resistors, resistor networks, capacitors and hybrid circuits. Laser
trimming is required because the screening process used to manufacture resistors
cannot cost effectively deposit material precisely enough to provide consistent
electrical values. The trimming system can also be rapidly reprogrammed to trim
devices to different values, enabling the manufacturer to
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efficiently convert volume-produced devices of a single value into devices with
a variety of values.
The following chart summarizes the models, typical applications and key
features of ESI's current laser trimming products:
<TABLE>
<CAPTION>
ESI LASER TRIMMING PRODUCTS
Beam
Positioning Throughput
Typical Resolution (trims per Work Area
Product Application (microns) second) (inches)
- ------- ----------- --------- ------- --------
<S> <C> <C> <C> <C>
Model 4210 Surface mount 2.50 50 4 x 4
capacitor and
resistor trimming
Model 977 Test intensive, thick 1.55 50 3 x 3
film, functional
trimming
Model 960 Thick film 1.27 50 3 x 3
functional trimming
Model 907 Chip resistor 1.27 100 3 x 3
trimming
Model 4410 Thick/thin film 1.01 15 3 x 3
functional trimming
</TABLE>
TEST AND PRODUCTION SYSTEMS FOR MINIATURE CAPACITORS. ESI's product
offering consists of automated test, production and handling equipment for the
manufacture of miniature multi-layer ceramic capacitors (MLCCs) which are used
in very large numbers in nearly all types of electronic circuits. Large numbers
of MLCCs are used in circuits that process analog signals or operate at high
frequencies such as in video products (VCRs and camcorders), voice communication
products, wireless telecommunication products and computers. Principal customers
for ESI's MLCC test and production equipment are Kemet, Kyocera/AVX, Murata,
Philips, Samsung and TDK.
The worldwide miniature capacitor market is estimated to have been $4.5
billion (200 billion units) in 1996. Most of the leading producers are in Japan,
led by Kyocera, Murata and TDK. ESI believes it is a leading merchant supplier
of equipment to the MLCC industry for production of miniature capacitors.
Production demands imposed by miniaturization and the constant need for product
development 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
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for MLCC manufacturers. ESI's test and termination equipment and specialty
handling tools perform a broad range of functions in the manufacturing process.
Test. Virtually all capacitors are tested and sorted by capacitance
(electrical energy storage) and dissipation (electrical energy leakage). ESI's
equipment employs high-speed handling and positioning techniques to precisely
load, test and sort capacitors based upon these electrical values.
Termination. MLCCs are manufactured in a lamination process, layering
conducting and insulating materials. ESI's microprocessor-based termination
systems apply conductive material to the ends of surface mountable MLCCs,
permitting connection of the device in a circuit.
Handling Tooling. ESI offers a wide range of specialized production
fixtures and tools for various stages of the manufacturing process, including a
series of patented carrier plates capable of handling up to 8,000 devices per
plate for application of the electrical termination. 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 certain of ESI's current miniature capacitor
test and production products, applications and key features:
<TABLE>
<CAPTION>
ESI MINIATURE CAPACITOR TEST AND PRODUCTION PRODUCTS
Product Application Key Features
- ------- ----------- ------------
Test Systems
<S> <C> <C>
Models 16A and 18 Tests capacitance, High speed rotary tester with
dissipation factor and voltage throughput of up to 50,000
capability for small (Model parts/hour.
18) and medium (Model
16A) size MLCCs
Models 12-4 and 3001 IR Tests insulation resistance High speed parallel tester
(IR) of MLCCs with 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 in excess of
for small and medium size 200,000 parts/hour.
MLCCs; tests insulation
resistance
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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
on MLCCs microprocessor controlled
surface mount termination
system with throughput up to
470,000 parts/hour.
Handling Tooling
Carrier Plates Plates to batch handle Patented composite carriers
MLCCs for test and to handle the full range of
termination MLCC sizes and up to 8,000
pieces per batch.
Test Tooling Test fixtures for use with Permits precise location and
ESI systems positioning of MLCCs
during the test operation.
</TABLE>
MEMORY YIELD IMPROVEMENT SYSTEMS. Semiconductor 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
repair systems include Fujitsu, Lucky Goldstar, Hitachi, Hyundai, IBM, Motorola,
NEC, Samsung, Siemens, Texas Instruments, and TSMC.
The laser process used by memory device manufacturers replaces defective
circuit elements with spare elements, and thereby salvages a memory device.
Lower cost, higher capacity memory devices have been achieved by reducing the
size of circuit elements and increasing the number of circuit elements per
device, thereby requiring leading edge semiconductor processes. These processes
generally result in lower manufacturing yields, especially in the early stages
of producing a new generation of memory devices. Yield improvement is thus
critical in the early stages of commercial production of a new generation
device.
The primary method used by memory manufacturers to maintain and increase
yield is to include extra circuit elements on each device. These "redundant"
elements can then be used to replace defective elements found by test after
fabrication. ESI's laser systems perform this repair by determining the optimum
number and location of connections and disconnections necessary to repair the
device, rapidly positioning links under the laser, and directing a laser energy
pulse to cut those links to deactivate defective memory cells and activate spare
cells. Redundancy is used by every significant manufacturer of DRAMs and is
increasingly being used
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by manufacturers of other semiconductor memory devices such as static random
access memories (SRAMS).
ESI currently offers the Model 9250 and the Model 1225CI and Model 9300
laser processing systems for memory repair. The Model 9250 is designed to
process increasingly dense memory devices, including 16 and 64 megabit DRAMs. To
accommodate the range of memory sizes, the Model 9250 includes a programmable
laser spot size feature. ESI's Model 9250 has a guaranteed mean time between
failure of better than 1,500 hours and has a raw throughput rate of 1,200 links
per second. The Model 1225CI laser memory repair system utilizes patented stage
plus galvanometer beam positioning to achieve 0.35 micron positioning accuracy
in a small footprint cost-effective system package. System size is becoming
increasingly important because of the escalating cost of cleanroom square
footage. ESI holds the patent for the ScribeView 2 illuminator, which is used in
the 1225CI and is used for optical character recognition (OCR), a vital step in
the memory repair process.
In June 1996, ESI announced the release of the new Model 9300 Laser Repair
System and in August 1996 began shipments. This system features a patented laser
system technology operating at a wavelength of 1.3 microns and offers memory
manufacturers using the latest advances in link material structure a method to
increase yields that would not exist using other products. This system is
targeted at memory manufacturers investing in 64 megabit device and beyond
manufacturing capacity.
VISION SYSTEMS. ESI designs and manufactures machine vision products. ESI's
vision systems combine advanced computer technology, proprietary software and
optical equipment to reduce application development time and provide machine
vision inspection that facilitates quality products and fast throughput. The
TurboHR+ vision system is integrated in ESI's laser memory repair systems and is
also marketed independently to electronic and semiconductor industry customers
for general purpose inspection, part position verification for manufacturing
processes, wafer identification using OCR, measurement, alignment, machine
guidance and assembly verification. ESI was recently appointed the exclusive
North American distributor of Bargold Electronics of Haifa, Israel. Bargold
produces a high-performance DSP vision system. Customers for ESI's vision
products include Hewlett Packard, Motorola and Seagate.
ELECTRONIC PACKAGING SYSTEMS. ESI's advanced laser technology provides a
cost effective method for forming electrical connections between layers, called
vias, in electronic interconnect products layer substrate. The initial product,
the Model 5000, is targeted for use in micro-via (smaller than six mils)
production. The Model 5100, introduced in June 1996, represents the next
generation and offers productivity improvement by providing the capability to
drill over 10,000 micro-vias per minute. Shipments of the Model 5100 began in
August 1996. Applications in this market include new generations of integrated
circuits packages, multi chip modules, and high density circuit boards. The
primary advantage of the ESI technology is the ability to process the wide
variety of materials used in the electronics industry, including ceramic,
plastic, traditional glass reinforced circuit boards, copper, and new organic
compounds. Customers include Automata, Erricson, Sheldahl, Siemens and W.L.
Gore.
SALES, MARKETING AND SERVICE
ESI sells its products worldwide through direct sales and service offices
located in or near: Boston, Dallas, Portland, San Diego, and San Jose in the
United States; Tokyo, Nagoya, Seoul and Taipei in Asia; and Munich, London,
Paris and Leiderdorp, Netherlands in Europe.
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ESI serves customers in approximately 30 additional countries through
manufacturers representatives.
ESI emphasizes strong working relationships with its customers in order to
meet their needs for additional systems and to facilitate the successful
development and sale of new products to satisfy the advanced manufacturing needs
of 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 original equipment manufacturer (OEM) contract with Advantest
Ltd. to supply memory yield improvement systems in Japan. Sales to Advantest
amounted to 11.8%, 6.8%, 7.2%, and 7.0% of net sales for the six months ended
November 30, 1996 and for the fiscal years ended May 31, 1996, 1995, and 1994.
ESI maintains a presence in Korea through a wholly-owned subsidiary.
International sales accounted for 75.8%, 66.8%, 70.9%, and 54.7% of ESI's
net sales for the six months ended November 30, 1996 and for the fiscal years
ended May 31, 1996, 1995 and 1994.
One customer accounted for 11.8%, 12.4%, and 10.8% of ESI's sales in the
six months ended November 30, 1996 and the fiscal years ended May 31, 1995 and
1994, respectively. In the fiscal year ended May 31, 1996, no one customer
exceeded 10% of sales.
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 $20 million at November 30,
1996, and was $35 million at May 31, 1996 versus $26 million at May 31, 1995 and
$8 million at May 31, 1994. ESI expects all of its existing backlog to ship
within the next twelve months.
RESEARCH, DEVELOPMENT AND TECHNOLOGY
ESI believes that its ability to compete effectively depends, in part, on
whether it can maintain and expand its expertise in core technologies and
product applications. The primary emphasis of ESI's research and development is
to advance ESI's capabilities in:
o Lasers and laser/ material interaction
o High speed, sub-micron motion control systems
o Precision optics
o High speed, small parts handling
o Image processing and optical character recognition
o Real-time production line electronic measurement
o Real-time software
o Systems integration
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ESI's research and development expenditures for the six months ended
November 30, 1996 and for the fiscal years ended May 31, 1996, 1995, and 1994
were $8.3 million (11.9% of net sales), $16.2 million (10.2% of net sales),
$13.1 million (12.1% of net sales), and $8.2 million (12.3% of net sales),
respectively. The foregoing figures do not include research and development
expenditures funded by the Advanced Research Projects Agency (ARPA) of the U.S.
Government or the BIRD Foundation described below.
In September 1993, ESI was awarded a cost-shared contract from ARPA. Under
the initial terms of the contract, ARPA provided $1 million of funding towards
the development of a flat panel display laser interconnect and repair system. In
March 1995 and September 1995, the contract scope of work was expanded and an
additional $100,000 and $210,000, respectively, of funding was awarded. This
project is consistent with ESI's technology strategy. During the six months
ended November 30, 1996 and the fiscal years ended May 31, 1996, 1995, and 1994
ESI received $1.2 million of funding from ARPA which offset research and
development expenses.
In June 1996 ESI was awarded a $1.1 million cost-shared joint development
program with the Israel-U.S. Binational Industrial Research Development (BIRD)
Foundation to develop an MLCC machine vision-based inspection system. ESI is
partnering with Industrial Development Corporation (IDC) of Haifa, Israel. BIRD
funding will offset some of ESI's research and development expenses.
In addition, research and development expenditures for the fiscal 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, ESI's 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 small vision companies
and captive vendors in Japan, North America and Europe. ESI's laser via-creation
systems compete with mechanical drilling manufacturers such as Hitachi, Seiko,
and Excellon and laser system provider Lumonics.
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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 subsidiary near San Diego,
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 November 30, 1996, ESI employed 662 persons, including 204 in
engineering, research and development, 208 in manufacturing and 142 in
marketing, sales and customer service and support. Many of ESI's employees are
highly skilled, and ESI's success will depend in part upon its ability to
attract and retain such employees, who are in great demand. ESI has never had a
work stoppage or strike and no employees are represented by a labor union or
covered by a collective bargaining agreement. ESI considers its employee
relations to be good.
PATENTS AND OTHER INTELLECTUAL PROPERTY
ESI has a policy of seeking patents when appropriate on inventions relating
to new products and improvements which are discovered or developed as part of
ESI's on-going research, development and manufacturing activities. ESI owns 40
United States patents and has applied for 16 additional 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.
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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 violating
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 or 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.
INFORMATION CONCERNING DYNAMOTION
GENERAL
Dynamotion, a New York corporation, develops, manufactures, and markets
computer numerical control ("CNC") drilling and routing machines used in the
production of high density mutli-layered printed circuit boards ("PCBs") and
semiconductor packages. Dynamotion offers a complete line of various machine
sizes and configurations to satisfy the needs of both high-tech and commercial
circuit board manufacturers.
In 1993, the current business of Dynamotion was acquired by Dynamotion
(then named Cybernetics Products, Inc.). At the time of such acquisition,
Dynamotion consisted of several other businesses. Since the acquisition in 1993,
Dynamotion has incurred large losses due to continuing financial and market
difficulties.
RECENT DEVELOPMENTS
For the last two years, Dynamotion has taken actions to dispose of
operations and product lines which produce negative cash flow or do not fit with
Dynamotion's long-term strategies. Originally, Dynamotion consisted of six
operating divisions and through an aggressive reorganization program, Dynamotion
has divested all non-core operating divisions. As of the date of this Proxy
Statement/Prospectus, only the business of the Dynamotion division survives.
These divestitures included:
1994 and 1995 Divestitures. On March 30, 1995 and April 3, 1995,
Dynamotion sold its Oxberry division and its 53% equity interest in Vision
Ten, respectively, for $350,000 and the assumption of certain liabilities.
In addition, on August 4, 1995, Dynamotion sold its CSA division to an
individual for the assumption of $150,000 of certain liabilities.
Accordingly, the Oxberry division, the Vision Ten division and the CSA
division were reported as discontinued operations in 1994. See "Dynamotion
Management's Discussion and Analysis of Financial Results" and Note 1 to
the Notes to Dynamotion's Financial Statements.
1996 Divestitures. On August 20, 1996, Dynamotion sold substantially
all of the assets associated with its ATI router product line to Advance
Technologies, Inc. On September 30, 1996, Dynamotion sold substantially all
of the assets associated with its Production Machine Control ("PMC")
division to Dynamotion's largest supplier. See
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"Dynamotion Management's Discussion and Analysis of Financial Results" and
Note 1 to the Notes to Dynamotion's Financial Statements.
On January 17, 1997, Dynamotion was notified that the Dynamotion Common
Stock, the Class A Stock and the Z Warrants had been delisted from the Nasdaq
SmallCap Market System due to non-compliance with the capital and surplus
requirements necessary to maintain Dynamotion's listing under the Nasdaq rules.
PRODUCTS
Drilling Products
Dynamotion produces computer-controlled drilling equipment which is sold to
manufacturers of PCBs and semiconductor packages. The drilling machines are used
to produce thousands of very small holes, sometimes as small as .004" in
diameter, which is smaller than a human hair.
Four product lines of computer-controlled drilling equipment are produced
by Dynamotion: DM 9400/9500 with a patented vacuum pre-load air bearing guiding
design for the high dynamic stability necessary for micro-drilling; Six-PAK(TM)
with its new innovative design (economical, accurate, compact and extremely
productive) for the commercial, high volume PCB market; Modular Systems offer
the same characteristics as the DM 9400/9500 to the prototype and quick turn
market; and 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.
DM 9400/9500. Dynamotion's 9400/9500 drilling machines are currently
used by manufacturers who require accelerated micro hole drilling. This
series of drilling machines includes over 10 design innovations (five of
which are patented) which form the fundamentals necessary to drill small
holes. Some of the unique machine design characteristics which the
9400/9500 is recognized for in the industry include: low mass positioning
systems, stiff table design, broad machine architecture, patented vacuum
preloaded air bearings, and rigid Z-axis mechanics. The 9400/9500 machines
are available in either four or five spindle configurations which can be
specified by the customer. This line of equipment has a large range of
users, starting with contract manufacturers through sophisticated R&D
companies.
Six-PAK(TM). The Six-PAK(TM) is based on a new design concept. The
unique architecture reduces the size of the machine to 58% of the
equivalent in-line design, preserving floor space for the customer. The
efficient architecture has three stations in the front of the machine and
three in the back. Historically, the double-sided machine has not been very
popular because of the inconvenience of front and rear loading. The
Six-PAK's(TM) unique telescopic table solves this problem by allowing the
table to move forward. This makes for easy loading and unloading of
material at all six stations from the front. A split-axis design, stiff
table, and linear Z-axis drive mechanisms provide the stability and
stiffness necessary to accurately drill PCB's at high speeds. The
Six-PAK(TM) is designed to appeal to customers producing high volumes of
commercial PCB's where high productivity is a key requirement.
1000 Series Modular Systems. Based upon the same technology used in
the construction of the 9400/9500, the single spindle modular units offer
the customer a high
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degree of flexibility. Modules can be added to meet a customer's changing
production requirements. Available options allow the machine to be
configured as a drill, drill/router, optimization station, and automatic
loading drill.
Smart Drill(TM). The Dynamotion Smart Drill(TM) is an economical
system for optimizing multilayers with accuracies unobtainable by any other
known commercially available device. X-ray units used for this task require
the job be taken to an off-line stand alone machine, which results in lower
productivity. The Smart Drill(TM) uses a video system to examine a conical
hole made by a custom designed drill bit. This hole exposes a special
fiducial mark on each layer of the panel. The marks provide the necessary
data to evaluate any stretch, shrink and rotation of the layers in the
multilayer. This highly accurate system was designed for sophisticated
multilayer board and semiconductor package 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 semi-conductor 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.
A 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.
SMART(TM) Driller/Router. Dynamotion developed the SMART(TM)
Driller/Router based on the SMART(TM) drill technology to satisfy industry
needs. The SMART(TM) Driller/Router is equipped with a special high torque
and high rpm air bearing spindle, to provide a sufficient rpm for routing
with small diameter tools. The SMART(TM) Driller/Router can maintain a
routing accuracy with respect to the fiducial marks of +/-0.0005" and
obtain it automatically by using the vision system without operator
intervention. Multi-image packaging can be optimized individually for
maximum accuracy.
Six-PAK(TM) Router Drill. This machine is an alternate hardware
configuration which utilizes the patented architecture of the Six-PAK(TM)
platform. This machine was designed to replace older technology routers as
tighter tolerance product demands increase. See the description of the
Six-PAK(TM) drilling product set forth above.
Field Service
The field service department provides machine installations, customer
training/support and repair and maintenance services for all drills and routers,
including services provided by the one-year warranty extended to customers. In
addition, the field service department sells new and used parts to Dynamotion's
existing customer base.
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CUSTOMERS
Current customers of Dynamotion include companies such as IBM, Johnson
Matthey, Advanced Circuits, Inc., and Cuplex.
During 1995, three companies, specifically Greatsino Electronics, Ltd.,
Howteh Enter. Co. (sales representatives for Dynamotion) and Advanced Circuits,
Inc., in the aggregate, accounted for more than 35% of Dynamotion's total
revenues and the top five customers accounted for approximately 43% of
Dynamotion's total revenues. During 1996, IBM, Johnson Matthey and Advanced
Circuits, Inc. (a subsidiary of Johnson Matthey), accounted for approximately
21%, 16% and 13%, respectively, of Dynamotion's total revenues. During 1996, the
top five customers accounted for approximately 61% of Dynamotion's total
revenues. The loss of any of these customers would have a material adverse
effect on the business of Dynamotion.
SALES AND MARKETING
In its domestic markets, Dynamotion's products are sold by in-house sales
executives. In its Canadian and Asian markets, Dynamotion has independent field
service representatives who assist Dynamotion's sales management team in the
marketing and servicing of Dynamotion products. Dynamotion displays its products
at specific trade shows in the United States, Europe and Asia.
During the 1996 and 1995 fiscal years, Dynamotion recorded $2.0 million and
$6.7 million, respectively, in sales to companies located in Asia. Dynamotion
sells in U.S. dollars to all customers and, accordingly, currency fluctuations
which increase the price of Dynamotion's products to its foreign customers can
adversely impact the level of Dynamotion's export sales from time to time.
Because all sales are generated domestically, Dynamotion does not recognize
translation profit or loss.
COMPETITION
Dynamotion competes with approximately 10 other companies both domestic and
foreign, in the computer-controlled drilling machine market. Dynamotion's
primary competitors in such market are Hitachi and Excellon, both of which have
significantly greater resources than Dynamotion. Dynamotion believes it has
competitive advantages in the high technology market because of its patented
innovations, its respected customer base, and its recognition as having a
technologically superior product.
INTELLECTUAL PROPERTY
Except for the patents described below, Dynamotion relies on proprietary
know-how and employs various methods, including confidentiality agreements with
its executives and appropriate vendors, to protect the source code, concepts,
ideas and documentation of its proprietary information. However, such methods
may not afford complete protection and there can be no assurance others will not
independently develop such know-how or obtain access to Dynamotion's know-how of
software codes, concepts, ideas and documentation.
Dynamotion currently holds six United States patents and two European
patents covering its drilling systems. These patents expire between 2005 and
2013.
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MANUFACTURING
Dynamotion's machines are produced at its facility in Santa Ana,
California.
Dynamotion utilizes commercially available component parts and relies on
vendors for some of the special parts and subassemblies required. Although
Dynamotion currently obtains most of the components required from single
sources, many of these parts are available from multiple sources. However, due
to negative payment histories with certain suppliers and Dynamotion's weak
financial condition, some of the alternative supply sources are not available to
Dynamotion. Finished subsystems are assembled and tested on Dynamotion's
premises by its technicians.
RESEARCH AND DEVELOPMENT
Dynamotion dedicates considerable resources to research and development to
further enhance its existing products and to create new products and
technologies. During the years ended December 31, 1996 and 1995, Dynamotion
expended $1,729,000 and $1,464,000, respectively, for design, development and
project management activities for existing and future development. All such
costs are expensed in the period in which they are incurred.
EMPLOYEES
As of December 31, 1996, Dynamotion had 72 employees, of which 71 were
full-time employees, 10 were in executive and administrative positions; 13 were
in research and development; 30 were in factory/production related positions;
and 19 were in sales, marketing and customer service.
Dynamotion is not a party to any collective bargaining agreement.
Dynamotion considers its relationship with its employees to be good.
PROPERTIES
The location and general description of the principal properties owned or
leased by Dynamotion are set forth in the table below:
<TABLE>
<CAPTION>
Location Principal Function Square Footage Ownership
- -------- ------------------ -------------- ---------
<S> <C> <C> <C>
Santa Ana, CA corporate headquarters/ 23,100 Leased (1)
manufacturing
Santa Ana, CA engineering 3,300 Leased (2)
Santa Ana, CA marketing/customer 3,300 Leased (3)
service
- ----------------
(1) The lease, which provides for base rental payments of $8,663 per
month, expires on September 30, 1998.
(2) The lease, which provides for base rental payments of $1,550 per
month, expires on August 31, 1997.
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(3) The lease, which provides for base rental payments of $1,550 per
month, expires on August 31, 1997.
</TABLE>
Dynamotion believes its properties are in good condition, suitable for its
operations and adequately insured. Dynamotion has not in the past invested, and
does not in the future intend to invest, in real estate properties.
LEGAL PROCEEDINGS
On December 10, 1996, Hamlet & Smith, Inc. filed a complaint against
Dynamotion in the United States District Court, Central District of California,
Santa Ana Division, alleging breach of contract, wrongful termination, bad faith
breach of contract, and for reasonable value of services rendered. The claims
are based on the termination of a sales representative agreement between
Dynamotion and Hamlet & Smith. The complaint requests general damages of
$967,000, as well as consequential damages, punitive damages, costs of suit and
pre-judgment interest. Dynamotion intends to vigorously defend itself. However,
at this time an estimate of the likely outcome, or an estimate of the upper
amount of the range of potential loss, if any, is not possible. See Note 7 to
the Notes to Dynamotion's Financial Statements.
On February 4, 1997, Robert G. Smith filed a complaint against Dynamotion
in the Superior Court of the State of California for the County of Orange
alleging breach of contract and claiming reasonable value of services rendered.
The claims are based on an alleged third party beneficiary relationship arising
from an alleged sales agent arrangement. The complaint requests damages of
$212,637, cost of suit, reasonable attorneys' fees and interest. Plaintiff's
Motion for Writ of Attachment was granted on February 27, 1997. Dynamotion
intends to vigorously defend itself. However, at this time, an estimate of the
likely outcome, or an estimate of the upper amount of the range of potential
loss, if any, is not possible. See Note 7 to the Notes to Dynamotion's Financial
Statements.
In addition, Dynamotion has been named as a defendant in various matters in
the normal course of business, including various matters seeking collection of
past due amounts owed.
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INFORMATION CONCERNING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 1, 1997, certain information
relating to the ownership of Dynamotion's Capital Stock by (i) each director ,
(ii) all directors and officers as a group, and (iii) any persons (including any
"group" as used in Section 13(d)(3) of the Securities Exchange Act of 1934),
known by Dynamotion to own beneficially 5% or more of the Capital Stock. Except
as otherwise indicated, the shareholders listed in the table below have sole
voting and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
Class A Class B Dynamotion
Stock Stock Common Stock Percentage of
------------------------ --------------------------- -------------------------- Shareholder
Number of Percent of Number of Percent of Number of Percent of Total Voting
Name and Address Shares Class(1) Shares Class(1) Shares Class(1) Power
- ---------------- ----------- ---------- ----------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jon R. Hopper (2)(7) 0 0 0 0 463,750(4)(5) 14.0 7.1
1639 E. Edinger Avenue
Santa Ana, CA 92705
Michael D. Henton (2)(13) 0 0 0 0 62,500(6) 2.2 1.0
1500 Quail Street, Suite 550
Newport Beach, CA 92660
Wojciech Kosmowski (2) 0 0 0 0 309,264(4)(8) 10.17 5.11
1639 E. Edinger Avenue
Santa Ana, CA 97205
Les Barkley (2) 0 0 0 0 82,500(6) 2.8 1.3
18201 Von Karman
Suite 460
Irvine, CA 92715
Howard J. Jelinek (2) 0 0 0 0 62,500(6) 2.2 1.0
119 Sunset Terrace
Laguna Beach, CA 92651
H.J. Meyers & Co., Inc. (3) 102,500(9) 9.8 0 0 0 0 2.4
180 Maiden Lane
New York, NY 10038
Royal Miles 0 0 250,000(10) 11.1 0 0 4.6
PO Box 238
Northvale, NJ 07647
Dynamotion Investment 0 0 2,000,000(10) 88.9 330,302(11) 10.4 36.5
L.L.C.(12)
Keith Hightower
Ted Walsh
339 South Street
Morristown, NJ 07950
All Directors and Executive 0 0 2,000,000 88.9 1,304,253 33.6 35.2
Officers as a Group
(7 persons)
- -------------------
(1) Percent of class calculated on the basis of the amount of outstanding
securities, plus for each individual, such securities which the individual
has the right to acquire within 60 days of March 1, 1997 pursuant to
options, warrants, conversion privileges or other rights.
(2) Director of Dynamotion.
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(3) The natural person exercising dispositive and voting power with regard to
Dynamotion's securities held by H.J. Meyers & Co., Inc. (formerly known as
Thomas James Associates, Inc.) is James Villa, the President of H.J. Meyers
& Co., Inc.
(4) Includes 21,250 and 19,688 shares of Dynamotion Common Stock issuable upon
exercise of options granted under Dynamotion's 1991 Stock Option Plan to
Messrs. Hopper and Kosmowski, respectively.
(5) Includes 31,250 shares of Dynamotion Common Stock issuable upon exercise of
immediately exercisable options granted under Dynamotion's 1993 Acquisition
Stock Option Plan to Mr. Hopper. Includes 36,250 shares of Dynamotion
Common Stock issuable upon exercise of immediately exercisable options
granted under Dynamotion's 1995 Executive Stock Option Plan to Mr. Hopper.
Includes 375,000 shares of Dynamotion Common Stock issuable upon exercise
of immediately exercisable options granted.
(6) Includes 62,500, 82,500 and 62,500 of shares to Mr. Jelinek, Mr. Barkley,
and Mr. Henton, respectively, of Dynamotion Common Stock issuable upon
exercise of immediately exercisable options granted.
(7) Effective May 8, 1996 Mr. Hopper was appointed the Chairman of the Board of
Dynamotion.
(8) Includes 15,625 each of shares of Common Stock issuable upon exercise of
immediately exercisable options granted under Dynamotion's 1995
Comprehensive Stock Option Plan and 1995 Executive Stock Option Plan, and
258,326 shares of Dynamotion Common Stock owned by Mr. Kosmowski.
(9) Represents shares of Class A Stock issuable upon exercise of warrants
issued to the underwriters of the preferred stock offering in July 1993. As
a condition to consummation of the Merger, these warrants will be
terminated.
(10) Represents new shares of Class B Stock.
(11) Represents warrants to acquire 330,302 shares of Dynamotion Common Stock.
As of the date of this Proxy Statement/Prospectus, these warrants were
exercised.
(12) Ted Walsh and Keith Hightower, each a director of Dynamotion, are
affiliates of Dynamotion Investment L.L.C. and may be deemed to share
voting and investment power as to all such shares.
(13) Corporate Secretary of Dynamotion.
</TABLE>
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DYNAMOTION MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL RESULTS
GENERAL
This filing contains forward-looking statements which involve risks and
uncertainties. Dynamotion's actual future results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause a difference include, but are not limited to, product demand and the rate
of market acceptance, the effect of economic conditions, the impact of
competitive products and pricing, delays in product development, capacity and
supply constraints or difficulties, general business and economic conditions,
and other risks detailed in Dynamotion's Securities and Exchange Commission
filings.
Dynamotion has experienced substantial losses and cash flow drains from
operations in the past few years. At December 31, 1996 current liabilities
exceed current assets by approximately $4.9 million and total liabilities exceed
total assets by $898,000. Dynamotion is in default of its operating line of
credit covenants, is in arrears on payments on other notes payable and has
substantial past due amounts owed to vendors. Certain vendors have placed
Dynamotion on cash payment terms for purchases. These conditions call into
question the ability of Dynamotion to continue as a going concern.
Dynamotion's management attributes Dynamotion's financial condition and
recent losses to a number of factors. The losses in the past years have severely
depleted Dynamotion's resources and as a result operating and financing costs
have increased. Management's ability to efficiently schedule production,
purchase materials in economic quantities, negotiate satisfactory pricing for
the sale of its products, reorganize operating departments, etc. are limited.
The costs of financing have increased both in terms of the stated rates and
legal costs associated with agreements. Dynamotion's backlog has increased but
management has not been able to increase production output. Several arrangements
have been made to increase cash flow by accelerating payment dates of
receivables at substantial discounts.
Dynamotion's management has taken a number of actions to reduce operating
expenses and losses. These include disposing of operations and product lines
that did not fit with Dynamotion's long term strategies and were producing
losses, 30% reductions in work force in the second quarter of 1996 and
replacement of senior management members in 1995 and 1996. While management has
not quantified an amount, it believes substantial additional capital is
necessary for Dynamotion to survive.
The primary plan of Dynamotion's management to increase its chances for
survival is a planned merger. Dynamotion executed a merger agreement with ESI in
January 1997. This agreement is subject to approval by Dynamotion's shareholders
which is in process. Under certain conditions, if management elects not to
complete this merger and Dynamotion subsequently merges with any other party
within one year, it will owe ESI a $1 million termina tion fee.
Dynamotion's management is not currently pursuing other mergers or other
sources of capital. If the ESI merger is not consummated, Dynamotion's financial
position may be such that other sources of capital will not be available to it.
Management believes there is substantial doubt about Dynamotion's ability to
survive without additional financing. If Dynamotion is
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unable to continue to operate and is forced to liquidate its assets, it may not
recover the assets' recorded amounts.
YEARS ENDED DECEMBER 31, 1995 AND 1996
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED, DECEMBER 31,
(amounts in 000's)
$ INCREASE % INCREASE
1995 1996 (DECREASE) (DECREASE)
----------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 20,512 100% $ 16,214 100% $ (4,298) (21%)
Total cost of sales 17,075 83% 12,992 80% (4,083) (24%)
-------- ---- -------- ---- -------- ----
Gross profit 3,437 17% 3,222 20% (215) (6%)
Selling, general and
administrative
expenses 4,473 22% 4,516 28% 43 1%
Research and
development 1,464 7% 1,729 11% 265 18%
Amortization of
intangibles 791 4% 417 3% (374) (47%)
Goodwill write-off 3,517 17% -- -- (3,517) (100%)
Loss on sale of
division and assets -- -- 575 3% 575 100%
-------- ---- -------- ---- -------- ----
Loss from operations $ (6,808) (33%) $ (4,015) (25%) 2,793 41%
======== ==== ======== ==== ======== ====
</TABLE>
Total revenues were $16.2 million, compared to total revenues of $20.5
million for the corresponding period in 1995. Total revenues from the sale of
drilling and routing machines were $13.3 million, compared to $17.3 million for
the corresponding period in 1995. As compared to 1995, 1996 unit volume
decreased 35%. Revenue levels achieved were significantly below Dynamotion's
expectations which is the result of two issues. First, the slowdown in demand in
the worldwide printed circuit board industry negatively impacted sales. Also,
Dynamotion experienced difficulty obtaining commitments from potential buyers of
its product due to its financial condition. During 1996, three customers
accounted for approximately 50% of Dynamotion's revenues. Orders from these
customers did not take place under formal contracts but rather took place on the
basis of multiple purchase orders. Under a purchase order relationship, there is
no assurance that the customer will issue additional purchase orders in the
future. The second issue is the sale of the ATI router product line in August
1996 which accounted for $7.0 million and $1.4 million of machine revenue in the
years ended December 31, 1995 and 1996, respectively. Although router machine
revenues were significant during 1995, Dynamotion sold its router line in
response to the 1996 slowdown and to enable Dynamotion to focus resources on
Dynamotion's higher margin, more technologically advanced products. Field
service revenue, which includes parts sales and repairs and maintenance sales,
remained comparable at $2.9 million for the years ended December 31, 1996 and
1995.
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Cost of sales for the year ended December 31, 1996 was $13.0 million, or
80% of revenues, compared to $17.1 million, or 83% of revenues for the
corresponding period in 1995. The percentage cost of sales decrease is due
primarily to charges against 1995 operations for revised estimates of reserves
for slow moving and obsolete inventory which were not as large in 1996 partially
offset by an increase in the cost of sales percentage for the ATI and PMC
divisions which were sold.
However, the cost of sales percentage for 1996 remains high primarily due
to the sale of several machines at low margins including the sale of two
engineering prototype machines at negative margins and higher than expected
overhead costs resulting from low machine production volume. Decreasing the cost
of sales percentage in the future is contingent upon product mixes, prices,
increased volume and improved manufacturing efficiencies after the proposed
merger with ESI. In response to the industry slowdown and Dynamotion's financial
performance, in April and June of 1996, Dynamotion reduced its workforce by
approximately, 10% and 20%, respectively, in an attempt to achieve better
margins at current or reduced sales levels. A significant portion of the June
workforce reduction were employees related to the ATI router product line, which
as previously noted, was sold in August 1996.
Selling, general and administrative expenses for the year ended December
31, 1996 was $4.5 million, or 28% of revenues, compared to $4.5 million, or 22%
of revenues for the corresponding period in 1995. The percentage increase (as a
function of revenues) over the comparable period in 1995 is primarily due to the
21% decrease in total revenues. In an effort to further contain costs as a
result of the revenue decrease, Dynamotion reduced its workforce in April and
June of 1996 and sold its PMC division in September of 1996. The PMC division
incurred approximately $25,000 per month in administrative expenses. Other
factors impacting administrative expenses include $107,000 of bad debt expense
recorded during the third and fourth quarters of 1996 in response to specific
delinquent receivables , $200,000 of severance accrued for two individuals in
senior management terminated in 1996, an accrual of $290,000 for losses related
to legal matters, an increase in legal fees of $130,000 incurred in the sale of
two entities previously noted and legal fees incurred related to the proposed
merger with ESI. Effective as of December 31, 1996, Dynamotion eliminated
virtually all of its domestic outside sales representatives thereby anticipating
a reduction in its future commission expense.
Research and development expenses for the year ended 1996 was $1.7 million,
or 11% of revenues, compared to $1.5 million or 7% of revenues for the
corresponding period in 1995. The increase in research and development expenses
of approximately $265,000 is primarily attributable to an increase in labor
costs and research and development materials related to the development of
several new products, of which two have already been introduced into the
production line and sold. Additionally, depreciation expense increased
approximately $78,000 related to the addition of a testing machine.
Amortization of intangible assets for the year ended December 31, 1996 was
$417,000, compared to $791,000 for the corresponding period in 1995. The
$374,000 decrease is primarily due to the elimination of amortization for $3.5
million of goodwill written-off in June 1995 and the elimination of deferred
financing costs related to the original credit facility superseded in March 1996
by a new debt facility entered into with IBJ Schroder Bank and Trust Co., which
is described under "Dynamotion Management's Discussion and Analysis of Financial
Results--Liquidity and Capital Resources."
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On August 20, 1996, Dynamotion sold substantially all of the assets
associated with its ATI router product line. On September 30, 1996, Dynamotion
sold substantially all of the assets associated with its PMC Division. The
following table discloses pro-forma information for the years ended December 31,
1995 and 1996 as though the two asset sales occurred at the beginning of the
periods:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
Revenue $11,564 $13,520
Loss from Continuing
Operations (8,210) (4,729)
Net Loss (8,380) (4,729)
Earning (loss) per share
Loss from Continuing
Operations (5.03) (1.81)
Net Loss (5.13) (1.81)
Gross profit generated from the PMC division and ATI router product line
for the year ended December 31, 1995 and 1996 was $1.1 million, and $.1 million,
respectively, on revenue of $8.9 million and $2.7 million, respectively.
The sale of the ATI router division resulted in a loss of $920,000 after
subsequent negotiations to accelerate cash payments. These negotiations to
accelerate cash payments, resulting in a total discount of $530,000, were the
result of management's efforts to accelerate cash payment on the receivables
related to the sale. The sale of the PMC division resulted in a gain of
$345,000. See Note 1 to Notes to Dynamotion's Financial Statements.
Interest expense was $750,000 for the year ended December 31, 1996,
compared to $614,000 for the corresponding period in 1995. The increase in
interest expense is primarily a result of $53,000 of interest expense recorded
in the third quarter of 1996 related to a significant overdue trade payable due
to the purchaser of the PMC division and the increase in Dynamotion's
outstanding indebtedness under the revolving credit facility from approximately
$2.2 million on December 31, 1995 to $5.6 million on December 31, 1996 under the
New Debt Facility. The higher bank level is the result of funding working
capital needs, including the funding of operating losses. In addition,
Dynamotion has experienced delays in the collection of several large trade
receivables. During the fourth quarter of 1996, Dynamotion suspended collection
efforts on a $468,000 receivable from the sale of two machines in the first
quarter of 1996. At December 31, 1996, $1.3 million of Dynamotion's receivables
were over 60 days old. Of these receivables, over $800,000 is from well
established companies whose payment policy is in excess of 60 days. Management
has evaluated the remaining receivables and believes it has adequate reserves
for potential losses.
At December 31, 1996, Dynamotion had net deferred tax assets of $5.3
million. These assets consist primarily of unused tax carryforwards arising from
operating losses. Dynamotion has provided a valuation allowance against these
assets. At December 31, 1996, Dynamotion had no net deferred taxes recorded on
its balance sheet. Ultimate realization of these assets is contingent upon
Dynamotion's ability to generate sufficient future taxable income. In addition,
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federal and state regulations place limits on the availability of carryforwards
in situations where a "change in ownership" has occurred. Dynamotion has
experienced significant changes in stock ownership in the past and with the
anticipated merger with ESI, management believes that utilization of its loss
carryforwards will be limited.
For the reasons set forth above, Dynamotion incurred a net loss for the
year ended December 31, 1996, of $4.8 million compared to a net loss of $7.3
million for the comparable period in 1995.
The Company reported a 1996 fourth quarter loss of approximately $2.5
million. The losses for this period increased substantially due to discounts of
$530,000 granted to ATI in order to accelerate cash payments; an accrual of
$200,000 in severance payments for two individuals in senior management; the
reversal of $170,000 in gross profit related to a sale for two machines; an
accrual of $290,000 for losses related to legal matters; and $130,000 in legal,
accounting and consulting expenses due to the sale of ATI and PMC and the
pending merger of the Company into ESI.
YEARS ENDED DECEMBER 31, 1994 AND 1995
The following table presents condensed financial data of Dynamotion for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(AMOUNTS IN 000'S)
$ INCREASE % INCREASE
1994 1995 (DECREASE) (DECREASE)
------------------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 15,934 100% $ 20,512 100% $ 4,578 29%
Total cost of sales 10,536 66% 17,075 83% 6,539 62%
-------- ---- -------- ---- -------- ----
Gross profit 5,398 34% 3,437 17% (1,961) (36%)
Selling, general and
administrative
expenses 3,321 21% 4,473 22% 1,152 35%
Research and
development 1,424 9% 1,464 7% 40 3%
Amortization of
intangibles 788 5% 791 4% 3 -
Goodwill write-off - - 3,517 17% 3,517 100%
-------- ---- -------- ---- -------- ----
Loss from operations $ (135) (1%) $ (6,808) (33%) $ (6,673) (4,942%)
======== ==== ======== ==== ======== =======
</TABLE>
Total revenues from continuing operations for the year ended December
31,1995 were $20.5 million compared to total revenues from continuing operations
of $15.9 million for the corresponding period in 1994. Total revenues for the
Dynamotion/ATI division were $19.9 million in 1995, compared to $15.2 million in
1994, representing a 31% increase. The increase in revenues for the
Dynamotion/ATI division is primarily attributable to an increase in sales
volume. Sales volume increased in 1995 primarily for two reasons. First, 1995
included a complete year of sales from the Six-PAK(TM) product line first
introduced in mid 1994. Second, 1995 revenues included a new customer, Greatsino
Electronics, Ltd., which accounted for approximately 20% of Dynamotion's 1995
revenues. The PMC division's total revenues were
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$585,000, compared to $728,000 for 1994. The decrease in revenues is a result of
the division focusing its efforts on supplying Dynamotion/ATI's drilling
machines with the PMC controller, combined with a decrease in sales by PMC to
outside customers during 1995.
Cost of sales for the year ended December 31, 1995 were $17.1 million or
83% of revenues, compared to $10.5 million, or 66% of revenues for the
corresponding period in 1994. The increase in cost of sales is attributable to
several factors. First, as a result of the refinement of certain costing
procedures and the numerous infrastructure changes implemented during 1995,
management recorded charges against operations for its revised estimates of
reserves for slow moving and obsolete inventory. Second, numerous machines were
sold during the first three quarters of 1995 at low or negative gross margins as
a result of Dynamotion's working capital deficiency in order to expedite the
sales. Several of these sales also included "trade-ins" to generate sales which
reduced margins on subsequent sales from the used machines. Third, Dynamotion
introduced the Six-PAK(TM) product line in mid 1994. The types of customers
targeted for this product line are different from Dynamotion's historical
customer base and Dynamotion intentionally priced these machines to achieve
market penetration which has resulted in lower margins.
Selling, general and administrative expenses for the year ended December
31, 1995 were $4.5 million, or 22% of revenues, compared to $3.3 million, or
21%, of revenues for the corresponding period in 1994. Although selling, general
and administrative expenses increased $1.2 million, the percentage (as a
function of revenues) remained comparable to 1994 primarily due to the 29%
increase in total revenues over the corresponding period in 1994, which assisted
in absorbing selling, general and administrative expenses when reflected as a
percentage of revenues. Several items contributed to the dollar increase. First,
a $314,000 increase related to commission expense incurred by outside sales
representatives, as a result of the increase in sales volume of machines.
Additionally, a $300,000 increase in professional fees incurred compared to 1994
primarily as a result of the numerous corporate and administrative issues
arising from Dynamotion's liquidity problems and its various organizational
changes proposed in Dynamotion's proxy statement. Furthermore, Dynamotion
incurred a $200,000 increase in salaries and wages compared to 1994 primarily as
a result of the increased staffing in the sales and marketing departments.
Research and development expenses for 1995 and 1994 remained constant at
$1.4 million or 7% and 9%, respectively, of revenues.
Amortization of intangible assets for the year ended December 31, 1995, was
$791,000, compared to $788,000 for the corresponding period in 1994. In December
1995, Dynamotion wrote-off approximately $234,000 of loan organization fees
related to prior loan agreements. Exclusive of the $234,000 write-off,
Dynamotion incurred $557,000 of amortization expense for 1995. The $231,000
decrease from 1994 is primarily due to previous organization costs which became
fully amortized in September 1994, and to the elimination of amortization for
goodwill written off in June 1995.
In June 1995, the Company determined that its intangible assets may have
been impaired based on an analysis of discounted cash flow projections, net of
interest expenseand the determination of the value placed by the marketplace on
the intangible assets of the Company using the methodology as described in Note
2 to Notes to Dynamotion's Financial Statements. Based on this analysis, the
Company determined that the difference between the market capitalization of the
Company increased by net tangible liabilities of approximately $841,000 was
less than the Company's recorded amounts for intangible assets by approximately
$3.5 million.
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Accordingly, the Company wrote off goodwill of $3.5 million by a charge against
operations. The goodwill was originally recorded at approximately $4.2 million
as a result of acquisitions in 1989 and 1993. Based on the analysis performed,
the Company determined that the patents were not impaired.
Interest expense was $614,000 for the year ended 1995, compared to $325,000
for the corresponding period in 1994. The increase is attributable to a higher
bank debt level maintained during 1995, in addition to the overall weighted
average increase in the IBJ base lending rate.
For 1995, Dynamotion recorded a deferred income tax benefit from continuing
operations of $264,000 compared to $150,000 in 1994. (See Note 6 to the Notes to
Dynamotion's Financial Statements for further information.)
For the reasons set forth above, Dynamotion incurred a net loss from
continuing operations for the year ended December 31, 1995 of $7,158,000,
compared to $310,000 for the comparable period in 1994.
Dynamotion completed the sale of its Oxberry division on March 30, 1995,
the sale of its 53% equity interest in Vision Ten on April 3, 1995, and the sale
of its CSA division on August 4, 1995. Accordingly, the Oxberry division, the
Vision Ten division and the CSA division were reported as discontinued
operations in 1994, with an accrual for estimated carrying costs and operating
costs to be incurred in 1995, pending the completion of their sale. Therefore,
except for $170,000, due to a shortage in the prior year estimate, no results of
operations for these entities have been reported in 1995. The $170,000
represents a shortfall in the prior year estimate due to the unexpected duration
required to complete the sale of the CSA division.
For the reasons set forth above, Dynamotion incurred a net lossafter
discontinued operationsfor the year ended December 31, 1995, of $7,328,000,
compared to a net loss after discontinued operations of $3,080,000 for the
comparable period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
On March 20, 1996, Dynamotion entered into the new debt facility with IBJ
Schroder Bank and Trust Co. (the "New Debt Facility"), superseding all terms of
Dynamotion's original credit facility. The New Debt Facility provides for up to
$7.0 million in senior secured financing segregated into two credit facilities
secured by a first priority lien against all of Dynamotion's assets. The first
credit facility allows for borrowings on a revolving line of credit up to $4.0
million with advances up to 80% of eligible accounts receivable and up to 40% of
eligible inventory (subject to a sub-limit of $1.0 million). The second credit
facility was a $2.5 million term loan amortizing in monthly installments of
$27,778 in year one, $45,000 in year two, $55,000 in year three, and final
payment aggregating $966,664 due at December 31, 1999, the date of the maturity.
Additionally, in August 1996 Dynamotion made a $300,000 payment against the term
loan from the proceeds of the sale of the ATI product line thereby reducing the
amount due at maturity to $666,664. Additional repayments are required equal to
25% of excess cash flow (as defined in the credit agreement) of each fiscal year
period payable on April 15th of the subsequent year. Interest, due monthly, is
at IBJ's base rate plus 1.75% on the revolver portion of the loan and at IBJ's
base rate plus 2.25% on the term loan portion. A collateral evaluation fee and
unused facility fee, due monthly, total $1,500, and .5% per annum, respectively.
As of December 31, 1996 Dynamotion's outstanding indebtedness under the line
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of credit and term loan was approximately $3.7 million and $1.9 million,
respectively. As of December 31, 1996, Dynamotion had approximately $236,000 of
availability provided by the New Debt Facility. As of December 31, 1996 and
through the date of this Proxy Statement/Prospectus, Dynamotion is in violation
of substantially all of the financial loan covenants contained in the New Debt
Facility. Although no assurances can be given, management believes that IBJ will
not attempt to accelerate payment on the New Debt Facility in the near term. If
a default is declared and demand is made for payment, Dynamotion would not be
able to meet such demand.
Concurrent with the aforementioned agreement, on March 20, 1996, Dynamotion
issued to new investors 2,000,000 shares of its Class B Stock and warrants to
purchase 330,302 shares of Dynamotion Common Stock for a total price of $2.0
million. The net proceeds were applied against the outstanding indebtedness
under Dynamotion's New Debt Facility.
In addition, in connection with such investment, Dynamotion entered into a
consulting agreement, with the aforementioned investors, pursuant to which
Dynamotion pays the consultant a quarterly fee equal to three-tenths of one
percent of Dynamotion's net revenues for each fiscal quarter until termination
of the consulting agreement, which expires in 2001. In July 1996, Dynamotion
issued 250,000 shares in a private placement of its Class B Stock for a total
price of $250,000. The shares are pari passu with the original issuance of Class
B Stock on March 20, 1996 with the following exceptions (i) the shares have no
demand registration rights and (ii) the piggyback registration rights associated
with such shares are subordinate to the rights of the other shares of such
preferred stock. The net proceeds of the private placement were applied against
the outstanding indebtedness under Dynamotion's New Debt Facility. The Class B
Stock requires an $.08 per share cumulative dividend increasing to $.12 per
share in 2001. At December 31, 1996, unpaid cumulative dividends totaled
$130,000.
On August 20, 1996 Dynamotion sold substantially all of the assets (other
than finished goods) associated with its ATI router product line to Advanced
Technologies, Inc. ("Purchaser"). The sales price for the assets consisted of
(a) $1,100,000 ($300,000 paid in cash which was applied to Dynamotion's term
loan balance under the New Debt Facility with the balance of the purchase price
paid by delivery to Dynamotion of a $800,000 promissory note (the "Note")) and
(b) the value of certain assumed liabilities. Principal under the Note was
payable monthly at a rate equal to 15% of Purchaser's monthly gross revenue and
interest at prime is payable quarterly with all unpaid principal and unpaid
accrued interest due on December 31, 1997. On January 3, 1997, Dynamotion
negotiated with the Purchaser and accepted a $500,000 cash payment as payment in
full satisfaction of the $800,000 Note. Dynamotion negotiated this settlement to
fund cash flow needs and recorded an expense in December 31, 1996 for this
$300,000 discount.
Pursuant to the terms of a Finished Goods Agreement (the "Agreement"), the
finished goods associated with Dynamotion's ATI router product line were to be
sold to the Purchaser. Such finished goods were transferred to the Purchaser as
its customers agreed to purchase the finished goods. No revenue was recognized
on these transfers. The Purchaser agreed, subject to certain conditions, to
acquire on December 31, 1996 all finished goods not sold to its customers on or
before such date. Payment for these finished goods was to be made through June
30, 1997. Pursuant to the terms of the Agreement, a receivable from Purchaser
for $329,000 was recorded at December 31, 1996 resulting in a loss of
approximately $76,000. In addition, Dynamotion is currently in negotiations with
Purchaser to accelerate all amounts due and owing to Dynamotion, and Dynamotion
estimates that this will result in a discount of approximately $230,000 which
has been recorded at December 31, 1996.
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Dynamotion sold substantially all of the assets associated with its PMC
division on September 30, 1996 to Dynamotion's largest supplier (the "Buyer").
The purchase price for the assets consisted of (a) $1,000,000 ($300,000 note
receivable from the Buyer and $700,000 reduction in $1.2 million of outstanding
trade payables due the Buyer) and (b) the value of certain assumed liabilities.
The $300,000 receivable was paid in full in October 1996. In addition,
Dynamotion agreed to pay on or before December 31, 1996 the remaining $500,000
in outstanding trade payables to the Buyer. Currently, Dynamotion has not paid
the $500,000 nor has the Buyer made demand for payment. As long as Dynamotion is
able to keep current with any subsequent obligations owed to the purchaser,
management believes that the Buyer will not take action to collect the
outstanding $500,000 in the near term.
As of December 31, 1996 Dynamotion's outstanding indebtedness under the New
Debt Facility increased to $5.6 million from $2.6 million on March 31, 1996. The
higher bank debt level is primarily attributable to two factors: 1) 1996 revenue
and earnings were significantly below management's expectations and 2) delays in
the collection of several large trade receivables.
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COMPARISON OF SHAREHOLDER RIGHTS
ESI and Dynamotion are incorporated in Oregon and New York, respectively.
Shareholders of Dynamotion receiving ESI Common Stock in connection with the
Merger, whose rights as shareholders are currently governed by the NYBCL and
other laws of the state of New York ("New York Law"), Dynamotion's Certificate
of Incorporation, as amended (the "Dynamotion Certificate") and Dynamotion's
Bylaws (the "Dynamotion Bylaws") (the Dynamotion Certificate and the Dynamotion
Bylaws are referred to as the "Dynamotion Charter Documents") will, upon the
Effective Time of the Merger, automatically become shareholders of ESI, and
their rights will be governed by the Oregon Business Corporation Act and other
laws of the State of Oregon ("Oregon Law"), ESI's Articles of Incorporation, as
amended (the "ESI Articles"), and ESI's Bylaws (the "ESI Bylaws") (the ESI
Articles and the ESI Bylaws are referred to as the "ESI Charter Documents").
The following is a summary of material similarities and differences between
the rights of ESI shareholders under the ESI Charter Documents and Oregon Law on
the one hand, and Dynamotion shareholders under the Dynamotion Charter Documents
and New York 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 Dynamotion Charter Documents, New
York Law or Oregon Law. The following discussion is qualified in its entirety by
reference to the ESI Charter Documents, the Dynamotion Charter Documents, New
York Law and Oregon Law, and holders of Dynamotion capital 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 ARTICLES OF INCORPORATION
Oregon Law generally provides 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 also
requires that, before 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 amendment, 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," each as defined therein. 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 New York Law, an amendment or change of the certificate of
incorporation may be authorized by a vote of the board, followed by a vote of
the holders of a majority of all outstanding shares entitled to vote thereon.
Certain categories of amendments, including the
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amendments proposed by this transaction, which adversely affect the rights of
any holders of shares of a class or series of stock require the affirmative vote
of the holders of a majority of all outstanding shares of such class or series,
voting separately.
By the terms of the Dynamotion Certificates designating the Class A and
Class B Stock, the rights and preferences of the shares of Class A and Class B
Stock can only be altered upon the affirmative vote of the holders of a majority
of its outstanding shares of each class, voting separately.
AMENDMENT OF 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 New York law, except as otherwise provided in the certificate of
incorporation, bylaws may be amended, repealed or adopted by the holders of
shares entitled to vote for the election of any director. When so provided in
the certificate of incorporation or a bylaw adopted by the shareholders, bylaws
may also be amended, repealed or adopted by the board by such vote as may be
therein specified, which may be greater than the vote otherwise prescribed by
law, but any bylaw adopted by the board may be amended or repealed by the
shareholders entitled to vote thereon. Under the Dynamotion Bylaws, the
Dynamotion Board has the power to alter, amend, supplement, and repeal the
Dynamotion Bylaws or adopt new Bylaws, provided that the vote of a majority of
the entire Board shall be required to change the number of authorized Directors.
If any Bylaw regulating an impending election of Directors is adopted, altered,
amended, supplemented or repealed by the Board, such Bylaw shall be set forth in
the notice of the next meeting of Shareholders for election of Directors,
together with a concise statement of the changes made. Any Bylaws adopted,
altered, amended, or supplemented by the Board may be altered, amended,
supplemented or repealed by the Shareholders entitled to vote thereon.
SPECIAL MEETING OF SHAREHOLDERS
Oregon Law provides that a special meeting of shareholders may be called by
the board of directors or the holders of ten percent (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.
Under New York Law, a special meeting of shareholders may be called by the
board of directors and by such person or persons as may be authorized to do so
in the certificate of incorporation or by-laws. In addition, if an annual
shareholder meeting has not been held for a certain period of time and a
sufficient number of directors were not elected to conduct the business of the
corporation, the board shall call a special meeting for the election of
directors.
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If the board fails to do so, or if sufficient directors are not elected within a
certain period, holders of 10% of the shares entitled to vote in an election of
directors may call a special meeting for such an election.
The Dynamotion Bylaws provide that a special meeting of shareholders may be
called, for any purpose or purposes, by the President, by any two Directors, by
the Secretary, or by the holders of ten percent (10%) of the total shares of all
classes then outstanding and entitled to vote.
DIVIDENDS
Under Oregon Law, the board of directors of a corporation may authorize and
the corporation may make distributions (including dividends) to shareholders
only if after giving effect to the distribution (i) the corporation would be
able to pay its debts as they become due in the usual course of business and
(ii) the corporation's total assets would at least equal the sum of the total
liabilities plus, unless the corporation's articles of incorporation permit
otherwise, the amount that would be needed if the corporation were to be
dissolved at the time of the distribution to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
Under New York Law, dividends may be declared or paid and other
distributions may be made out of surplus only, so that the net assets of the
company remaining after such declaration, payment or distribution must at least
equal the amount of its stated capital. When any dividend is paid or any other
distribution is made from sources other than earned surplus, a written notice in
the form prescribed by New York Law must accompany such payment or distribution.
A corporation may not declare and pay dividends or make other distributions
except when currently the corporation is insolvent or would thereby be made
insolvent, or when the declaration, payment or distribution would be contrary to
any restrictions contained in the corporation's certificate of incorporation.
CAPITAL STOCK
ESI has two authorized classes of stock (common and preferred). 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.
Dynamotion's Certificate of Incorporation authorizes Common Shares and
Preferred Shares, and authorizes the Board of Directors to issue one or more
classes or series of such Preferred Shares and to fix the rights, preferences
and privileges of each such class or series of Preferred Shares. As of the date
of this Proxy Statement/Prospectus, Dynamotion's Board of Directors has
designated two classes of Preferred Shares, Class A Non-Cumulative Redeemable
Convertible Preferred Shares (the "Class A Stock") and Class B Cumulative
Convertible Preferred Shares (the "Class B Stock").
The holders of Class A Stock (i) have the right to vote upon all matters
upon which the holders of Common Shares have the right to vote on an
as-converted basis, (ii) have the right to receive a non-cumulative dividend
equal to 8% per annum of the initial public offering price of the Class A Stock,
(iii) have the right to convert each share of Class A Stock into a number of
Common Shares, based on a specified conversion ratio, plus two Z Warrants, (iv)
are subject to the right of Dynamotion to redeem the Class A Stock in certain
events (which events have not occurred), and (v) are entitled to receive a
payment equal to the initial public offering price per
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share, together with all accrued and unpaid dividends, before any payment to
holders of shares of junior stock upon the liquidation, dissolution or
winding-up of Dynamotion.
The holders of Class B Stock (i) have the right to vote upon all matters
upon which the holders of Common Shares have the right to vote (except for the
election of directors) on an as-converted basis, the right to elect up to two
directors, and the right to vote on certain matters as a class, (ii) have the
right to receive a cumulative dividend equal to $0.08 per annum per share
(subject to increase in certain circumstances beginning on March 21, 2001),
(iii) have the right to convert each share of Class B Stock into a number of
Common Shares based on a specified conversion ratio, (iv) are subject to the
right of Dynamotion to redeem the Class B Stock on or after March 20, 2001, and
(v) are entitled to receive a payment of $1.00 per share, together with all
accrued and unpaid dividends, before any payment to holders of shares of junior
stock upon the liquidation, dissolution or winding-up of Dynamotion.
DISSENTERS' RIGHTS
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. ESI's
Common Stock is listed as a national market system security.
Under New York Law, a holder of any adversely affected shares who does not
consent to alteration of a certificate of incorporation, subject to complying
with the prescribed statutory procedure, shall have the right to dissent and
receive payment for such shares, if the Certificate of Amendment (a) alters or
abolishes any preferential right of such shares having preferences; or (b)
creates, alters or abolishes any provision or right in respect of the redemption
of such shares; (c) alters or abolishes any preemptive right of such holder to
acquire shares or other securities; or (d) excludes or limits the right of the
right of such holder to vote on any matter, except that such right may be
limited by the authorization of new shares of any new or existing class.
Likewise a shareholder who does not assent to any plan of merger or
consolidation to which the corporation is a party or to any sale, lease,
exchange or other disposition of substantially all the assets of a corporation
shall have the right to dissent and receive payment for such shares. There is no
exception under New York Law that prevents the exercise of dissenters' rights if
the stock affected is listed on a national securities exchange or is a national
market system security.
PROVISIONS RELATING TO DIRECTORS
Number of Directors
Under Oregon Law, a corporation must have a board of directors consisting
of at least one director. Under New York Law, a corporation must have a board of
directors consisting of at least three directors, except where all the shares of
the corporation are owned beneficially and of record by not less than three
shareholders, the number of directors may be less than three but not less than
the number of shareholders. 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 Dynamotion Bylaws provide that the Dynamotion Board must
consist of at least three directors, unless the number of beneficial and record
owners of shares of the company is less than three, then the number of directors
must be the same as the number of shareholders. Within such limitations,
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the Dynamotion Board has the authority to set the actual number, the current
number being set at seven.
Cumulative Voting for Directors
Both Oregon Law and New York Law allow for cumulative voting in the
election of directors, but only if the articles or certificate of incorporation
of the corporation so provide. Under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A shareholder may then cast all such votes for a single
candidate or may allocate the votes among as many candidates as the shareholder
may desire. Without cumulative voting, the holders of a majority of the shares
voting in the election of directors would have the power to elect all the
directors to be elected, and no person could be elected without the support of
holders of a majority of the shares. Neither of the ESI Articles nor the
Dynamotion Certificate provides for cumulative voting.
Voting for Directors by Proxy
Under both Oregon Law and New York Law, every shareholder entitled to vote
at an election of directors has the right to vote either in person or by proxy.
Vacancies
Oregon Law provides 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).
Under New York Law, newly created directorships resulting from an increase
in the number of directors and vacancies occurring on the board for any reason,
except the removal of directors without cause, may be filled by vote of the
board. However, the certificate of incorporation or bylaws may provide that such
newly created directorships or vacancies are to be filled by vote of the
shareholders. Unless the certificate of incorporation or the specific provision
of a bylaw adopted by the shareholders provide that the board may fill vacancies
occurring on the board by reason of the removal of directors without cause, such
vacancies may be filled only by vote of the shareholders. A director elected to
fill a vacancy, unless elected by the shareholders, will hold office until the
next meeting of shareholders at which the election of directors is in the
regular order of business and until his or her successor has been elected and
qualified.
The Dynamotion Bylaws provide that any vacancy in the respective Board of
Directors may be filled by a majority vote of the remaining directors or by the
shareholders.
Removal
Under Oregon Law, a director may be removed with or without cause unless
the articles of incorporation provide that directors may be removed only for
cause. 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.
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Under New York Law, (i) shareholders may remove any director for cause,
(ii) if the certificate or a provision of a bylaw adopted by the shareholders so
provides, any director may be removed for cause by action of the board except in
the case of a director elected by cumulative voting; (iii) if the certificate or
bylaws so provide, shareholders may remove directors without cause; and (iv) an
action to procure a judgment to remove a director for cause may be brought by
the attorney general or by the holders of ten percent of the outstanding shares,
whether or not such holders are entitled to vote. The Dynamotion Bylaws provide
that any or all of the company's directors may be removed with or without cause
by the shareholders.
Limitation on Liability
Section 60.047 of ORS provides that incorporations' articles of
incorporation may contain a provision limiting the personal liability of the
director to the corporation or its shareholders for monetary damages for
accounting as a director, provided that no such provision shall eliminate or
limit the liability of a director for any act or omission before the date when
such provision becomes effective. Further, such provision may not eliminate or
limit the liability of the director for: (i) any breach of the director's duty
of loyalty to the corporation or shareholders; (ii) acts or omission not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) any unlawful distribution as defined under ORS 60.367; or any transaction
from which the director derived an improper personal benefit.
Section 402(b) of the NYBCL provides that a corporation's certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of directors to the corporation or its shareholders for damages for
any breach of duty in such capacity. However, no such provision can eliminate or
limit (i) the liability of any director if a judgment or other final
adjudication adverse to such director establishes that such director's acts or
omissions were in bad faith, or involved intentional misconduct or a knowing
violation of law, or that the director personally gained in fact a financial
profit or other advantage to which such director was not legally entitled or
that the director's acts violated certain provisions of New York Law or (ii) the
liability of any director for any act or omission before the adoption of such a
provision in the certificate of incorporation.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Under Section 60.391 of ORS, a corporation may indemnify an individual made
a party to a proceeding because the individual is or was a director against any
liability incurred in the proceeding if: (i) the conduct of the individual was
in good faith; (ii) the individual reasonably believed that the individual's
conduct was in the best interest of the corporation, or at least was not opposed
to its best interests; and (iii) in the case of any criminal proceeding the
individual had no reasonable cause to believe the individual's conduct was
unlawful. A corporation may not indemnify a director under ORS 60.319: (i) in
connection with a proceeding by or in the right of the corporation in which the
director was adjudged liable to the corporation; or (ii) in connection with any
other proceeding charging improper personal benefit to the director in which the
director was adjudged liable on the basis that personal benefit was improperly
received by the director.
Under Section 60.394 of ORS, unless limited by its articles of
incorporation, a corporation must indemnify a director who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director was a party because of being a director of the corporation
against reasonable expenses incurred by the director in connection with the
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proceeding. Under Section 60.401 of ORS, unless the corporation's articles of
incorporation provide otherwise, a director of the corporation who is a party to
a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. The court may order
indemnification if it determines that: (i) the director is entitled to mandatory
indemnification under ORS 60.394, in which case the court shall also order the
corporation to pay the director's reasonable expenses incurred to obtain the
court-ordered indemnification; or (ii) the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances, whether
or not the director met the standard of conduct set forth in ORS 60.391 or was
adjudged liable.
Under ORS 60.397, a corporation may pay for or reimburse the reasonable
expenses incurred by a director who is a party to a proceeding in advance of
final disposition of the proceeding if: (i) a director furnishes the corporation
a written affirmation of the director's good faith belief that the director has
met the standard of conduct described in ORS 60.391; and (ii) the director
furnishes the corporation a written undertaking, executed personally on the
director's behalf, to repay the advance if it is ultimately determined that the
director did not meet the standard of conduct. The director's repayment
obligation must be an unlimited general obligation of the director but need not
be secured. Any authorization of payment under ORS 60.397 may be made by
provision in the Article of Incorporation, Bylaws, by Resolution of the
shareholders, or board of directors, or by contract.
Under ORS 60.407, unless a corporation's articles of incorporation provide
otherwise, an officer of the corporation is entitled to mandatory
indemnification and is entitled to apply for a court-ordered indemnification in
each case to the same extent as a director. Likewise the corporation may
indemnify and advance expenses to an officer, employee or agent of the
corporation to the same extent as a director.
The ESI Charter Documents provide that ESI shall provide indemnification to
its directors, officers, or fiduciaries of its employee benefits plans, as
defined by the Employment Retirement Income Security Act of 1974, in respect of
any action, suit, or proceeding to which such person is made, or threatened to
be made, a party by reason of the fact that the person is or was a director,
officer, or fiduciary of an employee benefit plan of ESI or at the request of
ESI acted in a similar capacity with regard to any other enterprise, against all
expenses, including attorney's fees, actually and reasonably incurred in
connection with such action, suit, or proceeding.
Under Section 722 of the NYBCL, a corporation may indemnify any person
made, or threatened to be made, a party to any action or proceeding, except for
shareholder derivative suits, by reason of the fact that he or she was a
director or officer of the corporation, provided such director or officer of the
corporation acted in good faith for a purpose which he or she reasonably
believed to be in the best interests of the corporation and, in criminal
proceedings, in addition, had no reasonable cause to believe his or her conduct
was reasonable expenses, including attorney's fees actually and necessarily
incurred as a result of such action, reasonable expenses, including attorney's
fees actually and necessarily incurred as a result of such action, proceeding or
appeal therefrom. Section 723 of the NYBCL provides that expenses incurred in
defending a civil or criminal action may be paid by the corporation in advance
of the final disposition of such proceeding upon receipt of an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that such person was not entitled to such indemnification. In the
case of shareholder derivative suits, the corporation may indemnify any person
by reason of the fact that he or she was a director or officer of the
corporation if he or she acted in good faith for a purpose which he or she
reasonably believed
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to be in the best interests of the company, except that no indemnification may
be made in respect of (i) a threatened action, or a pending action which is
settled or otherwise disposed of, or (ii) any claim, issue or matter as to which
such person has been adjudged to be liable to the corporation, unless and only
to the extent that the court in which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
The indemnification and advancement of expenses described above under New
York Law is not exclusive of other indemnification rights to which a director or
officer may be entitled, whether contained in the certificate of incorporation
or by-laws, or, when authorized by (i) such certificate of incorporation or
by-laws, (ii) a resolution of shareholders, (iii) a resolution of directors, or
(iv) an agreement providing for such indemnification, provided that no
indemnification may be made to or on behalf of any director or officer if a
judgment or other final adjudication adverse to the director or officer
establishes that his or her acts were committed in bad faith or were the result
of active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled.
Any person who has been successful on the merits or otherwise in the
defense of a civil or criminal action or proceeding will be entitled to
indemnification. Except as provided in the preceding sentence, unless ordered by
a court pursuant to New York Law, any indemnification under New York Law
pursuant to the above paragraphs may be made only if authorized in the specific
case and after a finding that the director or officer met the requisite standard
of conduct (i) by the disinterested directors if a quorum is available, or (ii)
in the event a quorum of disinterested directors is not available or so directs
by either (A) the board upon the written opinion of independent legal counsel,
or (B) by the shareholders.
The Dynamotion Certificate provides that Dynamotion shall provide
indemnification to its directors and officers in respect of actions, suits or
proceedings based upon, arising from, relating to or by reason of the fact that
any such director or officer serves or served in such capacity with Dynamotion
or at the request of Dynamotion in any capacity with any other enterprise,
against all reasonable expenses, including attorney's fees, actually and
necessarily incurred in defense of such action, suit or proceeding, and permits
Dynamotion to indemnify others and to advance expenses to the fullest extent
permitted by law, except in relation to matters as to which such director or
officer is adjudged to have breached his duty to Dynamotion.
ANTI-TAKEOVER STATUTES
Business Combinations
Oregon has enacted a business combination statute that is contained in
ss.ss. 60.825 - 60.845 of the Oregon Business Corporation Act (the "Oregon
Combination Law"), which provides that any person who acquires 15% or more of a
corporation's voting stock (thereby becoming an "interested shareholder") may
not engage in certain "business combinations" with the target corporation for a
period of three years following the date the person became an interested
shareholder, unless (1) the board of directors of the corporation has approved,
before 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
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corporation's voting stock outstanding at the time the transaction is commenced
(excluding shares owned by persons who are both directors and officers and
shares owned by employee stock plans in which participants do not have the right
to determine confidentially whether shares will be tendered in a tender or
exchange offer), or (3) the business combination is approved by the board of
directors and authorized by the affirmative vote (at an annual or special
meeting and not by written consent) of at least 662/3% of the outstanding voting
stock not owned by the interested shareholder.
Under the Oregon Combination Law, for purposes of determining whether a
person is the "owner" of 15% or more of a corporation's voting stock, ownership
is defined broadly to include the right, directly or indirectly, to acquire the
stock or to control the voting or disposition of the stock. A "business
combination" is also defined broadly to include (1) mergers and sales or other
dispositions of 10% or more of the assets of a corporation with or to an
interested shareholder, (2) certain transactions resulting in the issuance or
transfer to the interested shareholder of any stock of the corporation or its
subsidiaries, (3) certain transactions which would result in increasing the
proportionate share of the stock of a corporation or its subsidiaries owned by
the interested shareholder, and (4) receipt by the interested shareholder of the
benefit (except proportionately as a Shareholder) of any loans, advances,
guarantees, pledges, or other financial benefits.
These restrictions placed on interested shareholders by the Oregon
Combination Law do not apply under certain circumstances, including, but not
limited to, the following: (1) if the corporation's original articles of
incorporation contain a provision expressly electing not to be governed by the
Oregon Combination Law, (2) within 90 days after April 4, 1991, the corporation,
by action of its board of directors, adopts an amendment to its bylaws expressly
electing not to be governed by the Oregon Combination Law, or (3) if the
corporation, by action of its shareholders, adopts an amendment to its bylaws or
articles of incorporation expressly electing not to be governed by the Oregon
Combination Law, provided that such an amendment is approved by the affirmative
vote of not less than a majority of the outstanding shares entitled to vote and
that such an amendment will not be effective until 12 months after its adoption
and will not apply to any business combination with a person who became an
interested shareholder at or before such adoption. None of these circumstances
exist with respect to ESI; accordingly, the requirements of the Oregon
Combination Law apply to ESI.
New York also has enacted a business combination statute, which is
contained in Section 912 of the NYBCL. Section 912 provides that a domestic
corporation shall not engage in certain "business combinations" with any
"interested shareholder" for a period of five years following the date that such
person first became an interested shareholder, unless such business combination
or the purchase of stock that resulted in the person becoming an interested
shareholder was approved by the board of directors of the corporation before the
date the person first became an interested shareholder.
Section 912 also provides that a domestic corporation shall not engage at
any time in any business combination with an interested shareholder other than
(1) a business combination approved by the board of directors of the corporation
as set forth in the preceding paragraph, (2) a business combination approved by
a majority vote of the holders of the outstanding voting stock not beneficially
owned by such interested shareholder or any affiliate or associate thereof
occurring at least five years after the date the person first became an
interested shareholder, or (3) a business combination that meets certain
conditions (a) specifying the minimum amount of consideration to be received per
share by holders of outstanding shares of any class or series of stock of such
corporation, (b) limiting the type of consideration to be received by the
holders
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of each class or series of stock in the business combination, (c) requiring
payment of the proper consideration to the holders of all outstanding shares of
stock of the corporation not beneficially owned by the interested shareholder
immediately before the business combination, and (d) restricting the manner in
which the interested shareholder may become the beneficial owner of any
additional shares of voting stock of the corporation after the date the person
first became an interested shareholder and before the date of the business
combination.
Section 912 defines an "interested shareholder" as any person that is the
beneficial owner, directly or indirectly, of 20% or more of the voting stock of
the corporation, or any person that is an affiliate or associate of the
corporation and at any time within the preceding five years was the beneficial
owner, directly or indirectly, of 20% or more of the voting stock of the
corporation. A "business combination" is defined broadly to include certain (1)
mergers or consolidations, (2) sales, leases, exchanges, mortgages, pledges,
transfers or other dispositions of assets, (3) issuances or transfers of stock,
(4) liquidations or dissolutions, (5) reclassifications or recapitalizations, or
(6) loans, advances, guarantees, pledges or other financial assistance.
The restrictions placed on interested shareholders by New York law do not
apply under certain circumstances, including any business combination of a
corporation (1) that does not have a class of voting stock registered with the
SEC pursuant to Section 12 of the Exchange Act, unless the certificate of
incorporation provides otherwise, (2) whose certificate of incorporation has
been amended to provide that such corporation shall be subject to the provisions
of Section 912, if the corporation did not have a class of voting stock
registered with the SEC pursuant to Section 12 of the Exchange Act on the
effective date of such amendment, and if the person first became an interested
shareholder before the effective date of such amendment, (3) whose original
certificate of incorporation contains a provision expressly electing not to be
governed by Section 912, (4) which adopted an amendment to its bylaws before
March 31, 1986, electing not to be governed by Section 912, (5) which adopts an
amendment to its bylaws that is approved by a majority vote of the holders of
the outstanding voting stock of the corporation, excluding the interested
shareholders and their affiliates and associates, electing not to be governed by
Section 912, provided that such amendment is not effective until 18 months after
the shareholder vote and does not apply to any business combination with a
person who first became an interested shareholder on or before the effective
date of such amendment, (6) with a person who became an interested shareholder
inadvertently, if such interested shareholder divests itself of a sufficient
amount of the voting stock so that it no longer is the beneficial owner of 20%
or more of the outstanding voting stock of the corporation and would not at any
time within the preceding five years have been an interested shareholder but for
such inadvertent acquisition, or (7) with an interested shareholder who was the
beneficial owner of 5% or more of the outstanding voting stock of the
corporation on October 30, 1985, and remained so until the date he first became
an interested shareholder.
Control Shares
Oregon has enacted a control share statute that is contained in ss.ss.
60.801 - 60.816 of the Oregon Business Corporation Act (the "Oregon Control
Share Act"). The Oregon Control Share Act provides 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 one-fifth, more than one-third, or more than one-half 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
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votes cast by holders of shares entitled to vote, excluding shares voted or
controlled by the acquiring person 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 ss.60.801(e).
Submission for shareholder consideration of a resolution to grant voting
rights to control shares must be preceded by the filing with the corporation of
an acquiring person statement providing certain specified information. If the
acquiring person requests at the time of delivery of the acquiring person
statement a special meeting of shareholders and submits an undertaking to pay
the corporation's expenses, the corporation shall call a special meeting to
consider solely the voting rights to be accorded the voting shares acquired in
the control share acquisition, not later than 10 days from the date of receipt
of the acquiring person statement. Unless the acquiring person agrees otherwise
in writing, the special meeting of shareholders shall be held not sooner than 30
days and no later than 50 days after receipt by the corporation of the acquiring
person statement. If no request for a special meeting of shareholders is made in
the acquiring person statement, the Board shall present to the next annual or
special meeting of shareholders occurring more than sixty days after the filing
of the acquiring person statement, the voting rights to be accorded the voting
shares acquired in the control share acquisition.
Unless otherwise provided in a corporation's articles of incorporation or
bylaws, 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 and shall be entitled
to obtain the fair value of the holder's shares. "Fair value" means a value not
less than the highest price paid per share by the acquiring person in the
control share acquisition.
The ESI Charter Documents currently contain no provisions with respect to
control shares.
New York Law does not presently include a control share statute.
Security Takeover Disclosure
New York Law contains provisions (NYBCL ss.1600-1613) which provide that
offerors of a takeover bid comply with various disclosure requirements upon
commencement of the takeover bid ("Security Takeover Disclosure Act"). The
Security Takeover Disclosure Act defines a takeover bid as the acquisition or
offer to acquire, pursuant to a tender offer or request or invitation for
tenders, any equity security of a target company, if after acquisition thereof
the offeror would, directly or indirectly, be a beneficial owner of more than
five percent (5%) of any class of the issued and outstanding equity securities
of such target company. An offeror may not commence a takeover bid unless, as
soon as practicable on the date of commencement, it files with the attorney
general of the State of New York and delivers to the target company a
registration statement. Additionally, an offeror must make full and fair
disclosure to offerees of the takeover bid the material information set forth in
the registration statement transmitted to the attorney general and the company.
The registration statement required to be filed by the offeror must contain
the following: (i) copies of all prospectuses, brochures, advertisements,
circulars, letters or other matter through which the offeror proposes to
disclose to offerees all information material to a decision to accept or reject
the offer; (ii) the identity and background of all persons on whose behalf the
takeover bid is to be effected; (iii) the exact title and number of shares
outstanding of the class
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of equities securities being sought, the number of securities being sought and
the consideration being offered; (iv) the source and amount of funds or other
consideration used to finance the takeover bid, including a statement describing
any securities being offered in exchange for the equity securities of the target
company and copies of all loan or credit agreements and letter of commitment
used or to be used to secure financing for the acquisition of any equity
security of the target company; (v) a statement of any plans the offeror may
have to liquidate the target company upon gaining control or to effect a merger
or consolidation of it, or to make any other major change in its business,
corporate structure, management, personnel or policies of employment; (vi) the
number of shares of any equity security of the target company of which each
offeror is beneficial or record owner or has a right to acquire directly or
indirectly; (vii) particulars as to any contracts, arrangements or
understandings to which an offeror is party with respect to any equity security
of the target company; (viii) complete information on the organization and
operations of the offeror; (ix) a statement as to the potential impact, if any,
of the offeror's plans or proposals on the residents of New York State; (x)
particulars as to any employee benefit plans, labor law compliance and community
and charitable activities; (xi) if the offeror is a natural person, information
concerning his identity and background; and (xii) the investment rating on any
debt securities or preferred stock offered in the takeover bid or used as a
source of funds in making a takeover bid.
If the takeover bid is not subject to the requirements of Section 14(d) of
the Securities Exchange Act of 1934, 15 U.S.C. ss.78n(d), the takeover bid is
further subject to additional requirements delineated at NYBCL ss.1612. In the
event of an offeror's non-compliance with the Security Takeover Disclosure Act,
various criminal and civil penalties are provided under the law. Additionally,
NYBCL ss.1613 provides a private cause of action to any offeree whose equity
securities are the subject of a takeover bid and who has been injured by any
violation of the Security Takeover Disclosure Act to enjoin such unlawful act or
practice and to recover actual damages together with reasonable attorneys' fees
in the event the offeree is successful.
Oregon Law does not presently contain a security takeover disclosure
statute.
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LEGAL MATTERS
The legality of the shares of ESI Common Stock to be issued to the
Dynamotion 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.
EXPERTS
The consolidated financial statements incorporated in this Proxy
Statement/Prospectus by reference to ESI's Annual Report on Form 10-K for the
year ended May 31, 1996 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in 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 for the years ended December 31, 1995 and
1996 of Dynamotion included in this Proxy Statement/Prospectus have been audited
by McGladrey & Pullen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report. The audited financial
statements of Dynamotion for the year ended December 31, 1994 included in this
Proxy Statement/Prospectus have been audited by Feldman Radin & Co., P.C.,
independent public accountants, as indicated in 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.
SHAREHOLDER PROPOSALS
If the Merger is consummated, shareholders of Dynamotion will become
shareholders of ESI. ESI's next annual meeting of shareholders will take place
in September 1997. Any shareholder proposals to be considered for inclusion in
proxy material for ESI's annual meeting must have been received at the principal
executive office of ESI no later than April 14, 1997.
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DYNAMOTION/ATI CORP.
INDEX TO DYNAMOTION'S FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants................................... F-2
Report of Independent Public Accountants................................... F-3
Balance Sheets at December 31, 1995 and 1996............................... F-5
Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996...................................................... F-7
Statements of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1994, 1995 and 1996................................... F-8
Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996............................................................ F-9
Notes to Financial Statements...................................... F-10 - F-31
F-1
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Dynamotion/ATI Corp.
Santa Ana, California
We have audited the accompanying balance sheets of Dynamotion/ATI Corp. as of
December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. 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 required 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 Dynamotion/ATI Corp. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered recurring losses from operations
and its total liabilities exceeds its total assets. In addition, the Company is
in default of the terms of its bank financing. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 14.
These plans include a merger with Electro Scientific Industries, Inc. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Anaheim, California McGLADREY & PULLEN, LLP
March 7, 1997
F-2
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INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Dynamotion/ATI Corp.
(formerly known as Cybernetics Products, Inc.)
We have audited the consolidated balance sheet of Dynamotion/ATI Corp.
(formerly known as Cybernetics Products, Inc.) and subsidiaries for the year
ended December 31, 1994, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dynamotion/ATI
Corp. and subsidiaries for the year ended December 31, 1994, and the results of
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Dynamotion/ATI Corp. and subsidiaries will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements for the
year ended December 31, 1994, the Company is currently not in compliance with
certain financial covenants contained in its revolving credit facility and is
delinquent in the repayment of the over advance portion of this facility made
available to the Company subsequent to December 31, 1994. The Company's recent
losses from operations as well as other operational matters have negatively
affected the Company's liquidity. Therefore, the Company is in the process of
seeking alternative forms of capital to supplement its existing credit facility.
There can be no assurance that the Company will be successful in overcoming its
liquidity problem or that alternative sources of capital will be available on
terms satisfactory to the Company. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2 to the consolidated
financial statements for the year ended December 31,
F-3
<PAGE>
1994. The financial statements do not include any adjustment relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
February 17, 1995
New York, New York
F-4
<PAGE>
DYNAMOTION/ATI CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (Note 3)
(in thousands
except share and per share data)
December 31,
1995 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Trade accounts receivable, less allowance
for doubtful accounts of 1995 $121; 1996 $101;
(Notes 12 and 14) $ 3,803 $ 4,359
Other receivables, net of allowance for doubtful
accounts 1995 $0; 1996 $230 (Note 1) 72 614
Notes receivable - current (Note 11) 67 --
Inventories (Note 2) 6,401 3,761
Prepaid expenses and other current assets 45 63
-------- --------
TOTAL CURRENT ASSETS 10,388 8,797
MACHINERY AND EQUIPMENT, net (Note 2) 1,110 1,049
NOTES RECEIVABLE, long term net of allowance
for doubtful notes 1995 $0; 1996 $100 (Note 11) 183 145
PATENTS, net (Note 2) 3,423 3,099
-------- --------
$ 15,104 $ 13,090
======== ========
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
December 31,
1995 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable (Note 1) $ 4,532 $ 4,162
Unfunded disbursements 487 187
Revolving credit facility (Note 3) 2,148 3,658
Note payable to bank (Note 3) -- 1,950
Current maturities of long-term debt (Notes 4 and 14) 582 802
Accrued commissions 783 787
Accrued payroll and related expenses 345 540
Customer deposits -- 574
Other current liabilities 1,438 1,065
-------- --------
TOTAL CURRENT LIABILITIES 10,315 13,725
LONG-TERM DEBT (Note 4) 3,053 263
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 7, 8,
13 and 14)
SHAREHOLDERS' EQUITY (DEFICIT) (Notes 8 & 9):
Convertible and redeemable Class A preferred stock,
non-cumulative at $.44 per share, $.01 par value,
liquidation preference $5.50 per share, authorized
2,062,500 shares, issued and outstanding 1995
1,001,964; 1996 943,279 shares 10 10
Convertible Class B preferred stock, 8% cumulative,
$.01 par value (liquidation preference $1.00 per
share), authorized 2,250,000, issued and -- 22
outstanding 2,250,000
Common stock, $.04 par value, authorized 20,000,000
shares, issued and outstanding 1995 2,530,148; 1996
2,837,456 shares 101 113
Additional paid-in capital 15,181 17,618
Common Stock Warrants -- 270
Accumulated deficit (13,556) (18,931)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 1,736 (898)
-------- --------
$ 15,104 $ 13,090
======== ========
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-6
<PAGE>
DYNAMOTION/ATI CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1994 1995 1996
---- ---- ----
(In thousands, except shares and per share data)
<S> <C> <C> <C>
REVENUES (Notes 12 and 15) $ 15,934 $ 20,512 $ 16,214
COSTS AND EXPENSES
Cost of sales 10,536 17,075 12,992
Selling, general and
administrative expenses
(Notes 7 and 10) 3,321 4,473 4,516
Research and development 1,424 1,464 1,729
Amortization of intangible
assets 788 791 417
Loss on sale of division
and assets (Note 1) -- -- 575
Goodwill write-off (Note 5) -- 3,517 --
-------------- ------------ ------------
Total costs and expenses 16,069 27,320 20,229
-------------- ------------ ------------
LOSS FROM OPERATIONS (135) (6,808) (4,015)
Interest expense, net (325) (614) (750)
-------------- ------------ ------------
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES (460) (7,422) (4,765)
Income tax benefit (Note 6) 150 264 --
-------------- ------------ ------------
LOSS FROM CONTINUING
OPERATIONS (310) (7,158) (4,765)
-------------- ------------ ------------
DISCONTINUED OPERATIONS
(Note 1)
Loss from discontinued
operations (75) (170) --
Loss on disposal (after
applicable income tax
benefit of $1,113) (2,695) -- --
-------------- ------------ ------------
Total loss from
discontinued operations (2,770) (170) --
-------------- ------------ ------------
NET LOSS (Notes 1 and 14) $ (3,080) $ (7,328) $ (4,765)
============== ============ ============
NET LOSS PER COMMON SHARE:
(Primary and Fully Diluted)
Loss from continuing
operations $ (.68) $ (4.43) $ (1.82)
Loss from discontinued
operations $ (2.30) $ (.10) $ --
-------------- ------------ ------------
Net loss (Notes 4 and 9) $ (2.98) $ (4.53) $ (1.82)
============== ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 1,203,771 1,728,487 2,731,313
============== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
DYNAMOTION/ATI CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1994, 1995 and 1996
(in thousands)
Shares Par Values Addi-
------------------------------ -------------------------- tional Accu- Common
Class A Class B Class A Class B Paid-In mulated Stock
Common Pref. Pref. Common Pref. Pref. Capital Deficit Warrants Total
---------- -------- -------- ------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 1,102 1,567 -- $ 44 $ 15 $ -- $13,818 $(2,302) $ -- $11,575
Preferred stock converted to
common stock 171 (343) -- 7 (3) -- (3) -- -- 1
Shares issued in acquisition
of Vision Ten Inc. 101 -- -- 4 -- -- 410 -- -- 414
Common Shares issued for
Class A preferred stock
dividend 61 -- -- 2 -- -- 334 (336) -- --
Net loss -- -- -- -- -- -- -- (3,080) -- (3,080)
---------- -------- -------- ------- ------- ------- ------- ------- -------- -------
Balance at December 31,
1994 1,435 1,224 -- 57 12 -- 14,559 (5,718) -- 8,910
Preferred stock converted to
common stock 111 (222) -- 4 (2) -- (2) -- -- --
Stock options exercised 57 -- -- 2 -- -- 2 -- -- 4
Common Shares issued for
Class A preferred stock
dividend 165 -- -- 7 -- -- 503 (510) -- --
Shares issued in put feature 612 -- -- 25 -- -- (25) -- -- --
Sale of common stock 150 -- -- 6 -- -- 144 -- -- 150
Net loss -- -- -- -- -- -- -- (7,328) -- (7,328)
---------- -------- -------- ------- -------- ------- ------- ------- -------- -------
Balance at December 31,
1995 2,530 1,002 -- 101 10 -- 15,181 (13,556) -- 1,736
Preferred stock converted to
common stock 60 (59) -- 1 -- -- (1) -- -- --
Stock Compensation expense -- -- -- -- -- -- 59 -- -- 59
Issuance of Class B preferred
stock and common stock
warrants -- -- 2,250 -- -- 22 1,692 -- 270 1,984
Common Shares issued for
Class A preferred stock
dividend 195 -- -- 8 -- -- 392 (400) -- --
Accretion of discount on
Class B preferred stock -- -- -- -- -- -- 80 (80) -- --
Accrual of cumulative
dividend on Class B
preferred stock -- -- -- -- -- -- 130 (130) -- --
Sale of common stock 52 -- -- 3 -- -- 85 -- -- 88
Net loss -- -- -- -- -- -- -- (4,765) -- (4,765)
---------- -------- -------- ------- -------- ------- ------- ------- -------- -------
Balance at December 31,
1996 2,837 943 2,250 $ 113 $ 10 $ 22 $17,618 $(18,931) $ 270 $ (898)
========== ======== ======== ======= ======== ======= ======= ======= ======== =======
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
DYNAMOTION/ATI CORP.
STATEMENTS OF CASH FLOWS
Years Ended December 31
----------------------------------------
1994 1995 1996
---------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,080) $ (7,328) $ (4,765)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 1,208 801 768
Deferred income taxes (1,247) (264) --
Loss (gain) on sale of equipment (379) 18 --
Loss on sale of assets -- -- 575
Goodwill write-off -- 3,517 --
Other -- 217 167
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (784) 148 (261)
(Increase) decrease in inventories (35) (705) 47
Decrease in prepaid expenses and
other assets 110 145 34
Increase (decrease) in accounts payable (902) 1,912 374
Increase in accrued expenses and
other liabilities 675 398 481
---------- ----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (4,434) (1,141) (2,580)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (650) (795) (657)
Proceeds on sale of assets 1,548 40 742
Proceeds from the sale of discontinued operations -- 350 --
---------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 898 (405) 85
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in unfunded disbursements -- 487 (300)
Proceeds (payments) on revolving credit loan, net 3,014 (195) 1,510
Net proceeds from issuance of securities -- 154 1,994
Proceeds from notes payable -- 1,044 157
Proceeds from trade receivable 1,275 -- --
Proceeds from note due to shareholder 220 -- --
Payment on note due to shareholder (220) -- --
Principal payments on long-term debt (1,003) (156) (778)
Proceeds from equipment financing 403 -- --
Payment of deferred financing fees (259) (47) (88)
---------- ---------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 3,430 1,287 2,495
---------- ---------- -----------
NET (DECREASE) IN CASH (106) (259) --
---------- ---------- -----------
CASH - Beginning of period 365 259 --
---------- ---------- -----------
CASH - End of period $ 259 $ -- $ --
========== ========== ===========
CASH PAID FOR INTEREST $ 329 $ 520 $ 623
========== ========== ===========
Supplemental disclosure of non-cash financing and investing
activities (Notes 1, 8 and 9)
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
F-9
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share data)
1. THE COMPANY
Dynamotion/ATI Corp. (the "Company") is a New York corporation formerly known as
Cybernetics Products, Inc. The Company develops, manufactures and markets
products and systems which are utilized in certain segments of the electronics
and printed circuit board ("PCB") industries.
The Company develops, manufactures and sells a line of computer-controlled
drilling machines used to produce large volumes of accurately positioned holes
in PCBs. In addition, the Company also manufactures and sells, primarily to the
PCB and electronics/computer industries, a line of computer-controlled routers
used to cut and shape PCBs during the manufacturing process.
Acquisitions and Disposals
On May 19, 1994, the Company acquired 53% of the outstanding capital stock of
Vision Ten, Inc. ("Vision Ten") in exchange for 46,250 shares of the Company's
common stock. Vision Ten is engaged in the business of manufacturing, marketing
and selling the V-scan series of high resolution CCD X-ray film digitizers for
medical and industrial applications.
On October 1, 1994, the Company acquired the assets of Computer Service Supply
Corporation ("CSSC") for $80,000 in cash and a $70,000 promissory note, due
December 29, 1994. Under the agreement, the Company acquired the inventory,
equipment and intangible assets of CSSC which was a debtor under Chapter 7 of
the United States Bankruptcy Code. The acquired division operated nationwide as
a computer warranty repair and service company. The division operated under the
name of Computer Services of America ("CSA").
The Company completed the sale of its Oxberry division (a manufacturer of
computer graphic products) on March 30, 1995, and the sale of its 53% equity
interest in Vision Ten on April 3, 1995. The total sales price was $350,000 in
addition to the assumption of certain liabilities. Both of the purchasing
entities are controlled by a former member of the Company's Board of Directors.
On August 4, 1995, the Company sold its CSA division in exchange for the
assumption of certain liabilities in the aggregate principal amount of $150,000.
Accordingly, the Oxberry division, the CSA division and Vision Ten are reported
as discontinued operations at December 31, 1994 and 1995. At December 31, 1995
and 1996 there were no assets remaining from these operations.
F-10
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
The loss from discontinued operations for the years ended December 31, 1994,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 4,839 $ -- $ --
Cost and expenses (4,914) (170) --
---------- ---------- ----------
Loss from discontinued operations $ (75) $ (170) $ --
========== ========== ==========
</TABLE>
On August 20, 1996 the Company sold substantially all of the assets (other than
finished goods) associated with its ATI router product line to Advanced
Technologies, Inc. ("Purchaser"). The sales price for the assets consisted of
(a) $1,100,000 ($300,000 paid in cash which was applied to the Company's term
loan balance under the New Debt Facility with the balance of the purchase price
paid by delivery to the Company of a $800,000 promissory note (the "Note")) and
(b) the value of certain assumed liabilities. Principal under the Note was
payable monthly at a rate equal to 15% of Purchaser's monthly gross revenue and
interest at prime was payable quarterly with all unpaid principal and unpaid
accrued interest due on December 31, 1997. On January 3, 1997, the Company
negotiated with the Purchaser and accepted a $500,000 cash payment as payment in
full for the $800,000 promissory note issued in connection with the sale of its
ATI router product line in the third quarter. The Company negotiated this
settlement to fund cash flow needs and recorded an expense in December 1996 for
this $300,000 discount.
Pursuant to the terms of a Finished Goods Agreement (the "Agreement") the
finished goods associated with the Company's ATI router product line were to be
sold to the Purchaser. Such finished goods were transferred to the Purchaser as
its customers agreed to purchase the finished goods. No revenue was recognized
on these transfers. The Purchaser agreed, subject to certain conditions, to
acquire on December 31, 1996 all finished goods not sold to its customers on or
before such date. As of December 31, 1996, Dynamotion transferred a total of
$1.035 million of finished goods to accounts receivable at a recorded value of
$971,000, resulting in a loss of $64,000 which is recorded as a loss on sale of
division and assets in the statement of operations. Dynamotion is currently in
negotiations with Purchaser to accelerate all amounts due and owing to
Dynamotion and Dynamotion estimates that this will result in a discount of
approximately $230,000 which has been recorded at December 31, 1996. There are
no further finished goods to be transferred pursuant to the Agreement.
The Company sold substantially all of the assets associated with its Production
Machine Control ("PMC") division on September 30, 1996 to the Company's largest
supplier (the "Buyer"). The
F-11
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
purchase price for the assets consisted of (a) $1,000,000 ($300,000 note
receivable from the Buyer and $700,000 reduction in $1.2 million of outstanding
trade payables due the Buyer) and (b) the value of certain assumed liabilities.
The $300,000 receivable was collected in full in October 1996. In addition, the
Company agreed to pay on or before December 31, 1996 the remaining $500,000 in
outstanding trade payables due to the Buyer. The Company has not paid the
$500,000 nor has the Buyer made demand for payment. Subsequent to December 31,
1996, the amount will accrue interest at 8%. The Company continues to purchase
product from the Buyer. As long as the Company is able to keep current with any
subsequent obligations owed to the Buyer, management believes that the Buyer
will not take action to collect the outstanding $500,000 in the near term.
The following unaudited pro-forma information is disclosed for the years ended
December 31, 1995 and 1996 as though the ATI and PMC transactions occurred at
the beginning of the periods.
<TABLE>
<CAPTION>
Years ended
Dec. 31, 1995 Dec. 31, 1996
------------- -------------
(in thousands)
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 11,564 $ 13,520
Loss from Continuing Operations (8,210) (4,729)
Net Loss (8,380) (4,729)
Earnings (loss) per share
-------------------------
Loss from Continuing Operations (5.03) (1.81)
Net Loss (5.13) (1.81)
</TABLE>
2. BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company.
Oxberry, CSA, and the Company's interest in Vision Ten have been accounted for
as discontinued operations. Certain reclassifications have been made to prior
years' amounts to conform to the current year presentation.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported
F-12
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
A summary of the Company's significant accounting policies follow:
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
Inventories are comprised of the following at December 31, 1995 and 1996 (in
000's):
December 31,
----------------------------------
1995 1996
-------------- --------------
Raw materials $ 3,955 $ 1,326
Work-in-process 2,059 1,717
Finished goods 387 718
-------------- --------------
$ 6,401 $ 3,761
============== ==============
Inventories are presented net of $480,000 and $452,000 at December 31, 1995 and
1996, respectively, in reserves for obsolete and slow-moving items. The Company
utilizes commercially available component parts and relies on vendors for some
of the special parts and subassemblies required. Although the Company currently
obtains most of the components required from single sources, many of these parts
are available from multiple sources. If necessary, the Company believes
alternative supply sources could be developed within a reasonable period of
time; however, the Company may have difficulty establishing such relationships
due to its financial condition.
F-13
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
Machinery and Equipment
Machinery and equipment are stated at cost, less accumulated depreciation of
$1,205,000 and $1,433,000 at December 31, 1995 and 1996, respectively. Included
in machinery and equipment at December 31, 1996 are two assets with a net book
value of $387,000 which are leased to a customer under a short-term operating
lease. Depreciation is calculated under the straight-line method over the
estimated useful lives of the assets, which range from three to ten years.
Patents and Intangible Assets
The Company holds six United States patents and two European patents covering
its drilling systems, which were acquired in the acquisition of Dynamotion
Corporation. These patents expire between 2005 and 2013. The patent cost is
amortized on a straight line basis over the estimated economic life of 13 years
and aggregating $781,000 and $1,105,000 of accumulated amortization through
December 31, 1995 and 1996, respectively.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Under this Statement, long-lived assets and
certain identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Recoverability is assessed based on the gross undiscounted
estimated future cash flows before interest charges. If an impairment is
indicated, the amount would be determined by comparing the estimated fair value
to the carrying amount of the asset being evaluated. Estimated fair value is
determined using the projected cash flows discounted at a rate commensurate with
the risks involved. No adjustments were required as a result of applying this
new standard.
Prior to January 1, 1996, the Company evaluated its intangible assets for
impairment in value based on a combination of the following methods: (i)
discounted cash flow analysis projected for a 10-year period, net of interest
expense, (ii) determination of the value placed by the marketplace on the
intangible assets of the Company. The Company used its market capitalization
based on the quoted market price of its stock, adjusted by its net tangible
assets or liabilities to determine this value. If either method described above
indicated a potential impairment of intangible assets, the Company policy was to
compute the amount of impairment using method (ii) above and to charge current
earnings for the difference between the recorded amount of intangible assets and
the computed value of those assets.
F-14
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
Revenue Recognition
Revenue from the sale of Dynamotion's products is recognized at the time of
shipment. Sales are made with the right to exchange defective merchandise. The
Company provides for the cost of exchanging such products. Warranty expense for
the years ended December 31, 1994, 1995 and 1996, was $414,000, $617,000 and
$245,000, respectively. At December 31, 1995 and 1996, the Company has accrued
$424,000 and $264,000, respectively, for future warranty claims.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carry forwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Loss Per Share
Loss per share is based on the weighted average number of common shares and
common share equivalents outstanding during the period. Common share equivalents
are excluded if their effect is anti-dilutive. Escrowed shares, as disclosed in
Note 8, have been excluded from the computation of loss per share. The
computation includes an adjustment for Class A preferred stock dividends in 1994
and 1995 and none for 1996, due to the Board's intention not to pay the Class A
preferred stock dividend in 1997. Class B preferred stock dividends and
accretion of stock issuance costs are considered in determining loss per share
for 1996.
Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
These techniques are significantly affected by the assumption used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many
F-15
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
cases, could not be realized in immediate settlement of the instrument.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instruments at December 31, 1996 for which
it is practicable to estimate that value:
Notes Receivable
As discussed in Note 11, notes receivable includes a note from a customer
currently in bankruptcy. The carrying value of this note approximates fair
value based on a comparison of repayment terms and interest rates to market
and considering the priority position of the Company in the customer's
bankruptcy filing.
Revolving Credit Facility
The carrying amount of the revolving credit facility approximates its fair
value due to the variable interest rate and short term maturity.
Notes Payable and Long-Term Debt
The fair value of the Company's notes payable is estimated based on the
current rates offered to the Company for debt of the same remaining
maturities with similar collateral requirements. For variable rate
instruments, the fair market value is based on the carrying value. At
December 31, 1996 and 1995, the carrying amount approximates fair value.
3. REVOLVING CREDIT FACILITY
On March 20, 1996, the Company entered into a new loan agreement with IBJ
superseding all terms of the prior agreements (the "New Debt Facility"). The New
Debt Facility provides for up to $7.0 million in senior secured financing
segregated into two credit facilities secured by a first priority lien against
all of the Company's assets. The first credit facility allows for borrowings on
a line of credit up to $4.5 million with advances up to 80% of eligible accounts
receivable and up to 40% of eligible inventory (subject to a sublimit of $1.0
million). The second credit facility is for a $2.5 million term loan amortizing
in monthly instalments of $27,778 in year one, $45,000 in year two, $55,000 in
year three, and final payment aggregating
F-16
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
$966,664 due at the December 31, 1999 maturity. In August 1996 the Company made
a $300,000 payment against the term loan from the proceeds of the sale of the
ATI product line thereby reducing the amount due at the maturity to $666,664.
Additional repayments are required equal to 25% of excess cash flow recapture
(as defined in the credit agreement) of each fiscal year period payable on April
15th of the subsequent year. Interest, due monthly, is at IBJ's base rate (8.25%
at December 31, 1996) plus 1.75% on the revolver portion of the loan and at
IBJ's base rate plus 2.25% on the term loan portion. Loan origination fees
totaled $55,000 and were paid upon completion of the transaction. An additional
$25,000 of other loan related fees were also incurred related to the New Debt
Facility and were recorded in March 1996. At December 31, 1996, approximately
$67,000 of loan origination fees related to the New Debt Facility was written
off as the Company was in violation of the terms of the agreement. A collateral
monitoring fee and unused facility fee, due monthly, total $1,500, and .5% per
annum, respectively.
As of December 31, 1996 the Company's outstanding indebtedness under the line of
credit and term loan was approximately $3.7 million and $1.9 million,
respectively. As of December 31, 1996, the Company had approximately $236,000 of
availability provided by the New Debt Facility. As of December 31, 1996, the
Company was in violation of substantially all financial loan covenants contained
in the New Debt Facility; therefore, the long-term portion of the term loan was
reclassified to current liabilities on the December 31, 1996 balance sheet.
Management has not requested a waiver of these debt covenant violations.
Although no assurances can be given, management believes that IBJ will not
attempt to accelerate payment on the New Debt Facility in the near term. If a
default is declared and demand is made for payment, the Company would not be
able to meet such demand.
4. LONG-TERM DEBT
A. Notes Payable. Note payable in connection with the Company's purchase
of the PMC division in 1991. The note is unsecured, non-interest
bearing, due in 36 equal monthly installments of $4,100. At December
31, 1996, the outstanding balance was $118,000.
Notes payable resulting from negotiated extended payment terms with
trade vendors. At December 31, 1996, these notes totaled $218,000, of
which $119,000 is non-interest bearing and is due in various monthly
installments aggregating $5,700; $89,000 includes interest at the
prime rate (which is in default and is immediately due) and other
notes payable of $10,000.
F-17
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
In May 1996, $86,055 of payables to the former chairman of the
Company's Board of Directors was converted to a note payable in 24
monthly installments of approximately $3,900 beginning June 1996 and
bearing interest at 7.3%. At December 31, 1996, the outstanding
balance was $76,000.
B. Convertible Subordinated Notes. At December 31, 1996, the Company has
outstanding two convertible unsecured notes totaling $653,000, which
are subordinated to the bank debt. The first note requires quarterly
principal payments of $25,000 beginning June 1, 1996, through June 1,
1998, whereupon a balloon payment of approximately $140,000 is due.
The second note requires quarterly principal payments of $46,000
beginning on March 1, 1997 through March 1, 1998, whereby principal
payments reduce to $27,000 through December 1, 1999, at which time any
remaining principal will be paid. Interest is payable quarterly on
both notes beginning on June 1, 1996 at the greater of 6% or the prime
rate. If in default, the holders of the notes have the right to
convert the remaining principal and accrued interest into shares of
the Company's common stock at an initial conversion rate of $3.00 per
share, which is subject to adjustments. At December 31, 1996, one of
the notes for $388,000 is in default due to non-payment, therefore
this note has been classified as current. However, the note holder has
executed an agreement waiving their right to convert the note upon
default.
C. Aggregate Maturities. The aggregate maturities of long-term debt for
each of the five years subsequent to December 31, 1996, are as follows
(in 000's):
<TABLE>
<CAPTION>
Convertible
Subordinated
Notes Payable Notes Total
------------- ------- -------
<S> <C> <C> <C>
1997 $ 315 $ 487 $ 802
1998 97 166 263
1999 -- -- --
2000 -- -- --
2001 -- -- --
------- ------- -------
$ 412 $ 653 $ 1,065
======= ======= =======
</TABLE>
F-18
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. GOODWILL WRITE-OFF
In June 1995, the Company determined that its intangible assets may have been
impaired based on an analysis of discounted cash flow projections, net of
interest expense and the determination of the value placed by the marketplace on
the intangible assets of the Company using the methodology as described in Note
2. Based on this analysis, the Company determined that the difference between
the market capitalization of the Company increased by net tangible liabilities
of approximately $841,000 was less than the Company's recorded amounts for
intangible assets by approximately $3.5 million. Accordingly, the Company wrote
off goodwill of $3.5 million by a charge against operations. The goodwill was
originally recorded at approximately $4.2 million as a result of acquisitions in
1989 and 1993. Based on the analysis performed, the Company determined that the
patents were not impaired.
6. INCOME TAXES
The income tax benefit consists of reversal of deferred tax liabilities
previously recorded. The following is a reconciliation of income taxes shown in
the financial statements and amounts computed using the federal statutory rate
(in 000's):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
Federal tax benefits of loss $ 156 $ 2,598 $ 1,673
Effect of permanent differences,
primarily goodwill (92) (1,440) --
Reversal of temporary differences 86 -- --
Increase in valuation allowance -- (894) (1,673)
------------ ------------ --------------
$ 150 $ 264 $ --
============ ============ ==============
</TABLE>
F-19
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
The major deferred tax assets (liabilities) at December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
---------------- ---------------
<S> <C> <C>
Deferred tax assets
Receivables $ 49 $ 170
Inventory 281 152
Net operating loss carry forwards 2,540 4,074
Capital loss carry forwards 325 325
Patents 195 112
Tax credit carryovers 73 73
Accrued expenses 252 371
Other 100 51
---------------- ---------------
3,815 5,328
Less valuation reserve (3,655) (5,328)
---------------- ---------------
160 --
---------------- ---------------
Deferred tax liabilities:
Machinery and equipment (160) --
---------------- ---------------
Net deferred tax (liability) $ -- $ --
================ ===============
</TABLE>
F-20
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
Net operating loss carry-forward(s) at December 31, 1996, total approximately
$10,940,000 available to offset federal taxable income and approximately
$5,088,000 available to offset state taxable income. These carry-forward(s)
expire as follows (in 000's):
Net Operating Loss Carry-
forwards
------------------------------
Expires Federal State
------- ----------- -----------
2007 $ 74 $ --
2008 672 --
2009 384 98
2010 5,709 2,854
2011 4,101 2,136
----------- -----------
$ 10,940 $ 5,088
=========== ===========
In addition, the Company has approximately $800,000 in capital loss
carry-forward(s) and $70,000 in tax credits available to offset future federal
income tax. The capital loss carry-forward(s) expire in 2000 but can only be
applied to future capital gains. The tax credits expire in 2004.
Realization of deferred tax assets is contingent upon the Company's ability to
generate sufficient future taxable income during the carry-forward(s) period. In
addition, federal and state regulations place limits on the availability of
operating loss and credit carry-forward(s) in situations where a "change in
ownership," as defined by tax regulations, has occurred. The Company has
experienced significant changes in stock ownership in the past. Future changes
in stock ownership or future options and/or stock purchase warrants may affect
the availability of these carry-forward(s). As discussed in Note 14, the Company
has agreed to a merger which would limit the amount and the utilization of the
net operating loss carry-forwards. At December 31, 1996, the Company had
recorded a valuation reserve of $5,328,000 against deferred tax assets due to
the uncertainty as to their ultimate realization.
7. COMMITMENTS AND CONTINGENCIES
A. Employment Contracts. The Company has employment agreements with six
of its employees, expiring through 1999. Annual base salary amounts
over the terms of these agreements are, in the aggregate, as of
December 31, 1996, as follows (in 000's):
F-21
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1997 $ 536
1998 438
1999 119
---------
$ 1,093
=========
In addition to the annual base salaries, some of these agreements call
for payments of certain bonuses and incentive compensation, none of
which were achieved or accrued for in 1996. Two former employees were
terminated and the related severance expense of approximately $200,000
was accrued for in 1996.
B. Operating Leases. The Company is obligated under three leases covering
its California facilities, two of which expire in August 1997 and call
for base rent of $1,550 per month with the third lease expiring on
September 30, 1998, and calling for a base rent of $8,663 per month.
Future minimum lease payments for the years ended December are: 1997,
$116,000; 1998, $78,000; total, $194,000.
Aggregate rent expense was $178,000, $208,000 and $185,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
C. Litigation. On December 10, 1996, Hamlet & Smith, Inc. filed a
complaint against Dynamotion in the United States District Court,
Central District of California, Santa Ana Division, alleging breach of
contract, wrongful termination, bad faith breach of contract, and for
reasonable value of services rendered. The claims are based on the
termination of a sales representative agreement between the Company
and Hamlet & Smith. The complaint requests general damages of
$967,000, as well as consequential damages, punitive damages, costs of
suit and pre-judgment interest. On February 4, 1997, Robert G. Smith
filed a complaint against Dynamotion in the Superior Court of the
State of California for the County of Orange alleging breach of
contract and claiming reasonable value of services rendered. The
claims are based on an alleged third party beneficiary relationship
arising from an alleged sales agent arrangement. The complaint
requests damages of $212,637, cost of suit, reasonable attorneys' fees
and interest. Plaintiff's Motion for Writ of Attachment was granted on
February 27, 1997. Dynamotion intends to vigorously defend itself in
the foregoing actions. However, at this time, an estimate of likely
outcome, or an estimate of the upper amount of the range of possible
loss, if any, is not determinable. The estimate of the lower amount of
the range of possible loss is $487,000, which has been accrued in
accounts payable at December 31, 1996.
F-22
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
In the normal course of business, the Company also has been named as a
defendant in various matters, including collection of past due amounts
owed and claims for damages alleging breach of contract in amounts
totaling approximately $1.1 million plus interest, legal fees, etc.
Total amounts accrued at December 31, 1996 related to all claims
including those recorded in accounts payable are approximately
$897,000. Manage ment believes the amounts accrued for awards or
assessments related to these actions is a better estimate than any
other amount.
8. SHAREHOLDERS' EQUITY
In April and May 1991, the Company sold a total of 572,360 units to the public
for a price of $9.00 per unit. Each unit consisted of three-fourths shares of
common stock, par value $0.04 per share, and two redeemable common stock
purchase warrants. Each of the warrants contains anti-dilution provisions
providing for an adjustment of the exercise price and number and kind of shares
of stock or warrant underlying such warrant and is subject to adjustment, upon
the occurrence of certain events. The warrants may be redeemed at the option of
the Company, commencing ninety days after the date of the offering upon thirty
days written notice from the Company at a redemption price of $.05 per warrant.
On July 19, 1993, the Company consummated an offering of 1,832,325 shares of
Class A convertible preferred stock at $5.50 per share, resulting in net
proceeds of $8.3 million. Each share of preferred stock is convertible into
common stock. At December 31, 1996, the preferred stock is convertible into 1.05
shares of common stock and two redeemable common stock purchase warrants. The
conversion rate is subject to certain future adjustments. The preferred stock
pays a non-cumulative dividend of $.44 per share in each fiscal year in which
the Company has funds legally and contractually available, provided such
dividends may be payable in shares of common stock of an equal market value for
any year in which the Company incurs a net loss. In April 1994, 1995, and 1996
the Company issued 60,477, 164,921 and 195,505 shares of common stock, as
adjusted, to the preferred stockholders. The preferred stock carries a
liquidation preference of $5.50 per share. The preferred stock and the warrants
issuable upon conversion of the preferred stock are redeemable at the Company's
option under certain conditions. In connection with the preferred stock
offering, the underwriters received warrants to purchase 165,000 shares of
preferred stock at $8.25 per share, exercisable over a four-year period from the
first anniversary of the offering date.
As a result of a prior business combination, 250,000 shares of common stock
issued on July 27, 1993 were subject to a put feature, which obligated the
Company to repurchase such shares at a price of $14.00 per share, to be settled
(at the Company's option) in either cash or shares of
F-23
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
the Company's common stock with a total trading price of $3,500,000. The put
feature was exercised by the holders thereof on November 27, 1995, resulting in
the issuance of approximately 612,000 shares of common stock.
Concurrent with the New Debt Facility (Note 3), on March 20, 1996, the Company
issued to new investors 2,000,000 new shares of Class B convertible preferred
stock, par value $.01, and warrants described below in exchange for $2,000,000.
The preferred stock is entitled to receive an annual 8% cumulative dividend,
payable in cash or shares of common stock at the option of the Company. Each
share of preferred stock is convertible to approximately .99 shares of common
stock at any time. Each holder of preferred stock originally had the right to
put the shares back to the Company any time after the fifth anniversary of their
issuance date for cash at a price equal to the liquidation value ($1.00 per
share) thereof, plus all accrued and unpaid dividends. (See paragraph following)
The preferred stock votes with the common stock as a single class on most
corporate matters with each share of preferred stock entitled to the number of
votes equal to the number of shares of common stock into which it is
convertible. The preferred stock also contains demand registration rights once
converted to common stock. In connection with the issuance of Class B preferred
stock, the Company issued warrants to acquire 330,302 shares of common stock of
$1.01 per share. The warrants expire on March 25, 2001 and were recorded at
their estimated fair value of $270,000. Approximately $266,000 of issuance costs
and $270,000 of warrant value were offset against the proceeds from the sale of
Class B preferred stock. The carrying value of the Class B preferred stock is
being accreted to redemption value over a five year period by a charge to
accumulated deficit.
In July 1996, the Company issued 250,000 shares in a private placement of its
series Class B redeemable cumulative convertible preferred stock for a total
price of $250,000. The shares are pari passu with the original issuance of
series Class B shares issued on March 20, 1996 with the following exceptions (i)
the shares have no demand registration rights and (ii) the piggyback
registration rights associated with such shares are subordinate to the rights of
the other shares of such preferred stock.
Both the Class B preferred stock and the common stock warrants issued thereto
contain anti-dilution provisions that will increase the common stock issuable
upon the occurrence of certain events. The Company has also entered into an
agreement to issue a warrant to acquire .538 shares of common stock for each
share of common stock acquired with the warrants issued in connection with the
issuance of Class A preferred stock discussed in Note 9. The warrant would
provide for a purchase price equal to the weighted average price paid by the
Class A preferred stock warrant holders. The warrant is to be issued in July
1998 and expires on March 20, 2001. The agreement also contains acceleration
clauses in the event of the sale of 50% or more of the Company's stock.
F-24
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
On November 22, 1996, the holders of the Company's Class B Cumulative
Convertible Preferred Stock voted to amend the provisions of the Company's
Certificate of Incorporation regarding redemption of such stock. Each holder of
preferred stock had the right to put the shares back to the Company any time
after the fifth anniversary of their issuance date for cash at a price equal to
the liquidation value ($1.00 per share) thereof, plus all accrued and unpaid
dividends. In the amendment, the investors agreed to relinquish control of the
put feature to the Company in return for an increase in the annual dividend rate
to $0.12 per share on March 21, 2001, and further increase by one cent per share
on each anniversary of such date up to a maximum of $0.20 per share. At December
31, 1996, cumulative but undeclared dividends on Class B preferred stock is
$130,000.
9. STOCK OPTIONS AND WARRANTS
At December 31, 1996, the Company has 1,356,250 shares of common stock for
issuance to key employees and others under the 1991, 1993 and 1995 stock option
plans as approved by the shareholders. Options are granted at prices equal to
the fair value of the stock on the dates of grant, and are exercisable in
varying amounts over a four-year term from the date of grant. The options expire
ten years from the date of grant. The Company has issued approximately 740,000
more options outside of the stockholder approved plans.
As permitted under generally accepted accounting principles, grants under these
plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the stock option plans. The Company recorded $59,000 in
compensation expense for stock options granted to consultants for the
performance of services. Had compensation cost for all of the stock-based
compensation plans been determined based on the grant date fair values of awards
(the method described in FASB Statement No. 123), reported net loss and loss per
common share would have been increased to the pro forma amounts shown below:
F-25
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
1995 1996
------------ -----------
Net (loss) (in thousands):
As reported $ (7,328) $ (4,765)
Pro forma (7,588) (5,049)
Primary and fully diluted earnings per share:
As reported $ (4.53) $ (1.82)
Pro forma $ (4.68) $ (1.92)
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1995 and 1996, respectively: no dividends for all
years; price volatility of 52% and 55%, risk-free interest rates of 4.25%
and 6.15%; and expected lives of 4 and 3 years.
A summary of the status stock option plans at December 31, 1994, 1995 and
1996 and changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Under option, beginning of
year 206 $ 4.24 242 $ 4.58 1,181 $ 1.55
Granted 61 6.00 1,078 1.08 615 1.58
Expired (25) 6.00 (82) 5.36 (201) 2.91
Exercised -- -- (57) .05 -- --
----- ------ ------ ------ ------ ------
Under option, end of year 242 $ 4.58 1,181 $ 1.55 1,595 $ 1.39
===== ====== ====== ====== ====== ======
Options exercisable, end of
year 49 696 971
===== ====== ======
Available for grant, end of
year 208 175 450
===== ====== ======
Weighted Average Fair
Value per option of options
granted during the year $ .51 $ .69
====== ======
</TABLE>
F-26
<PAGE>
A further summary about options outstanding at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
Range of Exercise Prices Weighted
Average Weighted Weighted
Remaining Average Average
Shares Contractual Exercise Shares Exercise
(000's) Life Price (000's) Price
------ ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
$1.00 to $1.188 926 9.06 $1.00 587 $1.00
$1.50 to $1.63 623 9.11 1.59 354 1.60
$5.00 to $6.00 31 6.95 5.98 16 5.98
$8.00 15 7.87 $8.00 15 $8.00
----- ----
1,595 9.03 $1.39 971 $1.41
===== ==== ===== ==== =====
</TABLE>
F-27
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
Warrants
The Company has issued warrants to purchase common stock in connection with the
offerings of preferred and common stock discussed in Note 8 and to various
underwriters associated with these offerings. Certain warrants contain
antidilutive provisions which adjust the number and price paid for the common
stock upon the occurrence of certain events, as reflected below.
A summary of the warrants outstanding after adjustment for the transactions
discussed above is as follows:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price
------------ ---------
(in 000's)
<S> <C> <C>
Issued upon conversion of Class A preferred stock to common
stock, expires in July 1998 (1)(2) 1,778 4.37
Unissued warrants on Class A preferred stock not converted to
common stock, issuable upon conversion, expiring in July
1998 (1)(2) 1,162 4.37
Underwriters' warrants to acquire 165,000 shares of Class A
preferred stock at $8.25, expiring in July 1998, convertible
into common stock and common stock warrants 168 8.09
Warrants underlying Class A preferred stock discussed
above (1)(2) 211 4.37
Issued to public relations firm, exercisable through February
1998 3 8.00
Issued in connection with Class B Preferred Stock (1) 330 1.01
------------
3,652
============
(1) Contain anti-dilutive provisions discussed above.
(2) Subject to an agreement entered into on March 20, 1996, which will require
the Company to issue a warrant to purchase common stock, equivalent to .538
times the number of shares issued under these warrants at the weighed
average price paid by these warrant holders. Maximum amount of common stock
issuable under this agreement is 1,351,000.
</TABLE>
F-28
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. RELATED PARTY TRANSACTIONS
A former officer of the Company is a partner in the law firm that served as the
Company's legal counsel through December 1995. Aggregate amounts paid or accrued
to the law firm amounted to $205,000, $195,000 and $115,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. Approximately $89,000 of the
amount accrued to the law firm is classified as a note payable which is
currently in default. (See Note 4.)
11. NOTES RECEIVABLE
Notes receivable includes a receivable from a customer in connection with the
Company's sale of a drill machine. The note receivable carries interest at the
rate of 9% per annum, with principal and interest, payable in 48 equal payments
beginning in March 1995. In February 1996, the customer filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. The receivable is secured by a
first priority lien and the Company believes it is adequately reserved for any
potential loss. In 1996 the Company received no payments on the note and
recognized no interest income.
12. MAJOR CUSTOMERS AND FOREIGN SALES
Three customers accounted for approximately 50% of the Company's 1996 revenues,
specifically IBM for 21%, Johnson Matthey for 16% and ACI (a Johnson Matthey
affiliate) for 13%. These customers did not individually account for more than
10% of the Company's revenues for 1994 and 1995. During 1995, three companies,
specifically, Greatsino Electronics, Ltd. for 23%, Advanced Circuits, Inc. for
9% and Howteh Enter. Co. for 6% (sales representatives for Dynamotion), in the
aggregate, accounted for more than 35% of Dynamotion's total revenues. During
1995 and 1996, the Company sold $6,692,000 and $1,972,000, respectively, to
companies located in the Far East.
13. POTENTIAL ACQUISITION
During the fourth quarter of 1996, the Company suspended collection efforts on a
$468,000 receivable from the sale of two machines recorded in the first quarter
of 1996 due to preliminary discussions with that customer about possible
acquisition by the Company. As a result of the suspension of the collection
efforts and the related acquisition discussions, the Company reversed the sale
and related profit of approximately $170,000. In January 1997, the Company
signed a nonbinding letter of intent regarding the possible acquisition. If the
acquisition is completed, the acquired assets other than the two machines would
be insignificant.
F-29
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
14. MANAGEMENT PLANS
The Company's financial statements have been prepared assuming that the Company
will continue in existence as a going concern. The Company has experienced
substantial losses and cash flow drains from operations in the past few years.
At December 31, 1996 current liabilities exceed current assets by approximately
$4.9 million and total liabilities exceed total assets by $898,000. The Company
is in default of its operating line of credit covenants, is in arrears on
payments on other notes payable and has substantial past due amounts owed to
vendors. Certain vendors have placed the Company on cash payment terms for
purchases. These conditions call into question the ability of the Company to
continue as a going concern.
Management attributes the Company's financial condition and recent losses to a
number of factors. The losses in the past years have severely depleted the
Company's resources and as a result operating and financing costs have
increased. Management's ability to efficiently schedule production, purchase
materials in economic quantities, negotiate satisfactory pricing for the sale of
its products, reorganize operating departments, etc. are limited. The costs of
financing have increased both in terms of the stated rates and legal costs
associated with agreements. The Company's backlog has increased but management
has not been able to increase production output. Several arrangements have been
made to increase cash flow by accelerating payment dates of receivables at
substantial discounts.
Management has taken a number of actions to reduce operating expenses and
losses. These include disposing of operations and product lines that did not fit
with the Company's long term strategies and were producing losses, 30%
reductions in work force in the second quarter of 1996 and replacement of senior
management members in 1995 and 1996. Management has not quantified an amount,
however, it believes substantial additional capital is necessary for the Company
to survive.
Management's primary plan to increase its chances for survival is a planned
merger. The Company executed a merger agreement with Electro Scientific
Industries, Inc. (ESI) in January 1997. This agreement is subject to approval by
the Company's shareholders which is in process. Under certain conditions, if
management elects not to complete this merger and the Company subsequently
merges with any other party within one year, it will owe ESI a $1 million
termination fee.
Management is not currently pursuing other mergers or other sources of capital.
If the ESI merger is not consummated, the Company's financial position may be
such that other sources of capital will not be available to it. Management
believes there is substantial doubt about the Company's ability to survive
without additional financing. If the Company is unable to continue
F-30
<PAGE>
DYNAMOTION/ATI CORP.
NOTES TO FINANCIAL STATEMENTS (Continued)
to operate and is forced to liquidate its assets, it may not recover their
recorded amounts. The financial statements do not include any adjustments as a
result of this uncertainty.
F-31
<PAGE>
ANNEX A
AGREEMENT
OF
REORGANIZATION AND MERGER
among
Electro Scientific Industries, Inc.,
an Oregon corporation,
Dynamotion/ATI Corp.,
a New York corporation,
Dynamotion Merger Corp.,
a New York corporation,
and
Certain Key Shareholders of
Dynamotion/ATI Corp.
January 24, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
1.1 The Merger..............................................................2
1.2 Effect of Merger........................................................2
1.3 Merger Consideration....................................................3
1.3.1 Dynamotion Stock................................................4
1.3.2 Merger Corp. Stock..............................................4
1.3.3 Options.........................................................4
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..............................................9
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................................................................11
1.8 Subsequent Actions.....................................................11
ARTICLE II
FURTHER AGREEMENTS
2.1 Employee Agreements....................................................12
2.2 Pledge and Escrow Agreement............................................12
2.3 Noncompetition Agreement of Certain Dynamotion Executive Officers......12
2.4 Standstill Agreements..................................................13
2.5 Affiliate Representation Letters.......................................13
2.6 Voting Agreement.......................................................13
2.7 Exercise of Class B Warrants...........................................13
2.8 Termination of Agreement Relating to Z Warrants........................13
2.9 Termination of Underwriters' Warrants..................................14
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Dynamotion...........................14
3.1.1 Organization and Status........................................14
ii
<PAGE>
3.1.2 Capitalization.................................................15
3.1.2.1 Capital Structure.....................................15
3.1.2.2 Dynamotion Outstanding Securities Holders.............16
3.1.2.3 Redemption of Z Warrants..............................16
3.1.2.4 Convertible Debt......................................17
3.1.3 Corporate Authority............................................17
3.1.4 Section 368(a)(2)(D) Asset Requirement.........................17
3.1.5 Governmental Filings...........................................18
3.1.6 Investments; Subsidiaries......................................18
3.1.7 No Adverse Consequences........................................18
3.1.8 Financial Statements...........................................19
3.1.9 Undisclosed Liabilities........................................20
3.1.10 Absence of Certain Changes or Events...........................20
3.1.10.1 Absence of Changes or Events Since December 31,
1995.................................................20
3.1.10.2 Absence of Changes or Events Since September 30,
1996.................................................21
3.1.11 Prohibited Payments............................................23
3.1.12 Litigation.....................................................23
3.1.13 Compliance with Laws; Judgments................................24
3.1.14 Employment Matters.............................................24
3.1.14.1 Labor Matters........................................24
3.1.14.2 Employee Benefits....................................25
3.1.14.3 Employment Agreements................................27
3.1.14.4 Compensation.........................................27
3.1.14.5 Confidentiality and Inventions Agreements............28
3.1.15 Title to and Condition of Real Property........................28
3.1.16 Title to and Condition of Fixed Assets.........................29
3.1.17 Intellectual Property..........................................29
3.1.18 Certain Contracts and Arrangements.............................30
3.1.19 Status of Contracts............................................31
3.1.20 Insurance......................................................32
3.1.21 Permits and Licenses...........................................33
3.1.22 Taxes..........................................................34
3.1.22.1 Returns..............................................34
3.1.22.2 Taxes Paid or Reserved...............................35
3.1.22.3 Net Operating Losses.................................36
3.1.22.4 Definition...........................................36
3.1.23 Related Party Interests........................................36
3.1.24 No Powers of Attorney or Restrictions..........................37
3.1.25 Environmental Conditions.......................................37
3.1.25.1 Compliance...........................................37
3.1.25.2 Hazardous Substances.................................38
3.1.25.3 Filings and Notices..................................39
3.1.25.4 Definitions..........................................39
3.1.26 Consents and Approvals.........................................40
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3.1.27 Records........................................................40
3.1.28 Receivables....................................................40
3.1.29 Bank Accounts..................................................41
3.1.30 Product Warranties.............................................41
3.1.31 Inventories....................................................42
3.1.32 Product Liability..............................................42
3.1.33 Customer Information...........................................42
3.1.34 Accounting Controls............................................43
3.1.35 Liabilities Incurred in Ordinary Course........................43
3.1.36 Continuity of Business Enterprise..............................43
3.1.37 Fair Market Value of Dynamotion Assets.........................43
3.1.38 No Chapter 11 Proceedings......................................44
3.1.39 Not an Investment Company......................................44
3.1.40 Not a Real Property Holding Company............................44
3.1.41 Proxy Statement/Prospectus.....................................44
3.1.42 Dynamotion SEC Reports.........................................44
3.1.43 Compliance of Conversion Proposal, Etc.........................45
3.1.44 Brokers and Finders............................................46
3.1.45 Accuracy of Representations and Warranties.....................46
3.2 Representations and Warranties of Key Shareholders.....................46
3.2.1 Authority......................................................46
3.2.2 Filings........................................................47
3.2.3 Proxy Statement/Prospectus.....................................47
3.3 Representations and Warranties of ESI..................................48
3.3.1 Organization and Status........................................48
3.3.2 Capitalization.................................................48
3.3.3 Corporate Authority............................................49
3.3.4 Control of Merger Corp Before Merger...........................49
3.3.5 Control of Merger Corp After Merger............................49
3.3.6 Continuation of Dynamotion's Business..........................49
3.3.7 No Plan to Reacquire Merger Consideration......................49
3.3.8 No Plan to Liquidate or Merge Merger Corp......................50
3.3.9 Governmental Filings...........................................50
3.3.10 ESI SEC Reports................................................50
3.3.11 Litigation.....................................................51
3.3.12 No Adverse Consequences........................................51
3.3.13 Not Investment Companies.......................................52
3.3.14 Proxy Statement/Prospectus.....................................52
3.3.15 Brokers and Finders............................................52
3.4 Representations and Warranties Relating to Merger Corp.................52
3.4.1 Organization and Status........................................52
3.4.2 Capitalization.................................................53
3.4.3 Corporate Authority............................................53
3.4.4 Governmental Filings...........................................53
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3.4.5 Litigation.....................................................54
3.4.6 No Operations..................................................54
3.4.7 No Change of Control...........................................54
3.4.8 Continuation of Dynamotion's Business..........................54
ARTICLE IV
COVENANTS
4.1 Mutual Covenants.......................................................54
4.1.1 Consents and Approvals.........................................54
4.1.2 Reasonable Efforts.............................................54
4.1.3 Publicity......................................................55
4.1.4 Confidentiality................................................55
4.2 Covenants of Dynamotion................................................55
4.2.1 Conduct of Business............................................55
4.2.2 Acquisition Proposals..........................................58
4.2.3 Investigations and Customer Visits.............................59
4.2.4 Dynamotion Shareholders Meeting................................59
4.2.5 Information for Proxy Statement/Prospectus and Registration
Statement......................................................60
4.2.6 Conversion, Exercise, Redemption, or Termination of
Dynamotion Common Stock Equivalent Securities..................60
4.2.7 Compliance With Convertible Debt Obligations...................61
4.2.8 Consents.......................................................62
4.3 Covenants of ESI.......................................................62
4.3.1 Registration Statement.........................................62
4.3.2 Listing of ESI Common Stock....................................62
4.3.3 Issuance of Certificates.......................................63
4.3.4 Registration and Reservation of Option Shares..................63
4.3.5 Indemnification Provisions of Merger Corp.'s Certificate.......63
4.4 Covenants of Merger Corp...............................................63
ARTICLE V
CONDITIONS
5.1 Conditions to the Obligations of All Parties...........................64
5.1.1 Regulatory Approvals...........................................64
5.1.2 Litigation.....................................................64
5.1.3 Registration of Securities; Listing............................65
5.2 Conditions to the Obligations of Dynamotion and the Key Shareholders...65
5.2.1 Representations, Warranties and Covenants......................65
5.2.2 No Material Adverse Change.....................................66
5.2.3 Opinion of Counsel.............................................66
5.2.4 Dynamotion Shareholder Approval, Etc...........................66
5.3 Conditions to the Obligations of ESI and Merger Corp...................67
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5.3.1 Representations, Warranties and Covenants......................67
5.3.2 Opinions of Counsel............................................68
5.3.3 Consents and Approvals.........................................68
5.3.4 No Material Adverse Change.....................................68
5.3.5 Other Agreements...............................................68
5.3.6 Related Party and Other Agreements.............................69
5.3.7 Updated Financial and Other Information........................69
5.3.8 Environmental Report...........................................69
5.3.9 Dynamotion Shareholder Approval, Etc...........................70
5.3.10 Dynamotion Dissenters..........................................70
5.3.11 Conditions Relating to Z Warrants and Convertible Debt.........70
5.3.12 Arthur Andersen LLP Analysis of In-Process Research and
Development....................................................70
5.3.13 Consent of Underwriters........................................71
5.3.14 Governmental Entity Consents...................................71
5.3.15 Dynamotion Revised Schedules...................................71
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival...............................................................71
6.1.1 Survival of Representations and Warranties.....................71
6.1.2 Survival of Article IV Covenants...............................72
6.2 Indemnification........................................................72
6.3 Escrow.................................................................73
6.4 Threshold for Indemnity Claims.........................................73
6.5 Claim Procedure for Indemnification....................................73
6.5.1 Notice.........................................................74
6.5.2 Response to Third Party Claim..................................74
6.5.3 Diligent Conduct...............................................74
ARTICLE VII
TERMINATION
7.1 Termination by Mutual Consent..........................................75
7.2 Termination Under Certain Other Conditions.............................75
7.2.1 Automatic Termination..........................................75
7.2.2 Termination by ESI or Dynamotion...............................75
7.3 Effect of Termination and Abandonment..................................76
7.4 Termination Fee........................................................76
ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 Payment of Expenses....................................................77
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8.2 Entire Agreement.......................................................77
8.3 Assignment.............................................................77
8.4 Binding Effect; No Third Party Benefit.................................77
8.5 Amendment and Modification.............................................78
8.6 Waiver of Conditions...................................................78
8.7 Counterparts...........................................................78
8.8 Captions...............................................................78
8.9 Subsidiary.............................................................78
8.10 Notices................................................................79
8.11 Choice of Law..........................................................80
8.12 Attorneys' Fees........................................................80
8.13 Separability...........................................................80
8.14 Reliance on Dynamotion and Key Shareholder Representations and
Warranties.............................................................81
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EXHIBITS
A - Plan of Merger
B1 - Form of California ESI Confidentiality and Inventions Agreement
B2 - Form of Standard ESI Confidentiality and Inventions Agreement
C - Form of Pledge and Escrow Agreement
D - Form of Noncompetition Agreement
E - Form of Standstill Agreement
F - Form of Affiliate Representation Letter
G - Form of Voting Agreement
H - Form of Dynamotion Confidentiality and Inventions Agreement
I - Form of Amendments to Dynamotion Certificate of Incorporation
J - Form of Counsel Opinion for ESI
K - Form of Counsel Opinion for Dynamotion
L - Form of Counsel Opinion for Dynamotion Investment L.L.C.
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SCHEDULES
Schedule Page
-------- ----
A Key Shareholders.................................................1
1.3.3 Schedule of Non-Plan Stock Option Agreements
Between Dynamotion and Certain Dynamotion
Officers and Directors...........................................4
2.3 Schedule of Shareholders Signing Noncompetition
Agreement.....................................................12
2.5 Schedule of Affiliates Signing Affiliate Representation
Letter........................................................13
2.6 Schedule of Shareholders Signing Voting Agreements..............13
3.1-K Reference of Knowledge of Dynamotion............................16
3.1.2.1 Dynamotion Capital Structure....................................15
3.1.2.2 Dynamotion Securities Holders...................................16
3.1.2.3(a) Outstanding Z Warrants..........................................16
3.1.2.3(b) Steps Required to Redeem Z Warrants.............................17
3.1.2.4 Issuers of Convertible Debt.....................................17
3.1.5 Dynamotion Governmental Filings.................................18
3.1.6(a) Dynamotion Investments..........................................18
3.1.6(b) Previous Subsidiaries...........................................18
3.1.7 Adverse Consequences............................................19
3.1.9 Undisclosed Dynamotion Liabilities..............................20
3.1.10.1 Changes Since December 31, 1995.................................20
3.1.10.2 Changes Since September 30, 1996................................21
3.1.12 Pending Litigation..............................................23
3.1.14.2 Employee Benefits...............................................25
3.1.14.3 Employment Manuals..............................................27
3.1.14.4 Compensation....................................................27
3.1.15 Leased and Previously Leased Real Property......................28
3.1.16 Tangible Personal Property......................................29
3.1.17(a) Intellectual Property...........................................29
3.1.17(b) Intellectual Property Claims and Encumbrances...................29
3.1.18 Contracts and Arrangements......................................30
3.1.19 Status of Contracts.............................................32
3.1.20 Insurance Policies..............................................32
3.1.21(a) Permits.........................................................33
3.1.21(b) List of Permits for Which Consent to Merger Is Needed...........33
3.1.22.1 Tax Matters.....................................................35
3.1.23 Related Party Interests and Agreements..........................36
3.1.24 Powers of Attorney and Restrictions.............................37
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Schedule Page
-------- ----
3.1.25.2 Disclosure Concerning Hazardous Substances and
Underground Tanks.............................................39
3.1.28(a) Disclosures Concerning Collectibility of Receivables............40
3.1.28(b) Schedule of Accounts Payable Balances...........................40
3.1.29 Bank Accounts...................................................41
3.1.30 Product Warranty................................................41
3.1.31 Inventory.......................................................42
3.1.32 Product Liability...............................................42
3.1.33 Customer Information............................................42
3.1.42 Late or Omitted Dynamotion SEC Filings..........................45
3.2 Key Shareholder Disclosure Schedule.............................46
3.3 ESI Disclosure Schedule.........................................48
4.2.1 Changes in Dynamotion's Conduct of Business.....................55
5.3.6 Additional Agreements of Dynamotion To Be Terminated............69
5.3.12 In-Process Research Valuation...................................71
6.3 Schedule of Shares of ESI Common Stock To Be Withheld
and Deposited into Escrow.....................................73
8.10 Key Shareholder Representatives.................................80
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INDEX OF TERMS
Term Section Page
- ---- ------- ----
Acquisition Transaction Section 4.2.2 58
Agreement Preamble 1
Adjusted Dynamotion Common Stock Total Section 3.1.2.1 15
Affiliate Representation Letter Section 2.5 13
Average Sale Price Section 1.3(a) 3
Bylaws Section 3.1.1 14
California ESI Confidentiality Agreement Section 2.1 12
Certificate of Incorporation Section 3.1.1 14
Claim Notice Section 6.5.1 74
Claim Threshold Section 6.4 73
Class A Stock Section 1.3(b) 4
Class B Additional Warrant Agreement Section 2.8 14
Class B Stock Section 1.4.1 6
Class B Warrants Section 2.7 13
Closing Section 1.7 11
Closing Date Section 1.7 11
Code Recital B 1
Common Stock Equivalents Section 3.1.2.1 15
Condition Completion Date Section 1.7 11
Confidentiality Agreement Section 4.1.4 55
Contracts Section 3.1.19 31
Conversion Proposal Section 4.2.6 61
Conversion Ratio Section 1.3 3
Conversion Ratio Denominator Section 1.3(b) 4
Conversion Ratio Numerator Section 1.3(a) 3
Convertible Debt Section 3.1.2.4 17
Current Balance Sheet Section 3.1.8 19
Damages Section 6.2 72
DB Plan Section 3.1.14.2 27
Dissenters' Rights Section 1.5.1 9
Dissenting Shareholder Section 1.5.2 10
Dissenting Shares Section 1.5.2 10
Dynamotion Preamble 1
Dynamotion Common Stock Section 1.1 2
Dynamotion Common Stock
Equivalent Securities Section 3.1.2.1 15
Dynamotion Option Plans Section 1.3.3 5
Dynamotion Outstanding Securities Section 3.1.2.1 15
Dynamotion SEC Reports Section 3.1.42 45
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Term Section Page
- ---- ------- ----
Effective Time Section 1.1 2
Environmental Law Section 3.1.25.4(a) 39
ERISA Section 3.1.14.2 26
ERISA Plans Section 3.1.14.2 26
Escrow Agreement Section 2.2 12
Escrowed Property Section 6.3 73
ESI Preamble 1
ESI Common Stock Section 1.1 2
ESI Disclosure Schedule Section 3.3 48
ESI SEC Reports Section 3.3.10 50
Financial Statements Section 3.1.8 19
Governmental Entity Section 3.1.5 18
Hazardous Substance Section 3.1.25.4(b) 40
Holders Section 3.1.2 16
Indemnified Parties Section 6.2 72
Intellectual Property Section 3.1.17 29
Key Shareholder(s) Preamble 1
Key Shareholder Disclosure Schedule Section 3.2 46
Key Shareholder Representatives Section 8.10 80
Knowledge of Dynamotion Section 3.1.2.2 16
Leased Real Property Section 3.1.15 28
Litigation Reserves Section 3.1.12 23
Merger Section 1.1 2
Merger Consideration Section 1.3 3
Merger Corp. Preamble 1
Merger Corp. Certificate Section 4.3.5 63
Noncompetition Agreement Section 2.3 12
NYBCL Section 1.2 2
Options Section 1.3.3 5
Past CGL Policies Section 3.1.20 33
Permits Section 3.1.21 33
Plan of Merger Section 1.1 2
Policies Section 3.1.20 32
Previous Subsidiaries Section 3.1.6 18
Previously Leased Real Property Section 3.1.15 28
Proxy Statement/Prospectus Section 4.2.4 59
Returns Section 3.1.22.1 34
SEC Section 3.1.42 19
Special Meeting Section 1.5.1 9
Standard ESI Confidentiality Agreement Section 2.1 12
Standstill Agreement Section 2.4 13
Subsidiary Section 8.9 78
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Term Section Page
- ---- ------- ----
Tangible Personal Property Section 3.1.16 29
Taxes Section 3.1.22.3 36
Termination Fee Section 7.4 76
Third Party Claim Section 6.5.2 74
Underwriters Section 4.2.6 61
Underwriters' Warrants Section 2.9 14
Updated Financial Statements Section 5.3.7 69
Voting Agreement Section 2.6 13
Voting Dynamotion Securities Section 4.2.4 60
Warrant Agent Section 4.2.6 61
Z Warrants Section 1.3(b) 4
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AGREEMENT
OF
REORGANIZATION AND MERGER
THIS AGREEMENT OF REORGANIZATION AND MERGER (this "Agreement") is entered
into as of January 24, 1997 among Electro Scientific Industries, Inc., an
Oregon corporation ("ESI"), Dynamotion/ATI Corp., a New York corporation
("Dynamotion"), Dynamotion Merger Corp., a New York corporation ("Merger
Corp."), and the shareholders of Dynamotion listed on Schedule A (each, a "Key
Shareholder" and together, the "Key Shareholders").
RECITALS
A. The Boards of Directors of ESI and Dynamotion have determined that it
is in the best interests of their respective shareholders for ESI to acquire
Dynamotion upon the terms and subject to the conditions set forth in this
Agreement.
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").
C. It is further intended that certain rights relating to the acquisition
of, or conversion of securities into, the common stock or other capital stock
of Dynamotion (including certain warrants and convertible preferred stock) will
be exercised, converted, or redeemed according to their respective terms, or
will be terminated, before the consummation of the Merger.
<PAGE>
AGREEMENT
In consideration of the representations, warranties, covenants,
agreements and conditions contained herein, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Pursuant to the laws of the State of New York, and subject
to and in accordance with the terms and conditions of this Agreement and the
Plan of Merger in the form attached hereto as Exhibit A (the "Plan of Merger"),
Dynamotion will be merged with and into Merger Corp., and all shares of Common
Stock of Dynamotion, $0.04 per share par value (the "Dynamotion Common Stock"),
outstanding immediately before the Effective Time (as defined below), excluding
Dissenting Shares (as defined in Section 1.5.2), will be converted into the
right to receive shares of Common Stock of ESI, without par value (the "ESI
Common Stock"), or cash, as provided in Section 1.3. Dynamotion and Merger
Corp. will execute a Certificate of Merger to be filed by the Department of
State of the State of New York on the Closing Date (as defined in Section 1.7)
or as soon thereafter as practicable. The merger of Dynamotion with and into
Merger Corp. (the "Merger") will take effect (the "Effective Time") at the time
when the Certificate of Merger is duly filed by the Department of State of the
State of New York or at such other time as the parties may agree upon in
writing pursuant to applicable law.
1.2 Effect of Merger. At the Effective Time, Dynamotion will be merged
with and into Merger Corp. in the manner and with the effect provided by the
New York Business Corporation Law (the "NYBCL"), the separate corporate
existence of Dynamotion will cease,
A - 2
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and Merger Corp. will be the surviving corporation. From and after the
Effective Time, the Certificate of Incorporation, Bylaws, Board of Directors,
and officers of Merger Corp. in effect or in office, as the case may be,
immediately before the Effective Time will be the Certificate of Incorporation,
Bylaws, Board of Directors, and officers of the surviving corporation;
provided, however, that the Certificate of Incorporation of the surviving
corporation will be amended to effect the name change described in this Section
1.2. The outstanding shares of Dynamotion Common Stock will be converted into
the right to receive shares of ESI Common Stock or cash on the basis, terms and
conditions described in Section 1.3. At the Effective Time, the name of the
surviving corporation will become Dynamotion, Inc.
1.3 Merger Consideration. Each share of Dynamotion Common Stock
outstanding immediately before the Effective Time (excluding each Dissenting
Share) will be converted into the right to receive a fraction of a share of ESI
Common Stock (or cash in lieu of certain fractional shares as provided in
Section 1.4.3) (such ESI Common Stock and/or cash, the "Merger Consideration")
that equals the ratio (the "Conversion Ratio," which will be rounded to the
nearest .0001 of a share) determined by dividing the Conversion Ratio Numerator
by the Conversion Ratio Denominator where:
(a) the "Conversion Ratio Numerator" will be the quotient of
$13,000,000 divided by the per-share price for ESI Common Stock equal to the
average of the high and low sales prices for ESI Common Stock on each of the
five trading days immediately preceding the day before the Closing Date as
reported in The Wall Street Journal (such price, the "Average Sale Price");
A - 3
<PAGE>
(b) the "Conversion Ratio Denominator" will be equal to the number of
shares of Dynamotion Common Stock outstanding immediately before the Effective
Time (including all shares of Dynamotion Common Stock deemed to be outstanding
upon the effectiveness of the conversion contemplated by the Conversion
Proposal (as that term is defined in Section 4.2.6) immediately before the
Effective Time) plus the number of shares of Dynamotion Common Stock that are
issuable upon the exercise of Z Warrants for which holders of Z Warrants have
given exercise notices by 5:00 p.m., New York time, on the Closing Date (which
date will also be the "Redemption Date," as that term is defined in the Z
Warrants). As used herein, the term "Z Warrants" means all warrants to purchase
shares of Dynamotion Common Stock issued upon the conversion of Class A
Non-Cumulative Redeemable Convertible Preferred Shares of Dynamotion, $0.01 per
share par value (such shares, the "Class A Stock").
1.3.1 Dynamotion Stock. Each share of Dynamotion Common Stock that is
outstanding immediately before the Effective Time and that is not a Dissenting
Share will, by virtue of the Merger and without any action on the part of the
holder thereof, cease to exist and be converted into the right to receive the
Merger Consideration.
1.3.2 Merger Corp. Stock. Each share of Common Stock of Merger Corp.
issued and outstanding immediately before the Effective Time will remain
outstanding without change by virtue of the Merger.
1.3.3 Options. Dynamotion's 1991 Stock Option Plan, Dynamotion's 1993
Stock Option Plan, Dynamotion's 1995 Comprehensive Stock Option Plan,
Dynamotion's 1995 Executive Stock Option Plan, and the stock option agreements
listed on Schedule 1.3.3 between Dynamotion and certain current and former
officers and directors of Dynamotion are referred
A - 4
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to herein together as the "Dynamotion Option Plans." Except as otherwise
provided in this Section 1.3.3, the terms and provisions of the stock options
held by those Dynamotion option holders identified in Schedule 3.1.2.2 under
the Dynamotion Option Plans (the "Options") will 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
will be converted into an option to purchase the number of shares of ESI Common
Stock equal to the product (rounded to the nearest whole number) of (x) the
number of shares of Dynamotion Common Stock for which such Option will be
exercisable immediately before the Effective Time multiplied by (y) the
Conversion Ratio. The exercise price per share for each Option after the
Effective Time will be determined by dividing the per share exercise price for
such Option immediately before 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 each Option will to the extent permitted by law and otherwise
reasonably practicable be unchanged. Notwithstanding the foregoing, the terms
of each Option that is an incentive stock option under Section 422 of the Code
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 such
Option within the meaning of Section 424 of the Code. An optionee's continuous
employment with Dynamotion before the Effective Time will be given credit for
purposes of the vesting of the number of shares of ESI Common Stock subject to
exercise under such optionee's converted Option after the Effective Time.
A - 5
<PAGE>
1.4 Surrender and Cancellation of Certificates.
1.4.1 Surrender of Certificates. After the Effective Time, each
holder of shares of Dynamotion Common Stock outstanding immediately before the
Effective Time (other than Dissenting Shares), upon surrender to ESI or its
agent designated for such purpose of a certificate or certificates formerly
representing such shares (or a certificate for shares of Class A Stock or Class
B Cumulative Convertible Preferred Shares of Dynamotion, $0.01 per share par
value ("Class B Stock"), that have been converted into shares of Dynamotion
Common Stock pursuant to the Conversion Proposal) will be entitled to receive
(a) a certificate representing the number of shares of ESI Common Stock into
which such shares of Dynamotion Common Stock have been converted pursuant to
the provisions of Section 1.3 less, in the case of each Key Shareholder, the
number of such shares determined to be Escrowed Property (as defined in Section
6.3) and (b) subject to Section 6.3 and the provisions of the Escrow Agreement
(as defined in Section 2.2), 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 surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the certificate so surrendered 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 reasonable
satisfaction of ESI or its agent that such tax has been paid or is not payable.
If any holder of shares of Dynamotion Common Stock canceled and retired in
accordance with this Agreement is unable to deliver a certificate or
certificates representing such shares, ESI, in the absence of actual notice
that any shares theretofore represented by any such
A - 6
<PAGE>
certificate have been acquired by a bona fide purchaser, will deliver to such
holder the number of shares of ESI Common Stock to which such holder is
entitled in accordance with the provisions of this Agreement upon the
presentation of the following: (i) evidence reasonably satisfactory to ESI (1)
that such person is the owner of the shares theretofore represented by each
certificate claimed by him or her to be lost, wrongfully taken, or destroyed
and (2) that he or she is the person who would be entitled to present such
certificate for exchange pursuant to this Agreement; and (ii) such security or
indemnity as may be reasonably requested by ESI to indemnify and hold ESI and
its transfer agent harmless with respect to such exchange.
1.4.2 Option Agreements. After the Effective Time, each holder of an
Option outstanding immediately before the Effective Time will be deemed to hold
an option exercisable for ESI Common Stock in accordance with the provisions of
Section 1.3.3.
1.4.3 No Fractional Shares. No certificates or scrip evidencing
fractional shares of ESI Common Stock will 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 a fractional share, ESI will pay any holder of
shares of Dynamotion Common Stock who would otherwise have been entitled to a
fraction of a share of ESI Common Stock upon surrender of the certificates
therefor an amount of cash (without interest) determined by multiplying (a) the
Average Sale Price by (b) the fractional share interest in ESI Common Stock to
which such holder would otherwise be entitled. The provisions of this Section
1.4.3 will apply to the aggregate number of shares of Dynamotion Common Stock
held by each holder thereof and each such holder will be required to
simultaneously surrender all certificates relating to shares of
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<PAGE>
Dynamotion Common Stock held by such holder in accordance with the provisions
of Section 1.4 in order to surrender any such certificate.
1.4.4 Cancellation. At the Effective Time all shares of Dynamotion
Common Stock will no longer be outstanding and will automatically be canceled
and retired and will cease to exist, and each certificate previously evidencing
any such shares of Dynamotion Common Stock (and each certificate representing
shares of Class A Stock or Class B Stock that have been converted into shares
of Dynamotion Common Stock) will thereafter represent only the right to receive
the Merger Consideration in accordance with the terms of this Agreement;
provided, however, that in the case of Dissenting Shares, such certificates
will thereafter represent only the right to receive such consideration as may
be determined to be due under the NYBCL. The holders of such certificates
previously evidencing such shares of Dynamotion Common Stock outstanding
immediately before the Effective Time will cease to have any rights with
respect to such shares of Dynamotion Common Stock, except as provided in this
Agreement.
1.4.5 Treasury Shares. At the Effective Time, each share of
Dynamotion Common Stock or other Dynamotion capital stock held in the treasury
of Dynamotion immediately before the Effective Time will be canceled and
extinguished without any conversion thereof and no payment will be made with
respect thereto.
1.4.6 Escheat. Neither ESI nor Merger Corp. will be liable to any
holder of shares of Dynamotion Common Stock for any 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.
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1.4.7 Withholding Rights. ESI will be entitled to deduct and withhold
from the aggregate Merger Consideration deliverable to any Dynamotion
shareholder such amounts as ESI may be required to deduct and withhold with
respect to the making of such delivery under the Code or any applicable
provision of state, local, or foreign tax law. To the extent that amounts are
so withheld by ESI, such withheld amounts will be treated for all purposes of
this Agreement as having been delivered to the holder of the shares of
Dynamotion Common Stock in respect of which such deduction and withholding was
made by ESI.
1.5 Dissenters' Rights.
1.5.1 Notice. Dynamotion shareholders desiring to dissent from the
Merger and obtain payment of the fair value of their shares of Dynamotion
Common Stock (such fair value to be determined as of the day before the special
meeting of Dynamotion shareholders called in accordance with Section 4.2.4 to
approve the Merger and related transactions (the "Special Meeting")) in lieu of
the Merger Consideration may exercise their dissenters' rights under the
provisions of Sections 910 and 623 of the NYBCL ("Dissenters' Rights"). The
Proxy Statement/ Prospectus (as that term is defined in Section 4.2.4) sent by
Dynamotion to its shareholders in accordance with Section 4.2.4 will include a
notice complying with the provisions of Section 605 of the NYBCL concerning the
rights of shareholders to exercise Dissenters' Rights and a copy of the
provisions of Section 623 of the NYBCL. The notice of Dissenters' Rights will
state that written objection to the Merger must be received by Dynamotion at or
before the Special Meeting as provided in Section 623(a) of the NYBCL.
1.5.2 Rights of Dissenting Shares. Shares of Dynamotion Common Stock
that are issued and outstanding as of the Effective Time and held by any
shareholder who has, in
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accordance with Sections 910 and 623 of the NYBCL, delivered a written notice
of objection and payment demand accompanied by the required certification
("Dissenting Shares") will not be converted as described in Section 1.3 but
will from and after the Effective Time represent only the right to receive such
consideration as may be determined to be due under the NYBCL. Dynamotion will
give ESI prompt notice upon receipt by Dynamotion of any payment demand from
any such shareholder of Dynamotion (a "Dissenting Shareholder"). Dynamotion
will not, before the Effective Time, except with the prior written consent of
ESI (which consent will not unreasonably be withheld), 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 NYBCL, to payment for his, her, or its Dissenting
Shares will receive payment therefor in accordance with the NYBCL.
Notwithstanding the foregoing, if any Dissenting Shareholder rescinds, fails to
perfect, or otherwise loses Dissenters' Rights either before or after the
Effective Time, such shareholder's shares of Dynamotion Common Stock will be
converted into the right to receive ESI Common Stock or cash, as of the
Effective Time, in accordance with the provisions of this Agreement.
1.6 Stock Transfer Books. At the Effective Time, the stock transfer books
of Dynamotion will be closed and there will be no further registration of
transfers of Dynamotion capital stock or other securities thereafter on the
records of Dynamotion. At or after the Effective Time, any certificates for
Dynamotion Common Stock, Class A Stock, or Class B Stock (other than Dissenting
Shares) presented to ESI or its agent for any reason will be converted into the
right to receive the Merger Consideration in accordance with the provisions of
this Agreement.
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1.7 Closing. The closing of the Merger (the "Closing") will 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 Dynamotion, ESI and
Merger Corp. may agree (the "Closing Date"). The "Condition Completion Date"
will be the day on which the last of the conditions set forth in Article V has
been fulfilled or waived (other than those conditions that, by their terms, are
to be satisfied at the Closing).
1.8 Subsequent Actions. If, at any time after the Effective Time, Merger
Corp. considers or is advised that any deeds, bills of sale, assignments,
assurances, or any other actions or things are necessary or desirable to vest,
perfect, or confirm of record or otherwise in Merger Corp. its right, title, or
interest in, to, or under any of the rights, properties, or assets of
Dynamotion acquired or to be acquired by Merger Corp. as a result of, or in
connection with, the Merger or otherwise to carry out this Agreement, the
officers and directors of Merger Corp. will be authorized to execute and
deliver, in the name and on behalf of Dynamotion, or otherwise, all such deeds,
bills of sale, assignments, and assurances, and to take and do, in the name and
on behalf of Dynamotion, or otherwise, all such other actions and things as may
be necessary or desirable to vest, perfect, or confirm any and all right,
title, and interest in, to, and under such rights, properties, or assets in
Merger Corp. or otherwise to carry out the purposes of this Agreement.
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ARTICLE II
FURTHER AGREEMENTS
2.1 Employee Agreements. At or before the Closing, Dynamotion will use all
reasonable efforts to cause each of its employees located in California who
will become an employee of Merger Corp. to sign a confidentiality and
inventions assignment agreement substantially in the form attached as Exhibit
B1 (the "California ESI Confidentiality Agreement") and each of its employees
located outside of California who will become an employee of Merger Corp. to
sign a confidentiality, noncompete, and inventions assignment agreement
substantially in the form attached as Exhibit B2 (the "Standard ESI
Confidentiality Agreement").
2.2 Pledge and Escrow Agreement. At or before the Closing, ESI, the Key
Shareholders, and the Key Shareholder Representatives (as such term is defined
in Section 8.10) will execute and deliver a Pledge and Escrow Agreement (the
"Escrow Agreement") substan tially in the form attached as Exhibit C, together
with stock powers endorsed to ESI relating to the shares of ESI Common Stock
delivered into escrow, and will cause the Escrow Agent (as such term is defined
in the Escrow Agreement) to execute the Escrow Agreement.
2.3 Noncompetition Agreement of Certain Dynamotion Executive Officers.
Dynamotion will use all reasonable efforts to cause the shareholders who are
executive officers of Dynamotion and are listed on Schedule 2.3 to execute and
deliver, at or before the Closing, a Noncompetition Agreement in the form
attached as Exhibit D (the "Noncompetition Agreement") providing for certain
post-employment noncompetition and noninterference obligations.
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2.4 Standstill Agreements. The Key Shareholders will execute and deliver,
at or before the Closing, the Standstill Agreement in the form attached as
Exhibit E (the "Standstill Agreement") providing for, in addition to the terms
of the Escrow Agreement, restrictions on the resale of shares of ESI Common
Stock received by the Key Shareholders as Merger Consideration.
2.5 Affiliate Representation Letters. Dynamotion will use all reasonable
efforts to cause the affiliates of Dynamotion, as listed on Schedule 2.5, to
execute and deliver, at or before the Closing, an Affiliate Representation
Letter in the form attached as Exhibit F (the "Affiliate Representation
Letter") providing for certain tax and securities representations by affiliates
of Dynamotion.
2.6 Voting Agreement. Each of the Key Shareholders listed on Schedule 2.6
will execute and deliver, concurrently with the execution of this Agreement, a
Voting Agreement in the form attached as Exhibit G (the "Voting Agreement").
Each Voting Agreement provides that the signing holder will vote all of the
shares of Dynamotion Common Stock, Class A Stock, and/or Class B Stock that
such holder is entitled to vote at the Special Meeting in favor of the
Conversion Proposal and the Merger.
2.7 Exercise of Class B Warrants. The Key Shareholders who own shares of
Class B Stock and who hold warrants to purchase shares of Dynamotion Common
Stock (such warrants, the "Class B Warrants") will exercise the Class B
Warrants before the record date for the Special Meeting.
2.8 Termination of Agreement Relating to Z Warrants. At or before the
Closing, Dynamotion and the Key Shareholders who are parties to a letter
agreement dated March 29,
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1996 relating to the exercise of Z Warrants (the "Class B Additional Warrant
Agreement") will terminate the Class B Additional Warrant Agreement.
2.9 Termination of Underwriters' Warrants. Dynamotion will use its best
efforts to cause, at or before Closing, the termination of all outstanding
warrants to purchase shares of Class A Stock or shares of Dynamotion Common
Stock other than Z Warrants (the "Underwriters' Warrants").
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Dynamotion. Dynamotion hereby
represents and warrants to ESI and Merger Corp as follows:
3.1.1 Organization and Status. Dynamotion 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
Dynamotion. Dynamotion 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. Dynamotion has delivered to ESI complete and accurate copies
of the Certificate of Incorporation ("Certificate of Incorporation") and the
Bylaws of Dynamotion ("Bylaws"), each as amended to the date hereof.
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3.1.2 Capitalization.
3.1.2.1 Capital Structure. The capital structure of Dynamotion
as of January 15, 1997 is as stated on Schedule 3.1.2.1. Schedule 3.1.2.1
shows: (a) the number of shares of Dynamotion Common Stock, (b) the number of
shares of Class A Stock, (c) the number of shares of Class B Stock, and (d) all
other rights of any character relating to the acquisition of, or conversion of
securities into, Dynamotion Common Stock (including all warrants, options, and
convertible debt), in each case outstanding as of January 15, 1997 (the items
described in (b), (c), and (d) are referred to herein together as the
"Dynamotion Common Stock Equivalent Securities," and all Dynamotion Common
Stock and Dynamotion Common Stock Equivalent Securities are referred to herein
together as the "Dynamotion Outstanding Securities"). Schedule 3.1.2.1 also
shows as of January 15, 1997 the corresponding "Common Stock Equivalent," which
is the total number of shares of Dynamotion Common Stock that would be
outstanding if all outstanding Dynamotion Common Stock Equivalent Securities of
that type were converted or exercised according to their terms, for each type
of Dynamotion Common Stock Equivalent Security listed on Schedule 3.1.2.1. The
"Adjusted Dynamotion Common Stock Total," which is the sum of all outstanding
Dynamotion Common Stock plus all Common Stock Equivalents combined is
11,170,848. All of the Dynamotion Outstanding Securities have been duly
authorized and are validly issued, fully paid, and nonassessable, and no such
securities were issued in violation of preemptive or similar rights of any
shareholder or in violation of any applicable securities laws. Except as set
forth on Schedule 3.1.2.1, there are no shares of capital stock of Dynamotion
authorized, issued, or outstanding, and, except for Options granted pursuant to
the Dynamotion Option Plans and as set forth on Schedule 3.1.2.1,
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there are no preemptive rights or any outstanding subscriptions, options,
warrants, phantom stock, stock appreciation or similar rights, convertible
securities, or any other rights, agreements, or commitments of Dynamotion of
any character relating to the issued or unissued capital stock or other
securities of Dynamotion. Except as set forth on Schedule 3.1.2.1, there are no
outstanding obligations of Dynamotion to repurchase, redeem, or otherwise
acquire any Dynamotion Outstanding Securities.
3.1.2.2 Dynamotion Outstanding Securities Holders. Schedule
3.1.2.2 sets forth a complete and accurate list of each shareholder who, to the
Knowledge of Dynamotion, owns (beneficially or of record) five percent or more
of the voting power of any class of Dynamotion capital stock, as well as all
warrant holders (other than holders of publicly-traded Z Warrants) and Option
holders (collectively, "Holders") as of the date hereof, indicating the number
of Dynamotion Outstanding Securities (and their respective Common Stock
Equivalents) held by each Holder. As used in this Agreement, the term "to the
Knowledge of Dynamotion" means to the knowledge, after due inquiry, of the
individuals listed on Schedule 3.1-K
3.1.2.3 Redemption of Z Warrants. Schedule 3.1.2.3(a) states the
number of Z Warrants outstanding. Each Z Warrant is exercisable for .6941 of a
share of Dynamotion Common Stock at an exercise price of $4.37 per share. Upon
the effectiveness of the conversion contemplated by the Conversion Proposal
(following the approval of the Conversion Proposal by holders of the requisite
percentages of Dynamotion Common Stock, Class A Stock, and Class B Stock), the
Z Warrants will be redeemable, without any further
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action required (other than payment of the redemption price) at a redemption
price of $0.05 per Z Warrant, provided that the actions listed in Schedule
3.1.2.3(b) have been taken.
3.1.2.4 Convertible Debt. The convertible debt of Dynamotion
outstanding pursuant to notes issued to the parties listed on Schedule 3.1.2.4
(the "Convertible Debt") is convertible into shares of Dynamotion Common Stock
only upon Dynamotion's default with respect to the Convertible Debt. Dynamotion
is not in default with respect to the Convertible Debt except where the holder
of the Convertible Debt has signed a written agreement not to convert until at
least 10 business days after the Effective Time or until this Agreement has
been terminated, whichever occurs first.
3.1.3 Corporate Authority. Dynamotion 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 Dynamotion Board of
Directors and validly executed and delivered by Dynamotion. This Agreement
constitutes the valid and binding obligation of Dynamotion, 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.
3.1.4 Section 368(a)(2)(D) Asset Requirement. Merger Corp. will
acquire at least 90 percent of the fair market value of the net assets and at
least 70 percent of the fair market value of the gross assets held by
Dynamotion immediately before the Merger. For
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purposes of this representation, amounts, if any, paid by Dynamotion to
Dissenting Shareholders, amounts paid by Dynamotion to shareholders who receive
cash or other property, Dynamotion assets used to pay its reorganization
expenses, and all redemptions and distributions (except for regular, normal
dividends) made by Dynamotion immediately preceding the Effective Time will be
included as assets of Dynamotion held immediately before the Merger.
3.1.5 Governmental Filings. Other than the filing of (a) the
Certificate of Merger contemplated by Article I, (b) the Proxy
Statement/Prospectus described in Section 4.2.4, and (c) a Certificate of
Amendment to Dynamotion's Certificate of Incorporation relating to the
Conversion Proposal, no notices, reports or other filings are required to be
made by Dynamotion with, nor, except as set forth on Schedule 3.1.5 are any
consents, registrations, approvals, permits, or authorizations required to be
obtained by Dynamotion 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 Dynamotion and
the consummation by Dynamotion of the transactions contemplated hereby.
3.1.6 Investments; Subsidiaries. All direct or indirect investments
of Dynamotion in any corporation, partnership, association, joint venture or
other entity are listed in Schedule 3.1.6(a). Dynamotion has no subsidiaries.
All previously existing subsidiaries of Dynamotion or any predecessor (each, a
"Previous Subsidiary and together, the "Previous Subsidiaries") are listed on
Schedule 3.1.6(b).
3.1.7 No Adverse Consequences. Neither the execution and delivery of
this Agreement by Dynamotion nor the consummation of the transactions
contemplated by this Agreement will (a) result in the creation or imposition of
any lien, charge, encumbrance or
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restriction on any of the assets or properties of Dynamotion, (b) violate any
provision of the Certificate of Incorporation or Bylaws of Dynamotion, (c)
violate any statute, judgment, order, injunction, decree, rule, regulation or
ruling of any Governmental Entity applicable to Dynamotion, or (d) except as
set forth on Schedule 3.1.7, either alone or with the giving of notice or the
passage of time or both, conflict with, constitute grounds for termination of,
accelerate the performance required by, accelerate the maturity of any
indebtedness or obligation under, result in the breach of the terms, conditions
or provisions of, or constitute a default under any mortgage, deed of trust,
indenture, note, bond, lease, license, permit, or other agreement, instrument,
or obligation to which Dynamotion is a party or by which it is bound.
3.1.8 Financial Statements. Dynamotion has furnished to ESI an
audited balance sheet of Dynamotion as of December 31, 1995, and the related
statements of operations, shareholders' equity, and cash flows or the period
then ended, and the unaudited balance sheet of Dynamotion as of September 30,
1996 (the "Current Balance Sheet") and the related statements of operations,
shareholders' equity, and cash flows for the nine months then ended, and the
Updated Financial Statements delivered at or before the Closing pursuant to
Section 5.3.7 (all such balance sheets and statements collectively, the
"Financial Statements"). The Financial Statements are (or will be, in the case
of the Updated Financial Statements) complete and accurate in all material
respects and present fairly the financial position and operating results of
Dynamotion as of the dates and for the periods indicated therein, and have been
(or will be, in the case of the Updated Financial Statements) prepared in
accordance with generally accepted accounting principles and applicable
accounting rules and regulations of the Securities and Exchange Commission (the
"SEC"). The Financial Statements (including notes
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and schedules) are (or will be, in the case of the Updated Financial
Statements) in accordance with the books and records of the Company.
3.1.9 Undisclosed Liabilities. Except for current liabilities
incurred after September 30, 1996 in the ordinary course of business and of a
type and in an amount consistent with past practices and not more in the
aggregate than $150,000, Dynamotion has no liability or obligation (whether
absolute, accrued, contingent or otherwise, and whether due or to become due)
that is not accrued, reserved against, or identified on the Current Balance
Sheet. Except as set forth on Schedule 3.1.9, there are no rights of return or
other agreements between Dynamotion and any customer that would cause any sales
reflected in the Financial Statements to fail to qualify as sales in accordance
with generally accepted accounting principles, applicable accounting rules and
regulations of the SEC, and Dynamotion's revenue recognition policy as
reflected in the Financial Statements. Notwithstanding the foregoing, as to any
subject matter covered by a specific representation and warranty of Dynamotion
elsewhere in this Agreement, no fact or occurrence that would not breach
Dynamotion's specific representation and warranty covering that subject matter
will be deemed to be a breach of the representation and warranty contained in
this Section 3.1.9.
3.1.10 Absence of Certain Changes or Events.
3.1.10.1 Absence of Changes or Events Since December 31, 1995.
Since December 31, 1995, except as set forth on Schedule 3.1.10.1, there has
not been:
(a) Any direct or indirect declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock, property
or any
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combination thereof) in respect of any Dynamotion Outstanding Securities, or
any direct or indirect repurchase, redemption or other acquisition by
Dynamotion of any of its securities; or
(b) Any change by Dynamotion in accounting methods,
principles or practices.
3.1.10.2 Absence of Changes or Events Since September 30, 1996.
Since September 30, 1996, except as set forth on Schedule 3.1.10.2, there has
not been:
(a) Any material adverse change in the business, results of
operations, financial condition, properties, or assets of Dynamotion;
(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 Dynamotion;
(c) Other than as disclosed pursuant to Section 3.1.14.4,
any increase in the rate or terms of compensation payable or to become payable
by Dynamotion 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 Dynamotion; any
special bonus or remuneration paid; any written employment contract executed or
amended; or any change in personnel policies;
(d) 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 endorsement of payment or performance of any loan or
obligation of
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another, or any amendment, modification or termination of any existing
agreement, commitment or transaction) by Dynamotion except as contemplated in
this Agreement and except for such agreements, commitments, and transactions as
do not exceed $50,000 singly;
(e) Any issuance or sale of any stock of Dynamotion (other
than issuances pursuant to the exercise of Options) or any issuance, granting,
or creation of any option, warrant, phantom stock, stock appreciation or
similar rights, or any other right to purchase any stock of Dynamotion or any
commitment to do any of the foregoing;
(f) Any amendment to the Certificate of Incorporation or
Bylaws of Dynamotion, except as provided in Section 4.2.6 with respect to the
Conversion Proposal;
(g) Any conduct of business that is outside the ordinary
course of business or not substantially in the manner that Dynamotion
previously conducted its business;
(h) Any encumbrance or consent to encumbrance of any
property or assets;
(i) Any pending or, to the Knowledge of Dynamotion,
threatened labor disputes, organizational activities or disturbances;
(j) Any communication to Dynamotion from any customer of
Dynamotion that purchased $100,000 or more of products or services from
Dynamotion in the year ended December 31, 1995 that such customer intends to,
is desirous of, or is actively considering terminating or materially reducing
its purchases from Dynamotion for any reason; or
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(k) Any change not described above in the assets,
liabilities, licenses, permits, or franchises of Dynamotion, or in any
agreement to which Dynamotion is a party or by which it is bound, that, either
individually or in the aggregate, has had or is reasonably likely to have a
material adverse effect on the business, results of operations, financial
condition, properties, or assets of Dynamotion.
3.1.11 Prohibited Payments. To the Knowledge of Dynamotion, neither
Dynamotion 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 Dynamotion or any Previous Subsidiary, (a) made any payment
outside the ordinary course of business to any purchasing or selling agent or
other person charged with similar duties of any entity to which Dynamotion
sells or from which Dynamotion buys products, for the purpose of influencing
such agent or person to buy products from or sell products to Dynamotion which
payment was not legal to make or receive under any applicable law or regulation
of the United States or any other country or territory; or (b) engaged in any
transaction, maintained any bank account, or used any corporate funds or assets
except for transactions, bank accounts, funds, and assets that have been and
are reflected in the normally maintained books and records of Dynamotion.
3.1.12 Litigation. Except as listed on Schedule 3.1.12, no
litigation, proceeding, or governmental investigation is pending or, to the
Knowledge of Dynamotion, threatened against or relating to Dynamotion, its
officers, or directors in their capacities as such, or any of Dynamotion's
properties or businesses. No pending litigation or proceeding listed on
Schedule 3.1.12 seeks injunctive relief against Dynamotion. For the purposes of
this Section 3.1.12, the term "Litigation Reserves" means the amounts specified
on Schedule 3.1.12
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as such. The pending litigation and proceedings listed on Schedule 3.1.12 will
not, if settled, decided, or otherwise resolved in favor of the opposing party
or parties, result in any payment obligations of Dynamotion (including without
limitation damages and attorneys' fees) greater, in the aggregate, than the
Litigation Reserves.
3.1.13 Compliance with Laws; Judgments. Dynamotion and each Previous
Subsidiary has at all relevant times conducted its business in compliance with
(a) the provisions of its Certificate or Articles of Incorporation, Bylaws, and
(b) 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, other than violations that individually or in the aggregate do
not, and, with the passage of time will not, have a material adverse effect on
its business, financial condition, results of operations, properties, or
assets. Dynamotion is not subject to any outstanding judgment, order, writ,
injunction, or decree and has not been charged with, or, to the Knowledge of
Dynamotion, threatened with a charge of, a violation of any provision of any
applicable law or regulation.
3.1.14 Employment Matters.
3.1.14.1 Labor Matters. Dynamotion is not a party or otherwise
subject to any collective bargaining agreement governing the wages, hours, or
terms of employment of its employees. Dynamotion is, and Dynamotion and each
Previous Subsidiary 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
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Dynamotion 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 Dynamotion, threatened against Dynamotion;
(c) representation petition respecting the employees of Dynamotion 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 Dynamotion. Dynamotion has not experienced
any primary work stoppage or other organized work stoppage involving its
employees in the past two years. To the Knowledge of Dynamotion, there is no
labor strike, slowdown, or work stoppage occurring or threatened against any of
its principal suppliers that is reasonably likely to have a material adverse
effect on the business, financial condition, results of operations, properties,
or assets of Dynamotion.
3.1.14.2 Employee Benefits. Schedule 3.1.14.2 lists all pension,
retirement, profit sharing, deferred compensation, bonus, commission, incentive
compensation (including cash, stock, and option plans or arrangements), life
insurance, health and disability insurance, hospitalization, and all other
employee benefit plans or arrangements (including, without limitation, any
contracts or agreements with trustees, insurance companies or others relating
to any such employee benefit plans or arrangements) established or maintained
by Dynamotion, and Dynamotion has provided ESI with complete and accurate
copies of: (a) all such plans or arrangements; (b) Dynamotion's most recent
annual report (Form 5500 series) filed with the Internal Revenue Service; (c)
the most recent actuarial reports; and (d) all governmental rulings,
determinations, and opinions (and pending requests for governmental rulings,
determinations, and opinions). The employee welfare benefit plans (within the
meaning
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of Section 3(1) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) and the employee pension benefit plans (within the meaning
of Section 3(2) of the ERISA) established and maintained by Dynamotion (the
"ERISA Plans") are listed separately as ERISA Plans on Schedule 3.1.14.2. The
ERISA Plans comply in all material respects with the applicable requirements of
ERISA. Dynamotion 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 that is an employee pension benefit plan 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. Except as set forth on Schedule
3.1.14.2, Dynamotion has no obligation of any kind (whether under the terms of
the ERISA Plans or under any understanding with employees) to make payments
under, or to pay contributions to, any plan, agreement or other arrangement for
deferred compensation of employees, whether or not tax qualified, including,
without limitation, a single employer tax qualified plan, a tax qualified plan
of a controlled group of corporations, a multiemployer pension plan, a "defined
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benefit" plan, a nonqualified deferred compensation plan, an individual
employment or compensation agreement or a commitment to provide medical
benefits to retirees. Dynamotion has never adopted, maintained, or contributed
to any plan or arrangement that is or was subject to Section 412 of the Code or
Title IV of ERISA (a "DB Plan"), nor has Dynamotion ever been a member of a
controlled group of corporations, group of trades or businesses, or affiliated
service group (within the meaning of Sections 414(b), (c), and (m) of the Code)
that has adopted, maintained, or contributed to a DB Plan.
3.1.14.3 Employment Agreements. There are no employment or other
agreements or understandings of any kind between Dynamotion and any of its
employees, including without limitation any agreements or understandings
regarding compensation or commissions of any nature, severance payments, or
retirement benefits, except as reflected in the items listed in Schedules
3.1.14.2, 3.1.14.3, and 3.1.14.4 and except for standard Dynamotion
confidentiality and assignment agreements as described in Section 3.1.14.5.
Schedule 3.1.14.3 lists all Dynamotion'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.
3.1.14.4 Compensation. Schedule 3.1.14.4 contains a complete and
accurate list of all current directors, officers, employees, or consultants of
Dynamotion, specifying their names and job designations, the total annual
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
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without limitation vacation, sick, or wellness pay, if any) for such persons as
of December 31, 1995 and as of November 30, 1996. Dynamotion has not made any
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 that would in the aggregate exceed 100 percent of
such person's annual base cash compensation. Dynamotion has no discretionary
bonus plans. The provisions for wages and salaries accrued on the Current
Balance Sheet are adequate for salaries and wages accrued as of the date
thereof, including accrued vacation pay and sick or wellness pay, if any, and
Dynamotion 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, if any, and all commissions and other
fees payable to agents, salesmen, and representatives.
3.1.14.5 Confidentiality and Inventions Agreements. The
employees and consultants of Dynamotion listed on Schedule 3.1.14.5 have
previously signed a confidentiality and invention agreement substantially in
the form or forms attached hereto as Exhibit H.
3.1.15 Title to and Condition of Real Property. Neither Dynamotion
nor any Previous Subsidiary has ever owned any real property, and Dynamotion
does not now own any real property. Schedule 3.1.15 contains a list of all real
property currently leased, occupied, or used by Dynamotion (the "Leased Real
Property"), including the dates of and parties to all leases and any amendments
thereof. All real property previously leased, occupied, or used by Dynamotion,
any predecessor company, or any Previous Subsidiary is referred to herein as
the "Previously Leased Real Property." All Leased Real Property (including
improvements thereon)
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is in the same condition (ordinary wear and tear excepted) as it was when
Dynamotion's lease(s), occupancy, or use began, and is available for immediate
use in the conduct of Dynamotion's business. Neither the operations of
Dynamotion 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 Entity having jurisdiction. The Leased Real Property includes all
such property necessary to conduct the business of Dynamotion. None of the
Leased Real Property has been condemned or otherwise taken by public authority
and no such condemnation or taking is, to the Knowledge of Dynamotion,
threatened or contemplated.
3.1.16 Title to and Condition of Fixed Assets. Schedule 3.1.16
contains a complete and accurate list of all tangible personal property
(excluding inventory) owned or leased by Dynamotion (the "Tangible Personal
Property"), including the dates of and parties to all leases and any amendments
thereof. Except as noted on Schedule 3.1.16, Dynamotion has good and marketable
title to all of the Tangible Personal Property listed in Schedule 3.1.16, 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 Dynamotion. All Tangible Personal Property and the state of
maintenance thereof are in compliance with all applicable laws and regulations.
3.1.17 Intellectual Property. Dynamotion 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") used in the conduct of the business of Dynamotion as
now conducted. Schedule 3.1.17(a) contains a complete and accurate
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list of all patents, patent applications, trademarks, and service marks and
related applications, trade names, and copyrights owned by or licensed to
Dynamotion. Schedule 3.1.17(a) also contains a description of all agreements or
licenses relating to the acquisition by or license to Dynamotion of such
Intellectual Property or under which Dynamotion has sold or granted a right to
use any Intellectual Property. Except as set forth on Schedule 3.1.17(b), all
Intellectual Property owned by Dynamotion is owned by it free and clear of all
liens, claims, encumbrances or adverse claims of any third party. The conduct
of Dynamotion's business does not conflict with or infringe upon any
Intellectual Property rights of any other person and no claims of conflict or
infringement are pending or, to the Knowledge of Dynamotion, threatened against
Dynamotion. Dynamotion has made all necessary filings and recordations and has
paid all required fees and Taxes to maintain its ownership of its Intellectual
Property that is patented or registered in the United States Patent and
Trademark Office and has made all necessary filings and recordations and has
paid all required fees and Taxes to maintain its ownership of its Intellectual
Property that is patented or registered with applicable foreign agencies.
3.1.18 Certain Contracts and Arrangements. Schedule 3.1.18, 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 Dynamotion 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;
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(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 Dynamotion exceeds
$100,000;
(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 Dynamotion; and
(f) any other contract, instrument, agreement, or obligation not
described in any other Schedule that contains unfulfilled obligations, is not
terminable without payment of premium or penalty upon 30 days' notice or less
and the annual amount either due to or payable by Dynamotion exceeds $100,000
for any single contract.
3.1.19 Status of Contracts. Each of the contracts, agreements,
commitments and instruments listed on Schedules 3.1.15, 3.1.16, 3.1.17, and
3.1.18 and the agreements described in Section 3.1.14.5 (collectively, the
"Contracts") is in full force and effect and is valid, binding and enforceable
by Dynamotion 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
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discretion of the court before which any proceeding may be brought. Except as
listed in Schedule 3.1.19, there is no existing material default or violation
by Dynamotion under any Contract and no event has occurred that (whether with
or without notice, lapse of time or both) would constitute a material default
of Dynamotion under any Contract. There is no pending or, to the Knowledge of
Dynamotion, threatened proceeding that would interfere with the quiet enjoyment
of any leasehold of which Dynamotion is lessee or sublessee. Except set forth
on Schedule 3.1.19, no consent of the other parties to the Contracts is
necessary for the consummation of the transactions contemplated by this
Agreement. Complete and accurate copies of all Contracts have been delivered to
ESI. To the Knowledge of Dynamotion, there is no default by any other party to
any Contract or any event that (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
Dynamotion, there are no facts that exist indicating that any of the Contracts
may be totally or partially terminated or suspended by the other parties.
Dynamotion has not granted any waiver or forbearance with respect to any of the
Contracts. Dynamotion is not a party to, or bound by, any contract or agreement
that Dynamotion can reasonably foresee will result in any material loss to
Dynamotion upon the performance thereof (including any liability for penalties
or damages, whether liquidated, direct, indirect, incidental, or
consequential).
3.1.20 Insurance. Schedule 3.1.20 contains a complete and accurate
list of all current policies of primary, excess, or umbrella comprehensive
general liability, fire, worker's compensation, or any other form of insurance
insuring Dynamotion, its officers or directors, its assets, or its operations
(the "Policies"), setting forth the applicable deductible amounts. All
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past primary, excess, or umbrella comprehensive general liability policies or
any other policy insuring Dynamotion or any predecessor or Previous Subsidiary
against liability for third-party bodily or personal injury or property damage
are referred to herein as "Past CGL Policies". 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 by Dynamotion with respect to any Policy. The
Policies are sufficient for compliance with all requirements of law and
agreements to which Dynamotion 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. Neither the execution of this
Agreement nor the consummation of the Merger will bar or otherwise interfere
with the rights of Merger Corp. to recover under the Policies or Past CGL
Policies for claims arising out of pre-Closing acts or omissions of Dynamotion
or any predecessors or Previous Subsidiary. There have been no claims made for
insurance payment under any of the Policies or Past CGL 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. Dynamotion
has not been refused any insurance coverage and no insurance coverage has been
canceled during the three years preceding the date of this Agreement.
3.1.21 Permits and Licenses. Schedule 3.1.21(a) contains a complete
and accurate list of all governmental licenses, permits, franchises, easements,
and authorizations (collectively, "Permits") held by Dynamotion, listed by
Governmental Entity. To the Knowledge of Dynamotion, Dynamotion holds, and at
all times each of Dynamotion, its
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predecessors, and each Previous Subsidiary has held, all Permits necessary for
the lawful conduct of its business pursuant to all applicable statutes, laws,
ordinances, rules, and regulations of all Governmental Entities and other
authorities having jurisdiction over it or any part of its operations.
Dynamotion is in compliance with each of the terms of its Permits. Complete and
accurate copies of all Permits held by Dynamotion have been delivered to ESI.
Schedule 3.1.21(b) lists all consents from any Governmental Entities that have
issued any Permits to or with respect to Dynamotion or its business that are
required for the consummation of the transactions contemplated by this
Agreement.
3.1.22 Taxes.
3.1.22.1 Returns. Except as set forth on Schedule 3.1.22.1, each
of Dynamotion and each Previous Subsidiary 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) that relate to the business, results of operations, financial
condition, properties, or assets of Dynamotion or any Previous Subsidiary
(collectively, the "Returns") and has paid on a timely basis all Taxes shown to
be due on the Returns. Except as set forth on Schedule 3.1.22.1, Dynamotion is
not, and neither Dynamotion nor any Previous Subsidiary has ever been, 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. Except as set forth on Schedule
3.1.22.1, Dynamotion is not, and neither Dynamotion nor any Previous Subsidiary
has ever been, a party to any tax-sharing or tax-allocation agreement.
Dynamotion does not have any liability for Taxes of any person (other than
itself), whether arising under federal, state, local, or foreign law, as a
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transferee or successor, by contract, or otherwise. No extensions of time have
been requested for Returns that have not been filed and no statute of
limitations has been waived with respect to any Tax except as set forth on
Schedule 3.1.22.1. Except as set forth on Schedule 3.1.22.1, no Returns have
been examined by the applicable taxing authorities for all periods to and
including the fiscal year ended December 31, 1995 and, except as set forth on
Schedule 3.1.22.1, Dynamotion has not received any notice of claim or audit
from any taxing authority with respect to itself or any Previous Subsidiary 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 material respects and no additional
Taxes are owed by Dynamotion or any Previous Subsidiary with respect to the
periods covered by the Returns. Dynamotion has provided ESI with complete and
accurate copies of Returns for each of Dynamotion's fiscal years 1991 through
1995 and the Forms 1139 related to any loss or credit or carryback claim for
those years.
3.1.22.2 Taxes Paid or Reserved. The reserves for Taxes
reflected on 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 and applicable accounting rules and regulations
of the SEC consistently applied throughout the periods involved and with prior
periods. All Taxes that Dynamotion 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. Neither Dynamotion nor any Previous Subsidiary has
elected to be treated as a consenting corporation pursuant to Section 341(f) of
the Code.
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3.1.22.3 Net Operating Losses. Dynamotion's federal net
operating loss carry forward as of December 31, 1995 equaled $6,838,248.
3.1.22.4 Definition. The term "Tax" or "Taxes" means all
federal, state, local, or foreign taxes, charges, fees, levies, or other
assessments, including, without limitation, all net income, gross income, gross
receipts, premium, sales, use, ad valorem, transfer, franchise, profits,
license, withholding, payroll, employment, excise, estimated severance, stamp,
occupation, property, or other taxes, fees, assessments, or charges of any kind
whatsoever, together with any interest and any penalties (including penalties
for failure to file in accordance with applicable information reporting
requirements), and additions to tax.
3.1.23 Related Party Interests. Except as listed in Schedule 3.1.23,
no Holder, officer, or director of Dynamotion (or any entity owned or
controlled by one or more of such parties) (a) is indebted to Dynamotion or (b)
has any other right, arrangement, or agreement binding upon Dynamotion,
including without limitation any registration rights agreement, stock purchase
agreement, or similar arrangement (other than obligations contained in
Dynamotion's Certificate of Incorporation or Bylaws). Except as listed in
Schedule 3.1.23, to the Knowledge of Dynamotion, no Holder, officer, or
director of Dynamotion (or any entity owned or controlled by one or more of
such parties) (i) has any interest in any property, real or personal, tangible
or intangible, used in or pertaining to Dynamotion's business or (ii) has any
material financial interest, direct or indirect, in any supplier or customer
of, or other outside business which has significant transactions with
Dynamotion. True and complete copies of all agreements listed on Schedule
3.1.23 have been provided to ESI. Dynamotion is not indebted to any of its
shareholders, directors, or officers (or to the Knowledge of Dynamotion any
entity owned or
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controlled by one or more of such parties) except for amounts due under normal
salary arrangements and for reimbursement of ordinary business expenses. Except
as specifically referenced in this Agreement, 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 Dynamotion to any Holder or
any of Dynamotion's, officers, directors, or employees (or, to the Knowledge of
Dynamotion, any entity owned or controlled by one or more of such parties).
3.1.24 No Powers of Attorney or Restrictions. No power of attorney or
similar authorization given by Dynamotion is presently in effect or
outstanding. Except as set forth on Schedule 3.1.24, no contract or agreement
to which Dynamotion is a party or by which it is bound or to which any of its
properties or assets is subject limits the freedom of Dynamotion to compete in
any line of business or with any person. To the Knowledge of Dynamotion, none
of the employees of Dynamotion is obligated under any contract (including
licenses, covenants, or commitments of any nature), or subject to any judgment,
decree, or order of any Governmental Entity, that would interfere with the use
of his or her best efforts to promote the interests of Dynamotion or that would
conflict with the business of Dynamotion as now conducted or proposed to be
conducted.
3.1.25 Environmental Conditions.
3.1.25.1 Compliance. The business, assets, and operations of
Dynamotion, its predecessors and all Previous Subsidiaries, including without
limitation the Leased Real Property and the Previously Leased Real Property,
are and have been in compliance with all Environmental Laws (as defined below)
and all Permits required for the operations of
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Dynamotion, its predecessors, and the Previous Subsidiaries under any
Environmental Law. These Permits are listed separately in Schedule 3.1.21.
There are no pending or, to the Knowledge of Dynamotion, threatened claims,
actions or proceedings against Dynamotion under any Environmental Law or
related Permit. All wastes generated in connection with Dynamotion's business
are, and in the case of Dynamotion, its predecessors, and the Previous
Subsidiaries, have been transported and disposed of off-site in compliance with
all Environmental Laws, and there are no facility logs or manifests relating to
the transportation and disposal of such wastes. No wastes, including hazardous
and solid wastes, have been or are stored on, at, or under the Leased Real
Property or the Previously Leased Real Property in violation of any
Environmental Law or that could result in a remediation obligation.
3.1.25.2 Hazardous Substances. Except for ordinary household
cleaners and office supplies or as set forth on Schedule 3.1.25.2, no Hazardous
Substance (as defined below) is present on, at, or under the Leased Real
Property or the Previously Leased Real Property. Except as would neither
violate any Environmental Law nor result in any remediation obligation, no
Hazardous Substance has been disposed of, spilled, leaked, discharged, or
otherwise released on, in, under or has migrated off-site from the Leased Real
Property or the Previously Leased Real Property or has otherwise come to be
located in the soil or water (including surface and ground water) in, on,
under, or adjacent to the Leased Real Property or the Previously Leased Real
Property. Except as would neither violate any Environmental Law nor result in
any remediation obligation, none of the assets of Dynamotion or the
improvements on the Leased Real Property or the Previously Leased Real Property
have incorporated into them any asbestos, urea formaldehyde foam insulation,
polychlorinated
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biphenyls (including in any electrical transformer or capacitor located on such
property), or any other Hazardous Substance that is prohibited, restricted, or
regulated when present in buildings, structures, fixtures, or equipment. Except
for ordinary household cleaners and office supplies or as set forth on Schedule
3.1.25.2, 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 or in connection with the
business or operations of Dynamotion, its predecessors, or the Previous
Subsidiaries. Except as listed on Schedule 3.1.25.2, there are not and have
never been any above-ground or underground storage tanks (whether or not
regulated and whether or not out of service, closed, or decommissioned) on the
Leased Real Property or, during the period of occupancy or use by Dynamotion,
its predecessors, or the Previous Subsidiaries, on the Previously Leased Real
Property.
3.1.25.3 Filings and Notices. Each of Dynamotion and each
Previous Subsidiary 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 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 the Previously Leased Real Property
is listed as a site contaminated by Hazardous Substances pursuant to any
Environmental Law.
3.1.25.4 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,
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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 and petroleum oil and its fractions.
3.1.26 Consents and Approvals. Except as set forth in Sections 3.1.5
and 5.2.4 and as set forth on Schedule 3.1.21(b), no consent, approval, or
authorization of, or filing or registration with, any Governmental Entity or
any other entity or person not a party to this Agreement is required to be
obtained or made by Dynamotion for the consummation of the transactions
described in this Agreement.
3.1.27 Records. The books of account, minute books, stock certificate
books, and stock transfer ledgers of Dynamotion are complete and accurate in
all respects, and there has been no transaction involving the business or stock
ownership of Dynamotion, or action of Dynamotion's Board of Directors or
shareholders, that properly should have been set forth therein and has not been
accurately so set forth. Complete and accurate copies of such books, records,
and ledgers have been made available to ESI.
3.1.28 Receivables. Each of the receivables of Dynamotion (including
notes receivable, accounts receivable, loans receivable, and advances) that is
reflected on 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 Dynamotion's business and will, except as disclosed on
Schedule 3.1.28(a), be fully collected when due, or in the case of each account
receivable, within one year after the Closing Date, without resort to
litigation and without offset or counterclaim, except to the extent of (a) the
allowance for doubtful accounts with respect to
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accounts receivable as reflected on the Current Balance Sheet, plus (b) any
reduction in the accounts payable balances listed on Schedule 3.1.28(b) that
result from negotiations with vendors. The accounts payable listed on Schedule
3.1.28(b) are included in the accounts payable on the Current Balance Sheet.
3.1.29 Bank Accounts. Schedule 3.1.29 contains a complete and
accurate list of all the banks or other financial institutions at which
Dynamotion maintains accounts or safe deposit boxes, together with numbers of
such accounts and boxes and the names of the persons authorized to draw thereon
or permitted access thereto. Except as set forth on Schedule 3.1.29, all cash
in such accounts is held in demand deposits and is not subject to any
restriction or limitation as to withdrawal.
3.1.30 Product Warranties. Schedule 3.1.30 contains Dynamotion'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. Neither
Dynamotion nor, to the Knowledge of Dynamotion, any predecessor or Previous
Subsidiary, has undertaken any performance obligations or made any warranties
or guarantees with respect to its products other than those disclosed in
Schedule 3.1.30, or sold any products or services without the limitation of
liability provisions disclosed in Schedule 3.1.30. The aggregate cost to
Dynamotion to comply with its product warranties has not exceeded four percent
(4%) of machine revenue, as reported in Dynamotion's general ledger, for each
of the last three fiscal years. Except as set forth on Schedule 3.1.30, all
products under warranty as of the date of this Agreement serviced, distributed,
or sold by
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Dynamotion or, to the Knowledge of Dynamotion, any predecessor or Previous
Subsidiary, and the delivery thereof, have been in conformity with Dynamotion's
warranty commitments.
3.1.31 Inventories. Schedule 3.1.31 contains a true and complete list
and summary of all inventory of Dynamotion as of September 30, 1996. All
inventories, whether finished goods, work in process, or raw materials,
reflected on the Current Balance Sheet or thereafter acquired, are all items of
a quality usable or saleable in the ordinary and usual course of Dynamotion'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
Dynamotion's past practice and in accordance with generally accepted accounting
principles and applicable accounting rules and regulations of the SEC. Except
as set forth on Schedule 3.1.31, Dynamotion has good and marketable title to
all its inventories, free and clear of all liens, mortgages, pledges, leases,
restrictions, and other claims and encumbrances of any nature whatsoever.
3.1.32 Product Liability. Except as set forth on Schedule 3.1.32,
Dynamotion has not recalled any products manufactured, serviced, distributed,
leased, or sold by Dynamotion or any predecessor or any Previous Subsidiary,
and, to the Knowledge of Dynamotion, there is no reasonable basis for any such
recall on or after the Closing Date.
3.1.33 Customer Information. Schedule 3.1.33 lists (a) every
outstanding purchase order received by Dynamotion for more than $100,000 by
customer as of November 30, 1996 and (b) the top 10 Dynamotion customers for
each of the last two fiscal years, with aggregate annual revenue for each
customer for each year.
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3.1.34 Accounting Controls. Dynamotion maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's general or specific
authorizations, (b) transactions are accurately and completely recorded in
Dynamotion's general ledger in a manner that facilitates the preparation of
financial statements in conformity with generally accepted accounting
principles and applicable accounting rules and regulations of the SEC and the
maintenance of accountability for assets, (c) access to assets is permitted
only in accordance with management's general or specific authorization, and (d)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.1.35 Liabilities Incurred in Ordinary Course. Except as otherwise
specifically described in this Agreement or the schedules hereto, the
liabilities of Dynamotion and the liabilities to which the assets of Dynamotion
are subject were incurred by Dynamotion in the ordinary course of its business.
3.1.36 Continuity of Business Enterprise. Dynamotion 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
Regulation ss.1.368-1(d) under the Code.
3.1.37 Fair Market Value of Dynamotion Assets. The fair market value
of the assets of Dynamotion transferred to Merger Corp. pursuant to the Merger
at the Effective Time will equal or exceed the sum of the liabilities assumed
by Merger Corp., plus the amount of liabilities, if any, to which the
transferred assets are subject.
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3.1.38 No Chapter 11 Proceedings. Dynamotion is not under the
jurisdiction of a court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code.
3.1.39 Not an Investment Company. Dynamotion is not an investment
company as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
3.1.40 Not a Real Property Holding Company. Dynamotion has not been a
United States real property holding company within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
3.1.41 Proxy Statement/Prospectus. The information provided in
writing by Dynamotion (or its representatives) regarding Dynamotion
specifically for inclusion in the Proxy Statement/Prospectus and the
information in the Proxy Statement/Prospectus relating to Dynamotion that is
supplemented or reviewed by Dynamotion (or its representatives) without
objection before the mailing of such Proxy Statement/Prospectus, will be
correct in all material respects and will not omit any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading; provided, however, that no representation or warranty is made by
Dynamotion with respect to information supplied by ESI specifically for
inclusion therein or relating to and reviewed by ESI (or its representatives)
without objection. Dynamotion will promptly inform ESI of the happening of any
event before the Effective Time that would render such information regarding
Dynamotion incorrect in any material respect or require the amendment of the
Proxy Statement/Prospectus.
3.1.42 Dynamotion SEC Reports. Dynamotion has heretofore furnished
ESI with complete copies of all registration statements, reports, and proxy
statements, including amendments thereto, filed with the SEC since December 31,
1991 and before the date of this
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Agreement (collectively, the "Dynamotion SEC Reports"). Except as set forth on
Schedule 3.1.42, Dynamotion has timely filed with the SEC all registration
statements, reports, proxy statements, and other filings required to be made by
it under applicable laws and regulations. Each of the Dynamotion SEC Reports,
at the time filed or at the time of its effectiveness, if later, (a) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (b) complied in all respects with the applicable requirements of
the Securities Exchange Act of 1934, as amended, the Securities Act of 1933, as
amended, and the applicable rules and regulations of the SEC thereunder.
3.1.43 Compliance of Conversion Proposal, Etc. None of: (a) the
proposal of, shareholder approval of, or implementation of transactions
contemplated by, the Conversion Proposal as described in this Agreement; (b)
the redemption of the Z Warrants as described in this Agreement after the
actions described in Schedule 3.1.2.3(b) have been taken; (c) the termination
of the Class B Additional Warrant Agreement by mutual agreement of the parties
thereto; (d) the exercise of the Class B Warrants as described in this
Agreement; or (e) the termination of the Underwriters' Warrants by mutual
agreement of the parties thereto; will violate any provision of the Certificate
of Incorporation, the Bylaws, any applicable law or regulation (including
without limitation state and federal securities laws and regulations), or the
terms of any agreement or obligation by which Dynamotion is bound.
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3.1.44 Brokers and Finders. Dynamotion has not incurred any liability
for any brokerage or investment banking fees, commissions or finders' fees in
connection with the Merger.
3.1.45 Accuracy of Representations and Warranties. To the Knowledge
of Dynamotion, none of the representations or warranties of Dynamotion
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. To the Knowledge of
Dynamotion, no fact that has resulted or that, in the reasonable judgment of
Dynamotion is reasonably likely to result, in any material adverse change in
Dynamotion's business, results of operation, financial condition, properties,
or assets that has not been set forth in this Agreement.
3.2 Representations and Warranties of Key Shareholders. Each Key
Shareholder, severally and not jointly, for himself, herself, or itself only,
hereby represents and warrants to ESI and Merger Corp. that, except as
specifically set forth in Schedule 3.2 (the "Key Shareholder Disclosure
Schedule") in a numbered paragraph that corresponds to the section for which
disclosure is made:
3.2.1 Authority. Such Key Shareholder has the authority and has taken
all action necessary, or, with respect to any Key Shareholder that is a
corporation, such Key Shareholder 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 and validly executed and delivered by such Key
Shareholder. This Agreement constitutes the valid and binding obligation of
such Key
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Shareholder, enforceable in accordance with its terms, except as enforcement
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or similar laws affecting the enforcement of creditors' rights
generally and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought.
3.2.2 Filings. No notices, reports or other filings are required to
be made by such Key Shareholder with, nor are any consents, registrations,
approvals, permits, or authorizations required to be obtained by such Key
Shareholder from, any Governmental Entity or any other person not a party to
this Agreement in connection with the execution and delivery of this Agreement
by such Key Shareholder and the consummation by such Key Shareholder of the
transactions contemplated hereby.
3.2.3 Proxy Statement/Prospectus. The information provided in writing
by such Key Shareholder (or his, her, or its representative) regarding such Key
Shareholder specifically for inclusion in the Proxy Statement/Prospectus and
the information in the Proxy Statement/Prospectus regarding such Key
Shareholder that is reviewed by such Key Shareholder (or his, her, or its
representative) without objection before the mailing of such Proxy
Statement/Prospectus, will be correct in all material respects and will not
omit any material fact required to be stated therein or necessary in order to
make the statements therein not misleading; provided, however, that no
representation or warranty is made by such Key Shareholder with respect to
information supplied by ESI specifically for inclusion therein or relating to
and reviewed by ESI (or its representatives) without objection. Such Key
Shareholder will promptly inform ESI of the happening of any event before the
Effective Time that would render the
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information regarding such Key Shareholder provided by such Key Shareholder
incorrect in any material respect or require the amendment of the Proxy
Statement/Prospectus.
3.3 Representations and Warranties of ESI. ESI hereby represents and
warrants to Dynamotion that, except as specifically set forth in Schedule 3.3
(the "ESI Disclosure Schedule") in a numbered paragraph that corresponds to the
section for which disclosure is made:
3.3.1 Organization and Status. Each of ESI and its subsidiaries is a
corporation duly organized and validly existing under the laws of its
jurisdiction of incorporation and is duly qualified and in good standing as a
foreign corporation in each jurisdiction where the properties owned, leased, or
operated, or the business conducted, by it require such qualification, except
where the failure to so qualify or be in good standing, when taken together
with all such failures, would not have a material adverse effect on ESI. Each
of ESI and its subsidiaries has all requisite corporate power and authority to
own, operate, and lease its property and to carry on its businesses as they are
now being conducted.
3.3.2 Capitalization. ESI has authorized capital stock consisting of
40,000,000 shares of Common Stock, without par value, of which 8,671,333 shares
were outstanding on November 30, 1996 and 1,000,000 shares of Preferred Stock,
of which no shares were outstanding on November 30, 1996. All of the
outstanding shares of capital stock of ESI have been duly authorized and are
validly issued, fully paid, and nonassessable, and no shares were issued in
violation of preemptive or similar rights of any shareholder. Except under the
terms of the various ESI employee or director benefit plans, or as disclosed in
the ESI SEC Reports (defined in Section 3.3.10) there are no subscriptions,
options, warrants, rights,
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convertible securities or other agreements or commitments of any character
obligating ESI to issue any shares of capital stock.
3.3.3 Corporate Authority. ESI has the corporate power and authority
and has taken all corporate action necessary to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Board of Directors of ESI
and duly and validly executed and delivered by ESI. This Agreement constitutes
the valid and binding obligation of ESI, enforceable in accordance with its
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought.
3.3.4 Control of Merger Corp Before Merger. Before the Effective
Time, ESI will be in control of Merger Corp. within the meaning of Section
368(c) of the Code.
3.3.5 Control of Merger Corp After Merger. ESI has no plan or intent
to cause Merger Corp. to issue additional shares of its stock following the
Merger that would result in ESI losing control of Merger Corp. within the
meaning of Section 368(c) of the Code.
3.3.6 Continuation of Dynamotion's Business. ESI intends to cause
Merger Corp. to continue the historic business of Dynamotion or use a
significant portion of Dynamotion's business assets in a business following the
Merger.
3.3.7 No Plan to Reacquire Merger Consideration. ESI has no plan or
intention to reacquire any ESI Common Stock issued as Merger Consideration.
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3.3.8 No Plan to Liquidate or Merge Merger Corp. ESI has no plan or
intention to liquidate Merger Corp., to merge Merger Corp. with and into
another corporation, to sell or otherwise dispose of the stock of Merger Corp.,
or to cause Merger Corp. to sell or otherwise dispose of any of the assets of
Dynamotion transferred pursuant to the Merger, except for dispositions made in
the ordinary course of business or transfers described in Section 368(a)(2)(C)
of the Code.
3.3.9 Governmental Filings. Other than the filing of (a) the
Certificate of Merger contemplated by Article I and (b) the Registration
Statement described in Section 4.3.1, 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.
3.3.10 ESI SEC Reports. ESI has heretofore furnished Dynamotion with
complete copies of all registration statements, reports, and proxy statements,
including amendments thereto, filed with SEC since May 31, 1993 and before the
date of this Agreement (collectively, the "ESI SEC Reports"). ESI has timely
filed with the SEC all registration statements, reports, proxy statements, and
other filings required to be made by it under applicable laws and regulations.
Each of the ESI SEC Reports, at the time filed or at the time of its
effectiveness, if later, (a) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading and (b) complied in
all respects with the applicable requirements of the Securities Exchange Act of
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1934, as amended, the Securities Act of 1933, as amended, and the applicable
rules and regulations of the SEC thereunder. Since November 30, 1996, there has
been no material adverse change in the business, results of operations,
financial condition, properties, or assets of ESI.
3.3.11 Litigation. Except as set forth in the ESI SEC Reports, no
material 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.
3.3.12 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 of ESI, (b) violate any provision of the Articles of
Incorporation or Bylaws of ESI or any subsidiary of ESI, (c) violate any
statute, judgment, order, injunction, decree, rule, regulation, or ruling of
any Governmental Entity applicable to ESI or any subsidiary of ESI, or (d)
either alone or with the giving of notice or the passage of time or both,
conflict with, constitute grounds for termination of, accelerate the
performance required by, accelerate the maturity of any indebtedness or
obligation under, result in the breach of the terms, conditions, or provisions
of, or constitute a default under any mortgage, deed of trust, indenture, note,
bond, lease, license, permit, or other agreement, instrument or obligation to
which either ESI or any subsidiary of ESI is a party or by which any of them is
bound.
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3.3.13 Not Investment Companies. Neither ESI nor Merger Corp. is an
investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code
3.3.14 Proxy Statement/Prospectus. The information regarding ESI or
Merger Corp. contained in the Proxy Statement/Prospectus 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 Proxy Statement/Prospectus that is
furnished in writing by Dynamotion or any Key Shareholder (or their respective
representatives) expressly for use in such Proxy Statement/Prospectus or
information relating to Dynamotion or any Key Shareholder that is reviewed by
Dynamotion with the knowledge that it will be so used and without objecting to
such use. ESI will promptly inform Dynamotion of the happening of any event
before the Effective Time that would render the information regarding ESI or
Merger Corp. incorrect in any material respect or require the amendment of the
Proxy Statement/ Prospectus.
3.3.15 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.
3.4 Representations and Warranties Relating to Merger Corp. ESI and Merger
Corp. hereby represent and warrant to Dynamotion that:
3.4.1 Organization and Status. Merger Corp. is a corporation duly
organized and validly existing under the laws of the State of New York. Merger
Corp. does not own any
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properties (other than the initial cash subscription for shares) nor has it
commenced any business or operations.
3.4.2 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 Merger Corp. are owned by ESI.
3.4.3 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.
3.4.4 Governmental Filings. Other than the filing of the Certificate
of Merger contemplated by Article I, no notices, reports, or other filings are
required to be made by Merger Corp. with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by Merger Corp.
from, any Governmental Entity in connection with the execution and delivery of
this Agreement by Merger Corp. and the consummation by Merger Corp. of the
transactions contemplated hereby.
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3.4.5 Litigation. No litigation, proceeding or governmental
investigation is pending or, to the knowledge of ESI or Merger Corp.,
threatened against or relating to Merger Corp. or its officers or directors in
their capacities as such.
3.4.6 No Operations. Merger Corp. has not conducted active operations
and has no assets or liabilities other than in accordance with this Agreement.
3.4.7 No Change of Control. Merger Corp. has no plan or intent to
issue additional shares of its stock following the Merger that would result in
ESI losing control of Merger Corp. within the meaning of Section 368(c) of the
Code.
3.4.8 Continuation of Dynamotion's Business. Merger Corp. intends to
continue the historic business of Dynamotion or use a significant portion of
Dynamotion's business assets in a business following the Merger.
ARTICLE IV
COVENANTS
4.1 Mutual Covenants.
4.1.1 Consents and Approvals. Each of Dynamotion and ESI will use all
reasonable efforts to secure, and ESI will cause Merger Corp. to use all
reasonable efforts to secure, all consents, approvals, licenses, or permits
that 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
forms reasonably satisfactory to Dynamotion and ESI.
4.1.2 Reasonable Efforts. Subject to the terms of this Agreement,
each of Dynamotion and ESI will use all reasonable efforts, and ESI will cause
Merger Corp. to use all
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reasonable efforts, to effectuate the transactions contemplated hereby and to
cause the fulfillment of the conditions to their respective obligations under
this Agreement.
4.1.3 Publicity. Except as required by law or applicable Nasdaq or
stock exchange rules, 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 Dynamotion, in each case not to be
unreasonably withheld.
4.1.4 Confidentiality. The provisions of the Confidentiality
Agreement dated December 4, 1996 between Dynamotion and ESI (the
"Confidentiality Agreement") will apply to all "Confidential Information" (as
defined in the Confidentiality Agreement) obtained by any party pursuant to
this Agreement.
4.2 Covenants of Dynamotion.
4.2.1 Conduct of Business. From the execution of this Agreement until
the Effective Time, Dynamotion will carry on its business in the ordinary and
usual manner and will use all reasonable efforts to maintain its existing
relationships with suppliers, customers, employees, and business associates,
and will not, except as set forth on Schedule 4.2.1 or as specifically
permitted by this Agreement, without the prior written consent of ESI (which
consent will not unreasonably be withheld):
(a) amend its Certificate of Incorporation or Bylaws except as
provided in Section 4.2.6 in connection with the Conversion Proposal;
(b) enter into any new agreements with, or amend any plans or
arrangements with respect to an increase in compensation or benefits payable
to, its officers or employees, or declare, contribute, or pay any discretionary
amount relating to compensation,
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deferred compensation, or benefits payable to its officers or employees,
including without limitation bonus, profit sharing, incentive, or ERISA Plan
contributions;
(c) split, combine, or 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, create, pledge, dispose of, or encumber any
additional shares of its capital stock of any class, or any securities
convertible into or exchangeable for, or any options, warrants, calls, stock
appreciation or similar rights, or other commitments or rights of any kind with
respect to, any shares of its capital stock of any class or any phantom stock
other than pursuant to: (i) the exercise of Options, (ii) the exercise of
outstanding Z Warrants, (iii) the conversion of outstanding Class A Stock, (iv)
the conversion of outstanding Class B Stock; (v) the exercise of the Class B
Warrants, and/or (vi) the exercise of the Underwriters' Warrants, in each case
before the Effective Time;
(f) redeem, purchase, or otherwise acquire any shares of its
capital stock, merge into or consolidate with any other corporation, permit any
other corporation to merge into or consolidate with it, liquidate, sell, or
dispose of any of its assets (other than inventory sold in the ordinary course
of business), or close any plant or business operation;
(g) except for short-term indebtedness and indebtedness incurred
pursuant to Dynamotion's revolving credit agreement and renewals, replacements,
and amendments thereof not in excess of the current maximum credit limit under
such credit
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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 Dynamotion) or modify
any Contracts, except as otherwise contemplated or permitted by this Agreement
or in the ordinary course of business not exceeding 25,000 singly, or take or
omit to take any action that is reasonably likely to have a material adverse
effect on the business, properties, financial condition, or results of
operations of Dynamotion;
(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 course of business
or liabilities incurred in the ordinary course of business and less than
$25,000 singly;
(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;
(m) change its method of accounting as in effect at December 31,
1995, except as required by changes in generally accepted accounting principles
as concurred with by Dynamotion's independent auditors, or change its fiscal
year; or
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(n) authorize or enter into an agreement to do any of the
actions referred to in paragraphs (a) through (m) above.
4.2.2 Acquisition Proposals. Unless and until this Agreement has been
terminated pursuant to Section 7.1 or Section 7.2, Dynamotion will not
directly, or indirectly through any officer, director, agent, employee, or
representative, (a) 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 Dynamotion (each, an
"Acquisition Transaction"); (b) 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; (c) enter into or execute any agreement relating
to an Acquisition Transaction; or (d) 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 will prohibit Dynamotion 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 (i) the Board of Directors of
Dynamotion determines in good faith, upon advice of legal counsel, that such
action is required for the directors of Dynamotion to fulfill their fiduciary
duties and obligations under New York law and (ii) before furnishing such
information to or entering into discussions or negotiations with such third
party, Dynamotion provides prompt written notice to ESI of such proposal or
offer and, to the extent not inconsistent with the fiduciary duties of
Dynamotion's officers and directors, provides
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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 and Customer Visits. Dynamotion will give ESI
and its representatives and agents reasonable access to all its premises,
books, records, agreements, and files and will cause the officers of Dynamotion
to furnish ESI with such financial and operating data and other information in
its possession with respect to its business, customers, and properties as ESI
from time to time reasonably requests. Without limitation of the foregoing,
Dynamotion will permit ESI to conduct an operations review at the plant level
during which ESI will have access to the plant managers, sales and marketing
managers, finance officers, and technology, environmental, and human resource
managers of each Dynamotion operating facility, and will make all reasonable
efforts to arrange for ESI (or its representatives or agents) to visit such
Dynamotion customers as ESI may reasonably request. Any such investigations (a)
will be conducted in such a manner as not to interfere unreasonably with the
operation of Dynamotion's business or the businesses of Dynamotion's customers;
and (b) will not diminish any of the representations and warranties contained
in this Agreement.
4.2.4 Dynamotion Shareholders Meeting. Upon receipt from ESI of a
sufficient number of copies of the Proxy Statement/Prospectus relating to this
Agreement (the "Proxy Statement/Prospectus") in the form declared effective by
the SEC, Dynamotion will immediately cause to be duly called and noticed the
Special Meeting of the holders of Dynamotion Common Stock, Class A Stock, and
Class B Stock entitled to vote on the
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Conversion Proposal and the Merger (all such voting securities, the "Voting
Dynamotion Securities") to be held within 50 days (but not less than 20
business days) after such notice for the purpose of considering and approving
the Conversion Proposal, this Agreement, the Plan of Merger, and the
transactions contemplated hereby and thereby. Subject to the fiduciary duties
of the directors of Dynamotion, Dynamotion will recommend to the shareholders
of Dynamotion the approval of the Conversion Proposal, this Agreement, the Plan
of Merger, and the transactions contemplated hereby and thereby.
4.2.5 Information for Proxy Statement/Prospectus and Registration
Statement. Dynamotion will promptly provide to ESI for inclusion in the Proxy
Statement/Prospectus and in the Registration Statement described in Section
4.3.1, in a form reasonably satisfactory to ESI, such information concerning
the Conversion Proposal, Dynamotion's operations, capitalization, technology,
and securities ownership and such other information as ESI may reasonably
request.
4.2.6 Conversion, Exercise, Redemption, or Termination of Dynamotion
Common Stock Equivalent Securities. Dynamotion will use all reasonable efforts
to cause all of the outstanding Dynamotion Common Stock Equivalent Securities
(other than the Options and the Convertible Debt) to be converted into or
exercised for shares of Dynamotion Common Stock or redeemed or terminated
before the Effective Time, including without limitation: (a) submitting in the
Proxy Statement/Prospectus a proposal to amend Dynamotion's Certificate of
Incorporation to modify the terms of the Class A Stock and Class B Stock so as
to provide for their automatic conversion into shares of Dynamotion Common
Stock immediately before the Effective Time, in accordance with the form of
Certificate of Amendment attached as Exhibit
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I (such proposal, the "Conversion Proposal"); (b) causing the proposal,
shareholder approval, and implementation of the transactions contemplated by
the Conversion Proposal: (i) to comply with its Certificate of Incorporation
and Bylaws, (ii) to comply with applicable laws and regulations (including
without limitation state and federal securities laws) or to satisfy the
requirements for exemption therefrom, and (iii) not to violate the terms of any
agreement or obligation by which Dynamotion is bound; (c) on the first business
day following shareholder approval of the Conversion Proposal delivering for
filing by the Department of State of the State of New York a Certificate of
Amendment to Dynamotion's Certificate of Incorporation substantially in the
form attached as Exhibit I (and, if necessary, using all reasonable efforts to
cause the Department of State of the State of New York to file such Certificate
of Amendment); (d) using all reasonable efforts to cause, within five business
days following the execution of this Agreement, the underwriters for the public
offering of the Class A Stock (the "Underwriters") to consent in writing to the
redemption of the Z Warrants in the manner described in this Agreement; and (e)
delivering a notice of redemption to the warrant agent for the Z Warrants (the
"Warrant Agent") and using all reasonable efforts to cause the Warrant Agent to
deliver a notice of redemption to all holders of all Z Warrants and taking such
other steps in Dynamotion's power as may be necessary or desirable to permit
all outstanding Z Warrants to be redeemed immediately after the effectiveness
of the transactions contemplated by the Conversion Proposal and immediately
before the Effective Time.
4.2.7 Compliance With Convertible Debt Obligations. Between the
execution of this Agreement and the Effective Time, Dynamotion will not default
under the terms of the Convertible Debt nor take any action or omit to take any
action that would cause the Convertible
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Debt to become entitled to convert into Dynamotion Common Stock except where
the holder of the Convertible Debt has signed a written agreement not to
convert until at least 10 business days after the Effective Time or until this
Agreement has been terminated, whichever occurs first.
4.2.8 Consents. Dynamotion will use all reasonable efforts to obtain,
on or before the Closing Date and without modification of the rights or
obligations of Dynamotion, all necessary consents of Governmental Entities with
respect to the Permits listed on Schedule 3.1.21(b) and all necessary consents
with respect to the Contracts as listed on Schedule 3.1.19.
4.3 Covenants of ESI.
4.3.1 Registration Statement. ESI, with Dynamotion's cooperation,
will promptly file with the SEC a Registration Statement on Form S-4 (including
the Proxy Statement/Prospectus) for the purposes of (a) registering the sale of
the shares of ESI Common Stock that the holders of shares of Dynamotion Common
Stock will be entitled to receive pursuant to Section 1.3 of this Agreement,
and (b) soliciting Dynamotion shareholder approval of the Conversion Proposal
and the Merger, and ESI, with Dynamotion's cooperation, will use all reasonable
efforts to cause such Registration Statement to be declared effective as
promptly as practicable.
4.3.2 Listing of ESI Common Stock. Before the Effective Time, ESI
will list the shares of ESI Common Stock that the holders of shares of
Dynamotion Common Stock will be entitled to receive pursuant to the provisions
of this Agreement on the Nasdaq National Market System.
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4.3.3 Issuance of Certificates. After the Effective Time, ESI will
issue and deliver, or will cause to be issued and delivered, in accordance with
the provisions of this Agreement, stock certificates representing the number of
shares of ESI Common Stock to be issued in the Merger.
4.3.4 Registration and Reservation of Option Shares. ESI will cause
the shares of ESI Common Stock issuable upon exercise of the Options in
accordance with Section 1.3.3 to be issued pursuant to a then-effective
Registration Statement or otherwise to be registered after the Closing Date on
a Registration Statement on Form S-8 to be filed no later than 30 days after
the Closing Date. In addition, from and after the Effective Time, ESI will
reserve and make available and will keep reserved and available for so long as
any Option remains outstanding such number of shares of ESI Common Stock as are
issuable upon the exercise of all outstanding Options.
4.3.5 Indemnification Provisions of Merger Corp.'s Certificate. ESI
will cause the Certificate of Incorporation of Merger Corp. (the "Merger Corp.
Certificate") to include provisions for the indemnification of Dynamotion's
current and former officers and directors to the fullest extent permitted by
the NYBCL, and will not, for a period of five years following the Effective
Time, cause the removal of any such provision in the Merger Corp. Certificate
or permit any such provision to be materially and adversely modified or
amended.
4.4 Covenants of Merger Corp. Merger Corp, except as is contemplated by
this Agreement, will not, before the Effective Time, (a) engage in any business
activities, (b) liquidate or merge into, or consolidate with any other
corporation, (c) permit any other corporation to merge into or consolidate with
it, (d) increase its authorized capital stock, or
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(e) issue options, rights, or warrants to purchase any of its capital stock. In
addition, for a period of five years following the Effective Time, Merger Corp.
will not amend the Merger Corp. Certificate to remove any provision relating to
indemnification of Dynamotion's current or former officers and directors or
materially and adversely modify or amend any such provision.
ARTICLE V
CONDITIONS
5.1 Conditions to the Obligations of All Parties. The obligations of
Dynamotion, 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 will have made all filings
with and received all approvals of Governmental Entities of competent
jurisdiction necessary to consummate the Merger, and each of such approvals
will be in full force and effect at the Closing and not subject to any
condition that requires the taking or refraining from taking of any action that
would have a material adverse effect on Dynamotion or on ESI or its
subsidiaries.
5.1.2 Litigation. There will not be in effect any final order,
decree, or injunction of any Governmental Entity 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 non-final, appealable order,
decree, or injunction of such import set aside or lifted), and there will have
been no action taken, and no statute, rule, or regulation enacted, by any state
or federal
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government or Governmental Entity in the United States that would prevent the
consummation of the Merger.
5.1.3 Registration of Securities; Listing. The shares of ESI Common
Stock to be issued pursuant to this Agreement will have been registered under
the Securities Act of 1933, as amended, and under the securities laws of such
states as counsel for ESI deems necessary or exemptions from such state
registration or qualification will have been determined by such counsel to be
available, and will have been listed on the Nasdaq National Market System.
5.2 Conditions to the Obligations of Dynamotion and the Key Shareholders.
The obligations of Dynamotion and the Key Shareholders 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 will 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 (i)
representations and warranties made as of a specific date, which
representations and warranties need only be correct as of such date and (ii)
changes specifically contemplated by this Agreement, and ESI and Merger Corp.
will have performed all of their respective covenants and obligations hereunder
to be performed as of the Closing. Dynamotion will have received at the Closing
certificates to the foregoing effect, dated the Closing Date, and executed on
behalf of ESI by an officer of ESI and on behalf of Merger Corp. by an officer
of Merger Corp. For purposes of affirming the accuracy of the representations
and warranties of
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ESI made as of the Closing, the term "ESI SEC Reports" will be deemed to
include all registration statements, reports and proxy statements, including
all amendments thereto, filed by ESI with the SEC after the date of this
Agreement and before Closing.
5.2.2 No Material Adverse Change. Since November 30, 1996 there will
have been no material adverse change, or discovery of a condition or occurrence
of an event that 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.
5.2.3 Opinion of Counsel. Dynamotion will have received from Stoel
Rives LLP, counsel to ESI, an opinion dated the Closing Date with respect to
the matters described in Exhibit J.
5.2.4 Dynamotion Shareholder Approval, Etc. In accordance with the
applicable provisions of the NYBCL and the Certificate of Incorporation and
Bylaws of Dynamotion, the requisite percentages of the Voting Dynamotion
Securities will have approved the Conversion Proposal, this Agreement, the Plan
of Merger, and the transactions contemplated hereby and thereby, and amendments
of Dynamotion's Certificate of Incorporation will have been filed by the
Department of State of the State of New York effecting the Conversion Proposal
on or before the day immediately preceding the Closing Date; provided, however,
that Dynamotion may rely on this condition to avoid its obligation to
consummate the Merger and the other transactions contemplated by this Agreement
only if Dynamotion has used its best efforts to satisfy all of the conditions
contained in this Section 5.2.4.
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5.2.5 Termination of Underwriters' Warrants. The Underwriters'
Warrants will have been terminated; provided, however, that Dynamotion may rely
on this condition to avoid its obligation to consummate the Merger and the
other transactions contemplated by this Agreement only if Dynamotion has used
its best efforts to cause the termination of the Underwriter' Warrants.
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 Dynamotion and the Key Shareholders contained in this
Agreement will 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
(i) representations and warranties made as of a specific date which
representations and warranties need only be correct as of such date and (ii)
changes specifically contemplated by this Agreement, and each of Dynamotion and
each Key Shareholder will have performed in all material respects all of its,
his, or her respective covenants and obligations hereunder to be performed as
of the Closing. ESI will have received at the Closing a certificate to the
foregoing effect, dated the Closing Date and executed on behalf of Dynamotion
by an officer of Dynamotion with respect to Dynamotion's representations,
warranties, and covenants, and certificates dated the Closing Date and executed
by or on behalf of each of the Key Shareholders concerning the Key
Shareholders' representations, warranties, and covenants. For purposes of
affirming the accuracy of the representations and warranties of Dynamotion made
as of the Closing, the term "Dynamotion SEC Reports" will be deemed to
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include all registration statements, reports and proxy statements, including
all amendments thereto, filed by Dynamotion with the SEC after the date of this
Agreement and before Closing.
5.3.2 Opinions of Counsel. ESI will have received from Paul,
Hastings, Janofsky & Walker LLP, counsel to Dynamotion, an opinion dated the
Closing Date with respect to the matters described in Exhibit K with respect to
Dynamotion and the Key Shareholder specified in Exhibit K and from Kirkpatrick
& Lockhart LLP, counsel to Dynamotion Investment L.L.C., an opinion dated the
Closing Date with respect to the matters described in Exhibit L with respect to
Dynamotion Investment L.L.C.
5.3.3 Consents and Approvals. All nongovernmental consents and
approvals required to be obtained by Dynamotion for consummation of the Merger
will have been obtained, other than those that, if not obtained, would not,
either singly or in the aggregate, have a material adverse effect on
Dynamotion.
5.3.4 No Material Adverse Change. Since September 30, 1996 there will
have been no material adverse change, or discovery of a condition or occurrence
of an event that 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 Dynamotion.
5.3.5 Other Agreements. Dynamotion will have caused each of its
employees located in California to sign a California ESI Confidentiality
Agreement, and each other employee of Dynamotion to sign a Standard ESI
Confidentiality Agreement, and will have delivered such executed agreements to
ESI; the Escrow Agreement and related stock powers will have been executed and
delivered by the parties thereto other than ESI or Merger Corp; the
Noncompetition Agreement will have been executed and delivered by each party
listed on
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Schedule 2.3; the Standstill Agreement will have been executed and delivered by
the parties thereto other than ESI or Merger Corp; an Affiliate Representation
Letter will have been executed and delivered by each party listed on Schedule
2.5; all Class B Warrants will have been exercised before the record date for
the Special Meeting; the Class B Additional Warrant Agreement will have been
terminated; and all Underwriters' Warrants will have been terminated.
5.3.6 Related Party and Other Agreements. All agreements or
arrangements described on Schedule 3.1.23 (Related Parties) and any other
agreements or arrangements listed on Schedule 5.3.6 will have been terminated
or amended to the reasonable satisfaction of ESI, if so requested by ESI.
5.3.7 Updated Financial and Other Information. ESI will have received
(a) the unaudited balance sheet of Dynamotion and the related statements of
operations, shareholders' equity, and cash flows for the fiscal year ended
December 31, 1996 (together, the "Updated Financial Statements"), and (b)
schedules of accounts and notes receivable (including an aging analysis),
liability accounts, inventories (organized by category), and backlog (by
customer and product), in each case as of immediately before the Closing Date
and accompanied by an officer's certificate as to accuracy and completeness of
such statement or schedule, and the Updated Financial Statements will not
indicate that there has been any material adverse change in the financial
condition or operating results of Dynamotion since September 30, 1996.
5.3.8 Environmental Report. ESI will 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 are
satisfactory to ESI in its sole discretion.
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5.3.9 Dynamotion Shareholder Approval, Etc. In accordance with
applicable provisions of the NYBCL, the Certificate of Incorporation and Bylaws
of Dynamotion, and any applicable state or federal securities laws, the
requisite percentages of the Voting Dynamotion Securities will have approved
the Conversion Proposal, this Agreement, the Plan of Merger, and the
transactions contemplated hereby and thereby, and amendments to Dynamotion's
Certificate of Incorporation will have been filed by the Department of State of
the State of New York effecting the Conversion Proposal on or before the day
immediately preceding the Closing Date. ESI and Merger Corp. will have received
a certificate dated the Closing Date and executed by an authorized officer of
Dynamotion stating that this Agreement and the transactions contemplated by it
have been duly and validly approved by the shareholders of Dynamotion.
5.3.10 Dynamotion Dissenters. Not more than 20 percent of the Voting
Dynamotion Securities will have qualified as dissenting shares pursuant to the
NYBCL.
5.3.11 Conditions Relating to Z Warrants and Convertible Debt. The Z
Warrants will have been redeemed immediately following the effectiveness of the
conversion contemplated by the Conversion Proposal and immediately before the
Effective Time. There will be no default by Dynamotion under the terms of the
Convertible Debt, and the holders of the Convertible Debt will not have become
entitled to convert the Convertible Debt into shares of Dynamotion Common Stock
or such holders will have agreed in writing to waive such right to convert
until at least 10 business days after the Effective Time or until this
Agreement has been terminated, whichever occurs first.
5.3.12 Arthur Andersen LLP Analysis of In-Process Research and
Development. ESI will have received from Arthur Andersen LLP a written opinion
that the
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value of Dynamotion in-process research and development as of the Closing Date
is not less than the amount stated on Schedule 5.3.12.
5.3.13 Consent of Underwriters. The Underwriters will, within five
business days after the execution of this Agreement, have consented in writing
to the redemption of the Z Warrants in the manner described in this Agreement.
5.3.14 Governmental Entity Consents. Dynamotion will have obtained,
without modification of the rights or obligations of Dynamotion under any of
the listed Permits, all necessary consents of Governmental Entities with
respect to the Permits listed on Schedule 3.1.21(b).
5.3.15 Dynamotion Revised Schedules. All schedules to this Agreement
relating to Dynamotion's representations and warranties will have been revised
as necessary as of the Closing Date, and such revised schedules are
satisfactory to ESI in its sole discretion.
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival.
6.1.1 Survival of Representations and Warranties. All representations
and warranties of any party contained in this Agreement or in any agreement,
document, or instrument delivered pursuant to or in connection with this
Agreement will survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, but will be extinguished
and be of no further force or effect 18 months after the Effective Time, except
that any claim for which a Claim Notice (as defined in Section 6.5.1) is
delivered pursuant to Section 6.5.1 before the 18-month survival period has
elapsed will survive until the
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settlement or other final resolution of such claim. No Claim Notice will be
effective if delivered after the time period specified in this Section 6.1.1.
6.1.2 Survival of Article IV Covenants. All of the covenants of any
party contained in Article IV of this Agreement will be extinguished and be of
no further force or effect after the Effective Time, except that Sections
4.1.4, 4.3.3, 4.3.4, 4.3.5, and 4.4 will survive the Effective Time in
accordance with their respective terms.
6.2 Indemnification. (a) From and after the Effective Time and subject to
the limitations of this Article VI, the Key Shareholders will, severally and
not jointly, and only to the extent of the Escrowed Property, indemnify and
hold harmless ESI and Merger Corp. and their respective officers, directors,
and shareholders (collectively, the "Indemnified Parties") from, for, and
against any 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 Dynamotion made in
this Agreement (after taking into account any revised schedule provided
pursuant to Section 5.3.15); provided, however, that for the purposes of this
Section 6.2, the determination of whether there has been a breach of any of
Dynamotion's representations and warranties contained in (i) Section 3.1.28
will be made without regard to any disclosures contained in Schedule 3.1.28(a)
(except as noted otherwise on such schedule) and (ii) Section 3.1.25 will be
made without regard to any disclosures contained in Schedule 3.1.25.2. (b) From
and after the Effective Time and subject to the limitations of this Article VI,
each Key Shareholder will, severally and not jointly, and only to the extent of
his, her, or its Escrowed Property, indemnify and hold harmless each
Indemnified Party from, for,
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and against any Damages incurred by such Indemnified Party by reason of or
arising out of any inaccuracy in any representation or warranty or the breach
of any covenant of such Key Shareholder made in this Agreement.
6.3 Escrow. On the Closing Date, ESI will, on behalf of each of the Key
Shareholders, deliver to the Escrow Agent an aggregate of $1,500,000 worth of
the shares of ESI Common Stock to be received by the Key Shareholders pursuant
to Section 1.3 (such deposited shares, the "Escrowed Property"). The shares to
be delivered to the Escrow Agent on behalf of each Key Shareholder will be
withheld from the shares of ESI Common Stock otherwise to be received by such
Key Shareholder pursuant to Section 1.3 in the amounts set forth on Schedule
6.3. The Escrowed Property will be deposited with the Escrow Agent pursuant to
the terms of the Escrow Agreement. The escrow and the Escrow Agreement will
terminate and the Escrowed Property will be distributed to the Key Shareholders
at the time and as provided for in the Escrow Agreement.
6.4 Threshold for Indemnity Claims. No indemnification payment obligation
will arise under this Article VI unless and until the aggregate amount of
Damages claimed by all Indemnified Parties under this Article VI exceeds
$275,000 (the "Claim Threshold"); provided, however, that once the Claim
Threshold is exceeded, all Damages of the Indemnified Parties, including the
first $275,000 (in the aggregate) of Damages claimed by the Indemnified Partes,
will be subject to the indemnity provisions of this Article VI.
6.5 Claim Procedure for Indemnification. The obligations and liabilities
of the Key Shareholders in connection with claims for indemnification for
Damages by an Indemnified Party will be subject to the following terms and
conditions:
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6.5.1 Notice. The Indemnified Party must give written notice (a
"Claim Notice") to the Key Shareholder Representatives and the Escrow Agent of
its claim for indemnification as promptly as practicable whenever the
Indemnified Party has determined that there are facts or circumstances that may
entitle the Indemnified Party to indemnification under this Article VI;
provided, however, that the failure to give a timely Claim Notice (so long as
such Claim Notice is within the time period specified in Section 6.1.1) will
not diminish the indemnification obligations hereunder except to the extent
that the delay in giving such Claim Notice materially adversely affects the
ability of the Key Shareholder Representatives to mitigate Damages with respect
to any claim. The Claim Notice must 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 will undertake, conduct, and control, through counsel
of its choosing, the good faith settlement or defense of the Third Party Claim
and the Key Shareholder Representatives will provide such assistance as is
reasonably requested by ESI in connection with such settlement or defense.
6.5.3 Diligent Conduct. If, within five days after receipt by ESI
from the Key Shareholder Representatives of written notice that ESI is not
diligently conducting the defense or attempted settlement of any Third Party
Claim in good faith, ESI does not provide reasonably sufficient evidence to the
Key Shareholder Representatives that ESI is diligently conducting such defense
or attempting such settlement in good faith, the Key Shareholder
Representatives will thereafter have the right to contest, settle or compromise
such Third Party Claim.
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ARTICLE VII
TERMINATION
7.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time before the Effective Time by the mutual
consent of Dynamotion and ESI.
7.2 Termination Under Certain Other Conditions.
7.2.1 Automatic Termination. This Agreement will automatically
terminate without any action by ESI, Dynamotion, Merger Corp., or the Key
Shareholders if the Merger has not become effective on or before June 15, 1997,
provided, however, that automatic termination of this Agreement pursuant to
this Section 7.2.1 will not limit the liability of 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.
7.2.2 Termination by ESI or Dynamotion. This Agreement may be
terminated and the Merger may be abandoned at any time before the Effective
Time:
(a) by ESI or Dynamotion if any Governmental Entity of competent
jurisdiction in the United States or any state has issued an order, judgment,
or decree restraining, enjoining, or otherwise prohibiting the Merger and such
order, judgment, or decree has become final and nonappealable;
(b) by ESI or Dynamotion if the requisite approval of the Merger by
the shareholders of Dynamotion has not been obtained by May 31, 1997;
(c) by ESI if the Dynamotion Board of Directors has withdrawn or
modified in a manner adverse to ESI its approval of the Merger, this Agreement
or the transactions
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contemplated hereby or if Dynamotion or any officer, director, employee, agent,
or representative of Dynamotion takes any action that violates any provision of
Section 4.2.2; or
(d) by Dynamotion if the Dynamotion Board of Directors determines in
good faith, upon advice of legal counsel, that termination of this Agreement is
required for the directors of Dynamotion to fulfill their fiduciary duties and
obligations under New York 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, this
Agreement immediately will become void and of no effect, except that Sections
4.1.4, 7.4, 8.1, 8.11, and 8.12 will survive the event of termination.
7.4 Termination Fee. Dynamotion agrees to pay ESI (provided that
Dynamotion's termination of this Agreement has not resulted from the failure of
any of the conditions to the obligations of Dynamotion and the Key Shareholders
contained in Section 5.2) by wire transfer, the sum of $1,000,000 (the
"Termination Fee") in immediately available funds if Dynamotion terminates this
Agreement (other than pursuant to Section 7.2.2(a)) and within one year after
termination of this Agreement agrees to an Acquisition Transaction with any
person other than ESI or any of its affiliates and the Acquisition Transaction
results in a change in the beneficial owners of more than fifty percent (50%)
of the voting power of the capital stock of Dynamotion. Dynamotion will pay ESI
the Termination Fee promptly upon Dynamotion's execution of an agreement
relating to any such Acquisition Transaction.
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ARTICLE VIII
MISCELLANEOUS AND GENERAL
8.1 Payment of Expenses. Each party will be responsible for the costs and
expenses incurred by it in connection with this Agreement, the Merger, and the
other transactions contemplated by this Agreement, provided that nothing in
this Agreement will limit the right, if any, of a non-breaching party to obtain
damages, including attorneys' fees, incurred as a result of a breach of this
Agreement by another party.
8.2 Entire Agreement. This Agreement, including the schedules and exhibits
hereto, and the Confidentiality Agreement 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 its
subject matter.
8.3 Assignment. This Agreement is not assignable by any of the parties
hereto without the prior written consent of each of ESI and Dynamotion.
8.4 Binding Effect; No Third Party Benefit. This Agreement will inure to
the benefit of and be binding upon the parties hereto and their respective
successors and assigns, subject to the restrictions on assignment contained in
Section 8.3. Nothing express or implied in this Agreement is intended or will
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, except for the provisions of
Sections 4.3.5 and 4.4 concerning indemnification of current and former
officers and directors of Dynamotion under the Merger Corp. Certificate.
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8.5 Amendment and Modification. Subject to applicable law, this Agreement
may be amended, modified, and supplemented at any time before or at the
Closing, whether before or after the vote of the shareholders of Dynamotion, by
written agreement executed and delivered by each of the Key Shareholders and by
the duly authorized officers of Dynamotion, ESI, and Merger Corp.
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 will
together constitute the same agreement.
8.8 Captions. The article, section and paragraph captions used in this
Agreement are for convenience of reference only, do not constitute a part of
this Agreement and will not be deemed to limit or otherwise affect any of the
provisions hereof.
8.9 Subsidiary. When a reference is made in this Agreement to a subsidiary
of a party, the term "subsidiary" means any corporation or other organization,
whether incorporated or unincorporated, of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly 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.
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8.10 Notices. All notices, requests, demands, waivers, and other
communications required or permitted to be given under this Agreement must be
in writing and will be deemed to have been duly given if delivered personally
or mailed, certified or registered mail with postage prepaid, return receipt
requested, or sent by telex, telegram, or facsimile (in each case with evidence
of confirmed transmission) as follows:
If to Dynamotion, to it at:
1639 E. Edinger Avenue
Santa Ana, CA 92705
Attention: President and Chief
Executive Officer
Fax: (714) 541-4469
with copies to:
Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive, 17th Floor
Costa Mesa, CA 92626-1924
Attention: Scott N. Leslie
Fax: (714) 979-1921
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
with copies to:
Stoel Rives LLP
900 SW Fifth Avenue
Portland, Oregon 97204
Attention: Annette M. Mulee
Fax: (503) 220-2480
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If to the Key Shareholders, to the "Key Shareholder Representatives," who
are listed on Schedule 8.10, at the address specified for each Key Shareholder
Representative on Schedule 8.10. Each Key Shareholder hereby appoints each of
the Key Shareholder Representatives listed on Schedule 8.10 as his, her, or its
agent for the purpose of receiving notices and other communications relating to
this Agreement and the Escrow Agreement.
Any party may change the person or address for notices under this
Agreement by notifying all other parties in writing of such change. All
notices, requests, demands, waivers, and communications relating to this
Agreement will be deemed to have been received on the date of delivery or on
the third business day after mailing in accordance with this Section 8.10.
8.11 Choice of Law. This Agreement will 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 will
also be governed by the merger provisions of the NYBCL.
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 will 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 that is invalid
or unenforceable in any jurisdiction will, 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
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provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision will be
interpreted to be only so broad as is enforceable.
8.14 Reliance on Dynamotion and Key Shareholder Representations and
Warranties. Dynamotion and each Key Shareholder recognizes and agrees that,
notwithstanding any investigation by ESI, ESI is relying upon the
representations and warranties made by Dynamotion in this Agreement and upon
the representations and warranties made by the Key Shareholders in this
Agreement.
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.
KEY SHAREHOLDERS ELECTRO SCIENTIFIC INDUSTRIES, INC.
DYNAMOTION INVESTMENT L.L.C.
By: BARRY L. HARMON
--------------------------------------
By: KEITH A. HIGHTOWER Name: Barry L. Harmon
------------------------------- Title: Senior Vice President and
Name: Keith A. Hightower Chief Financial Officer
Title: Manager
DYNAMOTION/ATI CORP.
WOJCIECH KOSMOWSKI
- ---------------------------------- By: JON R. HOPPER
Wojciech Kosmowski -------------------------------------
Name: Jon R. Hopper
Title: President and Chief Executive
Officer
ROYAL MILES DYNAMOTION MERGER CORP.
By: JACK LAHAV By: BARRY L. HARMON
------------------------------- -------------------------------------
Name: Jack Lahav Name: Barry L. Harmon
Title: US Rep for Royal Title: Chief Financial Officer
Miles, Ltd.
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GERALD M. STAREK
- ----------------------------------
Gerald M. Starek
DOROTHY MUNROE
- ----------------------------------
Dorothy Munroe
DENNIS RICHARD
- ----------------------------------
Dennis Richard
RICHARD C. ELLIOTT, TRUSTEE
- ----------------------------------
Richard C. Elliott, Trustee
WIL LAYMAN
- ----------------------------------
Wil Layman
JAMES E. MUNROE
- ----------------------------------
James E. Munroe
DOROTHY BEEK
- ----------------------------------
Dorothy Beek
KLAUS SCHMIDT
- ----------------------------------
Klaus Schmidt
ROBERT MAPEL
- ----------------------------------
Robert Mapel
PHILIP FERINDE
- ----------------------------------
Philip Ferinde
WILLIAM G. PAUL
- ----------------------------------
William G. Paul
A - 82
<PAGE>
LINDA C. STAREK
- ----------------------------------
Linda C. Starek
FRANK ERLACH
- ----------------------------------
Frank Erlach
COURTNEY MOE
- ----------------------------------
Courtney Moe
JOHN P. KENSEY
- ----------------------------------
John P. Kensey
LINDA J. WHITE/STAREK
- ----------------------------------
Linda J. White/Starek
A - 83
<PAGE>
ANNEX B
PLAN OF MERGER
MERGING
DYNAMOTION/ATI CORP.
WITH AND INTO
DYNAMOTION MERGER CORP.
1. Parties. The names of the corporations proposing to merge are
Dynamotion/ATI Corp., a New York corporation ("Dynamotion"), and Dynamotion
Merger Corp., a New York corporation ("Merger Corp.") and a wholly owned
subsidiary of Electro Scientific Industries, Inc., an Oregon corporation
("ESI"). The name under which Dynamotion was formed is Richmark Camera Service,
Inc. The surviving corporation in the merger (the "Merger") will be Merger
Corp., and the name of the surviving corporation will be Dynamotion, Inc.
2. Capitalization. As to each constituent corporation, the designation and
number of outstanding shares of each class and series and the voting rights
thereof are as follows:
(a) Dynamotion has outstanding 2,843,791 Common Shares, par value
$0.04 per share ("Dynamotion Common Stock"), which are entitled to one vote
per share with respect to the Merger; 937,279 Class A Non-Cumulative
Redeemable Convertible Preferred Shares, par value $0.01 per share ("Class
A Stock"), which are entitled to 1.05 votes per share with respect to the
Merger; and 2,250,000 Class B Cumulative Convertible Preferred Shares, par
value $0.01 per share ("Class B Stock"), which are entitled to 0.990904
votes per share with respect to the Merger and are entitled to vote as a
class with respect to the Merger.
(b) Merger Corp. has outstanding 100 shares of Common Stock, without
par value, which are entitled to one vote per share with respect to the
Merger.
(c) The number of outstanding shares of Dynamotion referenced in
Section 2(a) above is subject to change prior to the consummation of the
Merger (the "Effective Time") as follows: (i) prior to the Effective Time,
any of the outstanding shares of Class A Stock may potentially be converted
into Dynamotion Common Stock and Class A Redeemable Common Stock Purchase
Warrants according to the formula for conversion of Class A Stock contained
in Dynamotion's Certificate of Incorporation (the "Certificate"); (ii)
immediately
B - 1
<PAGE>
prior to the Effective Time, pursuant to an amendment to the Certificate
(the "Amendment"), all outstanding shares of Class A Stock and Class B
Stock will automatically be converted into Dynamotion Common Stock
according to the terms of the Amendment; (iii) prior to the Effective Time,
any of the outstanding options to purchase up to an aggregate of 1,600,041
shares of Dynamotion Common Stock under Dynamotion's stock option plans and
agreements may potentially be exercised pursuant to the terms thereof; (iv)
prior to the Effective Time, any of the outstanding warrants to purchase up
to an aggregate of 330,302 shares of Dynamotion Common Stock by the holders
of Class B Stock may potentially be exercised pursuant to the terms
thereof; (v) prior to the Effective Time, any of the outstanding warrants
to purchase up to an aggregate of 165,000 shares of Class A Stock by three
underwriters and an additional warrant to purchase up to 2,500 shares of
Dynamotion Common Stock by another underwriter may potentially be exercised
pursuant to the terms thereof; and (vi) prior to the Effective Time, any of
the outstanding Class A Redeemable Common Stock Purchase Warrants may
potentially be exercised pursuant to the terms thereof.
3. Terms and Conditions. At the Effective Time, Dynamotion will be merged
with and into Merger Corp. in the manner and with the effects provided by the
New York Business Corporation law (the "NYBCL"), the separate corporate
existence of Dynamotion will cease, and Merger Corp. will be the surviving
corporation. The outstanding shares of Dynamotion Common Stock will be converted
into the right to receive shares of Common Stock, without par value, of ESI
("ESI Common Stock") or cash on the basis, terms and conditions described in
paragraph 4 below.
4. Conversion of Dynamotion Common Stock. At the Effective Time, Dynamotion
will have issued and outstanding no shares of stock other than Dynamotion Common
Stock. The manner and basis of converting the Dynamotion Common Stock will be as
follows:
(a) Exchange for ESI Common Stock. Each share of Dynamotion Common
Stock outstanding immediately before the Effective Time (excluding shares
with respect to which the holder has exercised dissenters' rights in
accordance with the NYBCL) will, by virtue of the Merger and without any
action on the part of the holder thereof, cease to exist and be converted
into the right to receive the number of shares of ESI Common Stock computed
in accordance with Section 1.3 of the Agreement of Reorganization and
Merger dated as of January 24, 1997, among ESI, Dynamotion, Merger Corp.
and certain key shareholders of Dynamotion (the "Merger Agreement"). In
lieu of any fractional shares, ESI will pay each holder of Dynamotion
Common Stock who would be entitled to a fraction of a share of ESI Common
Stock an amount of
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<PAGE>
cash (without interest) determined in accordance with Section 1.4.3 of the
Merger Agreement.
(b) Treasury Shares. Each share of Dynamotion Common Stock held in the
treasury of Dynamotion immediately before the Effective Time will be
canceled and extinguished without any conversion thereof and no payment
will be made with respect thereto.
5. Amendment to Certificate of Incorporation. As of the Effective Time,
Merger Corp.'s Certificate of Incorporation will be amended to change the name
of Merger Corp. to Dynamotion, Inc.
6. Abandonment of Plan of Merger. Notwithstanding the adoption of this Plan
of Merger by the shareholders of each constituent corporation entitled to vote,
this Plan of Merger may be abandoned prior to the Effective Time pursuant to the
provisions of Article VII of the Merger Agreement.
7. Effective Time. The Effective Time shall be 5:00 P.M., New York time, on
May ____, 1997.
B - 3
<PAGE>
ANNEX C
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
DYNAMOTION/ATI CORP.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
We, the undersigned, Jon R. Hopper and Michael D. Henton, being
respectively the President and Secretary of Dynamotion/ATI Corp., a corporation
organized under the Business Corporation Law of the State of New York (the
"Corporation"), hereby certify and set forth as follows:
FIRST: The name of the Corporation is Dynamotion/ATI Corp. The
Corporation was formed under the name Richmark Camera Service, Inc.
SECOND: The Certificate of Incorporation was filed by the Department
of State, Albany, New York, on the 28th day of April, 1960.
THIRD: This Certificate of Amendment amends the Certificate of
Incorporation, as amended, to revise certain provisions pertaining to the
Class A Non-Cumulative Redeemable Convertible Preferred Shares of the
Corporation (the "Class A Preferred Stock") and the Class B Cumulative
Convertible Preferred Shares (the "Class B Preferred Shares") relating to
the conversion of such Class A Preferred Stock and Class B Preferred Shares
immediately prior to the occurrence of a certain merger involving the
Corporation.
FOURTH: To accomplish the amendment relating to the conversion of the
Class A Preferred Stock immediately prior to the merger, Section 4.9 of
Article "FOURTH" of the Certificate of Incorporation pertaining to the
Class A Preferred Stock is hereby amended to add the following additional
language at the end of such section:
"Notwithstanding the foregoing in this Section 4.9,
immediately prior to the occurrence of the merger of
the Corporation with and into Dynamotion Merger Corp.,
a New York corporation ("Merger Corp."), pursuant to
the terms of that certain Agreement of Reorganization
and Merger dated as of January 24, 1997 (the "Merger
Agreement") among Electro Scientific Industries, Inc.,
an Oregon corporation, the Corporation, Merger Corp.
and certain shareholders of the
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<PAGE>
Corporation, each share of Class A Preferred Stock shall
automatically be converted into 1.05 Common Shares, and the
holders of such Class A Preferred Stock shall participate in
such merger solely as holders of Common Shares; provided,
however, that notwithstanding the provisions of Section 4.1
hereof, upon such conversion the holders of Class A
Preferred Stock shall not receive any of the Class A
Redeemable Common Stock Purchase Warrants referred to in
such section but shall instead receive $0.10 for each share
of Class A Preferred Stock so converted upon surrender of
the certificates representing such Class A Preferred Stock.
Upon the conversion of the Class A Preferred Stock pursuant
to this Section 4.9, all of the outstanding certificates
which, immediately prior to the such conversion, represented
shares of Class A Preferred Stock shall automatically and
without any action by the holder thereof be deemed for all
purposes to represent the number of Common Shares of the
Corporation into which such shares of Class A Preferred
Stock have converted as provided herein."
FIFTH: To accomplish the amendment relating to the conversion of the
Class B Preferred Shares immediately prior to the merger, Section 4.9 of
Article "FOURTH" of the Certificate of Incorporation pertaining to the
Class B Preferred Shares is hereby amended to add the following additional
language at the end of such section:
"Notwithstanding the foregoing in this Section 4.9,
immediately prior to the occurrence of the merger of
the Corporation with and into Dynamotion Merger Corp.,
a New York corporation ("Merger Corp."), pursuant to
the terms of that certain Agreement of Reorganization
and Merger dated as of January 24, 1997 (the "Merger
Agreement") among Electro Scientific Industries, Inc.,
an Oregon corporation, the Corporation, Merger Corp.
and certain shareholders of the Corporation, each Class
B Preferred Share shall automatically be converted into
0.990904 of a Common Share plus the accrued dividend on
such Class B Preferred Share payable in accordance with
Sections 3 and 4.4 hereof (provided that such dividend
shall be paid exclusively in cash), and the holders of
the Class B Preferred Shares shall participate in such
merger solely as holders of Common Shares. Upon the
conversion of the Class B Preferred Shares pursuant to
this Section 4.9, all of the outstanding certificates
which, immediately prior to such conversion,
represented Class B Preferred Shares shall
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<PAGE>
automatically and without any action by the holder thereof
be deemed for all purposes to represent the number of Common
Shares of the Corporation into which such Class B Preferred
Shares have converted as provided herein."
SIXTH: The foregoing amendment pertaining to the Class A Preferred
Stock was authorized by the Board of Directors of the Corporation by a
unanimous written consent thereof and by the holders of a majority of (i)
the outstanding voting securities of the Corporation and (ii) the
outstanding shares of the Corporation's Class A Preferred Stock, by the
vote thereof at a special meeting. The foregoing amendment pertaining to
the Class B Preferred Shares was authorized by the Board of Directors of
the Corporation by a unanimous written consent thereof and by the holders
of a majority of (i) the outstanding voting securities of the Corporation
and (ii) the outstanding shares of the Corporation's Class B Preferred
Shares, by the vote thereof at a special meeting.
We have hereunto affirmed this Certificate as true under penalties of
perjury this _____ day of May, 1997.
-----------------------------
Jon R. Hopper, President
-----------------------------
Michael D. Henton, Secretary
C - 3
<PAGE>
ANNEX D
SECTION 623 OF NEW YORK BUSINESS CORPORATION LAW
623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
D - 1
<PAGE>
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement
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<PAGE>
setting forth the aggregate number of shares with respect to which notices of
election to dissent have been received and the aggregate number of holders of
such shares. If the corporate action has been consummated, such offer shall also
be accompanied by (1) advance payment to each such shareholder who has submitted
the certificates representing his shares to the corporation, as provided in
paragraph (f), of an amount equal to eighty percent of the amount of such offer,
or (2) as to each shareholder who has not yet submitted his certificates a
statement that advance payment to him of an amount equal to eighty percent of
the amount of such offer will be made by the corporation promptly upon
submission of his certificates. If the corporate action has not been consummated
at the time of the making of the offer, such advance payment or statement as to
advance payment shall be sent to each shareholder entitled thereto forthwith
upon consummation of the corporate action. Every advance payment or statement as
to advance payment shall include advice to the shareholder to the effect that
acceptance of such payment does not constitute a waiver of any dissenters'
rights. If the corporate action has not been consummated upon the expiration of
the ninety day period after the shareholders' authorization date, the offer may
be conditioned upon the consummation of such action. Such offer shall be made at
the same price per share to all dissenting shareholders of the same class, or if
divided into series, of the same series and shall be accompanied by a balance
sheet of the corporation whose shares the dissenting shareholder holds as of the
latest available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not less
than a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation without
an
D - 3
<PAGE>
office in this state, such proceeding shall be brought in the county where the
office of the domestic corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors,
D - 4
<PAGE>
including the rate of interest which the corporation would have had to pay to
borrow money during the pendency of the proceeding. If the court finds that the
refusal of any shareholder to accept the corporate offer of payment for his
shares was arbitrary, vexatious or otherwise not in good faith, no interest
shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates for any such shares represented by
certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be canceled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his
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<PAGE>
shares, which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
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.
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(e) The above paragraphs summarize the indemnification expressly
authorized by the Oregon Business Corporation Act (the "Act"). Article VII
provides for indemnification to the fullest extent permitted by law, which
is intended to provide indemnification broader than that expressly
authorized by the Act. It is unclear to what extent Oregon law permits such
broader indemnification. The limits of lawful indemnification may
ultimately be determined by the courts.
The rights of indemnification described above are not exclusive of any
other rights of indemnification to which the persons indemnified may be entitled
under any statute, agreement, vote of shareholders or directors or otherwise.
ESI has directors' and officers' insurance coverage which insures
directors and officers of ESI and its subsidiaries against certain liabilities.
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
2.1 Agreement of Reorganization and Merger dated as of January 24, 1997
among Dynamotion, Merger Corp., ESI and certain key shareholders of
Dynamotion (included as Annex A to the Proxy Statement/Prospectus).
4.1 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.
4.2 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, 1994.
4.3 ESI agrees to furnish copies of long-term debt agreements to the
Commission upon request.
II - 2
<PAGE>
4.4 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 ESI's Common Stock. Incorporated by reference to Exhibit 1
to ESI's Report on Form 8-K dated May 12, 1989.
5.1 Opinion of Stoel Rives LLP.(1)
8.1 Opinion of Stoel Rives LLP as to certain tax matters.(2)
10.1 Voting Agreement dated as of January 24, 1997 between Electro
Scientific Industries, Inc. and certain shareholders of Dynamotion/ATI
Corp.(1)
11.1 Dynamotion/ATI Corp. Net Loss Per Common Share.(2)
23.1 Consent of McGladrey & Pullen LLP.
23.2 Consent of Feldman Radin & Co., P.C.
23.3 Consent of Arthur Andersen LLP
23.4 Consents of Stoel Rives LLP. Included in Exhibits 5.1 and 8.1 to this
Registration Statement.(1)(2)
24.1 Powers of Attorney. Included in signature page to the Registration
Statement.(1)
99.1 Form of Proxy for Common Shareholders.(1)
99.2 Form of Proxy for Class A Preferred Shareholders.(1)
99.3 Form of Proxy for Class B Preferred Shareholders.(1)
99.4 Form of Notice of Special Meeting of Shareholders of Dynamotion/ATI
Corp.(1)
99.5 Form of Letter to the Shareholders of Dynamotion/ATI Corp.
(b) Financial Statement Schedules. Not Applicable.
- --------------
(1) Filed on January 31, 1997
(2) Filed on March 18, 1997
II - 3
<PAGE>
Item 22. Undertakings.
1. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
Proxy Statement/Prospectus 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 Proxy
Statement/Prospectus 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 Proxy Statement/Prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
4. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 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
II - 4
<PAGE>
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.
7. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose 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) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II - 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Portland,
State of Oregon, on April 1, 1997.
ELECTRO SCIENTIFIC INDUSTRIES, INC.
By: DONALD R. VANLUVANEE
--------------------------------------
Donald R. VanLuvanee
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities indicated on this 1st day of April, 1997.
Signature Title
--------- -----
(1) Principal Executive, Financial
and Accounting Officer:
DONALD R. VANLUVANEE President and Chief
------------------------------ Executive Officer
Donald R. VanLuvanee
BARRY L. HARMON Senior Vice President
------------------------------ and Chief Financial Officer
Barry L. Harmon
(2) Directors:
DAVID F. BOLENDER* Chairman of the Board
------------------------------
David F. Bolender
DOUGLAS C. STRAIN* Vice-Chairman of the Board
------------------------------
Douglas C. Strain
LARRY L. HANSEN* Director
------------------------------
Larry L. Hansen
W. ARTHUR PORTER* Director
------------------------------
W. Arthur Porter
II - 6
<PAGE>
VERNON B. RYLES. JR.* Director
------------------------------
Vernon B. Ryles, Jr.
KEITH L. THOMSON* Director
------------------------------
Keith L. Thomson
DONALD R. VANLUVANEE Director
------------------------------
Donald R. VanLuvanee
*By: BARRY L. HARMON
------------------------------
Barry L. Harmon
Attorney-in-Fact
II - 7
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
------ --------------------
2.1 Agreement of Reorganization and Merger dated as of January 24, 1997
among Dynamotion, Merger Corp., ESI and certain key shareholders of
Dynamotion (included as Annex A to the Proxy Statement/Prospectus).
4.1 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.
4.2 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, 1994.
4.3 ESI agrees to furnish copies of long-term debt agreements to the
Commission upon request.
4.4 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 ESI Common Stock. Incorporated by reference to Exhibit 1 to
ESI's Report on Form 8-K dated May 12, 1989. 5.1 Opinion of Stoel
Rives LLP.(1)
8.1 Opinion of Stoel Rives LLP as to certain tax matters.(2)
10.1 Voting Agreement dated as of January 24, 1997 between Electro
Scientific Industries, Inc. and certain shareholders of Dynamotion/ATI
Corp.(1)
11.1 Dynamotion/ATI Corp. Net Loss Per Common Share.(2)
23.1 Consent of McGladrey & Pullen LLP.
23.2 Consent of Feldman Radin & Co., P.C.
23.3 Consent of Arthur Andersen LLP.
23.4 Consents of Stoel Rives LLP. Included in Exhibits 5.1 and 8.1 to this
Registration Statement.(1)(2)
24.1 Powers of Attorney. Included in signature page to the Registration
Statement.(1)
99.1 Form of Proxy for Common Shareholders.(1)
99.2 Form of Proxy for Class A Preferred Shareholders.(1)
99.3 Form of Proxy for Class B Preferred Shareholders.(1)
99.4 Form of Notice of Special Meeting of Shareholders of Dynamotion/ATI
Corp.(1)
99.5 Form of Letter to the Shareholders of Dynamotion/ATI Corp.
- --------------
(1) Filed on January 31, 1997.
(2) Filed on March 18, 1997
II - 8
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 2 to Form S-4 Registration
Statement of Electro Scientific Industries, Inc. filed on April 1, 1997 of our
report, dated March 7, 1997, which includes an emphasis paragraph relating to an
uncertainty as to Dynamotion/ATI Corp's ability to continue as a going concern,
relating to the 1995 and 1996 financial statements of Dynamotion/ATI Corp. and
to the reference of our Firm under the caption "Experts" in the Proxy
Statement/Prospectus.
McGLADREY & PULLEN, LLP
Anaheim, California
April 1, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-4 for
Electro Scientific Industries, Inc. of our report dated February 17, 1995
relating to the financial statements of Dynamotion/ATI Corp. (Formerly known as
Cybernetics Products, Inc.) as of December 31, 1994 and for the year then ended.
April 1, 1997 FELDMAN RADIN & CO., P.C.
New York, New York Certified Public Accountants
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Amendment No. 2 to Form S-4 Registration Statement and related
Proxy Statement/Prospectus pertaining to Electro Scientific Industries, Inc., of
our reports dated July 3, 1996 included in the Electro Scientific Industries,
Inc. Annual Report on Form 10-K for the fiscal year ended May 31, 1996 and to
all references to our firm included in this Registration Statement and related
Proxy Statement/Prospectus.
ARTHUR ANDERSEN LLP
Portland, Oregon
April 1, 1997
EXHIBIT 99.5
PRELIMINARY COPY
[LOGO]
DYNAMOTION/ATI CORP.
1639 East Edinger Avenue
Santa Ana, California 92705
April __, 1997
Dear Dynamotion Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Dynamotion/ATI Corp. (the "Special Meeting"), which will be held at
_____________, _____________, California, on May __, 1997, commencing at 8:00
a.m. local time.
At the Special Meeting, you will be asked to consider and vote on: (i) a
proposal to approve and adopt the Agreement of Reorganization and Merger (the
"Merger Agreement") dated as of January 24, 1997 entered into by Dynamotion/ATI
Corp. ("Dynamotion"), Electro Scientific Industries, Inc. ("ESI"), Dynamotion
Merger Corp., a wholly-owned subsidiary of ESI ("Merger Corp."), and certain key
shareholders of Dynamotion, to approve and adopt the related Plan of Merger
("Plan of Merger"), and to approve the merger of Dynamotion with and into Merger
Corp. (the "Merger") pursuant to the Merger Agreement and the Plan of Merger
(the foregoing proposal is hereinafter referred to as the "Merger Proposal");
(ii) a proposal to amend Dynamotion's Certificate of Incorporation (the
"Certificate") to provide that if the Merger Proposal is approved and the Merger
occurs, immediately before the consummation of the Merger, each share of the
outstanding Class A Non-Cumulative Redeemable Convertible Preferred Shares of
Dynamotion, par value $0.01 per share ("Class A Stock"), will automatically
convert into (a) 1.05 Common Shares of Dynamotion, par value $0.04 per share
("Dynamotion Common Stock"), and (b) cash in the amount of $0.10 representing
the redemption price for the two Class A Redeemable Common Stock Purchase
Warrants ("Z Warrants") that would have been issued with respect to such share
of Class A Stock under the existing conversion provisions of the Certificate
(the foregoing proposal is hereinafter referred to as the "Class A Conversion
Proposal"); and (iii) a proposal to amend Dynamotion's Certificate to provide
that if the Merger Proposal is approved and the Merger occurs, immediately
before the consummation of the Merger, each share of the outstanding Class B
Cumulative Convertible Preferred Shares of Dynamotion, par value $0.01 per share
("Class B Stock"), will automatically convert into (a) 0.990904 of a share of
Dynamotion Common Stock, and (b) cash in an amount equal to the accrued
dividends that the holder of such share of Class B Stock will be entitled to on
such share of Class B Stock as of the date the automatic conversion occurs (the
foregoing proposal is hereinafter referred to as the "Class B Conversion
Proposal;" the Class A Conversion Proposal and Class B Conversion Proposal are
hereinafter referred to collectively as the "Conversion Proposals").
If the Conversion Proposals are not approved, the Merger will not occur;
the approval of the Conversion Proposals is an essential condition precedent to
the Merger. If the Merger Proposal and the Conversion Proposals are approved and
become effective, Dynamotion will be merged with and into Merger Corp., a
wholly-owned subsidiary of ESI formed for this purpose, with Merger Corp.
continuing as the surviving corporation, and each share of Dynamotion Common
Stock will be converted into the right to receive a fraction of a share of
Common Stock, no par value, of ESI, determined in accordance
<PAGE>
with a conversion ratio formula specified in the Merger Agreement. If the Merger
Proposal and Conversion Proposals are approved by Dynamotion's shareholders at
the Special Meeting and the other conditions necessary to consummate the Merger
are satisfied, ESI and Dynamotion expect that it will take between seven and 14
days to complete the Merger. Accordingly, the Merger is expected to be
consummated on or about May __, 1997, or as soon thereafter as practicable after
satisfaction of all necessary closing conditions.
The purpose of the Conversion Proposals is to simplify the capital
structure of Dynamotion by providing for the conversion of all outstanding
shares of Class A Stock and Class B Stock into Dynamotion Common Stock
immediately before the Merger takes effect. In addition, the conversion of all
outstanding shares of Class A Stock into Dynamotion Common Stock will fulfill a
condition necessary to enable Dynamotion to redeem all outstanding Z Warrants.
Accordingly, after the automatic conversion of the Class A Stock into Dynamotion
Common Stock immediately before the Merger pursuant to the Conversion Proposals,
Dynamotion will redeem all of the outstanding Z Warrants in accordance with
their terms.
After careful consideration, your Board of Directors has unanimously
approved the Merger Proposal and the Conversion Proposals and has concluded that
they are in the best interests of Dynamotion and its shareholders. Your Board of
Directors unanimously recommends a vote in favor of approving and adopting the
Merger Proposal and the Conversion Proposals.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement/Prospectus relating to the actions to
be taken by Dynamotion Shareholders at the Special Meeting and a proxy. The
Proxy Statement/Prospectus more fully describes the proposed Merger and
information about Dynamotion and ESI. Please read it carefully.
We hope that you will be able to attend the Special Meeting in person.
However, whether or not you plan to attend the Special Meeting, please complete,
sign, and date your proxy and return it in the enclosed envelope. If you attend
the Special Meeting, you may vote in person if you wish, even though you have
previously returned your proxy. It is important that your shares be represented
and voted at the Special Meeting.
Sincerely,
Santa Ana, California Jon R. Hopper
April __, 1997 Chairman, President and
Chief Executive Officer
