Table of Contents
SECURITIES EXCHANGE ACT OF 1934
o | Preliminary proxy statement |
o | Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2)) |
þ | Definitive proxy statement |
o | Definitive additional materials |
o | Soliciting material pursuant to §240.14a-12 |
o | No fee required. |
o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
(1) | Title of each class of securities to which transaction applies: | ||
(2) | Aggregate number of securities to which transaction applies: | ||
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | ||
(4) | Proposed maximum aggregate value of transaction: | ||
(5) | Total fee paid: |
o | Fee paid previously with preliminary materials. |
þ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount Previously Paid: $2,278.34 | ||
(2) | Form, Schedule or Registration Statement No.: 333-150234 | ||
(3) | Filing Party: Echo Technology (Deleware) Inc. | ||
(4) | Date Filed: 4-14-08 |
Table of Contents
MERGER PROPOSAL — YOUR VOTE IS IMPORTANT
48401 Fremont Boulevard
Fremont, CA 94538
Chief Executive Officer
ESS Technology, Inc.
Table of Contents
48401 Fremont Boulevard
Fremont, CA 94538
Attention: Investor Relations
Telephone:(510) 492-1088
Table of Contents
48401 Fremont Boulevard
Fremont, CA 94538
(510) 492-1088
To Be Held June 27, 2008
Table of Contents
Chief Executive Officer
Table of Contents
1 | ||||
1 | ||||
1 | ||||
1 | ||||
1 | ||||
2 | ||||
2 | ||||
3 | ||||
3 | ||||
3 | ||||
4 | ||||
4 | ||||
4 | ||||
4 | ||||
5 | ||||
5 | ||||
5 | ||||
6 | ||||
6 | ||||
6 | ||||
7 | ||||
7 | ||||
8 | ||||
8 | ||||
9 | ||||
9 | ||||
9 | ||||
11 | ||||
12 | ||||
12 | ||||
14 | ||||
26 | ||||
26 | ||||
42 | ||||
43 | ||||
46 | ||||
53 | ||||
54 | ||||
54 | ||||
54 |
Table of Contents
59 | ||||
59 | ||||
59 | ||||
60 | ||||
61 | ||||
64 | ||||
72 | ||||
72 | ||||
72 | ||||
72 | ||||
72 | ||||
73 | ||||
74 | ||||
75 | ||||
75 | ||||
77 | ||||
83 | ||||
84 | ||||
85 | ||||
86 | ||||
88 | ||||
88 | ||||
88 | ||||
89 | ||||
89 | ||||
89 | ||||
89 | ||||
91 | ||||
95 | ||||
95 | ||||
96 | ||||
96 | ||||
96 | ||||
97 | ||||
97 | ||||
97 | ||||
97 | ||||
97 | ||||
97 | ||||
97 | ||||
98 | ||||
98 | ||||
98 | ||||
100 |
ii
Table of Contents
101 | ||||
102 | ||||
102 | ||||
102 | ||||
102 | ||||
102 | ||||
103 | ||||
103 | ||||
103 | ||||
104 | ||||
105 | ||||
106 | ||||
106 | ||||
108 | ||||
110 | ||||
111 | ||||
114 | ||||
118 | ||||
123 | ||||
123 | ||||
124 | ||||
124 | ||||
125 | ||||
125 | ||||
125 | ||||
126 | ||||
126 | ||||
127 | ||||
128 | ||||
129 | ||||
129 | ||||
130 | ||||
131 | ||||
131 | ||||
132 | ||||
132 | ||||
132 | ||||
132 | ||||
133 | ||||
134 | ||||
134 | ||||
135 | ||||
136 | ||||
137 |
iii
Table of Contents
138 | ||||
140 | ||||
140 | ||||
140 | ||||
141 | ||||
141 | ||||
141 | ||||
142 | ||||
143 | ||||
144 | ||||
145 | ||||
145 | ||||
146 | ||||
146 | ||||
147 | ||||
147 | ||||
148 | ||||
148 | ||||
148 | ||||
149 | ||||
150 | ||||
150 | ||||
151 | ||||
152 | ||||
153 | ||||
153 | ||||
154 | ||||
154 | ||||
154 | ||||
154 | ||||
154 | ||||
FINANCIAL STATEMENTS | F-1 |
Agreement and Plan of Merger | ||
Section 262 of the Delaware General Corporation Law | ||
Fairness Opinion of Needham & Company, LLC | ||
Fairness Opinion of Sutter Securities Incorporated | ||
Certificate of Incorporation of ESS Delaware | ||
Bylaws of ESS Delaware |
iv
Table of Contents
Q: | Why am I receiving this joint proxy statement/prospectus? | |
A: | You are receiving this joint proxy statement/prospectus because you have been identified as a shareholder of ESS and may be entitled to vote at the upcoming annual meeting of ESS and to submit an advance proxy in connection with the approval of the sale of our company to an affiliate of Imperium Partners Group, LLC, or Imperium. ESS is holding its 2007 annual meeting, which we refer to as the annual meeting, to consider the reincorporation of ESS from California into Delaware in connection with the sale to Imperium and to elect directors to the board of directors of ESS. | |
Q: | What is this joint proxy statement/prospectus? | |
A: | This document serves as both a proxy statement of ESS in connection with the solicitation of proxies for its annual meeting and approval of the principal terms of the reincorporation merger, and a prospectus and proxy statement of Echo in connection with the issuance of shares of ESS Delaware common stock in the reincorporation merger and the solicitation of advance proxies for the adoption of the merger agreement and approval of the sale to Imperium through the cash-out merger described below. | |
This joint proxy statement/prospectus contains important information about: | ||
• the reincorporation of ESS through its merger with and into Echo, which we refer to as the reincorporation merger; | ||
• the subsequent cash-out merger of an affiliate of Imperium with and into ESS Delaware, which we refer to as the cash-out merger; | ||
• the election of directors to our board of directors; and | ||
• the annual meeting and the other business to be conducted at the annual meeting. | ||
You should read this joint proxy statement/prospectus carefully. | ||
Q: | When and where is the annual meeting of ESS shareholders? (See page 97) | |
A: | The annual meeting will be held on June 27, 2008, beginning at 9:00 a.m., local time, at the Fremont Marriott, located at 46100 Landing Parkway, Fremont, CA 94538. | |
Q: | Who is soliciting my proxy? (See page 97) | |
A: | The board of directors of ESS is soliciting your proxy to use at our annual meeting of shareholders for the approval of the reincorporation merger, the election of directors, the approval of the adjournment proposal and for use with respect to such other matters as may properly come before the annual meeting. The boards of directors of ESS and Echo are also soliciting your advance proxy to adopt the merger agreement in order to approve the sale of ESS in the cash-out merger. |
v
Table of Contents
Certain directors, officers and employees of ESS and certain directors, officers and employees of Echo also may solicit proxies on behalf of each of our boards of directors by mail, telephone, email, fax or in person. We have hired MacKenzie Partners, Inc., or MacKenzie, to assist in soliciting proxies from brokers, bank nominees and other shareholders. | ||
Q: | Who is paying for this solicitation? (See page 102) | |
A: | ESS will pay for the solicitation of proxies and advance proxies. Our directors, officers and employees will not receive additional remuneration. We expect that we will pay MacKenzie not more than $10,000, plus reasonable out-of-pocket expenses, and also will reimburse banks, brokers, custodians, nominees and fiduciaries for their reasonable charges and expenses to forward our proxy materials to the beneficial owners of our common stock. | |
Q: | How may I communicate with the ESS or Echo board of directors? (See page 91) | |
A: | Shareholders may send communications to the ESS or Echo board of directors, or to any director in particular,c/o Robert L. Blair, Chief Executive Officer, ESS Technology, Inc., 48401 Fremont Blvd., Fremont, CA 94538. Any correspondence addressed to the ESS or Echo board of directors or to any one of the directors in care of the Chief Executive Officer is forwarded to the addressee without review. | |
Q: | Where can I find more information about ESS and Echo? | |
A: | You can find more information about ESS and Echo in this joint proxy statement/prospectus and the various sources described in this joint proxy statement/prospectus under the section entitled“Where You Can Find More Information” beginning on page 154. |
Q: | What is the reincorporation merger? | |
A: | In the reincorporation merger, ESS will merge with and into Echo. The separate corporate existence of ESS will cease, and Echo will survive the reincorporation merger as ESS Delaware. Upon consummation of the reincorporation merger, each outstanding share of ESS common stock will be automatically converted into one share of ESS Delaware common stock and you will be a stockholder in ESS Delaware. In general terms, the reincorporation merger changes ESS from being a California corporation to being a Delaware corporation, and should have no effect on the assets, liabilities or business of ESS. | |
Q: | What is the cash-out merger? (See page 59) | |
A: | The cash-out merger is the merger in which we will be sold to an affiliate of Imperium and your shares of ESS Delaware will be converted into the right to receive $1.64 per share in cash, without interest, unless you properly exercise your appraisal rights. | |
On February 21, 2008, ESS and Echo, as well as Semiconductor Holding Corporation, a Delaware corporation, which we refer to as Parent and which is a wholly owned subsidiary of Imperium Master Fund, Ltd., which in turn is an affiliate of Imperium Partners Group, LLC, and Echo Mergerco, Inc., an affiliate of Imperium, which we refer to as Merger Sub, entered into an Agreement and Plan of Merger, which we refer to as the merger agreement. | ||
The merger agreement provides for the reincorporation of ESS into Delaware in the reincorporation merger and, immediately following the consummation of the reincorporation merger, the merger of Merger Sub with and into ESS Delaware in the cash-out merger. In the cash-out merger, the separate corporate existence of Merger Sub will cease, and ESS Delaware will survive the cash-out merger as the surviving corporation and a wholly owned subsidiary of Parent. The surviving corporation in the cash-out merger will be a privately held corporation, and you will cease to have any ownership interest in the surviving corporation or any rights as its stockholder. |
vi
Table of Contents
Q: | When will the mergers be completed and what approvals are required to complete the mergers? (See page 71) |
Record Date and | ||||||||
Time (Date of | ||||||||
Eligibility to Vote) | Date of Vote | Required Vote | Time of Effectiveness | |||||
Reincorporation Merger | May 20, 2008 | June 27, 2008 | A majority of the outstanding shares of ESS common stock entitled to vote at the annual meeting must vote “FOR” the principal terms of the reincorporation merger | Before the opening of trading on the NASDAQ Global Market on the first business day following the approval by the shareholders of the principal terms of the reincorporation merger at the annual meeting | ||||
Cash-Out Merger | Immediately following the effective time of the reincorporation merger, which is expected to be before the opening of trading on the NASDAQ Global Market | The same date as the record date for the cash-out merger | A majority of the outstanding shares of ESS Delaware common stock entitled to vote must vote “FOR” the adoption of the merger agreement | Immediately following the adoption of the merger agreement by the stockholders (acting by written consent pursuant to the advance proxies) |
Q: | Why are we reincorporating? (See page 42) | |
A: | Due to certain restrictions on distributions under California law that may be applicable to our sale to Imperium, prior to completing our sale to Imperium we must first reincorporate from California into Delaware through a reincorporation merger with our wholly owned subsidiary, Echo. If those restrictions on distributions apply, the payment to shareholders of consideration in connection with a cash-out merger of ESS could constitute a “distribution,” which is subject to size limitations under California Corporations Code Section 500, which we refer to as Section 500. To date, courts in California have not actually addressed the applicability of Section 500 in the context of a merger of the corporation, and the applicability of the statutory limitations on distributions under Section 500 to the consideration payable in a cash-out merger is not clear from Section 500 itself. | |
In contrast, courts in Delaware have held that a form of transaction that is valid under one section of the Delaware General Corporation Law is not subject to attack solely because it reaches a functional result that would require different or additional steps under another section of the Delaware General Corporation Law. This is known as the doctrine of “independent legal significance.” Under that doctrine, the statutory limitations on stock repurchases by a corporation under Section 160 of the Delaware General Corporation Law would not be applicable to a merger of the corporation effected pursuant to Section 251 of the Delaware General Corporation Law. For these reasons, our board of directors determined that it was in the best interests of ESS and its shareholders to recommend a reincorporation of ESS from California into Delaware immediately prior to the cash-out merger in order to obtain increased certainty that Section 500 would not apply to the cash-out merger. | ||
Q: | Following the reincorporation merger, what will I receive upon completion of the cash-out merger? (See page 71) | |
A: | If the cash-out merger is completed, you will be entitled to receive $1.64 per share in cash, without interest, for each share of ESS Delaware common stock you own at the effective time of the cash-out merger, unless you properly exercise your appraisal rights with respect to the shares of ESS Delaware common stock that you own. |
vii
Table of Contents
Q: | Will you complete the reincorporation merger if the cash-out merger cannot be completed? (See page 71) | |
A: | No. The consummation of the reincorporation merger is conditioned upon receipt of a sufficient number of advance proxies to consummate the cash-out merger immediately following the consummation of the reincorporation merger, and if we have not received a sufficient number of advance proxies to consummate the cash-out merger, we will not complete the reincorporation merger. | |
In addition, the cash-out merger is conditioned upon the consummation of the reincorporation merger and the cash-out merger will not be consummated unless the reincorporation merger has been approved by our shareholders and we have reincorporated from California into Delaware. | ||
Q: | Why am I being asked to vote on the mergers? (See page 101) | |
A: | In order to complete the sale to Imperium, the shareholders of ESS must approve the principal terms of the reincorporation merger and must submit a sufficient number of advance proxies to permit the adoption of the merger agreement by the stockholders of ESS Delaware following the consummation of the reincorporation merger. | |
Q: | What is an advance proxy? (See page 102) | |
A: | You are being asked to consider, in advance, the adoption of the merger agreement by ESS Delaware following the consummation of the reincorporation merger, and are being asked to submit an advance proxy for action by written consent and power of attorney, which we refer to as an advance proxy and which accompanies this joint proxy statement/prospectus. The advance proxy would authorize the persons named therein to include the shares of ESS Delaware common stock that you would own following the consummation of the reincorporation merger in the written consent of the stockholders of ESS Delaware adopting the merger agreement, which we refer to as the written consent. | |
If you provide (and do not subsequently revoke) an advance proxy, and do not sell or transfer your shares of common stock of ESS or ESS Delaware, as applicable, prior to the date the written consent is executed, the shares of common stock of ESS Delaware that you would hold of record on the date the written consent is executed will be included in the written consent adopting the merger agreement. | ||
Q: | What is the difference between a proxy and an advance proxy? (See page 102) | |
A: | Your proxy that we are soliciting in connection with the annual meeting authorizes the persons named therein to vote the shares of ESS common stock that you own as of the record date for the annual meeting at the annual meeting with respect to approval of the reincorporation merger, the election of directors, the approval of the adjournment proposal and such other matters as may properly come before the annual meeting. In contrast, your advance proxy that we are soliciting grants the persons named therein a power of attorney to include the shares of ESS Delaware common stock that you would own following the consummation of the reincorporation merger in the written consent adopting the merger agreement. | |
Q: | What is the difference between an advance proxy and the written consent? (See page 101) | |
A: | The advance proxy authorizes the persons named therein to include the shares of ESS Delaware common stock that you would own following the consummation of the reincorporation merger in the written consent adopting the merger agreement. In contrast, the written consent is the action that would be taken, following the consummation of the reincorporation merger, on your behalf by the persons named in the advance proxy adopting the merger agreement. | |
Q: | What happens if I do not vote my shares of ESS common stock for the reincorporation merger or submit my advance proxy? (See page 101) | |
A: | Since approval of the principal terms of the reincorporation merger requires the affirmative vote of the shares of ESS common stock outstanding as of May 20, 2008, the record date for the annual meeting, a failure to vote your shares of our common stock or an abstention will have the same effect as voting against the reincorporation merger. Similarly, since the consummation of the cash-out merger requires the adoption of the merger agreement by a majority of the outstanding shares of common stock of ESS Delaware, which will be accomplished through the submission of advance proxies, failure to submit your advance proxy will have the same effect as voting against the cash-out merger. |
viii
Table of Contents
Q: | When do you expect the mergers to be completed? (See page 71) | |
A: | We are working to complete the reincorporation merger and cash-out merger, which we refer to together as the mergers, as soon as possible. We anticipate completing the mergers in the second quarter of 2008. | |
Q: | What risks should I consider in deciding whether to approve the reincorporation merger and whether to provide an advance proxy with respect to the cash-out merger? | |
A: | You should carefully review the section of this joint proxy statement/prospectus entitled “Risk Factors” beginning on page 12, which presents risks and uncertainties relating to the reincorporation merger, the cash-out merger and our business. | |
Q: | Should I send in my stock certificates representing shares of ESS common stock now? (See page 72) | |
A: | No, not at this time. If the cash-out merger is completed, a paying agent will send you, as an ESS Delaware stockholder, written instructions for exchanging your stock certificates for the merger consideration. | |
Q: | Am I entitled to dissenters’ rights/appraisal rights in connection with the mergers? (See page 54) | |
A: | Under Delaware law, yes, holders of ESS Delaware common stock following the reincorporation merger who have not provided an advance proxy with respect to their shares of ESS Delaware common stock (or who have revoked any previously submitted advance proxy) and have not otherwise consented to the cash-out merger are entitled to appraisal rights in connection with the cash-out merger pursuant to Section 262 of the Delaware General Corporation Law. Failure to take any of the steps required under Section 262 of the Delaware General Corporation Law on a timely basis may result in a loss of those appraisal rights. A copy of Section 262 of the Delaware General Corporation Law is attached to this proxy statement as Annex B. | |
ESS shareholders who vote for the reincorporation merger, but who do not consent to the cash-out merger, will be entitled to appraisal rights in connection with the cash-out merger pursuant to Section 262 of the Delaware General Corporation Law. | ||
Under California law, holders of ESS common stock are not entitled to dissenters’ rights in connection with the reincorporation merger. | ||
Q: | What will happen to my ESS stock options and my rights under the ESS Employee Stock Purchase Plan in the mergers? (See page 74) | |
A: | In the mergers, each outstanding option to purchase our common stock will be automatically converted into the right to receive, for each share of our common stock subject to the option, an amount in cash equal to the excess, if any, of $1.64 over the applicable exercise price per share for such stock option net of all applicable withholding taxes, and the stock option will be cancelled and extinguished. For example, an ESS stock option holder holding options to purchase 1,000 shares of ESS common stock with an exercise price of $1.00 per share would receive total consideration of $640 in cash following the cash-out merger, subject to applicable withholding tax, and an ESS option holder holding options to purchase 1,000 shares of ESS common stock with an exercise price of $1.64 per share or higher would not receive any consideration in the mergers. | |
In addition, the outstanding offering period under our Employee Stock Purchase Plan, or ESPP, will terminate as of the last business day prior to the closing of the reincorporation merger, all rights to purchase shares of ESS common stock under the ESPP will be exercised as of that date and ESS will apply the funds credited as of such date under the ESPP within each participant’s payroll withholding account to the purchase of whole shares of ESS common stock in accordance with the terms of the ESPP. | ||
Q: | Is it possible that the reincorporation merger will not be voted on at the annual meeting? (See page 102) | |
A: | ESS expects to elect directors at the annual meeting but, if a sufficient number of shares are voted in favor of Proposal 3, may adjourn the annual meeting until a later date if it does not receive proxies sufficient to approve the principal terms of the reincorporation merger or advance proxies sufficient to authorize the execution and delivery of the written consent of the stockholders of ESS Delaware adopting the merger agreement in order to solicit additional proxies and advance proxies. | |
Q: | Who can help answer my questions? (See page 154) | |
A: | If you are a shareholder and would like additional copies of this joint proxy statement/prospectus, or if you have questions about the mergers, including the procedures for voting your shares, you should contact our proxy |
ix
Table of Contents
solicitation agent, MacKenzie, at800-322-2885 (toll-free) or212-929-5500 (collect), or write to MacKenzie, 105 Madison Avenue, New York, New York 10016. |
Q: | What matters will be voted upon at the annual meeting of shareholders? (See page 97) | |
A: | In addition to the reincorporation merger described above, our shareholders will be asked to vote upon the election of directors to the ESS board of directors, to consider and vote upon and approve the adjournment proposal and to vote upon any other business that may properly come before the annual meeting. | |
Q: | Who are the director nominees? (See page 89) | |
A: | Our board of directors has nominated each of Robert L. Blair, Peter T. Mok, Alfred J. Stein, David S. Lee and John A. Marsh (each of whom is currently a director of ESS) for election to the ESS board of directors. | |
Q: | Why did ESS not hold its annual meeting of shareholders in 2007? (See page 12) | |
A: | ESS did not hold its annual meeting of shareholders in 2007 due to its ongoing consideration of strategic alternatives that led to the execution of the merger agreement. Our board of directors determined that our shareholders should have our decision as to strategic alternatives before being asked to vote upon the election of directors. Please see“Risk Factors — Risks Relating to Mergers — We may be delisted from NASDAQ Global Market and the shares of common stock of ESS Delaware may not be listed on the NASDAQ Global Market.” |
Q: | What is the record date for the annual meeting? (See page 98) | |
A: | The record date for the annual meeting is May 20, 2008. | |
Q: | What is the deadline for submitting a proxy and an advance proxy? (See page 98) | |
A: | In order to be counted, proxies and advance proxies submitted by telephone or the Internet must be received by 8:59 p.m. pacific time on June 26, 2008. Proxies and advance proxies submitted by mail must be received prior to the start of the annual meeting. | |
Q: | Can I attend the ESS annual meeting and vote at the meeting? (See page 100) | |
A: | You are entitled to vote at the annual meeting if you owned shares of ESS common stock at the record date for the annual meeting, or you hold a valid proxy for the annual meeting. If you are not a record holder but hold shares through a broker, bank, or other nominee (i.e., in “street name”) you will need to provide proof of beneficial ownership of your shares on the record date (and, if you are submitting an advance proxy at the annual meeting, on the date of the annual meeting), such as your most recent account statement prior to May 20, 2008, or other similar evidence of ownership. | |
Q: | What constitutes a quorum for purposes of the annual meeting? (See page 101) | |
A: | The presence in person or by proxy of the holders of a majority of the shares of our common stock outstanding at the close of business on the record date will constitute a quorum for purposes of the annual meeting. | |
Q: | What vote is needed in order to elect directors or adjourn the annual meeting? (See page 100) | |
A: | For the election of directors, once a quorum has been established, the nominees receiving the highest number of votes of the shares present in person or represented by proxy at the annual meeting and entitled to vote on the election of directors will be elected as directors. As a result, if you withhold your authority to vote for any nominee, your vote will not affect the outcome of the election. |
x
Table of Contents
For the adjournment of the annual meeting, once a quorum has been established, a majority of the shares of ESS common stock present in person or by proxy at the annual meeting must vote “FOR” the adjournment of the annual meeting. | ||
For voting requirements with respect to the reincorporation merger and the solicitation of advance proxies please see “When will the mergers be completed and what approvals are required to complete the mergers?” beginning on page vii above. | ||
Q: | How can I vote at the annual meeting? (See page 98) | |
A: | Shareholders of ESS as of the record date may submit a proxy with respect to the reincorporation merger, the election of directors, the adjournment proposal and any other business that may properly come before the annual meeting, or may choose to attend and vote in person at the annual meeting. | |
Q: | As an ESS Delaware stockholder following the reincorporation merger, how can I cause my shares to be voted on the adoption of the merger agreement? (See page 99) | |
A: | Since the adoption of the merger agreement by the stockholders of ESS Delaware will not be considered at a meeting of stockholders of ESS Delaware, but instead will be approved, if at all, by written consent, stockholders of ESS prior to the reincorporation merger must provide an advance proxy with respect to the shares of ESS Delaware common stock that they would receive in the reincorporation merger in order to cause their shares of ESS Delaware common stock to be voted in favor of the adoption of the merger agreement by ESS Delaware. | |
Q: | What if I sell my shares of ESS after providing an advance proxy? (See page 99) | |
A: | If you are not a stockholder of record of ESS Delaware at the time the written consent is delivered, your advance proxy will be null and void and your shares will not be included in the written consent adopting the merger agreement. | |
Accordingly, shareholders of ESS who would like the shares of ESS Delaware common stock they would receive in the reincorporation merger to be included in the written consent adopting the merger agreement may ensure their shares are included in the written consent by providing (and not subsequently revoking) an advance proxy and refraining from transferring or selling any of their shares of common stock of ESS or ESS Delaware, as applicable, prior to the date the written consent is executed. See “Risk Factors — Risk Related to the Mergers — Trading in shares of our common may make it more difficult to obtain a sufficient number of advance proxies to execute the written consent adopting the merger agreement” beginning on page 15. | ||
Q: | What if I hold my shares in “street name”? (See page 102) | |
A: | If you hold ESS shares in “street name,” which means your shares are held of record by a broker, bank or other record holder, you may cause the shares of ESS common stock that you beneficially own to be represented and voted at the annual meeting and to be represented by an advance proxy by following the instructions provided by the broker, bank or other holder of record of your shares. If your shares are held in “street name,” and you wish to vote at the annual meeting, you must bring a proxy from the record holder of the shares authorizing you to vote at the annual meeting. Whether or not ESS shareholders plan to attend the annual meeting, they should give their proxy as described in this joint proxy statement/prospectus. In addition, if your shares are held in “street name” and you wish to provide an advance proxy, you must request a legal proxy and power of attorney from the bank, broker or other nominee that holds your shares and present that proxy and power of attorney along with your advance proxy in order to be able to provide your advance proxy. | |
Q: | What happens if I hold my shares in “street name” and I do not instruct my broker, bank or other holder of record how to vote? (See page 102) | |
A: | For the reincorporation merger and for the advance proxy for the written consent to adopt the merger agreement, your broker will not be permitted to vote your shares for the reincorporation merger or to provide an advance proxy with respect to the adoption of the merger agreement unless you specifically instruct them to do so. Because the approval of these matters requires the affirmative vote of a majority of the outstanding shares of |
xi
Table of Contents
common stock of ESS and ESS Delaware, as applicable, the failure to provide instructions to your broker, bank or nominee will have the effect of a vote “AGAINST” the reincorporation merger and the cash-out merger. | ||
For the election of directors and the adjournment proposal, your broker has discretion to vote your shares on your behalf with respect to these “routine” matters. | ||
Q: | Can I change my vote after I have mailed my proxy card or advance proxy card? (See page 100) | |
A: | Yes. If you are a record holder of ESS common stock you can change your vote by: | |
• delivering a valid, later-dated proxy by mail, telephone or Internet, in each case before the annual meeting; | ||
• delivering a signed written notice to the Secretary of ESS before the annual meeting; or | ||
• appearing at the annual meeting and voting in person by ballot. Your attendance at the annual meeting alone will not revoke your proxy. | ||
Additionally, you can revoke your advance proxy at any time prior to the execution and delivery of the written consent adopting the merger agreement by delivering a notice of revocation to the Secretary of ESS (prior to the reincorporation merger) or the Secretary of ESS Delaware (following the reincorporation merger). | ||
If your shares are held in street name by a bank or broker, you must follow directions from your broker or bank to change your vote or revoke your advance proxy. | ||
Q: | What happens if I do not indicate how my shares are to be voted on my proxy or advance proxy card? (See page 100) | |
A: | If you sign and send in your proxy card and do not indicate how you want the shares covered by your proxy to be voted, those shares will be voted “FOR” the proposals being considered. | |
If you sign and send in your advance proxy card (and do not subsequently revoke it), any shares of ESS Delaware common stock that you hold on the date of the written consent will be included in the written consent “FOR” the adoption of the merger agreement. | ||
Q: | Why is my vote important? (See page 101) | |
A: | If you do not return your proxy card and advance proxy card by mail or submit your proxy and advance proxy by telephone or through the Internet or vote or deliver an advance proxy in person at the annual meeting, it will be more difficult for ESS to obtain the necessary quorum to transact business at the annual meeting and for ESS to collect a sufficient number of advance proxies to allow the proxyholders named therein to execute and deliver the written consent adopting the merger agreement immediately following the consummation of reincorporation merger. | |
In addition, failure to vote your shares of ESS common stock (or submit a proxy to vote your shares of ESS) will have the same effect as a vote against the reincorporation merger and failure to provide an advance proxy will have the same effect as a vote against the cash-out merger. | ||
Q: | What do I need to do now? (See page 98) | |
A: | After you carefully read this joint proxy statement/prospectus, mail your signed proxy card and your signed advance proxy card in the enclosed return envelope, or submit your proxy and advance proxy by telephone or the Internet in accordance with the instructions on the proxy cards. In order to ensure that your shares are represented and voted, please submit your proxy and advance proxy as soon as possible even if you currently plan to attend the annual meeting in person. | |
If your shares are held in “street name” by your broker or another nominee, you must instruct your broker or other nominee on how to vote the shares you beneficially own with respect to the reincorporation merger and you should provide your broker or other nominee with instructions regarding whether you wish to provide an advance proxy with respect to the shares you beneficially own using the directions provided by your broker or other nominee. |
xii
Table of Contents
1
Table of Contents
• | the full vesting of all previously unvested stock options held by our directors and executive officers will accelerate in connection with the cash-out merger and any outstanding awards with an exercise price of less than $1.64 per share will be cashed out for an amount in cash equal to the excess, if any, of $1.64 over the applicable exercise price per share for such stock option multiplied by the aggregate number of shares of ESS Delaware common stock subject to the option; | |
• | the merger agreement provides for indemnification arrangements for each of our and our subsidiaries’ present and former directors and officers for a period of six years following the cash-out merger, as well as insurance coverage for acts or omissions occurring at or prior to the cash-out merger; and | |
• | although, to our knowledge, no agreements have been entered into as of the date of this joint proxy statement/prospectus, members of our management may enter into employment agreements or other arrangements with the surviving corporation of the cash-out merger or Imperium, and may participate in the equity of the surviving corporation of the cash-out merger. |
• | One of Imperium’s founding partners and its chief executive officer was an employee of an affiliate of Needham & Company, LLC, one of our financial advisors with respect to the mergers, which we refer to as Needham & Company, prior to 2005, and both the former chairman of our board of directors, Mr. Alexander, and one of the managing partners of Imperium were employed by an affiliate of Needham & Company at the time that Needham & Company represented ESS in its initial public offering in 1995 and the subsequent transactions described below. | |
• | Mr. Alexander, the former chairman of our board of directors, had an informal business relationship with Imperium and one of its managing partners since 2006, for which he was not compensated, and was an employee of Needham & Company between 1994 and 2006. | |
• | Mr. Blair, our chief executive officer and a member of our board of directors, has been involved in our ongoing business relationships with Needham & Company described above and first met Imperium’s chief executive officer following prior to our spin-off of our subsidiary Vialta in 2001. Since that time, Mr. Blair has had an ongoing social relationship with Imperium’s chief executive officer. |
2
Table of Contents
• | Needham & Company, |
• | was engaged as a co-manager for our initial public offering in 1995, | |
• | had an advisory role in connection with the spin-off of our subsidiary Vialta in 2001, | |
• | worked as lead underwriter for our follow-on public offering in 2002, and | |
• | had an advisory role in connection with our acquisitions of Divio and Pictos Technologies in 2003. |
3
Table of Contents
4
Table of Contents
5
Table of Contents
6
Table of Contents
• | the principal terms of the reincorporation merger must have been approved by our shareholders; | |
• | as of the date of the consummation of the reincorporation merger, ESS must have received advance proxies from holders of a majority of the outstanding common stock of ESS in order to allow the persons named therein, following the consummation of the reincorporation merger, to execute and deliver the written consent adopting the merger agreement; | |
• | the filing or waiting periods applicable to the consummation of the cash-out merger under theHart-Scott-Rodino Act, if any, must have expired or been terminated; | |
• | all actions by or filings with any governmental authority required to permit the consummation of the mergers, if any, must have been obtained or made; | |
• | no statute, rule or regulation may have been enacted or promulgated by any governmental authority which prohibits the consummation of the reincorporation merger or the cash-out merger, and there may not be any order or injunction of a court of competent jurisdiction in effect preventing the consummation of the reincorporation merger or the cash-out merger; | |
• | since February 21, 2008, there must not have occurred any event, change, occurrence or development that, individually or in the aggregate, has a material adverse effect on the business, results of operations or financial condition of ESS and its subsidiaries taken as a whole; | |
• | ESS must have delivered its audited consolidated financial statements for the year ended December 31, 2007, our auditors must have issued a customary audit opinion with respect to such financial statements, and we must not have received any notice from our auditors that such opinion and related financial statements may no longer be relied upon; | |
• | each party must have performed or complied in all material respects with all of its material agreements and covenants required by the merger agreement to be performed or complied with by it prior to the closing date of the reincorporation merger; and | |
• | the representations and warranties of each of ESS, Parent and Merger Sub must be true and correct as of February 21, 2008 and as of the closing date of the reincorporation merger in the manner described under the caption, “The Merger Agreement — Conditions to the Mergers” beginning on page 83. |
7
Table of Contents
• | the consummation of the reincorporation merger must have occurred; | |
• | the written consent must have been executed and delivered in accordance with applicable law; and | |
• | no statute, rule or regulation may have been enacted or promulgated by any governmental authority which prohibits the consummation of the cash-out merger, and there may not be any order or injunction of a court of competent jurisdiction in effect preventing the consummation of the cash-out merger. |
• | directly or indirectly solicit, initiate, or knowingly encourage any third party takeover proposal; | |
• | enter into any agreement or agreement in principle with respect to a third party takeover proposal; or | |
• | engage in any negotiations or discussions regarding, or furnish or disclose to any third party any information with respect to, any takeover proposal. |
• | by mutual written consent of Parent and ESS; or | |
• | by either Parent or ESS, if: |
• | our shareholders do not approve the principal terms of the reincorporation merger at the annual meeting or any adjournment or postponement thereof, or our shareholders do approve the principal terms of the reincorporation merger at any such meeting, but ESS does not receive advance proxies from a sufficient number of holders of ESS common stock to allow the written consent to be delivered following the closing of the reincorporation merger; | |
• | the reincorporation merger has not been consummated by August 21, 2008; or |
8
Table of Contents
• | any final and nonappealable order, decree or ruling or other action of a governmental authority has the effect of permanently prohibiting the reincorporation merger or the merger; or |
• | by ESS, if: |
• | Parent or Merger Sub has breached any of its covenants, agreements, representations or warranties under the merger agreement and such breach (if curable) is not cured by the earlier of August 21, 2008 or 30 business days after notice of such breach; | |
• | prior to the approval of the principal terms of the reincorporation merger by our shareholders, our board of directors determines in good faith that the failure to accept a superior proposal is reasonably likely to be inconsistent with its fiduciary duties to our shareholders; or |
• | by Parent, if: |
• | we breach any of our covenants, agreements, representations or warranties under the merger agreement and such breach (if curable) is not cured by the earlier of August 21, 2008 or 30 business days after notice of such breach; or | |
• | our board of directors withdraws or modifies its recommendation that our shareholders vote in favor of the principal terms of the reincorporation merger, or our board of directors approves, recommends or adopts a superior proposal. |
�� | ||||||||||||||||
Year Ended | Three Months Ended | |||||||||||||||
December 31, | March 31, | |||||||||||||||
2007 | 2006 | 2008 | 2007 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Total net revenues | $ | 68,331 | $ | 100,465 | $ | 14,371 | $ | 17,772 | ||||||||
Net income (loss) | $ | 3,122 | $ | (44,094 | ) | $ | (2,798 | ) | $ | 4,603 | ||||||
Per share net income (loss) diluted | $ | 0.09 | $ | (1.14 | ) | $ | (0.08 | ) | $ | 0.13 | ||||||
Weighted average number of shares outstanding, diluted | 35,527 | 38,723 | 35,545 | 35,508 |
9
Table of Contents
At December 31, | At March 31, | |||||||||||
2007 | 2006 | 2008 | ||||||||||
BALANCE SHEET DATA: | ||||||||||||
Cash and cash equivalents | $ | 43,110 | $ | 33,731 | $ | 41,089 | ||||||
Short-term investments | 6,837 | 10,264 | 8,047 | |||||||||
Accounts receivable, net | 5,403 | 9,189 | 7,676 | |||||||||
Other receivables | 482 | 1,154 | 428 | |||||||||
Inventory | 7,210 | 8,278 | 6,833 | |||||||||
Prepaid expenses and other assets | 823 | 1,764 | 899 | |||||||||
Total current assets | 63,865 | 64,380 | 64,972 | |||||||||
Property, plant and equipment, net | 12,609 | 16,996 | 12,015 | |||||||||
Non-current deferred tax asset | 5,874 | — | 5,874 | |||||||||
Other assets | 9,025 | 9,052 | 7,992 | |||||||||
Total assets | $ | 91,373 | $ | 90,428 | $ | 90,853 | ||||||
Current liabilities | $ | 7,947 | $ | 43,405 | $ | 10,645 | ||||||
Non-current deferred tax liabilities | 35,661 | — | 36,167 | |||||||||
Total liabilities | $ | 43,608 | $ | 43,405 | $ | 46,812 | ||||||
Shareholders’ equity | $ | 47,765 | $ | 47,023 | $ | 44,041 |
10
Table of Contents
• | the possibility that there may be unexpected delays in the consummation of the mergers, which would delay receipt of the merger consideration by ESS Delaware stockholders; | |
• | the risk that our stock price and future business operations could be harmed if the mergers are not completed; | |
• | the risk that uncertainty about the mergers and diversion of management could harm ESS; | |
• | the risk that we may be delisted from the NASDAQ Global Market and the shares of common stock of ESS Delaware may not be listed on the NASDAQ Global Market; | |
• | the possibility that your ability to sell or otherwise transfer your shares of ESS Delaware common stock between the closing of the reincorporation merger and the closing of the cash-out merger may be limited; | |
• | the fact that certain directors and executive officers of ESS and Echo may have potential conflicts of interest in recommending that you vote to approve the principal terms of the reincorporation merger and adopt the merger agreement; | |
• | the risk that we may incur transaction expenses associated with the cash-out merger in the event that we do not consummate the mergers; and | |
• | the fact that trading in shares of our common may make it more difficult to obtain a sufficient number of advance proxies to execute the written consent adopting the merger agreement. |
11
Table of Contents
12
Table of Contents
13
Table of Contents
14
Table of Contents
15
Table of Contents
• | The timing and success of our new product introductions and those of our customers and competitors; | |
• | The ability to control product cost and produce consistent yield of our products; | |
• | The ability to obtain adequate foundry capacity and sources of raw materials; | |
• | The price, quality and performance of our products and the products of our competitors; | |
• | The emergence of new multimedia standards; | |
• | The development of technical innovations; | |
• | The rate at which our customers integrate our products into their products; | |
• | The number and nature of our competitors in a given market; and | |
• | The protection of our intellectual property rights. |
16
Table of Contents
• | The failure of the acquired products or technology to attain market acceptance, which may result from our inability to leverage such products and technology successfully; | |
• | The failure to integrate acquired products and business with existing products and corporate culture; | |
• | The inability to restructure or realign our businesses effectively and cost-efficiently; | |
• | The inability to retain key employees from the acquired company; | |
• | Diversion of management attention from other business concerns; | |
• | The potential for large write-offs of intangible assets; | |
• | Issuances of equity securities dilutive to our existing shareholders; | |
• | The incurrence of substantial debt and assumption of unknown liabilities; and | |
• | Our ability to properly access and maintain an effective internal control environment over an acquired company in order to comply with public reporting requirements. |
• | Charges related to the net realizable value of inventories; | |
• | Changes in demand or sales forecast for our products; | |
• | Changes in the mix of products sold and our revenue mix; | |
• | Changes in the cost of producing our products; | |
• | The timely implementation of customer-specific hardware and software requirements for specific design wins; |
17
Table of Contents
• | Increasing pricing pressures and resulting reduction in the ASP of any or all of our products; | |
• | Availability and cost of foundry capacity; | |
• | Gain or loss of significant customers; | |
• | Seasonal customer demand; | |
• | The cyclical nature of the semiconductor industry; | |
• | The timing of our and our competitors’ new product announcements and introductions and the market acceptance of new or enhanced versions of our and our customers’ products; | |
• | The timing of significant customer ordersand/or design wins; | |
• | Charges related to the impairment of other intangible assets; | |
• | Loss of key employees which could impact sales or the pace of product development; | |
• | The “turns” basis of most of our orders, which makes backlog a poor indicator of the next quarter’s revenue; | |
• | The potential for large adjustments due to resolution of multi-year tax examinations; | |
• | The lead time we normally receive for our orders, which makes it difficult to predict sales until the end of the quarter; | |
• | Availability and cost of raw materials; | |
• | Significant increases in expenses associated with the expansion of operations; and | |
• | A shift in manufacturing of consumer electronic products away from Asia. |
18
Table of Contents
• | Anticipation of market trends; | |
• | Timely completion of design, development, and testing of both the hardware and software for each product; | |
• | Timely completion of customer specific design, development and testing of both hardware and software for each design win; | |
• | Market acceptance of our products and the products of our customers; | |
• | Offering new products at competitive prices; | |
• | Meeting performance, quality and functionality requirements of customers and OEMs; and | |
• | Meeting the timing, volume and price requirements of customers and OEMs. |
19
Table of Contents
20
Table of Contents
21
Table of Contents
• | Unexpected changes in legislative or regulatory requirements and related compliance problems; | |
• | Political, social and economic instability; | |
• | Lack of adequate protection of our intellectual property rights; | |
• | Changes in diplomatic and trade relationships, including changes in most favored nations trading status; | |
• | Tariffs, quotas and other trade barriers and restrictions; | |
• | Longer payment cycles, greater difficulties in accounts receivable collection and greater difficulties in ascertaining the credit of our customers and potential business partners; | |
• | Potentially adverse tax consequences, including withholding in connection with the repatriation of earnings and restrictions on the repatriation of earnings; | |
• | Difficulties in obtaining export licenses for technologies; | |
• | Language and other cultural differences, which may inhibit our sales and marketing efforts and create internal communication problems among our U.S. and foreign counterparts; and | |
• | Currency exchange risks. |
22
Table of Contents
• | Possibility of an interruption or loss of manufacturing capacity; | |
• | Reduced control over delivery schedules, manufacturing yields and costs; and | |
• | The inability to reduce our costs as rapidly as competitors who perform their own manufacturing and who are not bound by volume commitments to subcontractors at fixed prices. |
23
Table of Contents
• | Future announcements concerning us, our competitors or our principal customers, such as quarterly operating results, changes in earnings estimates by analysts, technological innovations, new product introductions, governmental regulations, or litigation; | |
• | Changes in accounting rules, particularly those related to the expensing of stock options and accounting for uncertainty in income taxes; | |
• | The liquidity within the market for our common stock; | |
• | Sales or purchases by us or by our officers, directors, other insiders and large shareholders; | |
• | Investor perceptions concerning the prospects of our business and the semiconductor industry; | |
• | Market conditions and investor sentiment affecting market prices of equity securities of high technology companies; and | |
• | General economic, political and market conditions, such as recessions or international currency fluctuations. |
24
Table of Contents
25
Table of Contents
ADVANCE PROXY — THE CASH-OUT MERGER
26
Table of Contents
27
Table of Contents
28
Table of Contents
29
Table of Contents
30
Table of Contents
31
Table of Contents
32
Table of Contents
33
Table of Contents
34
Table of Contents
35
Table of Contents
36
Table of Contents
37
Table of Contents
38
Table of Contents
39
Table of Contents
40
Table of Contents
41
Table of Contents
42
Table of Contents
• | the value of the $1.64 per share cash consideration to be paid to our shareholders upon consummation of the mergers; | |
• | the possible alternatives to the sale of ESS, including a self-tender offer for our common stock for less than all of our shares, a full liquidation of ESS and continuing to operate ESS without undertaking any significant strategic transaction, and the risks and uncertainties associated with such alternatives, compared to the relative certainty of realizing a fair cash value for all of our shareholders in the mergers; | |
• | current financial market conditions and the current and historical market prices of our common stock; | |
• | each board of directors’ understanding of current trends in the markets and the business sectors in which ESS operates and each board of directors’ view of the prospects of ESS as a very small publicly-held company faced with the additional ongoing costs associated with being a publicly-held company; | |
• | management’s view of the financial condition, results of operations and businesses of ESS and the evaluation by each board of directors of ESS’ current business plan, as well as the execution risks related to achieving that plan, compared to the risks and benefits of the cash-out merger; | |
• | the extensive sale process conducted by ESS, with the assistance of our financial and legal advisors, which involved engaging in discussions with approximately 78 parties (both strategic and private equity) to determine their interest in acquiring ESS, entering into confidentiality agreements with 23 parties, the receipt of 4 initial indications of interest and the receipt of final proposals to acquire ESS from Imperium and one other party; | |
• | the belief of each board of directors that, as a result of the process leading to the announcement of the merger agreement, including the public announcement of the appointment of the strategic transaction committee, and the terms of the definitive merger agreement, the merger consideration represented a full and fair price |
43
Table of Contents
for the shares of common stock of ESS and that accepting the Imperium merger proposal would be in the best interests of ESS’ stockholders; |
• | the price proposed by Imperium reflected extensive negotiations between the parties and represented the highest price ultimately proposed by any party for the acquisition of ESS; | |
• | the financial analysis of Needham & Company and its opinion that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in such opinion, the consideration to be received by the holders of the common stock of ESS Delaware following the reincorporation merger pursuant to the merger agreement was fair, from a financial point of view, to such stockholders (see“— Opinions of the Company’s Financial Advisors — Opinion of Needham & Company, LLC” beginning on page 46 andAnnex C-1 to this proxy statement/prospectus); and | |
• | the financial analysis of Sutter and its opinion that, as of February 19, 2008, and based upon and subject to the factors and assumptions set forth in such opinion, the consideration to be received by the holders of the common stock of ESS Delaware following the reincorporation merger pursuant to the merger agreement was fair, from a financial point of view, to such stockholders. Sutter provided an updated opinion to the strategic transaction committees dated as of May 21, 2008 (see“— Opinions of the Company’s Financial Advisors — Opinion of Sutter Incorporated”beginning on page 50 andAnnex C-2 to this join proxy statement/prospectus); | |
• | the terms of the merger agreement and the related agreements, including: |
• | the limited number and customary nature of the conditions to the Parent’s and Merger Sub’s obligation to consummate the mergers, including the absence of any financing condition; | |
• | the provisions of the merger agreement that allow our board of directors to change its recommendation that our shareholders vote in favor of the approval of the principal terms of the reincorporation merger under certain limited circumstances if the failure to take such action is reasonably likely to be inconsistent with its fiduciary duties to our shareholders; | |
• | our ability to furnish information to and conduct negotiations with third parties regarding other takeover proposals under certain limited circumstances where we have not solicited interest from such third parties following the execution of the merger agreement; | |
• | our ability to terminate the merger agreement in order to accept a superior proposal, subject to paying Parent a termination fee of $1.981 million and reimbursing Parent for its reasonable transaction-related expenses of up to $500,000; | |
• | the conclusion of our board of directors that both the termination fee of $1.981 million and reimbursement of reasonable transaction-related expenses of up to $500,000 (and the circumstances when such fee and expense reimbursement could be payable), were reasonable in light of the benefits of the mergers to our shareholders, the auction process conducted by ESS with the assistance of Needham & Company and the typical range and size of such terms in similar transactions; | |
• | our ability to seek damages from Parent and Merger Sub in certain circumstances in which Parent or Merger Sub breach the merger agreement and to require Parent and Merger Sub to specifically perform their obligations under the merger agreement; and | |
• | the availability of appraisal rights to stockholders of ESS Delaware following the reincorporation merger who properly exercise their statutory rights (see“Differences between the Rights of ESS Shareholders and ESS Delaware Stockholder — Significant Differences between the Corporation Laws of California and Delaware — Appraisal Rights” beginning on page 67 and Annex B to this proxy statement/prospectus). |
44
Table of Contents
• | the possibility of disruption to our operations associated with the mergers and the risk that the mergers might not be completed in a timely manner or at all; | |
• | the risk that as a result of the announcement or completion of the merger, key employees of ESS might terminate their employment with the company; | |
• | the fees and expenses associated with completing or attempting to complete the mergers; | |
• | the fact that our shareholders will be cashed out and will not participate in any future earnings or growth of ESS Delaware; | |
• | the restrictions on the conduct of our business under the merger agreement, which may delay or prevent ESS from undertaking business opportunities that may arise pending completion of the mergers; | |
• | the fact that the merger consideration consists of cash and will therefore be taxable to our stockholders for U.S. federal income tax purposes; | |
• | the restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding other transaction proposals and the requirement that we pay Parent a termination fee of $1.981 million and reimbursement of reasonable transaction-related expenses of up to $500,000 if our board of directors accepts a superior proposal; | |
• | the risk of diverting management focus and resources from other strategic opportunities and from operational matters while working to implement the merger; and | |
• | the other risks and uncertainties discussed above under“Risk Factors” beginning on page 12. |
45
Table of Contents
46
Table of Contents
• | reviewed a draft of the merger agreement dated February 18, 2008; | |
• | reviewed certain publicly available information concerning ESS and certain other relevant financial and operating data of ESS furnished to Needham & Company by ESS; | |
• | reviewed the historical stock prices and trading volumes of ESS common stock; | |
• | held discussions with members of ESS management concerning the current operations of and future business prospects of ESS; | |
• | reviewed certain financial forecasts with respect to ESS prepared by ESS management and held discussions with members of ESS management concerning those forecasts; | |
• | compared certain publicly available financial data of companies whose securities are traded in the public markets and that Needham & Company deemed relevant to similar data for ESS; | |
• | reviewed the financial terms of certain other business combinations that Needham & Company deemed generally relevant; and | |
• | performed and considered such other studies, analyses, inquiries and investigations as Needham & Company deemed appropriate. |
• | Centillium Communications Inc., | |
• | Leadis Technology Inc., |
47
Table of Contents
• | Pixelworks Inc., | |
• | SigmaTel Inc., and | |
• | Vimicro International Corp. |
• | enterprise value as a multiple of actual and estimated calendar year 2007 revenues; | |
• | enterprise value as a multiple of projected calendar year 2008 revenues; and | |
• | market value as a multiple of book value. |
Merger | ||||||||||||
Low | High | Consideration | ||||||||||
Enterprise value as a multiple of actual and estimated calendar year 2007 revenues | (0.2 | )x | 0.6x | 0.2x | ||||||||
Enterprise value as a multiple of projected calendar year 2008 revenues | (0.1 | )x | 0.6x | 0.2x | ||||||||
Market value as a multiple of book value | 0.8 | x | 1.5x | 1.2x |
Acquirer | Target | Date Announced | ||
Freescale Semiconductor | SigmaTel, Inc. | February 2008 | ||
Ikanos Communications Inc. | Centillium Communications Inc. | January 2008 | ||
DSL technology and assets | ||||
STMicroelectronics NV | Genesis Microchip, Inc. | December 2007 | ||
Magnum Semiconductor, Inc. | LSI Logic Consumer Products Group | June 2007 |
Enterprise Value/ | ||||
Transaction | LTM Revenue | |||
Freescale Semiconductor/SigmaTel | 0.3x | |||
Ikanos/Centillium | 0.4x | |||
STMicroelectronics/Genesis Microchip | 0.7x | |||
Magnum Semiconductor/LSI Logic | 0.3x | |||
Merger (Imperium/ESS) | 0.1x |
48
Table of Contents
Target | Acquirer | Date Announced | ||
Carrier Access Corp. | Turin Networks, Inc. | December 2007 | ||
CompuDyne Corp. | CompuDyne Corp./Private Group | August 2007 | ||
EasyLink Services Corp. | Internet Commerce Group | May 2007 | ||
Applied Innovation, Inc. | KEG Holdings, Inc. | February 2007 | ||
Tut Systems, Inc. | Motorola, Inc. | December 2006 | ||
Strategic Distribution, Inc. | Platinum Equity LLC | January 2007 | ||
Onyx Software Corp. | M2m Holdings Inc. | June 2006 |
Selected Transactions | Merger | |||||||||||
Low | High | at $1.64 | ||||||||||
One day stock price premium | (2.1 | )% | 32.3 | % | 35.5 | % | ||||||
Seven day stock price premium | (1.8 | )% | 31.1 | % | 33.3 | % | ||||||
30 day stock price premium | (12.9 | )% | 25.2 | % | 35.5 | % | ||||||
60 day stock price premium | (26.6 | )% | 32.1 | % | 21.5 | % | ||||||
90 day stock price premium | (32.6 | )% | 26.3 | % | 10.1 | % |
49
Table of Contents
Per Share | ||||||
Illustrative Implied Equity Value per Share | Merger Consideration | |||||
Base case | Low forecast | |||||
$1.07-$1.53 | $0.84-$1.29 | $ | 1.64 |
50
Table of Contents
• | reviewed the proxy statement in substantially the form to be sent to the shareholders of ESS and the merger agreement; | |
• | reviewed ESS’ Annual Reports to Shareholders and Annual Reports onForm 10-K for the fiscal years ended December 31, 2005, 2006 and 2007, and its Quarterly Reports on Form10-Q for the period ended March 31, 2008; | |
• | reviewed certain operating and financial information, including projections, provided to Sutter by management relating to ESS’ business and prospects; | |
• | met with certain members of ESS’ senior management to discuss our operations, historical financial statements and future prospects; | |
• | discussed information concerning ESS with outside advisors to ESS; | |
• | reviewed the historical market prices and trading volume of shares of ESS common stock; and | |
• | conducted such other studies, analyses, inquiries and investigations as Sutter deemed appropriate. |
51
Table of Contents
High Forecast | Low Forecast | |||||||
Base Case through 2012 | $ | 1.40 | $ | 1.21 | ||||
Base Case extended through 2013 | $ | 1.65 | $ | 1.50 |
52
Table of Contents
Probability of Success of New Products | High Forecast | Low Forecast | ||||||
75% | $ | 1.59 | $ | 1.43 | ||||
50% | $ | 1.52 | $ | 1.36 | ||||
25% | $ | 1.46 | $ | 1.29 |
• | the full vesting of all previously unvested stock options held by our directors and executive officers will accelerate in connection with the cash-out merger and any outstanding awards with an exercise price of less than $1.64 per share will be cashed out for an amount in cash equal to the excess, if any, of $1.64 over the applicable exercise price per share for such stock option multiplied by the aggregate number of shares of ESS Delaware common stock subject to the option; | |
• | the merger agreement provides for indemnification arrangements for each of our and our subsidiaries’ present and former directors and officers for a period of six years following the merger, as well as insurance coverage for acts or omissions occurring at or prior to the cash-out merger; and | |
• | although, to our knowledge, no agreements have been entered into as of the date of this joint proxy statement/prospectus, members of our management may enter into employment agreements or other |
53
Table of Contents
arrangements with the surviving corporation or Imperium and may participate in the equity of the surviving corporation. |
• | One of Imperium’s founding partners and its chief executive officer was an employee of an affiliate of Needham & Company prior to 2005, and both the former chairman of our board of directors, Mr. Alexander, and one of the managing partners of Imperium were employed by an affiliate of Needham & Company at the time that Needham & Company represented ESS in its initial public offering in 1995 and the subsequent transactions described below. | |
• | Mr. Alexander, the former chairman of our board of directors, had an informal business relationship with Imperium and one of its managing partners since 2006, for which he was not compensated, and was an employee of Needham & Company between 1994 and 2006. | |
• | Mr. Blair, our chief executive officer and a member of our board of directors, has been involved in our ongoing business relationships with Needham & Company described above and first met Imperium’s chief executive officer prior to our spin-off of our subsidiary Vialta in 2001. Since that time, Mr. Blair has had an social relationship with Imperium’s chief executive officer. | |
• | Needham & Company, |
• | was engaged as a co-manager for our initial public offering in 1995, | |
• | had an advisory role in connection with the spin-off of our subsidiary Vialta in 2001, | |
• | worked as lead underwriter for our follow-on public offering in 2002, and | |
• | had an advisory role in connection with our acquisitions of Divio and Pictos Technologies in 2003. |
54
Table of Contents
55
Table of Contents
56
Table of Contents
57
Table of Contents
58
Table of Contents
59
Table of Contents
60
Table of Contents
61
Table of Contents
62
Table of Contents
• | signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; and | |
• | the action otherwise complies with applicable law. |
• | vacancies and newly created directorships may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director; and | |
• | whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. |
63
Table of Contents
• | The merger agreement does not amend the existing certificate of incorporation; | |
• | Each share of stock of the surviving corporation outstanding immediately before the transaction is an identical outstanding share after the merger; and | |
• | Either: |
• | no shares of common stock of the surviving corporation (and no shares, securities or obligations convertible into such stock) are to be issued in the merger; or | |
• | the shares of common stock of the surviving corporation to be issued in the merger (including shares issuable upon conversion of any other shares, securities or obligations to be issued in the merger) do not exceed twenty percent (20%) of the shares of common stock of the surviving corporation outstanding immediately prior to the transaction. |
64
Table of Contents
• | Prior to the time at which the interested stockholder becomes an interested stockholder, the board of directors of the corporation approves either the business combination or the transaction that resulted in the person or entity becoming an interested stockholder; | |
• | Upon consummation of the transaction that makes the person or entity an interested stockholder, the interested stockholder owns at least eighty-five percent (85%) of the corporation’s voting stock outstanding at the time the transaction commenced (excluding, for purposes of determining voting stock outstanding, shares owned by directors who are also officers of the corporation and shares held by employee stock plans that do not give employee participants the right to decide confidentially whether to accept a tender or exchange offer); or | |
• | At or subsequent to the time at which the person or entity becomes an interested stockholder, the business combination is approved both by the board of directors and by the stockholders (acting at a meeting and not by written consent) by sixty-six and two-thirds percent (662/3%) of the outstanding voting stock not owned by the interested stockholder. |
65
Table of Contents
• | Breaches of the director’s duty of loyalty to the corporation or its stockholders; | |
• | Acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; |
66
Table of Contents
• | The payment of unlawful dividends or unlawful stock repurchases or redemptions; or | |
• | Transactions in which the director received an improper personal benefit. |
• | intentional misconduct or knowing and culpable violation of law; | |
• | acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director; | |
• | receipt of an improper personal benefit; | |
• | acts or omissions that show reckless disregard for the director’s duty to the corporation or its shareholders, where the director in the ordinary course of performing a director’s duties should be aware of a risk of serious injury to the corporation or its shareholders; | |
• | acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the corporation and its shareholders; | |
• | transactions between the corporation and a director who has a material financial interest in such transaction; and | |
• | liability for improper distributions, loans or guarantees. |
67
Table of Contents
• | with respect to the sale, lease or exchange of all or substantially all of the assets of a corporation; | |
• | with respect to a merger or consolidation of a corporation whose shares are either listed on a national securities exchange or are held of record by more than 2,000 holders (provided that appraisal rights will nonetheless be available if the shareholders are required by the terms of the agreement of merger or consolidation to accept for such stock: (i) shares of the surviving or resulting corporation, (ii) shares of another corporation that is either listed on a national securities exchange or held of record by more than 2,000 holders, or (iii) cash in lieu of fractional shares or any combination thereof); or | |
• | to shareholders of a corporation surviving a merger if no vote of the shareholders of the surviving corporation is required to approve the merger under Section 251(f) of the Delaware General Corporation Law. |
68
Table of Contents
• | Under the Delaware General Corporation Law, in order to exercise appraisal rights, a stockholder must deliver a written appraisal demand either prior to the taking of the vote on the merger (if the merger agreement is submitted to the stockholders at a meeting) or within 20 days following notice of the availability of appraisal rights (with respect to merger agreements adopted by written consent of stockholders and certain other mergers). By comparison, under the California Corporations Code a stockholder who has not voted in favor of the cash-out merger is not required to deliver a written appraisal demand until 30 days after the date on which a notice of the approval of the cash-out merger is mailed to the stockholder; and | |
• | Under the Delaware General Corporation Law, a petition for an appraisal must be filed within 120 days after the effective date of the merger in order for stockholders who have demanded an appraisal to perfect their appraisal rights. By comparison, under the California Corporations Code, if the parties do not agree on the status of shares as dissenting shares or their fair market value, the stockholder has until six months after the date on which notice of approval of the cash-out merger was mailed to the stockholder to file a complaint in the California Superior Court requesting a determination of these matters. |
69
Table of Contents
• | the corporation’s retained earnings immediately prior to the proposed distribution equal or exceed the amount of the proposed distribution; or | |
• | immediately after giving effect to the distribution, the corporation’s assets (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to one and one fourth (11/4) times its liabilities (not including deferred taxes, deferred income and other deferred credits), and the corporation’s current assets would be at least equal to its current liabilities (or one and one fourth (11/4) times its current liabilities if the average pre-tax and pre- interest expense earnings for the preceding two fiscal years were less than the average interest expense for such years). |
70
Table of Contents
71
Table of Contents
72
Table of Contents
73
Table of Contents
74
Table of Contents
• | organization, standing and qualifications to do business; | |
• | our subsidiaries and our equity interest in them; | |
• | our capital structure; | |
• | our authority and Echo’s authority to enter into and consummate the transactions contemplated by the merger agreement; | |
• | governmental consents and approvals required for the transactions contemplated by the merger agreement; |
75
Table of Contents
• | that the mergers do not violate our charter documents, laws or contracts; | |
• | our filings and reports with the SEC; | |
• | our internal controls and procedures; | |
• | the absence of certain changes to our business and the absence of undisclosed liabilities; | |
• | the absence of litigation; | |
• | employee benefit matters; | |
• | tax matters; | |
• | our material contracts; | |
• | real and personal property; | |
• | intellectual property matters; | |
• | matters relating to employee benefit plans and labor and employment matters; | |
• | compliance with applicable laws; | |
• | the accuracy of information supplied for inclusion or incorporation by reference in this joint proxy statement/prospectus; | |
• | insurance matters; | |
• | environmental matters; | |
• | ESS’ ownership and operation of Echo; | |
• | the fairness opinions of Needham & Company and Sutter; | |
• | the absence of undisclosed brokers’ fees; | |
• | affiliate transactions; and | |
• | anti-takeover statutes. |
• | changes generally affecting any industry in which we operate to the extent that such conditions do not have a materially disproportionate effect on us and our subsidiaries, taken as a whole, relative to other companies of comparable size to us operating in the same industries; | |
• | changes generally affecting economic conditions in the United States, in any country in which we or our subsidiaries conduct business or in the global economy as a whole; | |
• | changes in law, rules or regulations or GAAP to the extent that such conditions do not have a materially disproportionate effect on us or our subsidiaries, taken as a whole, relative to other companies of comparable size to us operating in the same industries; | |
• | conditions arising out of acts of terrorism, war, weather conditions or other force majeure events; | |
• | the public announcement or pendency of the merger agreement or any of the transactions contemplated by the merger agreement, including the impact on our relationships or the relationships of our subsidiaries with customers, suppliers, distributors, consultants, employees or independent contractors or other third parties; | |
• | changes in the price or trading volume of our stock, in and of itself; | |
• | any failure to meet any published analyst estimates or expectations, in and of itself; | |
• | any failure to meet internal projections or forecasts, in and of itself; and |
76
Table of Contents
• | any legal proceedings made or brought by any of the current or former shareholders of ESS (on their own behalf or on behalf of ESS) arising out of or related to the merger agreement or any of the transactions contemplated by the merger agreement. |
• | their organization, standing and qualification to do business; | |
• | their authority to enter into and consummate the transactions contemplated by the merger agreement; | |
• | governmental consents and approvals required for the transactions contemplated by the merger agreement; | |
• | that the mergers do not violate Parent’s or Merger Sub’s charter documents, laws or contracts; | |
• | the availability of sufficient funds to consummate the transactions contemplated by the merger agreement; | |
• | the accuracy of information supplied for inclusion or incorporation by reference in this joint proxy statement/prospectus; | |
• | the enforceability of the guarantee provided by an affiliate of Imperium; | |
• | the solvency of the surviving corporation; | |
• | Parent’s ownership and operation of Merger Sub; and | |
• | the absence of any required stockholder votes (other than the vote of Parent as sole stockholder of Merger Sub) to approve the merger agreement. |
• | amend the California articles or California bylaws or equivalent documents of any ESS subsidiary or amend the terms of any outstanding security of ESS or any of its subsidiaries; | |
• | split, combine, subdivide or reclassify any shares of capital stock of ESS or any subsidiary (other than transactions by a subsidiary that remains a wholly owned subsidiary following such transaction made in the ordinary course of business); | |
• | declare, set aside or pay dividends or make other distributions with respect to ESS’ capital stock or the capital stock of any ESS subsidiary that is not wholly owned by ESS; | |
• | redeem, purchase or otherwise acquire, or offer to redeem, purchase or acquire any equity interests, except repurchases of unvested shares at cost in connection with the termination of the services relationship with any service provider pursuant to stock option or purchase agreement existing as of the date of the merger agreement; |
77
Table of Contents
• | issue, sell, pledge, deliver, transfer, dispose of or encumber any shares of, or securities convertible into or exchangeable for capital stock, or grant any options or warrants, calls, commitments or rights of any kind to acquire, any shares of capital stock of any class or any equity interests with respect to ESS or any subsidiary, or grant to any person any right the value of which is based on the value of common stock or other capital stock, other than |
• | issuances of common stock pursuant to the exercise of options of ESS outstanding as of the date of the merger agreement; | |
• | grants of options in accordance with ESS’ stock plans in an amount not to exceed 10,000 shares of common stock; or | |
• | issuances of common stock to participants in the ESPP; |
• | acquire by merger, stock or asset purchase or otherwise in one transaction or any series of related transactions (1) any assets having a fair market value in excess of $150,000, except in the ordinary course of business consistent with past practice, or (2) any equity interests in any person or any business or division of any person or all or substantially all of the assets of any person (or business or division thereof); | |
• | transfer, lease, license, sell, mortgage, pledge, dispose of, or encumber any material assets, other than (1) sales in the ordinary course of business, and (2) dispositions of equipment and property no longer used in the operation of the business; | |
• | (1) incur or assume any long-term or short-term indebtedness, except short-term indebtedness made in the ordinary course of business, (2) assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person (other than with respect to ESS’ subsidiaries in the ordinary course of business), or (3) make any loans, advances or capital contributions to, or investments in, any person, other than loans, advance or capital contributions to, or investments in, wholly owned subsidiaries of ESS made in the ordinary course of business; | |
• | except as required by applicable law or by the terms of any agreement, ESS benefit plan or other plan existing as of the date of the merger agreement, |
• | make any change in, or accelerating the vesting of, the compensation or benefits payable or to become payable to, or grant any severance or termination pay to, any officers, directors, employees, agents or consultants; | |
• | enter into or amend any employment, consulting, severance, retention, change in control, termination pay, collective bargaining or other agreement or any equity based compensation, pension, deferred compensation, welfare benefits or other employee benefit plan or arrangement; | |
• | make any loans to any officers, directors, employees, affiliates or agents or consultants; | |
• | make any change in existing borrowing or lending arrangements for or on behalf of any of persons pursuant to a benefit plan of ESS or otherwise; | |
• | pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any existing plan, agreement or arrangement to any officer, director, employee or pay or agree to pay or make any accrual or arrangement for payment to any officers, directors, employees or affiliates of any amount relating to unused vacation days; or | |
• | adopt or pay, grant, issue, accelerate or accrue salary or other payments or benefits pursuant to any pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, ESS stock plan, stock purchase, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or any employment agreement with or for the benefit of ESS or and ESS subsidiary director, officer, employee or agent, whether past or present, or amend any such existing plan, agreement or arrangement in a manner inconsistent with the terms of the merger agreement; |
• | except as publicly announced prior to the date of the merger agreement, announce, implement or effect any reduction in labor force, lay-off, early retirement program, severance program or other program or effort concerning the termination of employment of employees of ESS or any ESS subsidiary other than routine employee terminations; |
78
Table of Contents
• | incur any capital expenditures or any obligations or liabilities in respect thereof in excess of $150,000, in the aggregate, except those contemplated in the capital expenditures budgets for ESS or ESS subsidiaries previously made available to Parent; | |
• | enter into any agreement or arrangement that limits or otherwise restricts ESS, any subsidiary or any successor thereto from engaging or competing in any line of business or in any location; | |
• | amend, modify in a material respect or terminate any material contract of ESS or otherwise waive, release or assign any material rights, claims or benefits thereunder, or enter into any contract that would be material; | |
• | settle, pay or discharge any litigation, investigation, arbitration, other than the payment, discharge or satisfaction, in the ordinary course of business, of such claims, liabilities or obligations (1) disclosed or reserved against in financial statements found in ESS’ filings with the SEC as of the date of the merger agreement in amounts no greater than the amount reserved with respect to the relevant liability therein or (2) incurred in the ordinary course of business since the date of such financial statements; | |
• | permit any material insurance policy naming ESS as a beneficiary or a loss payee to be cancelled or terminated without reasonable prior notice to Parent; | |
• | change any of the accounting methods materially affecting assets, liabilities or business, except for such changes required by GAAP orRegulation S-X promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as concurred in by its independent registered public accountants; | |
• | revalue in any material respect any material assets, including writing down the value of inventory or writing down notes or accounts receivable, other than in the ordinary course of business; | |
• | except as required by applicable law, make or change any material tax election other than on a basis consistent with past practice, change an annual accounting period, adopt or change any accounting method, file any material amendment to a material tax return, enter into any closing agreement with respect to material taxes, settle or consent to any material tax claim, take any affirmative action to surrender any right to claim a refund of taxes, or consent to any extension or waiver of the limitation period applicable to any material tax claim; | |
• | adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of ESS (other than the mergers); and | |
• | enter into any written agreement, contract, commitment or arrangement to do any of the foregoing, or authorize in writing any of the foregoing. |
• | directly or indirectly solicit, initiate, or knowingly encourage any takeover proposal; | |
• | enter into any agreement or agreement in principle with respect to a takeover proposal; or | |
• | engage in any negotiations or discussions regarding, or furnish or disclose to any third party any information with respect to, any takeover proposal. |
79
Table of Contents
• | a merger, reorganization, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving a direct or indirect acquisition of ESS (or any of our subsidiaries whose business constitutes 20% or more of our net revenues, net income or assets (based on fair market value)); or | |
• | the acquisition (including by way of tender or exchange offer) in any manner, directly or indirectly, of 20% of (i) our outstanding common stock or (ii) our consolidated total assets (based on fair market value). |
• | withdraw (or not continue to make) or modify, or publicly propose to withdraw (or not continue to make) or modify its recommendation that our shareholders approve the principal terms of the reincorporation merger; | |
• | approve, recommend or adopt, or publicly propose to approve, recommend or adopt, a superior proposal (if we give Parent three business days’ prior written notice and the board considers in good faith any changes or revisions to the merger agreement proposed in writing by Parent); or | |
• | enter into an agreement regarding a superior proposal (if we give Parent three business days’ prior written notice, the board considers in good faith any changes or revisions to the merger agreement proposed in writing by Parent and we have terminated the merger agreement and paid the termination fee to Parent). |
• | taking or disclosing to our shareholders a position contemplated byRule 14d-9 orRule 14e-2 promulgated under the Exchange Act; or | |
• | making any disclosure to our shareholders if, in the good faith judgment of our board, such disclosure would be reasonably necessary under applicable law. |
• | Preparation of Registration Statement and Joint Proxy Statement/Prospectus. ESS agreed to prepare and file with the SEC this joint proxy statement/prospectus and the registration statement as promptly as reasonably practicable following the date of the merger agreement. ESS and Echo also agreed to consult with Parent and to use commercially reasonable efforts to respond promptly to any SEC comments. Parent and Merger Sub also agreed to furnish all information reasonably requested by ESS and Echo in connection with the preparation of this joint proxy statement/prospectus and agreed to cause their representatives to cooperate in the preparation of this joint proxy statement/prospectus. | |
• | Meeting of ESS Shareholders. ESS agreed to call and hold a meeting of our shareholders as promptly as reasonably practicable following the date on which the registration statement, of which this joint proxy |
80
Table of Contents
statement/prospectus is a part, is declared effective by the SEC for the purpose of considering and voting upon the approval of the principal terms of the reincorporation merger. |
• | Notification of Certain Matters. ESS and Parent each agreed to give prompt written notice to the other of: |
• | any notice or other material communication from a governmental authority in connection with the merger agreement or the transactions contemplated by the merger agreement alleging that its consent may be required in connection therewith, | |
• | any claims, actions, suits, proceedings or investigations commenced or threatened involving such party or its subsidiaries and related to the merger agreement or transactions contemplated by the merger agreement, and | |
• | any fact, event or circumstance that would cause or constitute a breach in any material respect of any representation, warranty, covenant or agreement or that would prevent, delay or impede the consummation of the mergers or any transactions contemplated by the merger agreement. |
• | Access to Information. ESS has agreed to provide to Parent and Merger Sub and their representatives reasonable access at reasonable times and upon reasonable prior notice to the officers, employees, agents, properties, office and other facilities of ESS and it subsidiaries and to the books and records thereof and to furnish such other information concerning the business, properties, agreements, assets, liabilities, personnel and other aspects of ESS or its subsidiaries as Parent, Merger Sub or their representatives may reasonably request, except as would interfere in any significant manner with the our operation or business, jeopardize our attorney-client privilege or contravene any applicable law, binding contract or privacy policy applicable to customer information. | |
• | Third Party Consents. Each of ESS and Parent agreed to use its commercially reasonable efforts to obtain any consents under any of its respective contracts, which are necessary, proper or advisable in connection with the consummation of the transactions contemplated by the merger agreement, subject to certain exceptions. | |
• | Public Announcements. ESS and Parent each agreed to receive the other party’s prior consent prior to issuing any press release or otherwise making any other announcement about the mergers or the merger agreement, unless otherwise required by any applicable law or regulation. | |
• | Directors’ and Officers’ Insurance. ESS agreed that at or prior to the effective time of the reincorporation merger it will obtain a prepaid policy or prepaid policies which provide for directors and officers insurance coverage of equivalent amount and on no more favorable terms than that provided by ESS’ current directors’ and officers’ insurance for an aggregate period of at least six years, with respect to claims arising from facts or events that occurred on or before the effective time of the cash-out merger, including in connection with the approval of the merger agreement and the transactions contemplated by the merger agreement. Parent and surviving corporation will maintain such policies in full force and effect for the full policy period thereunder, and continue to honor ESS’ and surviving corporation’s obligations thereunder. | |
• | State Takeover Laws. ESS, Echo and ESS Delaware each agree that if any anti-takeover law or regulation enacted under state of federal law is deemed to become applicable to ESS, ESS Delaware, the reincorporation merger, the cash-out merger or any of the transactions contemplated by the merger agreement, the boards of directors of ESS, Echo and ESS will take all action necessary to render such statute inapplicable. | |
• | Section 16 Matters. Prior to the effective time of the cash-out merger, ESS and ESS Delaware have agreed to take all such steps as may be reasonably necessary to cause any dispositions of shares of ESS Delaware common stock resulting from the transactions contemplated by the merger agreement by each individual who is or will be subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to ESS or ESS Delaware, to be exempt underRule 16b-3 promulgated under the Exchange Act. | |
• | Obligations of Merger Sub and Contribution to Merger Sub. Parent has agreed to cause Merger Sub and the surviving corporation to perform all of their respective obligations under the merger agreement and to consummate the transactions contemplated by the merger agreement upon the terms and subject to the |
81
Table of Contents
conditions set forth in the merger agreement. Parent has agreed to make at least $10,000,000 in funding available to Merger Sub prior to the effective time of the cash-out merger. |
• | Approval of the Cash-Out Merger. Immediately after, and subject to the occurrence of, the effective time of the reincorporation merger, ESS Delaware has agreed to, and has agreed to cause the persons named in the advance proxies to, execute and deliver the written consent adopting the merger agreement on behalf of the stockholders of ESS Delaware. | |
• | Assumption of Registration Statements. ESS, Echo and ESS Delaware have agreed to take such steps as may be reasonably necessary or appropriate to cause ESS Delaware, at the effective time of the reincorporation merger, to assume or otherwise become the successor issuer under any and all registration statements of ESS filed with the SEC that are in effect at the effective time of the reincorporation merger. | |
• | Maintenance Listing on the NASDAQ Global Market. ESS has agreed to use its commercially reasonable efforts to cause the shares of ESS Delaware common stock to be issued in the reincorporation merger to be approved for listing on the NASDAQ Global Market. However, we cannot assure you that the shares of ESS Delaware common stock to be issued in the reincorporation merger will be listed on the NASDAQ Global Market following the reincorporation merger or at all. Please see “Risk Factors — Risks Related to the Mergers — We may be delisted from the NASDAQ Global Market and the shares of common stock of ESS Delaware may not be listed on the NASDAQ Global Market” beginning on page 12. |
82
Table of Contents
• | take all appropriate action and do all things necessary, proper or advisable under any applicable law or otherwise to consummate the transactions contemplated in the merger agreement as promptly as practicable; and | |
• | obtain from any governmental authority any consents, licenses, permits, waivers, clearances, approvals, authorizations or orders required to be obtained or made to avoid action or proceeding by any governmental authority in connection with the merger agreement and the consummation of the transactions contemplated by the merger agreement. |
83
Table of Contents
• | the principal terms of the reincorporation merger must have been approved by our shareholders; | |
• | as of the date of the consummation of the reincorporation merger, ESS must have received advance proxies from a sufficient number of holders of common stock of ESS to allow the persons named therein, following the consummation of the reincorporation merger, to deliver the written consent approving the cash-out merger immediately after the consummation of the reincorporation merger; | |
• | the filing or waiting periods applicable to the consummation of the cash-out merger under theHart-Scott-Rodino Act, if any, must have expired or been terminated; | |
• | all actions by or filings with any governmental authority required to permit the consummation of the mergers, if any, must have been obtained or made; | |
• | no statute, rule or regulation may have been enacted or promulgated by any governmental authority which prohibits the consummation of the reincorporation merger or the cash-out merger, and there may not be any order or injunction of a court of competent jurisdiction in effect preventing the consummation of the reincorporation merger or the cash-out merger; | |
• | since February 21, 2008, there must not have occurred any event, change, occurrence or development that, individually or in the aggregate, has a material adverse effect on the business, results of operations or financial condition of ESS and its subsidiaries taken as a whole; | |
• | ESS must have delivered its audited consolidated financial statements for the year ended December 31, 2007, our auditors must have issued a customary audit opinion with respect to such financial statements, and we must not have received any notice from our auditors that such opinion and related financial statements may no longer be relied upon; | |
• | each party must have performed or complied in all material respects with all of its material agreements and covenants required by the merger agreement to be performed or complied with by it prior to the closing date of the reincorporation merger; | |
• | the representations and warranties of each of ESS must be true and correct as of February 21, 2008 and as of the closing date of the reincorporation merger as if made at and as of February 21, 2008 and the closing date of the reincorporation merger, as applicable, (except for those representations and warranties which address matters only as of an earlier date which shall have been true and correct as of such earlier date), except for such failures to be true and correct which would not have, individually or in the aggregate, or would not reasonably be expected to have, a company material adverse effect (it being understood that, for the purposes of determining the effect of such failures, all company material adverse effect and materiality qualifiers contained in such representations and warranties shall be disregarded); provided, however, the representations and warranties of ESS with respect to ownership of our subsidiaries, our capitalization, our authorization of the merger agreement and our receipt of fairness opinions from our financial advisors must be true and correct in all material respects; | |
• | the representations and warranties of each of Parent and Merger Sub must be true and correct as of February 21, 2008 and the closing date of the reincorporation merger as if made at and as of February 21, 2008 and as of the closing date of the reincorporation merger, as applicable, (except for those representations and warranties which address matters only as of an earlier date which shall have been true and correct as of such earlier date), except for such failures to be true and correct which do not, individually or in the aggregate, have a material adverse effect on the ability of Parent or Merger Sub to obtain financing for or consummate the cash-out merger or other transactions contemplated by the merger agreement (it being |
84
Table of Contents
understood that, for the purposes of determining the effect of such failures, all material adverse effect and materiality qualifiers contained in such representations and warranties shall be disregarded); |
• | ESS must have delivered an officer’s certificate to Parent certifying (1) the compliance with all material agreements and covenants required by the merger agreement as described above and (2) the truth and correctness of the representations and warranties as described above; and | |
• | Parent and Merger Sub must have delivered an officer’s certificate to ESS certifying (1) the compliance with all material agreements and covenants required by the merger agreement as described above and (2) the truth and correctness of the representations and warranties as described above. |
• | the consummation of the reincorporation merger must have occurred; | |
• | the written consent must have been delivered in accordance with applicable law; and | |
• | no statute, rule or regulation may have been enacted or promulgated by any governmental authority which prohibits the consummation of the cash-out merger, and there may not be any order or injunction of a court of competent jurisdiction in effect preventing the consummation of the cash-out merger. |
• | by mutual written consent of Parent and ESS; | |
• | by either Parent or ESS, if: |
• | our shareholders do not approve the principal terms of the reincorporation merger at the annual meeting or any adjournment or postponement thereof, or our shareholders do approve the principal terms of the reincorporation merger at any such meeting, but ESS does not receive advance proxies from a sufficient number of holders of ESS common stock to allow the written consent to be delivered on behalf of holders of ESS Delaware common stock immediately following the closing of the reincorporation merger, thereby giving the ESS Delaware stockholder approval by written consent in accordance with applicable law; | |
• | the reincorporation merger has not been consummated by August 21, 2008, provided however that a party will not have the right to terminate that merger agreement if any action of such party or the failure by any party to perform any of its obligations under the merger agreement has been the cause of, or resulted in, the failure of the reincorporation merger and the other transactions contemplated by the merger agreement to be consummated by August 21, 2008; or | |
• | any final and nonappealable order, decree or ruling or other action of a governmental authority has the effect of permanently prohibiting the reincorporation merger or the merger; |
85
Table of Contents
• | by ESS, if: |
• | Parent or Merger Sub has breached any of its covenants, agreements, representations or warranties under the merger agreement, in either case such that the applicable conditions to the reincorporation merger described under “The Merger Agreement — Conditions to the Mergers” beginning on page 83 would not be satisfied and such breach is incapable of being cured or, if capable of being cured, shall not have been cured prior to the earlier of August 21, 2008 or 30 business days after notice of such breach and provided that we will not have the right to terminate the merger agreement if we or Echo is then in material breach of any of its covenants or agreements; | |
• | prior to the approval of the principal terms of the reincorporation merger by our shareholders, our board of directors has received a superior proposal and our board of directors determines in good faith that the failure to accept a superior proposal is reasonably likely to be inconsistent with its fiduciary duties to our shareholders, ESS has complied in all material respects with its commitment not to solicit takeover proposals described under “The Merger Agreement — No Solicitation of Competing Takeover Proposals” beginning on page 79 of this joint proxy statement/prospectus; and ESS pays the termination fee to Parent; or |
• | by Parent, if: |
• | we or ESS Delaware breach any of our covenants, agreements, representations or warranties under the merger agreement, in either case such that the applicable conditions to the reincorporation merger described under “The Merger Agreement — Conditions to the Mergers” would not be satisfied and such breach is incapable of being cured or, if capable of being cured, shall not have been cured prior to the earlier of August 21, 2008 or 30 business days after notice of such breach and provided that Parent will not have the right to terminate the merger agreement if Parent or Merger Sub is then in material breach of any of its covenants or agreements; or | |
• | prior to approval of the principal terms of the reincorporation merger by our shareholders, our board of directors withdraws or modifies its recommendation that our shareholders vote in favor of the principal terms of the reincorporation merger, we failed to include the recommendations of our board and the Echo board with respect to the mergers in this joint proxy statement/prospectus, or our board approves, recommends or adopts, or publicly proposes to approve, recommend or adopt, a takeover proposal or approves or recommends that holders of our common stock tender their shares in any tender offer or exchange offer that is a takeover proposal. |
• | by ESS: |
• | if, prior to obtaining the approval of our shareholders of the principal terms of the reincorporation merger, |
• | our board has received a superior proposal, | |
• | our board has determined in good faith that the failure to accept such superior proposal is reasonably likely to be inconsistent with the fiduciary duties of the members of our board to the shareholders of ESS under applicable law, and | |
• | we complied in all material respects with our commitment not to solicit takeover proposals described under “The Merger Agreement — No Solicitation of Competing Takeover Proposals” beginning on page 79 of this joint proxy statement/prospectus. |
86
Table of Contents
• | by Parent: |
• | if we have breached our obligations described under “The Merger Agreement — No Solicitation of Competing Takeover Proposals” beginning on page 79 of this joint proxy statement/prospectus by affirmatively soliciting a takeover proposal and either: |
• | ESS or Echo has breached its covenants or agreements contained in the merger agreement or we have breached any of our representations or warranties contained in the merger agreement, in either case such that the applicable conditions to the reincorporation merger described under “The Merger Agreement — Conditions to the Mergers” would not be satisfied and such breach is incapable of being cured or, if capable of being cured, is not cured by the earlier of August 21, 2008 or 30 business days after notice of such breach; or | |
• | if, prior to the obtaining of the approval of our shareholders of the principal terms of the reincorporation merger, | |
• | our board has changed is recommendation to our shareholders with respect to their approval of the principal terms of the reincorporation merger, | |
• | we failed to include the recommendations of our board and the Echo board with respect to the mergers in this joint proxy statement/prospectus, or | |
• | our board approves, recommends or adopts, or publicly proposes to approve, recommend or adopt, a takeover proposal or approves or recommends that holders of our common stock tender their shares in any tender offer or exchange offer that is a takeover proposal. |
• | by ESS or Parent because: |
• | the approval by our shareholders of the principal terms of the reincorporation merger is not obtained at the annual meeting or any adjournment or postponement thereof; or | |
• | approval by our shareholders of the principal terms of the reincorporation merger is obtained at the annual meeting or any such adjournment or postponement thereof, but we did not receive advance proxies from a sufficient number of holders of our common stock to allow adoption of the merger agreement by the stockholders of ESS Delaware by written consent; or |
• | by Parent: |
• | if, prior to the obtaining of the approval of our shareholders of the principal terms of the reincorporation merger, |
• | our board has changed is recommendation to our shareholders with respect to their approval of the principal terms of the reincorporation merger, | |
• | we failed to include the recommendations of our board and the Echo board with respect to the mergers in this joint proxy statement/prospectus, or | |
• | our board approves, recommends or adopts, or publicly proposes to approve, recommend or adopt, a takeover proposal or approves or recommends that holders of our common stock tender their shares in any tender offer or exchange offer that is a takeover proposal, and, in any such case, |
87
Table of Contents
• | extend the time for the performance of any of the obligations or other acts of the other parties to the merger agreement; | |
• | waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement or in any document delivered pursuant to the merger agreement; | |
• | waive compliance with any of the agreements or conditions contained in the merger agreement for the benefits of such party. |
88
Table of Contents
Director | ||||||||||
Name of Nominee | Age | Principal Occupation | Since | |||||||
Robert L. Blair | 60 | President and Chief Executive Officer of the Company | 1999 | |||||||
Peter T. Mok(1)(2)(3) | 54 | President and Chief Executive Officer of KLM Capital Management, Inc. | 1993 | |||||||
Alfred J. Stein(1)(2)(3) | 75 | Director of Advanced Power Technology | 2003 | |||||||
John A. Marsh | 49 | Vice President and Chief Financial Officer of the Company | 2008 | |||||||
David S. Lee(1) | 70 | Chairman of the Board for eOn Communication Corporation, Cortelco, Inc., Spark Technology Corporation and Symbio Group | 2008 |
(1) | Member of the Audit Committee of the board of directors. | |
(2) | Member of the Compensation Committee of the board of directors. |
89
Table of Contents
(3) | Member of the Corporate Governance and Nominating Committee of the board of directors. |
90
Table of Contents
91
Table of Contents
• | appoint, compensate, oversee, evaluate and replace, if necessary, the independent registered public accounting firm; | |
• | review and approve the scope of the annual internal and external audit; | |
• | review and pre-approve the engagement of our independent registered public accounting firm to perform audit and non-audit services and the related fees; | |
• | meet independently with our internal auditing staff, independent registered public accounting firm and senior management; | |
• | review disclosures from our independent registered public accounting firm regarding Independence Standards Board Standard No. 1; | |
• | review the integrity of our financial reporting process; | |
• | review our financial statements and SEC filings and disclosures; | |
• | monitor compliance with our Code of Ethics; and | |
• | establish procedures for the confidential and anonymous receipt, retention and treatment of complaints regarding our accounting, internal controls and auditing matters. |
92
Table of Contents
93
Table of Contents
Quarterly Retainer | $ | 5,000 | ||
Scheduled Meeting Fee* | $ | 2,000 | ||
Special Meeting Fee** | $ | 500 | ||
Additional Quarterly Committee Retainer: | ||||
Audit Committee Chair | $ | 4,000 | ||
Audit Committee Member | $ | 2,000 | ||
Other Committee Chair | $ | 1,000 | ||
Other Committee Member | $ | 500 | ||
Strategic Transaction Committee Compensation+ | ||||
Strategic Transaction Committee Chair | $ | 95,000 | ||
Strategic Transaction Committee Member | $ | 76,000 |
* | $1,000 for each scheduled meeting attended via conference call. | |
** | For each special meeting, attended in person or via conference call, where board actions are required. | |
+ | Compensation is a one time payment that is not conditioned upon the recommendation or consummation of a strategic transaction. |
94
Table of Contents
Change in | ||||||||||||||||||||||||||||
Pension | ||||||||||||||||||||||||||||
Fees Earned | Non-Equity | Value and | ||||||||||||||||||||||||||
or Paid | Stock | Option | Incentive Plan | Nonqualified | All Other | |||||||||||||||||||||||
in Cash | Awards | Awards | Compensation | Deferred | Compensation | Total | ||||||||||||||||||||||
Name(1) | ($) | ($) | ($)(2)(3) | ($) | Earnings | ($) | ($) | |||||||||||||||||||||
Bruce J. Alexander | $ | 37,000 | $ | 8,026 | $ | 45,026 | ||||||||||||||||||||||
Gary L. Fischer | $ | 21,000 | $ | 33,180 | $ | 54,180 | ||||||||||||||||||||||
Peter T. Mok(4) | $ | 121,000 | $ | 16,441 | $ | 137,441 | ||||||||||||||||||||||
Alfred J. Stein(4) | $ | 138,000 | $ | 18,970 | $ | 156,970 |
(1) | Robert L. Blair, director of ESS, is not listed on this table because he is also a named executive officer and received no compensation for serving on our board of directors. Bruce J. Alexander was appointed to the board on February 16, 2007 and passed away in March 2008. Gary L. Fischer resigned from the board on May 21, 2007. Fred Chan resigned from the board on July 18, 2007 and, like Robert L. Blair, he received no compensation for serving on our board of directors. | |
(2) | The grant date fair value pursuant to FAS 123R of option awards issued to our non-employee director Bruce Alexander in 2007 is $27,525. There were no option awards issued to the other non-employee directors during 2007. | |
(3) | The following are the aggregate number of option awards outstanding for each of our non-employee directors as of December 31, 2007, the last day of the 2007 fiscal year: Bruce Alexander: 44,167; Peter Mok: 74,167; and Alfred Stein: 90,417 and 33,125 for Gary Fischer, who resigned on May 21, 2007. | |
(4) | On February 7, 2008, Alfred J. Stein, Chairman, and Peter T. Mok received fees in the amount of $95,000 for Mr. Stein and $76,000 for Mr. Mok for serving on the strategic transaction committee. |
95
Table of Contents
• | to constitute a quorum for purposes of the meeting or | |
• | to solicit additional proxies in favor of the approval of the principal terms of the reincorporation mergerand/or to solicit advance proxies authorizing the execution of the written consent of the stockholders of ESS Delaware adopting the merger agreement. |
96
Table of Contents
97
Table of Contents
• | complete, sign and date the enclosed proxy card and return it in the prepaid envelope provided; | |
• | call the toll-free telephone number on the proxy card and follow the recorded instructions; or |
98
Table of Contents
• | access ESS’ secure website registration page through the Internet athttp://www.proxyvoting.com/esst, as identified on the proxy card, and follow the instructions. |
• | complete, sign, date and return your voting instruction card in the enclosed pre-addressed envelope; or | |
• | follow the other methods listed on your voting instruction card or other information forwarded by your bank, broker or other holder of record to determine whether you may provide voting instructions by telephone or electronically on the Internet. |
• | complete, sign and date the enclosed advance proxy card and return it in the prepaid envelope provided; | |
• | call the toll-free telephone number on the advance proxy card and follow the recorded instructions; or |
• | access ESS’ secure website registration page through the Internet athttp://www.proxyvoting.com/echo, as identified on the advance proxy card, and follow the instructions. |
• | complete, sign, date and return your voting instruction card in the enclosed pre-addressed envelope; or |
99
Table of Contents
• | follow the other methods listed on your voting instruction card or other information forwarded by your bank, broker or other holder of record to determine whether you may provide instructions by telephone or electronically on the Internet. |
• | delivering a valid, later-dated proxy by mail, or a later-dated proxy by telephone or Internet, in each case before the annual meeting; | |
• | delivering a signed written notice to the Secretary of ESS before the annual meeting; | |
• | by appearing at the annual meeting and voting in person by ballot. Your attendance at the annual meeting alone will not revoke your proxy. |
100
Table of Contents
101
Table of Contents
102
Table of Contents
103
Table of Contents
2008 | 2007 | 2006 | ||||||||||||||||||||||
High | Low | High | Low | High | Low | |||||||||||||||||||
First Quarter | $ | 1.54 | $ | 1.08 | $ | 1.33 | $ | 0.92 | $ | 4.00 | $ | 3.23 | ||||||||||||
Second Quarter (through May 23, 2008) | $ | 1.58 | $ | 1.47 | 1.66 | 1.20 | 3.75 | 2.02 | ||||||||||||||||
Third Quarter | 1.80 | 1.23 | 2.17 | 0.81 | ||||||||||||||||||||
Fourth Quarter | 1.65 | 1.26 | 1.33 | 0.91 |
Total Number | Maximum | |||||||||||||||
of Shares | Number | |||||||||||||||
Purchased as | of Shares That | |||||||||||||||
Weighted | Part of | may yet be | ||||||||||||||
Total Number | Average Price | Publicly | Purchased | |||||||||||||
of Shares | Paid per | Announced | Under the | |||||||||||||
Period | Purchased | Share | Programs | Programs(1) | ||||||||||||
October 1, 2007 — October 31, 2007 | — | $ | — | — | 5,688,000 | |||||||||||
November 1, 2007 — November 30, 2007 | — | — | — | 5,688,000 | ||||||||||||
December 1, 2007 — December 31, 2007 | — | — | — | 5,688,000 | ||||||||||||
January 1, 2008 — January 31, 2008 | — | — | — | 5,688,000 | ||||||||||||
February 1, 2008 — February 29, 2008 | — | — | — | 5,688,000 | ||||||||||||
March 1, 2008 — March 31, 2008 | — | — | — | 5,688,000 | ||||||||||||
Total | — | $ | — | — | ||||||||||||
(1) | We announced on April 16, 2003 that our Board of Directors authorized us to repurchase up to 5,000,000 shares of our common stock. As of December 31, 2007, we had approximately 688,000 shares remaining available for repurchase under this program, for which there is no stated expiration. In addition, we announced on February 16, 2007 that our Board of Directors authorized us to repurchase up to an additional 5,000,000 shares of our common stock with no stated expiration for this program. |
104
Table of Contents
Three Months Ended | ||||||||||||||||||||||||||||
Years Ended December 31, | March 31, | |||||||||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | 2008 | 2007 | ||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||
Product | $ | 67,393 | $ | 97,797 | $ | 161,921 | $ | 237,278 | $ | 190,273 | $ | 14,628 | $ | 16,991 | ||||||||||||||
License and royalty | 938 | 2,668 | 20,000 | 20,000 | 5,000 | (257 | ) | 781 | ||||||||||||||||||||
Total net revenues | 68,331 | 100,465 | 181,921 | 257,278 | 195,273 | 14,371 | 17,772 | |||||||||||||||||||||
Cost of product revenues(1) | 42,597 | 97,640 | 169,312 | 219,397 | 132,690 | 9,143 | 10,400 | |||||||||||||||||||||
Gross profit | 25,734 | 2,825 | 12,609 | 37,881 | 62,583 | 5,228 | 7,372 | |||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Research and development(1) | 12,550 | 36,044 | 33,983 | 37,467 | 33,184 | 3,023 | 4,591 | |||||||||||||||||||||
Selling, general and administrative(1) | 18,211 | 27,566 | 34,973 | 41,056 | 31,761 | 4,941 | 4,940 | |||||||||||||||||||||
In-process research and development | — | — | — | — | 2,690 | — | — | |||||||||||||||||||||
Impairment of goodwill and intangible assets | — | — | 42,743 | — | — | — | — | |||||||||||||||||||||
Impairment of property, plant and equipment | 859 | — | — | — | — | — | 859 | |||||||||||||||||||||
Gain on sale of technology and tangible assets(2) | (10,481 | ) | — | — | — | — | — | (8,481 | ) | |||||||||||||||||||
Operating income (loss) | 4,595 | (60,785 | ) | (99,090 | ) | (40,642 | ) | (5,052 | ) | (2,736 | ) | 5,463 | ||||||||||||||||
Non-operating income (loss), net | 1,663 | (652 | ) | 1,316 | 3,360 | 45,946 | 477 | (86 | ) | |||||||||||||||||||
Income (loss) before income taxes | 6,258 | (61,437 | ) | (97,774 | ) | (37,282 | ) | 40,894 | (2,259 | ) | 5,377 | |||||||||||||||||
Provision for (benefit from) income taxes | 3,136 | (17,343 | ) | 1,779 | (1,732 | ) | 15,603 | 539 | 774 | |||||||||||||||||||
Net income (loss) | $ | 3,122 | $ | (44,094 | ) | $ | (99,553 | ) | $ | (35,550 | ) | $ | 25,291 | $ | (2,798 | ) | $ | 4,603 | ||||||||||
Net income (loss) per share: | ||||||||||||||||||||||||||||
Basic | $ | 0.09 | $ | (1.14 | ) | $ | (2.50 | ) | $ | (0.90 | ) | $ | 0.64 | $ | (0.08 | ) | $ | 0.13 | ||||||||||
Diluted | $ | 0.09 | $ | (1.14 | ) | $ | (2.50 | ) | $ | (0.90 | ) | $ | 0.61 | $ | (0.08 | ) | $ | 0.13 | ||||||||||
Shares used in calculating net income per share: | ||||||||||||||||||||||||||||
Basic | 35,525 | 38,723 | 39,781 | 39,476 | 39,517 | 35,545 | 35,508 | |||||||||||||||||||||
Diluted | 35,527 | 38,723 | 39,781 | 39,476 | 41,238 | 35,545 | 35,508 | |||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 49,947 | $ | 43,995 | $ | 99,722 | $ | 126,688 | $ | 164,846 | $ | 49,136 | ||||||||||||||||
Working capital | $ | 55,918 | $ | 20,975 | $ | 58,718 | $ | 107,305 | $ | 145,221 | $ | 54,327 | ||||||||||||||||
Total assets | $ | 91,373 | $ | 90,428 | $ | 171,841 | $ | 283,744 | $ | 352,593 | $ | 90,853 | ||||||||||||||||
Current liabilities | $ | 7,947 | $ | 43,405 | $ | 78,507 | $ | 90,384 | $ | 113,804 | $ | 10,645 | ||||||||||||||||
Total shareholders’ equity | $ | 47,765 | $ | 47,023 | $ | 93,334 | $ | 192,912 | $ | 227,081 | $ | 44,041 |
(1) | After 2005, the cost of product revenues, research and development expenses, and selling, general and administrative expenses include the effect of the adoption of SFAS No. 123(R). See Note 12, “Stock-Based Compensation” to our consolidated financial statements for additional information. | |
(2) | In 2007, we sold certain tangible assets and licensed intellectual property related to our HD-DVD and Blu-ray DVD technologies. See Note 9 “Gain on Sale of Technology and Tangible Assets” to our consolidated financial statements for additional information. |
105
Table of Contents
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
106
Table of Contents
107
Table of Contents
• | Revenue Recognition | |
• | Inventories and Inventory Reserves | |
• | Impairment of Long-Lived Assets | |
• | Income Taxes | |
• | Legal Contingencies | |
• | Stock-based Compensation |
108
Table of Contents
109
Table of Contents
• | Level 1 — Quoted prices in active markets for identical assets or liabilities | |
• | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
110
Table of Contents
Three Months Ended March 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
(In thousands, except percentage data) | ||||||||||||||||
Net revenues | $ | 14,371 | 100.0 | % | $ | 17,772 | 100.0 | % | ||||||||
Cost of revenues | 9,143 | 63.6 | 10,400 | 58.5 | ||||||||||||
Gross profit | 5,228 | 36.4 | 7,372 | 41.5 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 3,023 | 21.0 | 4,591 | 25.8 | ||||||||||||
Selling, general and administrative | 4,941 | 34.4 | 4,940 | 27.8 | ||||||||||||
Impairment of property, plant and equipment | — | n/a | 859 | 4.8 | ||||||||||||
Gain on sale of technology and tangible assets | — | n/a | (8,481 | ) | (47.7 | ) | ||||||||||
Operating income (loss) | (2,736 | ) | (19.0 | ) | 5,463 | 30.8 | ||||||||||
Non-operating income (loss), net | 477 | 3.3 | (86 | ) | (0.5 | ) | ||||||||||
Income (loss) before income taxes | (2,259 | ) | (15.7 | ) | 5,377 | 30.3 | ||||||||||
Provision for income taxes | 539 | 3.8 | 774 | 4.4 | ||||||||||||
Net income (loss) | $ | (2,798 | ) | (19.5 | )% | $ | 4,603 | 25.9 | % | |||||||
111
Table of Contents
Three | ||||||||
Months | ||||||||
Ended March 31, | ||||||||
2008 | 2007 | |||||||
Video Business: | ||||||||
DVD | 79 | % | 78 | % | ||||
VCD | 9 | % | 6 | % | ||||
License & royalty | (2 | )% | 4 | % | ||||
Other | 14 | % | 11 | % | ||||
Total Video Business | 100 | % | 99 | % | ||||
Digital Imaging Business | — | 1 | % | |||||
Total | 100 | % | 100 | % | ||||
112
Table of Contents
113
Table of Contents
Year Ended December 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
(In thousands, except percentage data) | ||||||||||||||||
Net revenues | $ | 68,331 | 100.0 | % | $ | 100,465 | 100.0 | % | ||||||||
Cost of product revenues | 42,597 | 62.3 | 97,640 | 97.2 | ||||||||||||
Gross profit | 25,734 | 37.7 | 2,825 | 2.8 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 12,550 | 18.4 | 36,044 | 35.9 | ||||||||||||
Selling, general and administrative | 18,211 | 26.7 | 27,566 | 27.4 | ||||||||||||
Impairment of property, plant and equipment | 859 | 1.2 | — | — | ||||||||||||
Gain on sale of technology and tangible assets | (10,481 | ) | (15.3 | ) | — | — | ||||||||||
Operating income (loss) | 4,595 | 6.7 | (60,785 | ) | (60.5 | ) | ||||||||||
Non-operating income (loss), net | 1,663 | 2.4 | (652 | ) | (0.6 | ) | ||||||||||
Net income (loss) before income taxes | 6,258 | 9.1 | (61,437 | ) | (61.1 | ) | ||||||||||
Provision for (benefit from) income taxes | 3,136 | (4.5 | ) | (17,343 | ) | (17.2 | ) | |||||||||
Net income (loss) | $ | 3,122 | 4.6 | % | $ | (44,094 | ) | (43.9 | )% | |||||||
114
Table of Contents
Year Ended | ||||||||
December 31, | ||||||||
2007 | 2006 | |||||||
Video business: | ||||||||
DVD | 79 | % | 68 | % | ||||
VCD | 7 | % | 18 | % | ||||
License and Royalty | 1 | % | 2 | % | ||||
Other | 13 | % | 7 | % | ||||
Total Video business | 100 | % | 95 | % | ||||
Digital Imaging business | 0 | % | 5 | % | ||||
Total | 100 | % | 100 | % | ||||
115
Table of Contents
116
Table of Contents
117
Table of Contents
Year Ended December 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(In thousands, except percentage data) | ||||||||||||||||
Net revenues | $ | 100,465 | 100.0 | % | $ | 181,921 | 100.0 | % | ||||||||
Cost of product revenues | 97,640 | 97.2 | 169,312 | 93.1 | ||||||||||||
Gross profit | 2,825 | 2.8 | 12,609 | 6.9 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 36,044 | 35.9 | 33,983 | 18.6 | ||||||||||||
Selling, general and administrative | 27,566 | 27.4 | 34,973 | 19.2 | ||||||||||||
Impairment of goodwill and intangible assets | — | — | 42,743 | 23.5 | ||||||||||||
Operating loss | (60,785 | ) | (60.5 | ) | (99,090 | ) | (54.4 | ) | ||||||||
Non-operating income (loss), net | (652 | ) | (0.6 | ) | 1,316 | 0.7 | ||||||||||
Loss before income taxes | (61,437 | ) | (61.1 | ) | (97,774 | ) | (53.7 | ) | ||||||||
Provision for (benefit from) income taxes | (17,343 | ) | (17.2 | ) | 1,779 | 1.0 | ||||||||||
Net loss | $ | (44,094 | ) | (43.9 | )% | $ | (99,553 | ) | (54.7 | )% | ||||||
Year Ended | ||||||||
December 31, | ||||||||
2006 | 2005 | |||||||
Video business: | ||||||||
DVD | 68 | % | 57 | % | ||||
VCD | 18 | % | 17 | % | ||||
License and Royalty | 2 | % | 11 | % | ||||
Other | 7 | % | 3 | % | ||||
Total Video business | 95 | % | 88 | % | ||||
Digital Imaging business | 5 | % | 12 | % | ||||
Total | 100 | % | 100 | % | ||||
118
Table of Contents
119
Table of Contents
120
Table of Contents
121
Table of Contents
Payment Due by Periods | ||||||||||||||||||||
Less Than | 1-3 | 3-5 | More Than | |||||||||||||||||
Contractual Obligations | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease obligations | $ | 982 | $ | 982 | $ | — | $ | — | $ | — | ||||||||||
Purchase order commitments | 8,918 | 8,918 | — | — | — | |||||||||||||||
Total | $ | 9,900 | $ | 9,900 | $ | — | $ | — | $ | — | ||||||||||
122
Table of Contents
123
Table of Contents
124
Table of Contents
125
Table of Contents
126
Table of Contents
127
Table of Contents
128
Table of Contents
Percentage of Net | ||||||||||||
Revenues for Years | ||||||||||||
Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Video business: | ||||||||||||
DVD | 79 | % | 68 | % | 57 | % | ||||||
VCD | 7 | % | 18 | % | 17 | % | ||||||
License and royalty | 1 | % | 2 | % | 11 | % | ||||||
Other | 13 | % | 7 | % | 3 | % | ||||||
Total Video business | 100 | % | 95 | % | 88 | % | ||||||
Digital Imaging business | 0 | % | 5 | % | 12 | % | ||||||
Total | 100 | % | 100 | % | 100 | % | ||||||
129
Table of Contents
130
Table of Contents
131
Table of Contents
132
Table of Contents
133
Table of Contents
134
Table of Contents
Name | Age | Position | ||||
Robert L. Blair | 60 | President, Chief Executive Officer and Director | ||||
John A. Marsh | 49 | Chief Financial Officer and Vice President |
135
Table of Contents
136
Table of Contents
137
Table of Contents
Shares Beneficially | ||||||||||||
Owned(1) | Options | |||||||||||
% of | Exercisable | |||||||||||
Number of | Common | on or Before | ||||||||||
Name and Address | Shares | Stock | May 30, 2008(1) | |||||||||
Dimensional Fund Advisors, LP(2) | 1,945,975 | 5.5 | % | — | ||||||||
1299 Ocean Ave. Santa Monica, CA 90401 | ||||||||||||
Renaissance Technologies LLC(3) | 2,852,422 | 8.0 | % | — | ||||||||
800 Third Ave., 33rd floor New York, NY 10022 | ||||||||||||
Loeb Arbitrage Management, Inc.(4) | 3,976,935 | 11.2 | % | — | ||||||||
61 Broadway New York, NY 10006 | ||||||||||||
Chan Family Foundation(5) | 3,264,826 | 9.2 | % | — | ||||||||
19770 Stevens Creek Boulevard Cupertino, CA 95014 | ||||||||||||
Robert L. Blair, Director, President and CEO | 24,724 | * | (6) | |||||||||
John Marsh, Vice President and Chief Financial Officer, Director | 150,000 | * | 150,000 | (7) | ||||||||
James B. Boyd, Former CFO, | 2,003 | * | — | |||||||||
Senior Vice President and Assistant Secretary c/o ESS Technology, Inc. 48401 Fremont Blvd. Fremont, CA 94538 | ||||||||||||
Fred S.L. Chan(8) | 1,420,000 | 4.0 | % | — | ||||||||
19770 Stevens Creek Boulevard Cupertino, CA 95014 | ||||||||||||
Bruce J. Alexander, | 44,167 | * | 44,167 | (9) | ||||||||
Former Director c/o ESS Technology, Inc. 48401 Fremont Blvd. Fremont, CA 94538 | ||||||||||||
Peter T. Mok, | 15,000 | * | 15,000 | (10) | ||||||||
Director c/o KLM Capital Management, Inc. 10 Almaden Blvd., Suite 988 San Jose, CA 95113 | ||||||||||||
Alfred Stein, Jr., Director | 15,000 | * | 15,000 | (11) | ||||||||
c/o ESS Technology, Inc. 48401 Fremont Blvd. Fremont, CA 94538 | ||||||||||||
David S. Lee, Director | 0 | (12) | * | — | ||||||||
c/o Spark Technology Corporation 185 Martinvale Lane San Jose, CA 95119 | ||||||||||||
All executive officers and directors as a group(13) | 1,672,279 | 4.0 | % | 224,167 |
* | Less than one percent of the outstanding shares of ESS’ common stock. |
138
Table of Contents
(1) | Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable and except as indicated in the other footnotes to this table. As of March 31, 2008, 35,548,423 shares of ESS’ common stock were issued and outstanding. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days after March 31, 2008 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Additionally, for purposes of this table, it is assumed that the cash-out merger will close within sixty (60) days of March 31, 2008 and therefore, the options that accelerate upon change of control will be vested. Therefore, if the exercise price is less than the per share cash-out merger consideration of $1.64, options that accelerate as a result of the cash-out merger are included in the share numbers in this table. Options that will accelerate that have an exercise price that is greater than the per share cash-out merger consideration are excluded from the table, but identified in the reporting owner’s individual footnote, provided their ownership of common stock is more than 1%. | |
(2) | The Schedule 13G/A filed on February 6, 2008 by Dimensional Fund Advisors LP (fka Dimensional Fund Advisors, Inc.) (“Dimensional”) indicates that Dimensional is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 and serves as investment manager to certain other commingled group trusts and separate accounts (the “Funds”). Dimensional possesses investment and/or voting power of the securities of ESS, but disclaims beneficial ownership of the securities as the Funds own the securities. | |
(3) | The Schedule 13G/A filed by Renaissance Technologies LLC (“RTC”) on February 13, 2008 indicates that RTC is an Investment Adviser. James H. Simons, an individual, is also reflected as an owner of ESS common stock as he is a control person of RTC. | |
(4) | The Schedule 13D/A filed by Loeb Partners Corp., a registered broker/dealer and a registered investment adviser on November 13, 2007 and theSchedule 13F-HR filed by Loeb Arbitage Management, Inc., an institutional investment manager on February 15, 2008 (collectively referred to as “Loeb”) indicates that Loeb is, and that Loeb Shares of common stock of ESS are held by, several funds managed by Loeb or its affiliate organizations specifically including: Loeb Arbitrage Fund, Loeb Partners Corporation, Loeb Offshore Fund Ltd., Loeb Arbitrage B Fund LP, Loeb Offshore B Fund Ltd., Loeb Marathon Fund, LP and Loeb Marathon Offshore Fund, Ltd. | |
(5) | The Chan Family Foundation is a California 501(c) nonprofit corporation. | |
(6) | Excludes 884,666 options to purchase common stock because they will terminate upon a change of control of ESS because the exercise price is more than the per share cash-out merger consideration. The exercise prices of those options are as follows: 400,000 options at $9.78 per share; 138,000 options at $4.8750 per share; 346,666 options at $4.12 per share. | |
(7) | Includes 116,042 options that will accelerate upon a change of control. The exercise prices for the aggregate 150,000 options are as follows: 40,000 options at $0.96 per share and 110,000 at $1.26 per share. | |
(8) | Fred S. L. Chan and Annie M. H. Chan are husband and wife (the “Chans”). Fred S. L. Chan served as a director and Chairman of the board of directors until July 18, 2007. This amount includes 1,140,000 shares held by the Annie M.H. Chan Living Trust for the benefit of Annie M. H. Chan and 280,000 shares held by a trust for the benefit of Michael Y.J. Chan, a minor child who resides with the Chans. | |
(9) | Includes 27,500 options that will accelerate upon a change of control. The exercise price for the 44,167 options reflected in the table is $1.27. | |
(10) | Includes 6,458 options that will accelerate upon change of control. The exercise price for the aggregate 15,000 options reflected in the table is $0.98 per share. 59,167 options are excluded from the table because they will terminate upon a change of control of ESS because the exercise price is more than the per share cash-out merger consideration. The exercise prices of those options are as follows: 15,000 at $4.00 per share; 15,000 at $6.83 per share; 417 options at $6.96 per share; 2,500 at $7.05 per share; 15,000 at $8.32 per share; 1,250 at $11.6875 per share; 10,000 at $15.02 per share. |
139
Table of Contents
(11) | Includes 6,458 options that will accelerate upon change of control. The exercise price for the 15,000 options reflected in the table is $0.98 per share. 75,417 options are excluded from the table because they will terminate upon a change of control of ESS because the exercise price is more than the per share cash-out merger consideration. The exercise prices of those options are as follows: 15,000 at $4.00 per share; 15,000 at $6.83 per share; 40,417 options at $6.96 per share; 5,000 at $8.32 per share. | |
(12) | As of March 31, 2008 Mr. Lee did not hold any shares. However, he was granted 40,000 options when he joined the board in May 2008. These options will accelerate upon change of control. | |
(13) | Includes 1,140,000 shares held by trusts held for the benefit of individuals in the immediate family of a former director as described in Note (8). |
Number of Securities | ||||||||||||
Remaining Available | ||||||||||||
for Future Issuance | ||||||||||||
Under Equity | ||||||||||||
Number of Securities | Compensation | |||||||||||
to be Issued Upon | Weighted-Average | Plans | ||||||||||
Exercise of | Exercise Price of | (Excluding | ||||||||||
Outstanding | Outstanding Options, | Securities | ||||||||||
Options, Warrants | Warrants and | Reflected in | ||||||||||
Plan Category | and Rights(a) | Rights(b) | Column(a)(b) | |||||||||
Equity compensation plans approved by security holders | 2,726,398 | $ | 5.95 | 831,243 | (2) | |||||||
Equity compensation plans not approved by security holders | 633,219 | $ | 3.70 | 1,352,451 | ||||||||
Total | 3,359,617 | $ | 5.52 | 2,183,694 | ||||||||
(1) | Includes only options outstanding under ESS’ stock option plans, as no stock warrants or rights were outstanding as of December 31, 2007. | |
(2) | Includes 132,493 shares of common stock reserved for future issuance under the ESS Technology, Inc. 1995 Employee Stock Purchase Plan. |
140
Table of Contents
• | attract and retain highly qualified executives by offering an overall compensation package that is competitive with that offered for comparable positions in comparable companies in the high-technology industry, in Silicon Valley and in other parts of the world where we operate; | |
• | motivate executives to achieve our business goals through the use of an incentive compensation plan that ties a portion of an executive’s compensation to objectives of ESS and individual performance; | |
• | reward achievement of our short-term and long-term performance goals; and | |
• | align the interests of executives with the long-term interests of stockholders through executive participation in equity-based compensation plans. |
• | base salary; | |
• | incentive cash compensation which consists of an annual bonus plan that is completely discretionary and only earned based on achieving certain corporate and individual objectives; and | |
• | in past years, stock-based incentive compensation programs, including the shareholder-approved 1995 Equity Incentive Plan and 1997 Equity Incentive Plan. |
141
Table of Contents
Change in | ||||||||||||||||||||||||||||||||||||
Pension | ||||||||||||||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||||||||||||||
Non-Equity | Non-Qualified | |||||||||||||||||||||||||||||||||||
Incentive | Deferred | |||||||||||||||||||||||||||||||||||
Stock | Option | Plan | Compensation | All Other | ||||||||||||||||||||||||||||||||
Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($)(1) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
Fred S.L. Chan, | 2007 | $ | 165,261 | — | — | $ | 62,583 | — | — | $ | 47,455 | (3) | $ | 275,299 | ||||||||||||||||||||||
Former Chairman of the Board of Directors(2) | 2006 | $ | 328,000 | — | — | $ | 355,928 | — | — | $ | 298 | (4) | $ | 684,226 | ||||||||||||||||||||||
Robert L. Blair, | 2007 | $ | 328,000 | — | — | $ | 93,095 | — | — | $ | 298 | (4) | $ | 421,393 | ||||||||||||||||||||||
President & CEO | 2006 | $ | 328,000 | $ | 750 | — | $ | 320,484 | — | — | $ | 298 | (4) | $ | 649,532 | |||||||||||||||||||||
James B. Boyd, | 2007 | $ | 182,522 | $ | 180,000 | (5) | — | $ | 38,067 | — | — | $ | 40,311 | (6) | $ | 440,900 | ||||||||||||||||||||
Sr. V.P. & CFO(2) | 2006 | $ | 221,481 | $ | 150,000 | — | $ | 89,040 | — | — | $ | 298 | (4) | $ | 460,819 | |||||||||||||||||||||
John Marsh, | 2007 | (1) | $ | 164,141 | $ | 10,000 | (7) | — | $ | 10,437 | — | — | $ | 297 | (4) | $ | 184,876 | |||||||||||||||||||
V.P. & CFO | 2006 | $ | 121,760 | — | — | — | — | — | $ | 9,715 | (8) | $ | 131,475 |
(1) | Represents the amount of compensation cost recognized during fiscal year 2007 related to stock option awards granted prior and during fiscal year 2007, as described in Statement of Financial Accounting Standards No. 123R (SFAS 123R). With the exception of Mr. Marsh who was granted 150,000 stock option awards during 2007, no other executive officers were granted stock option awards in 2007. For a discussion of valuation assumptions, see Note 12 to our 2007 Consolidated Financial Statements included in this joint proxy statement/prospectus for the year ended December 31, 2007. | |
(2) | Mr. Chan resigned as Chairman of the Board of Directors on July 18, 2007, Mr. Boyd resigned as Sr. V.P. & CFO on August 14, 2007 and Mr. Marsh was appointed VP & CFO effective August 15, 2007. | |
(3) | The $47,455 includes $47,306 of vacation accrual that was paid to Mr. Chan upon his termination as Chairman and $149 of the annual premiums paid by ESS under ESS’ group term life insurance policy and accidental death and dismemberment policy on behalf of Named Executive Officers. |
142
Table of Contents
(4) | Represents the annual premiums paid by ESS under ESS’ group term life insurance policy and accidental death and dismemberment policy on behalf of Named Executive Officers. | |
(5) | The $180,000 includes a $30,000 payment for staying with ESS until August 2007, and payment in full of his $150,000 MBO Target for 2007. The 2007 MBO Targets were $75,000 for filing ESS’ annual report on Form10-K and an additional $75,000 for filing the annual report onForm 10-K in a timely manner. | |
(6) | The $40,311 represents $39,662 of vacation accrual that was paid to Mr. Boyd upon his termination as CFO and $649 of the annual premiums paid by ESS under ESS’ group term life insurance policy and accidental death and dismemberment policy on behalf of Named Executive Officers. | |
(7) | The $10,000 represents a percentage of Mr. Marsh’s salary while serving as corporate controller, pro-rated for the period prior to Mr. Marsh becoming chief financial officer in August 2007. | |
(8) | The $9,715 includes $9,490 of vacation pay paid when Mr. Marsh terminated employment on October 6, 2006 and $225 of annual premiums paid by ESS under ESS’ group term life insurance policy and accidental death and dismemberment policy. |
143
Table of Contents
144
Table of Contents
145
Table of Contents
All Other | All Other | |||||||||||||||||||||||||||||||
Stock | Option | |||||||||||||||||||||||||||||||
Awards: | Awards: | Exercise | ||||||||||||||||||||||||||||||
Number of | Number of | or Base | Grant Date | |||||||||||||||||||||||||||||
Estimated Future Payouts Under | Shares of | Securities | Price of | Fair Value | ||||||||||||||||||||||||||||
Non-Equity Incentive Plan Awards(1) | Stock or | Underlying | Option | of Stock | ||||||||||||||||||||||||||||
Grant | Threshold | Target | Maximum | Units | Options | Awards | and Option | |||||||||||||||||||||||||
Name | Date/Plan | (#) | (#) | (#) | (#) | (#) | ($/Share) | Awards(2) | ||||||||||||||||||||||||
01/16/2007 | ||||||||||||||||||||||||||||||||
John Marsh | 1997 Plan | — | — | — | — | 40,000 | $ | 0.96 | $ | 4,509 | ||||||||||||||||||||||
08/10/2007 2002 Plan | — | $ | 40,000 | — | — | 110,000 | $ | 1.26 | $ | 5,929 |
(1) | Mr. Marsh was hired as Corporate Controller on January 15, 2007. His targeted annual MBO Bonus was set at $20,000. Upon his appointment as VP & CFO on August 15, 2007 his targeted annual MBO Bonus was increased to $40,000. The target bonus amounts do not include thresholds or maximums. | |
(2) | The value of a stock or option award is based on the fair value as of the grant date of such awards pursuant to SFAS 123(R). Please refer to Note 12, “Stock-Based Compensation,” in the Notes to Consolidated Financial Statements included in this proxy statement/prospectus for the relevant assumptions used to determine the compensation cost of our stock and option awards. |
146
Table of Contents
Stock Awards | ||||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||
Equity | Incentive | |||||||||||||||||||||||||||||||||||
Option Awards | Incentive | Plan | ||||||||||||||||||||||||||||||||||
Equity | Plan | Awards: | ||||||||||||||||||||||||||||||||||
Incentive | Awards: | Market or | ||||||||||||||||||||||||||||||||||
Plan | Number of | Payout | ||||||||||||||||||||||||||||||||||
Awards: | Market | Unearned | Value of | |||||||||||||||||||||||||||||||||
Number of | Number of | Number of | Number | Value of | Shares, | Unearned | ||||||||||||||||||||||||||||||
Securities | Securities | Securities | of Shares | Shares or | Units or | Shares, | ||||||||||||||||||||||||||||||
Underlying | Underlying | Underlying | or Units | Units of | Other | Units or | ||||||||||||||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | of Stock | Stock | Rights | Other | |||||||||||||||||||||||||||||
Options | Options | Unearned | Exercise | Option | That Have | That Have | That Have | Rights That | ||||||||||||||||||||||||||||
(#) | (#) | Options | Price | Expiration | not Vested | not Vested | not Vested | have | ||||||||||||||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | ($) | ($) | (#) | not Vested | |||||||||||||||||||||||||||
Robert L. Blair | 24,410 | — | (1) | — | 9.7800 | 7/8/2013 | — | — | — | — | ||||||||||||||||||||||||||
375,590 | — | (1) | — | 9.7800 | 7/8/2013 | — | — | — | — | |||||||||||||||||||||||||||
168,000 | — | (1) | — | 4.8750 | 1/3/2011 | — | — | — | — | |||||||||||||||||||||||||||
16,000 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
15,420 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
144,580 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
3,750 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
154,666 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
11,250 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
1,000 | — | (1) | — | 4.1200 | 6/28/2015 | — | — | — | — | |||||||||||||||||||||||||||
John Marsh | 9,167 | 30,833 | (2) | — | 0.9600 | 1/15/2017 | — | — | — | — | ||||||||||||||||||||||||||
9,167 | 100,833 | (3) | — | 1.2600 | 8/9/2017 | — | — | — | — |
(1) | Options were fully vested as of December 31, 2007. | |
(2) | 1/48th of the 40,000 shares vest monthly on the 16th day of each month commencing February 16, 2008 through January 16, 2011. | |
(3) | 1/48th of the 110,000 shares vest monthly on the 10th day of each month commencing September 10, 2007 through August 10, 2011. |
147
Table of Contents
Potential Payments Upon Change-in-Control Termination | ||||||||||||||||||||||||
Intrinsic Value of | ||||||||||||||||||||||||
Cash | Benefit | Accelerated Equity Awards | 280G Excise | |||||||||||||||||||||
Name | Severance | Continuation | Options(1) | Restricted Stock | Tax Gross Up | Total | ||||||||||||||||||
Robert L. Blair | — | — | — | — | — | $ | 0 | (2) | ||||||||||||||||
John Marsh | — | — | $ | 54,970 | — | — | $ | 54,970 | ||||||||||||||||
Peter T. Mok | — | — | $ | 4,538 | — | — | $ | 4,538 | ||||||||||||||||
Alfred J. Stein | — | — | $ | 4,538 | — | — | $ | 4,538 |
(1) | Intrinsic value is based on the unvested options as of March 31, 2008 that would be accelerated at the closing of the merger and calculated on the difference between the $1.64 cash-out merger consideration per share and the exercise price of the accelerated option. | |
(2) | The exercise price of Mr. Blair’s options exceed the $1.64 cash-out merger consideration per share and these shares are fully vested |
Fiscal Year | Fiscal Year | |||||||
2007 | 2006 | |||||||
Audit Fees | $ | 1,103,256 | $ | 1,326,995 | ||||
Tax Fees | 348,787 | 209,003 | ||||||
All Other Fees | 2,320 | 2,320 | ||||||
Total | $ | 1,454,363 | $ | 1,538,318 | ||||
148
Table of Contents
149
Table of Contents
Alfred J. Stein
David S. Lee
Alfred J. Stein, Chairman
150
Table of Contents
151
Table of Contents
Among ESS Technology, Inc., The NASDAQ Composite Index
And The RDG Technology Composite Index
Fiscal year ending December 31.
152
Table of Contents
153
Table of Contents
154
Table of Contents
Washington, D.C. 20549
48401 Fremont Boulevard
Fremont, CA 94538
Attn: Investor Relations
Tel:(510) 492-1088
• | ESS’ annual report onForm 10-K for the fiscal year ended December 31, 2007, filed with the SEC on March 31, 2008; | |
• | ESS’ current report onForm 8-K filed with the SEC on January 9, 2008; |
155
Table of Contents
• | ESS’ current report onForm 8-K filed with the SEC on February 22, 2008; | |
• | ESS’ current report onForm 8-K filed with the SEC on March 31, 2008; | |
• | ESS’ current report onForm 8-K filed with the SEC on April 8, 2008; | |
• | ESS’ current report onForm 8-K filed with the SEC on April 16, 2008; | |
• | ESS’ current report onForm 8-K filed with the SEC on April 28, 2008; and | |
• | ESS’ quarterly report on Form 10-Q filed with the SEC on May 15, 2008. |
156
Table of Contents
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
(2). Supplementary Data: | ||||
F-32 | ||||
F-33 | ||||
F-34 | ||||
F-34 | ||||
F-35 | ||||
F-36 | ||||
F-37 |
F-1
Table of Contents
F-2
Table of Contents
1. | Financial Statements: |
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 43,110 | $ | 33,731 | ||||
Short-term investments | 6,837 | 10,264 | ||||||
Accounts receivable, net | 5,403 | 9,189 | ||||||
Other receivables | 482 | 1,154 | ||||||
Inventory | 7,210 | 8,278 | ||||||
Prepaid expenses and other assets | 823 | 1,764 | ||||||
Total current assets | 63,865 | 64,380 | ||||||
Property, plant and equipment, net | 12,609 | 16,996 | ||||||
Non-current deferred tax asset | 5,874 | — | ||||||
Other assets | 9,025 | 9,052 | ||||||
Total assets | $ | 91,373 | $ | 90,428 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Accounts payable and accrued expenses | $ | 7,928 | $ | 20,404 | ||||
Income tax payable and deferred income taxes | 19 | 23,001 | ||||||
Total current liabilities | 7,947 | 43,405 | ||||||
Non-current income tax liabilities | 35,661 | — | ||||||
Total liabilities | 43,608 | 43,405 | ||||||
Commitments and contingencies (Note 15) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, no par value, 10,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, no par value, 100,000 shares authorized; 35,545 and 35,508 shares issued and outstanding at December 31, 2007 and 2006, respectively | 176,459 | 175,528 | ||||||
Accumulated other comprehensive income | 845 | 86 | ||||||
Accumulated deficit | (129,539 | ) | (128,591 | ) | ||||
Total shareholders’ equity | 47,765 | 47,023 | ||||||
Total liabilities and shareholders’ equity | $ | 91,373 | $ | 90,428 | ||||
F-3
Table of Contents
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Net revenues: | ||||||||||||
Product | $ | 67,393 | $ | 97,797 | $ | 161,921 | ||||||
License and royalty | 938 | 2,668 | 20,000 | |||||||||
Total net revenues | 68,331 | 100,465 | 181,921 | |||||||||
Cost of product revenues | 42,597 | 97,640 | 169,312 | |||||||||
Gross profit | 25,734 | 2,825 | 12,609 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 12,550 | 36,044 | 33,983 | |||||||||
Selling, general and administrative | 18,211 | 27,566 | 34,973 | |||||||||
Impairment of goodwill and intangible assets | — | — | 42,743 | |||||||||
Impairment of property, plant and equipment | 859 | — | — | |||||||||
Gain on sale of technology and tangible assets | (10,481 | ) | — | — | ||||||||
Operating income (loss) | 4,595 | (60,785 | ) | (99,090 | ) | |||||||
Non-operating income (loss), net | 1,663 | (652 | ) | 1,316 | ||||||||
Income (loss) before income taxes | 6,258 | (61,437 | ) | (97,774 | ) | |||||||
Provision for (benefit from) income taxes | 3,136 | (17,343 | ) | 1,779 | ||||||||
Net income (loss) | $ | 3,122 | $ | (44,094 | ) | $ | (99,553 | ) | ||||
Net income (loss) per share — basic | $ | 0.09 | $ | (1.14 | ) | $ | (2.50 | ) | ||||
Net income (loss) per share — diluted | $ | 0.09 | $ | (1.14 | ) | $ | (2.50 | ) | ||||
Shares used in per share calculation: | ||||||||||||
Basic | 35,525 | 38,723 | 39,781 | |||||||||
Diluted | 35,527 | 38,723 | 39,781 | |||||||||
F-4
Table of Contents
Accumulated | ||||||||||||||||||||||||
Other | Retained | |||||||||||||||||||||||
Comprehensive | Earnings | Total | Total | |||||||||||||||||||||
Common Stock | Income | (Accumulated | Shareholders’ | Comprehensive | ||||||||||||||||||||
Shares | Amount | (Loss) | Deficit) | Equity | Income (Loss) | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Balance at December 31, 2004 | 39,681 | 178,030 | (174 | ) | 15,056 | 192,912 | ||||||||||||||||||
Issuance of common stock upon exercise of options | 52 | 203 | — | — | 203 | |||||||||||||||||||
Issuance of common stock for employee stock purchase plan | 160 | 457 | — | — | 457 | |||||||||||||||||||
Repurchase of common stock | (329 | ) | (1,165 | ) | — | — | (1,165 | ) | ||||||||||||||||
Stock-based compensation expense | — | 20 | — | — | 20 | |||||||||||||||||||
Unrealized gain on marketable securities, net of tax | — | — | 460 | — | 460 | $ | 460 | |||||||||||||||||
Net loss | — | — | — | (99,553 | ) | (99,553 | ) | (99,553 | ) | |||||||||||||||
Total comprehensive loss | — | — | — | — | — | $ | (99,093 | ) | ||||||||||||||||
Balance at December 31, 2005 | 39,564 | 177,545 | 286 | (84,497 | ) | 93,334 | ||||||||||||||||||
Issuance of common stock upon exercise of options | 6 | 17 | — | — | 17 | |||||||||||||||||||
Issuance of common stock for employee stock purchase plan | 123 | 227 | — | — | 227 | |||||||||||||||||||
Repurchase of common stock | (4,185 | ) | (5,852 | ) | — | — | (5,852 | ) | ||||||||||||||||
Stock-based compensation expense | — | 3,591 | — | — | 3,591 | |||||||||||||||||||
Unrealized loss on marketable securities, net of tax | — | — | (200 | ) | — | (200 | ) | $ | (200 | ) | ||||||||||||||
Net loss | — | — | — | (44,094 | ) | (44,094 | ) | (44,094 | ) | |||||||||||||||
Total comprehensive loss | — | — | — | — | — | $ | (44,294 | ) | ||||||||||||||||
Balance at December 31, 2006 | 35,508 | $ | 175,528 | $ | 86 | $ | (128,591 | ) | $ | 47,023 | ||||||||||||||
Issuance of common stock for employee stock purchase plan | 37 | 30 | — | — | 30 | |||||||||||||||||||
Stock-based compensation expense | — | 901 | — | — | 901 | |||||||||||||||||||
FIN 48 income tax adjustment | — | — | — | (4,070 | ) | (4,070 | ) | |||||||||||||||||
Unrealized gain on marketable securities, net of tax | — | — | 759 | — | 759 | $ | 759 | |||||||||||||||||
Net income | — | — | — | 3,122 | 3,122 | 3,122 | ||||||||||||||||||
Total comprehensive income | — | — | — | — | — | $ | 3,881 | |||||||||||||||||
Balance at December 31, 2007 | 35,545 | $ | 176,459 | $ | 845 | $ | (129,539 | ) | $ | 47,765 | ||||||||||||||
F-5
Table of Contents
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | 3,122 | $ | (44,094 | ) | $ | (99,553 | ) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||
Depreciation | 3,567 | 5,981 | 6,022 | |||||||||
Amortization | — | 795 | 4,321 | |||||||||
Write-down of goodwill and intangible assets | — | — | 42,743 | |||||||||
(Gain) on sale of technology and tangible assets | (10,481 | ) | — | — | ||||||||
Impairment of property plant and equipment | 859 | — | — | |||||||||
(Gain) loss on sale of property, plant and equipment | 192 | (234 | ) | (628 | ) | |||||||
Write-down of equity investments | 643 | 3,534 | 1,316 | |||||||||
Stock-based compensation | 901 | 3,591 | 20 | |||||||||
Changes in assets and liabilities: | ||||||||||||
Accounts receivables, net | 3,786 | 5,801 | 6,104 | |||||||||
Other receivables | 672 | 4,641 | (5,433 | ) | ||||||||
Inventory, net | 1,068 | 4,199 | 33,192 | |||||||||
Prepaid expenses and other assets | 960 | 2,527 | (453 | ) | ||||||||
Accounts payable and accrued expenses | (12,476 | ) | (15,512 | ) | (14,730 | ) | ||||||
Income tax payable and deferred income taxes | 2,728 | (19,397 | ) | 2,103 | ||||||||
Net cash used in operating activities | (4,459 | ) | (48,168 | ) | (24,976 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property, plant and equipment | (611 | ) | (1,854 | ) | (4,708 | ) | ||||||
Sale of property, plant and equipment | 109 | 244 | 1,190 | |||||||||
Purchase of short-term investments | (4,791 | ) | (14,420 | ) | (44,135 | ) | ||||||
Maturities and Sales of short-term investments | 8,250 | 35,365 | 98,573 | |||||||||
Purchase of long-term investments | (500 | ) | — | (282 | ) | |||||||
Purchase of other assets | — | (458 | ) | — | ||||||||
Sale of technology and tangible assets | 11,351 | — | — | |||||||||
Refund of acquisition consideration under escrow | — | — | 1,946 | |||||||||
Net cash provided by investing activities | 13,808 | 18,877 | 52,584 | |||||||||
Cash flows from financing activities: | ||||||||||||
Repurchase of common stock | — | (5,852 | ) | (1,165 | ) | |||||||
Issuance of common stock under employee stock purchase plan and stock option plans | 30 | 244 | 660 | |||||||||
Net cash provided by (used in) financing activities | 30 | (5,608 | ) | (505 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 9,379 | (34,899 | ) | 27,103 | ||||||||
Cash and cash equivalents at beginning of year | 33,731 | 68,630 | 41,527 | |||||||||
Cash and cash equivalents at end of year | $ | 43,110 | $ | 33,731 | $ | 68,630 | ||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid for income taxes | $ | 440 | $ | 2,363 | $ | — | ||||||
Cash refund for income taxes | $ | 10 | $ | 698 | $ | 491 |
F-6
Table of Contents
Note 1. | Nature of Business |
F-7
Table of Contents
Note 2. | Summary of Significant Accounting Policies |
F-8
Table of Contents
Building and building improvements | 7-30 years | |||
Machinery and equipment | 3-5 years | |||
Furniture and fixtures | 3-5 years |
F-9
Table of Contents
F-10
Table of Contents
Year-Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Beginning balance | $ | 254 | $ | 506 | $ | 324 | ||||||
Accrual for warranty during the year | (87 | ) | 47 | 406 | ||||||||
Settlements made during the year | (7 | ) | (299 | ) | (224 | ) | ||||||
Ending balance | $ | 160 | $ | 254 | $ | 506 | ||||||
F-11
Table of Contents
F-12
Table of Contents
Note 3. | Balance Sheet Components |
December 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Accounts receivable, net: | ||||||||
Accounts receivable | $ | 5,526 | $ | 9,465 | ||||
Less: Allowance for doubtful accounts | (123 | ) | (276 | ) | ||||
$ | 5,403 | $ | 9,189 | |||||
Other receivables: | ||||||||
Insurance | $ | 362 | $ | 966 | ||||
Other | 120 | 188 | ||||||
$ | 482 | $ | 1,154 | |||||
Inventories: | ||||||||
Raw materials | $ | 1,531 | $ | 1,210 | ||||
Work-in-process | 957 | 758 | ||||||
Finished goods | 4,722 | 6,310 | ||||||
$ | 7,210 | $ | 8,278 | |||||
F-13
Table of Contents
Prepaid expenses and other assets: | ||||||||
Prepaid insurance | $ | 419 | $ | 527 | ||||
Prepaid maintenance | 215 | 327 | ||||||
Prepaid royalty | 84 | 713 | ||||||
Other | 105 | 197 | ||||||
$ | 823 | $ | 1,764 | |||||
Property, plant and equipment, net: | ||||||||
Land | $ | 2,860 | $ | 2,860 | ||||
Building and building improvements | 23,865 | 24,679 | ||||||
Machinery and equipment | 35,341 | 37,260 | ||||||
Furniture and fixtures | 20,661 | 23,607 | ||||||
82,727 | 88,406 | |||||||
Less: Accumulated depreciation and amortization | (70,118 | ) | (71,410 | ) | ||||
$ | 12,609 | $ | 16,996 | |||||
Long-term other assets: | ||||||||
Investments — Best Elite (Note 5) | $ | 6,857 | $ | 7,000 | ||||
Investments — Marketable securities | 2,071 | 1,344 | ||||||
Other | 97 | 708 | ||||||
$ | 9,025 | $ | 9,052 | |||||
Accounts payable and accrued expenses: | ||||||||
Accounts payable | $ | 3,194 | $ | 6,167 | ||||
Accrued compensation costs | 2,272 | 6,057 | ||||||
Accrued commission and royalties | 282 | 281 | ||||||
Deferred revenue related to distributor sales, net of deferred cost of goods sold | 250 | 216 | ||||||
Non-cancelable, adverse purchase order commitments | 39 | 3,077 | ||||||
Deposit from SiS | — | 1,500 | ||||||
Other accrued liabilities | 1,891 | 3,106 | ||||||
$ | 7,928 | $ | 20,404 | |||||
F-14
Table of Contents
Note 4. | Marketable Securities |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
December 31, 2007 | Cost | Gains | (Loss) | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds | $ | 100 | $ | — | $ | — | $ | 100 | ||||||||
Time deposit | 3,200 | — | — | 3,200 | ||||||||||||
Corporate debt securities | 23,775 | 11 | (7 | ) | 23,779 | |||||||||||
Corporate equity security | 1,233 | 838 | — | 2,071 | ||||||||||||
Government agency bonds | 10,958 | 3 | — | 10,961 | ||||||||||||
Total available-for-sale | $ | 39,266 | $ | 852 | $ | (7 | ) | $ | 40,111 | |||||||
Classified as: | ||||||||||||||||
Cash equivalents | $ | 31,203 | ||||||||||||||
Short-term marketable securities | 6,837 | |||||||||||||||
Long-term marketable securities | 2,071 | |||||||||||||||
$ | 40,111 | |||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
December 31, 2006 | Cost | Gains | (Loss) | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds | $ | 3,363 | $ | — | $ | — | $ | 3,363 | ||||||||
Time deposit | 2,800 | — | — | 2,800 | ||||||||||||
Corporate debt securities | 17,203 | 2 | (3 | ) | 17,202 | |||||||||||
Corporate equity security | 1,233 | 111 | — | 1,344 | ||||||||||||
Government agency bonds | 6,676 | 1 | (21 | ) | 6,656 | |||||||||||
Total available-for-sale | $ | 31,275 | $ | 114 | $ | (24 | ) | $ | 31,365 | |||||||
Classified as: | ||||||||||||||||
Cash equivalents | $ | 19,757 | ||||||||||||||
Short-term marketable securities | 10,264 | |||||||||||||||
Long-term marketable securities | 1,344 | |||||||||||||||
$ | 31,365 | |||||||||||||||
Estimated | ||||
December 31, 2007 | Fair Value | |||
(In thousands) | ||||
Maturing in 90 days or less | $ | 31,103 | ||
Maturing between 90 days and one year | 6,014 | |||
Maturing in more than one year | 823 | |||
Total available-for-sale debt securities | $ | 37,940 | ||
F-15
Table of Contents
Note 5. | Investments in Equity Securities |
Note 6. | Non-Operating Income (Loss), Net |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Interest income | $ | 1,987 | $ | 2,611 | $ | 2,212 | ||||||
Income on other investments | — | — | 102 | |||||||||
Impairment of investments | (643 | ) | (3,534 | ) | (1,316 | ) | ||||||
Vialta rental income | — | 17 | 345 | |||||||||
Other | 319 | 254 | (27 | ) | ||||||||
Total non-operating income (loss) | $ | 1,663 | $ | (652 | ) | $ | 1,316 | |||||
F-16
Table of Contents
Note 7. | Income Taxes |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Domestic | $ | (2,532 | ) | $ | (3,701 | ) | $ | (51,289 | ) | |||
Foreign | 8,790 | (57,736 | ) | (46,485 | ) | |||||||
$ | 6,258 | $ | (61,437 | ) | $ | (97,774 | ) | |||||
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Current: | ||||||||||||
Federal | $ | 2,382 | $ | (15,715 | ) | $ | 1,859 | |||||
State | 2 | (2,213 | ) | (369 | ) | |||||||
Foreign | (39 | ) | 531 | 540 | ||||||||
2,345 | (17,397 | ) | 2,030 | |||||||||
Deferred | ||||||||||||
Federal | 791 | 54 | (708 | ) | ||||||||
State | — | — | 457 | |||||||||
791 | 54 | (251 | ) | |||||||||
Total | $ | 3,136 | $ | (17,343 | ) | $ | 1,779 | |||||
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Provision (benefit) at statutory rate | $ | 2,190 | $ | (21,503 | ) | $ | (34,221 | ) | ||||
Tax expense related to foreign jurisdictions | (2,604 | ) | 6,710 | 25,935 | ||||||||
State income taxes, net of federal tax benefit | 340 | (3,250 | ) | (5,299 | ) | |||||||
General business credit | — | (497 | ) | (1,882 | ) | |||||||
Impairment of goodwill | — | — | 16,745 | |||||||||
Stock- based compensation | 255 | 949 | ||||||||||
Interest expense | 2,233 | — | — | |||||||||
Change in Valuation Allowance | 777 | 685 | 1,536 | |||||||||
Other | (55 | ) | (437 | ) | (1,035 | ) | ||||||
Provision for (benefit from) income taxes | $ | 3,136 | $ | (17,343 | ) | $ | 1,779 | |||||
F-17
Table of Contents
December 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Current: | ||||||||
Accrued liabilities and reserves | $ | 368 | $ | 1,163 | ||||
Unrealized gains/losses on investments | 660 | 660 | ||||||
Other | — | 15 | ||||||
Current deferred tax assets | $ | 1,028 | $ | 1,838 | ||||
Non-current: | ||||||||
Depreciation and amortization | $ | 3,766 | $ | 3,818 | ||||
Net operating loss carryforwards | 328 | 21,468 | ||||||
Credit carryforwards | 2,113 | 8,249 | ||||||
Stock based compensation | 200 | 357 | ||||||
Non-current deferred tax assets | 6,407 | 33,892 | ||||||
Total deferred tax assets | 7,435 | 35,730 | ||||||
Valuation allowance | (1,561 | ) | (34,497 | ) | ||||
Net deferred tax assets | $ | 5,874 | $ | 1,233 | ||||
F-18
Table of Contents
Year Ended | ||||
December 31, | ||||
2007 | ||||
(In thousands) | ||||
Balance at January 1, 2007 | $ | 78,323 | ||
Additions for tax positions related to 2007 | 670 | |||
Additions for tax positions of prior years | 148 | |||
Reductions for tax positions of prior years | — | |||
Settlements | (155 | ) | ||
Lapse of statutes of limitations | — | |||
Balance at December 31, 2007 | $ | 78,986 | ||
Note 8. | Impairment of Property, Plant and Equipment |
Note 9. | Gain on Sale of Technology and Tangible Assets |
F-19
Table of Contents
Note 10. | Net Income (Loss) Per Share |
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Numerator: | ||||||||||||
Net income (loss) available to common stockholders | $ | 3,122 | $ | (44,094 | ) | $ | (99,553 | ) | ||||
Denominator: | ||||||||||||
Weighted shares outstanding used for net income (loss) per share: | ||||||||||||
Basic | 35,525 | 38,723 | 39,781 | |||||||||
Dilutive impact of stock options and ESPP | 2 | — | — | |||||||||
Diluted | 35,527 | 38,723 | 39,781 | |||||||||
Note 11. | Shareholders’ Equity |
F-20
Table of Contents
Note 12. | Stock-Based Compensation |
F-21
Table of Contents
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Stock-based compensation expense by type of award: | ||||||||
Employee stock options: | ||||||||
Cost of product revenues | $ | 31 | $ | 210 | ||||
Research and development | 387 | 1,700 | ||||||
Selling, general and administrative | 453 | 1,527 | ||||||
Employee stock purchase plan: | ||||||||
Selling, general and administrative | 30 | 154 | ||||||
Total stock-based compensation | 901 | 3,591 | ||||||
Tax effect on stock-based compensation | — | — | ||||||
Net effect on net income (loss) | $ | 901 | $ | 3,591 | ||||
F-22
Table of Contents
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Stock option plans: | ||||||||||||
Expected life (in years) | 3.16 | 3.79 | 2.31 | |||||||||
Expected stock price volatility | 62 | % | 71 | % | 83 | % | ||||||
Risk-free interest rate | 4.2 | % | 4.6 | % | 3.7 | % | ||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Stock purchase plan: | ||||||||||||
Expected life (in years) | 1.0 | 1.0 | 1.0 | |||||||||
Expected stock price volatility | 61 | % | 69 | % | 76 | % | ||||||
Risk-free interest rate | 4.3 | % | 5.1 | % | 4.0 | % | ||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % |
F-23
Table of Contents
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Options | Average | Contractual | ||||||||||
Outstanding | Exercise Price | Term | ||||||||||
(In thousands) | ||||||||||||
Balances at December 31, 2004 | 5,562 | $ | 7.29 | |||||||||
Granted | 5,284 | 4.06 | ||||||||||
Exercised | (52 | ) | 3.86 | |||||||||
Forfeited | (1,041 | ) | 7.73 | |||||||||
Expired | — | — | ||||||||||
Balances at December 31, 2005 | 9,753 | $ | 5.51 | |||||||||
Granted | 293 | 2.33 | ||||||||||
Exercised | (6 | ) | 2.66 | |||||||||
Forfeited | (1,123 | ) | 4.82 | |||||||||
Expired | (1,630 | ) | 5.86 | |||||||||
Balances at December 31, 2006 | 7,287 | $ | 5.40 | |||||||||
Granted | 226 | 1.24 | ||||||||||
Forfeited | (465 | ) | 4.78 | |||||||||
Expired | (3,689 | ) | 5.11 | |||||||||
Balances at December 31, 2007 | 3,359 | 5.53 | 6.13 | |||||||||
Fully vested and exercisable at December 31, 2007 | 2,957 | 5.95 | 5.80 | |||||||||
Expected at December 31, 2007 to vest in the future | 375 | 2.53 | 8.56 |
F-24
Table of Contents
Year Ended | ||||
December 31, | ||||
2005 | ||||
Net loss — as reported | $ | (99,553 | ) | |
Stock based compensation expense related to non-employees included in reported net loss | 20 | |||
Stock based compensation determined under fair value based method for all awards, net of tax | (8,593 | ) | ||
Pro forma net loss | $ | (108,126 | ) | |
Net loss per share — basic and diluted: | ||||
As reported | $ | (2.50 | ) | |
Pro forma | $ | (2.72 | ) |
Note 13. | Business Segment Information and Concentration of Certain Risks |
Percentage of Net | ||||||||||||
Revenues for Years | ||||||||||||
Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Video business: | ||||||||||||
DVD | 79 | % | 68 | % | 57 | % | ||||||
VCD | 7 | % | 18 | % | 17 | % | ||||||
License and Royalty | 1 | % | 2 | % | 11 | % | ||||||
Other | 13 | % | 7 | % | 3 | % | ||||||
Total Video business | 100 | % | 95 | % | 88 | % | ||||||
Digital Imaging business | 0 | % | 5 | % | 12 | % | ||||||
Total | 100 | % | 100 | % | 100 | % | ||||||
F-25
Table of Contents
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Net revenues: | ||||||||||||
Video | $ | 68,153 | $ | 95,736 | $ | 159,522 | ||||||
Digital Imaging | 178 | 4,729 | 22,399 | |||||||||
Total net revenues | $ | 68,331 | $ | 100,465 | $ | 181,921 | ||||||
Segment operating income (loss): | ||||||||||||
Video | $ | 17,830 | $ | (36,089 | ) | $ | (15,176 | ) | ||||
Digital Imaging | (2,427 | ) | (12,388 | ) | (25,159 | ) | ||||||
Total segment operating income (loss) | $ | 15,403 | $ | (48,477 | ) | $ | (40,335 | ) | ||||
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Segment operating income (loss) | $ | 15,403 | $ | (48,477 | ) | $ | (40,335 | ) | ||||
Unallocated corporate expenses | (10,808 | ) | (12,308 | ) | (16,012 | ) | ||||||
Impairment of goodwill and intangible assets | — | — | (42,743 | ) | ||||||||
Operating income (loss) | $ | 4,595 | $ | (60,785 | ) | $ | (99,090 | ) | ||||
Property, | ||||||||
Plant, | ||||||||
Net | and | |||||||
Revenue | Equipment | |||||||
(In thousands) | ||||||||
Year Ended December 31, 2007 | ||||||||
United States | $ | 57 | $ | 11,941 | ||||
Canada | — | 458 | ||||||
Hong Kong | 21,425 | — | ||||||
Taiwan | 19,984 | — | ||||||
Japan | 5,186 | — | ||||||
China (excluding Hong Kong) | 5,948 | 70 |
F-26
Table of Contents
Property, | ||||||||
Plant, | ||||||||
Net | and | |||||||
Revenue | Equipment | |||||||
(In thousands) | ||||||||
Korea | 7,983 | 86 | ||||||
Indonesia | 5,474 | — | ||||||
Austria | 1,332 | — | ||||||
Rest of the world | 942 | 54 | ||||||
Total foreign | 68,274 | 668 | ||||||
Total | $ | 68,331 | $ | 12,609 | ||||
Year Ended December 31, 2006 | ||||||||
United States | $ | 59 | $ | 15,663 | ||||
Canada | — | 355 | ||||||
Hong Kong | 44,577 | — | ||||||
Taiwan | 18,360 | 96 | ||||||
Japan | 9,708 | — | ||||||
China (excluding Hong Kong) | 2,363 | 292 | ||||||
Korea | 15,053 | 156 | ||||||
Turkey | 2,484 | — | ||||||
Singapore | 2,997 | — | ||||||
Rest of the world | 4,864 | 434 | ||||||
Total foreign | 100,406 | 1,333 | ||||||
Total | $ | 100,465 | $ | 16,996 | ||||
Year Ended December 31, 2005 | ||||||||
United States | $ | 499 | ||||||
Hong Kong | 72,220 | |||||||
Taiwan | 44,089 | |||||||
Japan | 16,297 | |||||||
China (excluding Hong Kong) | 1,439 | |||||||
Korea | 29,659 | |||||||
Turkey | 8,337 | |||||||
Singapore | 2,221 | |||||||
Rest of the world | 7,160 | |||||||
Total foreign | 181,422 | |||||||
Total | $ | 181,921 | ||||||
F-27
Table of Contents
Year Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Samsung Electronics Company | 31 | % | 13 | % | 11 | % | ||||||
LG International Corporation | 16 | % | 15 | % | 15 | % | ||||||
Xing Qiu | 10 | % | — | — | ||||||||
ATLM (Eastech) | — | — | 10 | % |
Year Ended December 31, | ||||||||
2007 | 2006 | |||||||
LG International Corporation | 34 | % | 20 | % | ||||
Samsung Electronics Company | 32 | % | 14 | % | ||||
Weikeng Industrial Company, Ltd | 12 | % | — | |||||
Universe Electron Corporation | — | 11 | % |
Note 14. | Related Party Transactions with Vialta, Inc. |
Transactions Between | ||||||||||||
ESS and Vialta | ||||||||||||
Years Ended | ||||||||||||
December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Lease charges to Vialta under Real Estate Matters Agreement | $ | — | $ | 15 | $ | 346 | ||||||
Products sold to Vialta | — | — | 12 | |||||||||
Products purchased from Vialta | — | — | (31 | ) | ||||||||
Selling, general, administrative and other services provided to Vialta, net of charges from Vialta | — | (1 | ) | 4 | ||||||||
Total charges to Vialta, net of charges from Vialta | $ | — | $ | 14 | $ | 331 | ||||||
F-28
Table of Contents
As of | ||||||||
December 31, | ||||||||
2007 | 2006 | |||||||
Receivable from Vialta | $ | — | $ | — | ||||
Note 15. | Commitments and Contingencies |
Payment Due by Periods | ||||||||||||||||||||
Less Than | 1-3 | 3-5 | More than | |||||||||||||||||
Contractual Obligations | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease obligations | $ | 982 | $ | 982 | — | — | — | |||||||||||||
Purchase order commitments | 8,918 | 8,918 | — | — | — | |||||||||||||||
Total | $ | 9,900 | $ | 9,900 | — | — | — | |||||||||||||
F-29
Table of Contents
F-30
Table of Contents
Note 16. | Employee Benefit Plan |
F-31
Table of Contents
2. | Supplementary Data: |
2006 | 2007 | |||||||||||||||||||||||||||||||
Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||
Product | $ | 26,886 | $ | 29,066 | $ | 23,190 | $ | 18,655 | $ | 16,991 | $ | 17,179 | $ | 17,570 | $ | 15,658 | ||||||||||||||||
License and royalty | — | — | 4 | 2,664 | 781 | 5 | 109 | 38 | ||||||||||||||||||||||||
Total net revenues | 26,886 | 29,066 | 23,194 | 21,319 | 17,772 | 17,184 | 17,679 | 15,696 | ||||||||||||||||||||||||
Cost of product revenues | 24,523 | 28,354 | 27,219 | 17,544 | 10,400 | 12,514 | 10,817 | 8,865 | ||||||||||||||||||||||||
Gross profit (loss) | 2,363 | 712 | (4,025 | ) | 3,775 | 7,372 | 4,670 | 6,862 | 6,831 | |||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | 9,597 | 9,941 | 8,691 | 7,815 | 4,591 | 2,570 | 2,734 | 2,655 | ||||||||||||||||||||||||
Selling, general and administrative | 7,999 | 7,045 | 7,567 | 4,955 | 4,940 | 4,738 | 3,962 | 4,572 | ||||||||||||||||||||||||
Impairment of property, plant and equipment | — | — | — | — | 859 | (b) | — | — | — | |||||||||||||||||||||||
Gain on sale of technology and intangible assets | — | — | — | — | (8,481 | )(c) | (2,000 | )(c) | — | — | ||||||||||||||||||||||
Operating income (loss) | (15,233 | ) | (16,274 | ) | (20,283 | ) | (8,995 | ) | 5,463 | (638 | ) | 166 | (396 | ) | ||||||||||||||||||
Non-operating income (loss), net | 476 | 883 | 505 | (2,516 | ) | (86 | ) | 580 | 540 | �� | 629 | |||||||||||||||||||||
Income (loss) before income taxes | (14,757 | ) | (15,391 | ) | (19,778 | ) | (11,511 | ) | 5,377 | (58 | ) | 706 | 233 | |||||||||||||||||||
Provision for (benefit from) income taxes | (687 | ) | (167 | ) | (15,411 | )(a) | (1,078 | ) | 774 | 606 | 800 | 956 | ||||||||||||||||||||
Net income (loss) | $ | (14,070 | ) | $ | (15,224 | ) | $ | (4,367 | ) | $ | (10,433 | ) | $ | 4,603 | $ | (664 | ) | $ | (94 | ) | $ | (723 | ) | |||||||||
Net income (loss) per share — basic and diluted | $ | (0.36 | ) | $ | (0.39 | ) | $ | (0.11 | ) | $ | (0.28 | ) | $ | 0.13 | $ | (0.02 | ) | $ | (0.00 | ) | $ | (0.02 | ) | |||||||||
Shares used in per share calculation: | ||||||||||||||||||||||||||||||||
Basic | 39,122 | 39,150 | 39,177 | 37,450 | 35,508 | 35,522 | 35,529 | 35,540 | ||||||||||||||||||||||||
Diluted | 39,122 | 39,150 | 39,177 | 37,450 | 35,508 | 35,522 | 35,529 | 35,540 | ||||||||||||||||||||||||
(a) | Benefit from income taxes includes a favorable tax adjustment of $14.9 million. | |
(b) | See Note 8, “Impairment of Property, Plant and Equipment.” | |
(c) | See Note 9, “Gain on Sale of Technology and Tangible Assets.” |
F-32
Table of Contents
3. | Financial Statement Schedule: |
Additions | ||||||||||||||||
Balance at | Charged to | Balance at | ||||||||||||||
Beginning | Costs and | Ending of | ||||||||||||||
of Period | Expenses | Deductions | Period | |||||||||||||
(In thousands) | ||||||||||||||||
Year Ended December 31, 2007 | ||||||||||||||||
Allowance for doubtful accounts | $ | 276 | $ | 8 | $ | 161 | $ | 123 | ||||||||
Allowance for sales returns and warranty reserve | $ | 365 | $ | 10 | $ | 121 | $ | 254 | ||||||||
Year Ended December 31, 2006 | ||||||||||||||||
Allowance for doubtful accounts | $ | 449 | $ | (169 | ) | $ | 4 | $ | 276 | |||||||
Allowance for sales returns and warranty reserve | $ | 742 | $ | (67 | ) | $ | 310 | $ | 365 | |||||||
Year Ended December 31, 2005 | ||||||||||||||||
Allowance for doubtful accounts | $ | 787 | $ | — | $ | 338 | $ | 449 | ||||||||
Allowance for sales returns and warranty reserve | $ | 757 | $ | 601 | $ | 616 | $ | 742 |
F-33
Table of Contents
(Unaudited)
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 41,089 | $ | 43,110 | ||||
Short-term investments | 8,047 | 6,837 | ||||||
Accounts receivable, net | 7,676 | 5,403 | ||||||
Other receivables | 428 | 482 | ||||||
Inventory | 6,833 | 7,210 | ||||||
Prepaid expenses and other assets | 899 | 823 | ||||||
Total current assets | 64,972 | 63,865 | ||||||
Property, plant and equipment, net | 12,015 | 12,609 | ||||||
Non-current deferred tax asset | 5,874 | 5,874 | ||||||
Other assets | 7,992 | 9,025 | ||||||
Total assets | $ | 90,853 | $ | 91,373 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Accounts payable and accrued expenses | $ | 10,592 | $ | 7,928 | ||||
Income tax payable | 53 | 19 | ||||||
Total current liabilities | 10,645 | 7,947 | ||||||
Non-current income tax liabilities | 36,167 | 35,661 | ||||||
Total liabilities | 46,812 | 43,608 | ||||||
Commitments and contingencies (Note 12) Shareholders’ equity: | ||||||||
Common stock | 176,529 | 176,459 | ||||||
Accumulated other comprehensive income (loss) | (151 | ) | 845 | |||||
Accumulated deficit | (132,337 | ) | (129,539 | ) | ||||
Total shareholders’ equity | 44,041 | 47,765 | ||||||
Total liabilities and shareholders’ equity | $ | 90,853 | $ | 91,373 | ||||
F-34
Table of Contents
(Unaudited)
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands, except per share data) | ||||||||
Net revenues | $ | 14,371 | $ | 17,772 | ||||
Cost of revenues | 9,143 | 10,400 | ||||||
Gross profit | 5,228 | 7,372 | ||||||
Operating expenses: | ||||||||
Research and development | 3,023 | 4,591 | ||||||
Selling, general and administrative | 4,941 | 4,940 | ||||||
Impairment of property, plant and equipment | — | 859 | ||||||
Gain on sale of technology and tangible assets | — | (8,481 | ) | |||||
Operating income (loss) | (2,736 | ) | 5,463 | |||||
Non-operating income (loss), net | 477 | (86 | ) | |||||
Income (loss) before income taxes | (2,259 | ) | 5,377 | |||||
Provision for income taxes | 539 | 774 | ||||||
Net income (loss) | $ | (2,798 | ) | $ | 4,603 | |||
Net income (loss) per share — basic and diluted | $ | (0.08 | ) | $ | 0.13 | |||
Shares used in per share calculation — basic and diluted | 35,545 | 35,508 | ||||||
F-35
Table of Contents
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Net income (loss) | $ | (2,798 | ) | $ | 4,603 | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation and amortization | 753 | 1,014 | ||||||
Gain on sale of technology and tangible assets | — | (8,481 | ) | |||||
Impairment of property, plant and equipment | — | 859 | ||||||
(Gain) loss on disposal of property, plant and equipment | (95 | ) | 22 | |||||
Loss on equity investments | — | 500 | ||||||
Stock-based compensation | 69 | 330 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (2,272 | ) | (1,607 | ) | ||||
Other receivables | 53 | (3,546 | ) | |||||
Inventory | 377 | 1,779 | ||||||
Prepaid expenses and other assets | (72 | ) | 135 | |||||
Accounts payable and accrued expenses | 2,664 | (419 | ) | |||||
Income tax payable | 540 | 491 | ||||||
Net cash used in operating activities | (781 | ) | (4,320 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property, plant and equipment | (167 | ) | (15 | ) | ||||
Sale of property, plant and equipment | 103 | — | ||||||
Purchase of short-term investments | (2,174 | ) | (514 | ) | ||||
Maturities and sales of short-term investments | 997 | 5,500 | ||||||
Purchase of long-term investments | — | (500 | ) | |||||
Sale of technology and tangible assets | — | 9,351 | ||||||
Net cash provided by (used in) investing activities | (1,241 | ) | 13,822 | |||||
Cash flows from financing activities: | ||||||||
Issuance of common stock under employee stock purchase plan and stock option plans | 1 | — | ||||||
Net cash provided by financing activities | 1 | — | ||||||
Net increase (decrease) in cash and cash equivalents | (2,021 | ) | 9,502 | |||||
Cash and cash equivalents at beginning of period | 43,110 | 33,731 | ||||||
Cash and cash equivalents at end of period | $ | 41,089 | $ | 43,233 | ||||
F-36
Table of Contents
NOTE 1. | NATURE OF BUSINESS |
F-37
Table of Contents
NOTE 2. | BASIS OF PRESENTATION |
NOTE 3. | STOCK-BASED COMPENSATION |
Three Months Ended March 31. | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Stock-based compensation expense by type of award: | ||||||||
Employee stock options: | ||||||||
Cost of revenues | $ | 5 | $ | 7 | ||||
Research and development | 26 | 125 | ||||||
Selling, general and administrative | 34 | 182 | ||||||
Employee stock purchase plan: | ||||||||
Selling, general and administrative | 4 | 16 | ||||||
Tax effect on stock-based compensations | — | — | ||||||
Total stock-based compensation | $ | 69 | $ | 330 | ||||
F-38
Table of Contents
Three Months Ended March 31. | ||||||||
2008 | 2007 | |||||||
Stock option plans: | ||||||||
Expected life (in years) | 3.2 | 3.2 | ||||||
Expected stock price volatility | 57 | % | 67 | % | ||||
Risk-free interest rate | 2.0 | % | 4.8 | % | ||||
Expected dividend yield | 0 | % | 0 | % |
F-39
Table of Contents
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Options | Average | Contractual | ||||||||||
Outstanding | Exercise Price | Term | ||||||||||
(In thousands) | ||||||||||||
Balances at December 31, 2007 | 3,359 | $ | 5.53 | |||||||||
Granted | 4 | 1.27 | ||||||||||
Forfeited | (1 | ) | 4.08 | |||||||||
Expired | (395 | ) | 4.89 | |||||||||
Balances at March 31, 2008 | 2,967 | $ | 5.63 | 6.00 | ||||||||
Fully vested and exercisable at March 31, 2008 | 2,642 | $ | 6.04 | 5.70 | ||||||||
Expected at March 31, 2008 to vest in the future | 301 | $ | 2.31 | 8.46 |
NOTE 4. | BALANCE SHEET COMPONENTS |
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Accounts receivable, net: | ||||||||
Accounts receivable | $ | 7,890 | $ | 5,526 | ||||
Less: Allowance for doubtful accounts | (214 | ) | (123 | ) | ||||
$ | 7,676 | $ | 5,403 | |||||
Other receivables: | ||||||||
Insurance | 358 | $ | 362 | |||||
Other | 70 | 120 | ||||||
$ | 428 | $ | 482 | |||||
Inventory: | ||||||||
Raw materials | $ | 1,191 | $ | 1,531 | ||||
Work-in-process | 2,441 | 957 | ||||||
Finished goods | 3,201 | 4,722 | ||||||
$ | 6,833 | $ | 7,210 | |||||
F-40
Table of Contents
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Prepaid expenses and other assets: | ||||||||
Prepaid insurance | $ | 290 | $ | 419 | ||||
Prepaid maintenance | 222 | 215 | ||||||
Prepaid royalty | 115 | 84 | ||||||
Other | 272 | 105 | ||||||
$ | 899 | $ | 823 | |||||
Property, plant and equipment, net: | ||||||||
Land | $ | 2,860 | $ | 2,860 | ||||
Building and building improvements | 23,719 | 23,865 | ||||||
Machinery and equipment | 35,400 | 35,341 | ||||||
Furniture and fixtures | 20,750 | 20,661 | ||||||
82,729 | 82,727 | |||||||
Less: Accumulated depreciation and amortization | (70,714 | ) | (70,118 | ) | ||||
$ | 12,015 | $ | 12,609 | |||||
Other assets: | ||||||||
Investments — Best Elite | $ | 6,857 | $ | 6,857 | ||||
Investments — Marketable security | 1,042 | 2,071 | ||||||
Other | 93 | 97 | ||||||
$ | 7,992 | $ | 9,025 | |||||
Accounts payable and accrued expenses: | ||||||||
Accounts payable | $ | 4,779 | $ | 3,194 | ||||
Accrued compensation costs | 2,456 | 2,272 | ||||||
Accrued legal and professional fees | 1,601 | 835 | ||||||
Accrued commission and royalties | 525 | 282 | ||||||
Deferred revenue related to distributor sales, net of deferred cost of goods sold | 98 | 250 | ||||||
Non-cancelable, adverse purchase order commitments | 48 | 39 | ||||||
Other accrued liabilities | 1,085 | 1,056 | ||||||
$ | 10,592 | $ | 7,928 | |||||
NOTE 5. | WARRANTY |
F-41
Table of Contents
Three Months | ||||||||
Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Beginning balance | $ | 160 | $ | 254 | ||||
Release for expired warranties | (30 | ) | (15 | ) | ||||
Settlements made during the period | — | (2 | ) | |||||
Ending balance | $ | 130 | $ | 237 | ||||
NOTE 6. | MARKETABLE SECURITIES |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
March 31, 2008 | Cost | Gains | (Loss) | Value | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds | $ | 9,171 | $ | — | $ | — | $ | 9,171 | ||||||||
Time deposit | 3,298 | — | — | 3,298 | ||||||||||||
Corporate debt securities | 8,004 | 43 | — | 8,047 | ||||||||||||
Corporate equity security | 1,233 | — | (191 | ) | 1,042 | |||||||||||
Government agency bonds | 17,984 | 2 | 17,986 | |||||||||||||
Total available-for-sale | $ | 39,690 | $ | 45 | $ | (191 | ) | $ | 39,544 | |||||||
Classified as: | ||||||||||||||||
Cash equivalents | $ | 30,455 | ||||||||||||||
Short-term marketable securities | 8,047 | |||||||||||||||
Long-term marketable securities | 1,042 | |||||||||||||||
$ | 39,544 | |||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
December 31, 2007 | Cost | Gains | (Loss) | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Money market funds | $ | 100 | $ | — | $ | — | $ | 100 | ||||||||
Time deposit | 3,200 | — | — | 3,200 | ||||||||||||
Corporate debt securities | 23,775 | 11 | (7 | ) | 23,779 | |||||||||||
Corporate equity security | 1,233 | 838 | — | 2,071 | ||||||||||||
Government agency bonds | 10,958 | 3 | — | 10,961 | ||||||||||||
Total available-for-sale | $ | 39,266 | $ | 852 | $ | (7 | ) | $ | 40,111 | |||||||
F-42
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
December 31, 2007 | Cost | Gains | (Loss) | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
Classified as: | ||||||||||||||||
Cash equivalents | $ | 31,203 | ||||||||||||||
Short-term marketable securities | 6,837 | |||||||||||||||
Long-term marketable securities | 2,071 | |||||||||||||||
$ | 40,111 | |||||||||||||||
March 31, 2008 | Estimated Fair Value | |||
(In thousands) | ||||
Maturing in 90 days or less | $ | 23,296 | ||
Maturing between 90 days and one year | 5,513 | |||
Maturing in more than one year | 522 | |||
Total available-for-sale debt securities | $ | 29,331 | ||
NOTE 7. | OTHER COMPREHENSIVE INCOME (LOSS) |
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Net income (loss) | $ | (2,798 | ) | $ | 4,603 | |||
Change in unrealized gain (loss) on marketable securities and long-term investments | (996 | ) | 31 | |||||
Total comprehensive income (loss) | $ | (3,794 | ) | $ | 4,634 | |||
F-43
Table of Contents
NOTE 8. | NON-OPERATING INCOME, NET |
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Interest income | $ | 412 | $ | 431 | ||||
Impairment of investments | — | (500 | ) | |||||
Other | 65 | (17 | ) | |||||
Non-operating income (loss), net | $ | 477 | $ | (86 | ) | |||
NOTE 9. | INCOME TAXES |
NOTE 10. | NET INCOME (LOSS) PER SHARE |
NOTE 11. | BUSINESS SEGMENT INFORMATION AND CONCENTRATION OF CERTAIN RISKS |
F-44
Table of Contents
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Video Business: | ||||||||
DVD | 79 | % | 78 | % | ||||
VCD | 9 | % | 6 | % | ||||
License & royalty | (2 | )% | 4 | % | ||||
Other | 14 | % | 11 | % | ||||
Total Video Business | 100 | % | 99 | % | ||||
Digital Imaging Business | — | 1 | % | |||||
Total | 100 | % | 100 | % | ||||
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Segment net revenues: | ||||||||
Video | $ | 14,371 | $ | 17,670 | ||||
Digital Imaging | — | 102 | ||||||
Total net revenues | $ | 14,371 | $ | 17,772 | ||||
Segment operating income (loss): | ||||||||
Video | $ | 754 | $ | 10,431 | ||||
Digital Imaging | — | (2,066 | ) | |||||
Total segment operating income (loss) | 754 | 8,365 | ||||||
Unallocated corporate expenses | (3,490 | ) | (2,902 | ) | ||||
Operating income (loss) | $ | 2,736 | $ | 5,463 | ||||
F-45
Table of Contents
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
FE Global (China) Limited | — | 37 | % | |||||
CKD (Hong Kong) High Tech Company Limited | 15 | % | — | |||||
Weiking Industrial Company, Ltd. | 15 | % | — |
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Samsung Electronics Company | 45 | % | 18 | % | ||||
LG International Corporation | 13 | % | 15 | % | ||||
Xing Qiu | — | 24 | % |
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
Samsung Electronics Company | 61 | % | 32 | % | ||||
LG International Corporation | 23 | % | 34 | % | ||||
Weiking Industrial Company, Ltd. | — | 12 | % |
NOTE 12. | COMMITMENTS AND CONTINGENCIES |
Payment Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Operating lease obligations | $ | 663 | $ | 643 | $ | 20 | $ | — | $ | — | ||||||||||
Purchase obligations | 12,098 | 12,098 | — | — | — | |||||||||||||||
Total | $ | 12,761 | $ | 12,741 | $ | 20 | $ | — | $ | — | ||||||||||
F-46
Table of Contents
F-47
Table of Contents
• | Level 1 — Quoted prices in active markets for identical assets or liabilities | |
• | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities |
F-48
Table of Contents
NOTE 14. | FAIR VALUE MEASUREMENTS |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Money market funds | $ | 9,171 | $ | — | — | $ | 9,171 | |||||||||
Time deposit | — | 3,298 | — | 3,298 | ||||||||||||
Corporate debt securities | — | 8,047 | — | 8,047 | ||||||||||||
Corporate equity security | 1,042 | — | — | 1,042 | ||||||||||||
Government agency bonds | — | 17,986 | — | 17,986 | ||||||||||||
Total | $ | 10,213 | $ | 29,331 | $ | — | $ | 39,544 | ||||||||
F-49
Table of Contents
Table of Contents
Page | ||||||
ARTICLE I THE REINCORPORATION MERGER | 1 | |||||
Section 1.1 | The Reincorporation Merger | 1 | ||||
Section 1.2 | Effect of the Reincorporation Merger | 1 | ||||
Section 1.3 | Reincorporation Closing | 1 | ||||
Section 1.4 | Effective Time of the Reincorporation Merger | 1 | ||||
Section 1.5 | Certificate of Incorporation and Bylaws of ESS Delaware | 2 | ||||
Section 1.6 | Directors and Officers of ESS Delaware | 2 | ||||
ARTICLE II CONVERSION OF SECURITIES | 2 | |||||
Section 2.1 | Conversion of Capital Stock | 2 | ||||
Section 2.2 | Treatment of Company Options and Other Equity Awards | 2 | ||||
Section 2.3 | Treatment of Employee Stock Purchase Plan | 3 | ||||
ARTICLE III THE MERGER | 3 | |||||
Section 3.1 | The Merger | 3 | ||||
Section 3.2 | Effect of the Merger | 3 | ||||
Section 3.3 | Closing | 3 | ||||
Section 3.4 | Effective Time of the Merger | 3 | ||||
Section 3.5 | Certificate of Incorporation and Bylaws | 3 | ||||
Section 3.6 | Directors and Officers | 3 | ||||
ARTICLE IV CONVERSION OF SECURITIES | 4 | |||||
Section 4.1 | Conversion of ESS Delaware Capital Stock | 4 | ||||
Section 4.2 | Payment and Exchange of Certificates | 4 | ||||
Section 4.3 | Dissenting Shares | 5 | ||||
Section 4.4 | Treatment of ESS Delaware Options and Other Equity Awards | 6 | ||||
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY | 6 | |||||
Section 5.1 | Organization | 7 | ||||
Section 5.2 | Capitalization | 7 | ||||
Section 5.3 | Corporate Authorization | 8 | ||||
Section 5.4 | Governmental Authorization | 9 | ||||
Section 5.5 | Non-contravention | 9 | ||||
Section 5.6 | Company SEC Documents and Financial Statements | 9 | ||||
Section 5.7 | Internal Controls; Sarbanes-Oxley Act | 10 | ||||
Section 5.8 | Absence of Certain Changes | 11 | ||||
Section 5.9 | No Undisclosed Liabilities | 11 | ||||
Section 5.10 | Litigation | 11 | ||||
Section 5.11 | Employee Benefit Plans; ERISA | 11 | ||||
Section 5.12 | Taxes | 12 | ||||
Section 5.13 | Contracts | 13 | ||||
Section 5.14 | Properties | 14 | ||||
Section 5.15 | Intellectual Property | 14 | ||||
Section 5.16 | Labor Matters | 16 | ||||
Section 5.17 | Compliance with Laws; Permits | 16 | ||||
Section 5.18 | Information in the Proxy Statement and the Registration Statement | 17 | ||||
Section 5.19 | Insurance | 17 | ||||
Section 5.20 | Environmental Laws and Regulations | 17 | ||||
Section 5.21 | Opinions of Financial Advisors | 17 |
A-i
Table of Contents
Page | ||||||
Section 5.22 | Brokers | 17 | ||||
Section 5.23 | Affiliate Transactions | 17 | ||||
Section 5.24 | Takeover Statutes | 18 | ||||
Section 5.25 | Capitalization of Delaware Merger Sub; No Prior Activities | 18 | ||||
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER | 18 | |||||
Section 6.1 | Organization | 18 | ||||
Section 6.2 | Corporate Authorization | 18 | ||||
Section 6.3 | Governmental Authorization | 18 | ||||
Section 6.4 | Non-contravention | 18 | ||||
Section 6.5 | Sufficient Funds | 19 | ||||
Section 6.6 | Information in the Proxy Statement and the Registration Statement | 19 | ||||
Section 6.7 | Guarantee | 19 | ||||
Section 6.8 | Solvency of the Surviving Corporation | 19 | ||||
Section 6.9 | Capitalization of Merger Sub; No Prior Activities | 19 | ||||
Section 6.10 | Vote Required | 19 | ||||
ARTICLE VII CONDUCT OF BUSINESS PENDING THE MERGER | 20 | |||||
Section 7.1 | Interim Operations of the Company | 20 | ||||
Section 7.2 | Proxy Statement and Registration Statement; Company Shareholders’ Meeting | 22 | ||||
Section 7.3 | No Solicitation; Unsolicited Proposals | 23 | ||||
ARTICLE VIII ADDITIONAL AGREEMENTS | 24 | |||||
Section 8.1 | Notification of Certain Matters | 24 | ||||
Section 8.2 | Access to Information; Confidentiality | 24 | ||||
Section 8.3 | Consents and Approvals | 25 | ||||
Section 8.4 | Publicity | 26 | ||||
Section 8.5 | Directors’ and Officers’ Insurance and Indemnification | 27 | ||||
Section 8.6 | State Takeover Laws | 27 | ||||
Section 8.7 | Section 16 | 28 | ||||
Section 8.8 | Obligations of Merger Sub; Contribution to Merger Sub | 28 | ||||
Section 8.9 | Assumption of Benefit Plans; Employee Benefits Matters | 28 | ||||
Section 8.10 | Termination of 401(k) Plan | 28 | ||||
Section 8.11 | Treatment of Employee Stock Purchase Plan | 28 | ||||
Section 8.12 | Approval of the Merger | 29 | ||||
Section 8.13 | Assumption of Registration Statements | 29 | ||||
Section 8.14 | Maintenance of NASDAQ Listing | 29 | ||||
Section 8.15 | Resignation of Directors | 29 | ||||
ARTICLE IX CONDITIONS TO THE REINCORPORATION MERGER | 29 | |||||
Section 9.1 | Conditions to the Reincorporation Merger | 29 | ||||
Section 9.2 | Additional Conditions For the Benefit of Parent | 30 | ||||
Section 9.3 | Additional Conditions to Obligations of the Company and Delaware Merger Sub | 30 | ||||
Section 9.4 | Frustration of Reincorporation Closing Conditions | 30 | ||||
ARTICLE X CONDITIONS TO THE MERGER | 31 | |||||
Section 10.1 | Conditions to the Merger | 31 | ||||
Section 10.2 | Frustration of Closing Conditions | 31 |
A-ii
Table of Contents
Page | ||||||
ARTICLE XI TERMINATION | 31 | |||||
Section 11.1 | Termination | 31 | ||||
Section 11.2 | Effect of Termination | 32 | ||||
Section 11.3 | Fees and Expenses | 32 | ||||
Section 11.4 | Company Termination Fee | 32 | ||||
ARTICLE XII MISCELLANEOUS | 33 | |||||
Section 12.1 | Amendment and Modification; Waiver | 33 | ||||
Section 12.2 | Non-survival of Representations and Warranties | 33 | ||||
Section 12.3 | Notices | 34 | ||||
Section 12.4 | Certain Definitions | 34 | ||||
Section 12.5 | Terms Defined Elsewhere | 38 | ||||
Section 12.6 | Interpretation | 40 | ||||
Section 12.7 | Counterparts | 40 | ||||
Section 12.8 | Entire Agreement; No Third-Party Beneficiaries | 40 | ||||
Section 12.9 | Severability | 40 | ||||
Section 12.10 | Governing Law; Jurisdiction | 40 | ||||
Section 12.11 | Assignment | 41 | ||||
Section 12.12 | Enforcement; Remedies | 41 |
EXHIBITS AND SCHEDULES | ||
Exhibit A | Certificate of Incorporation of Delaware Merger Sub | |
Exhibit B | Bylaws of Delaware Merger Sub | |
Exhibit C | Amended and Restated Certificate of Incorporation of Surviving Corporation | |
Exhibit D | Amended and Restated Bylaws of Surviving Corporation | |
Exhibit E | Form of Limited Guarantee |
A-iii
Table of Contents
A-1
Table of Contents
A-2
Table of Contents
A-3
Table of Contents
A-4
Table of Contents
A-5
Table of Contents
A-6
Table of Contents
A-7
Table of Contents
A-8
Table of Contents
A-9
Table of Contents
A-10
Table of Contents
A-11
Table of Contents
A-12
Table of Contents
A-13
Table of Contents
A-14
Table of Contents
A-15
Table of Contents
A-16
Table of Contents
A-17
Table of Contents
A-18
Table of Contents
A-19
Table of Contents
A-20
Table of Contents
A-21
Table of Contents
A-22
Table of Contents
A-23
Table of Contents
A-24
Table of Contents
A-25
Table of Contents
A-26
Table of Contents
A-27
Table of Contents
A-28
Table of Contents
A-29
Table of Contents
A-30
Table of Contents
A-31
Table of Contents
A-32
Table of Contents
A-33
Table of Contents
(a) | if to Parent or Merger Sub, to: |
Imperium Partners Group, LLC 153 East 53rd Street, 29th Floor New York, New York 10022 Attention: John Michaelson Maurice Hryshko Facsimile:(212) 433-1361 |
2475 Hanover Street
Palo Alto, California 94304
Attention: Lior O. Nuchi
Facsimile:(650) 233-4545
(b) | if to the Company, Delaware Merger Sub or ESS Delware, to: |
48401 Fremont Boulevard
Fremont, California 94538
Attention: Robert L. Blair
Facsimile:(510) 492-1098
Latham & Watkins LLP 140 Scott Drive Menlo Park, California 94025 Attention: Christopher L. Kaufman Jamie K. Leigh Joshua M. Dubofsky Facsimile:(650) 463-2600 |
Orrick, Herrington & Sutcliffe LLP 1020 Marsh Road Menlo Park, California 94025 Attention: Peter Cohn Lowell Ness Facsimile:(650) 463-7401 |
A-34
Table of Contents
A-35
Table of Contents
A-36
Table of Contents
A-37
Table of Contents
Term | Section | |
401(k) Plan | 8.10 | |
Agreement | Introduction | |
Balance Sheet Date | 5.8(a) | |
Benefit Plans | 5.11(a) | |
CCC | Recitals | |
Certificate | 4.2(b) | |
Closing | 3.3 | |
Closing Date | 3.3 | |
Code | 4.2(e) | |
Company | Introduction | |
Company Agreement | 5.5 | |
Company Adverse Recommendation Change | 7.3(b) | |
Company Collective Bargaining Agreement | 5.16(b) | |
Company Disclosure Schedule | Article V | |
Company Financial Advisors | 5.21 | |
Company IP Agreements | 5.15(b) | |
Company Material Contract | 5.13(a) | |
Company Options | 2.2 | |
Company Permits | 5.17(b) | |
Company Recommendation | 5.3 |
A-38
Table of Contents
Term | Section | |
Company Representative | 7.3(a) | |
Company SEC Documents | 5.6(a) | |
Company Shareholder Approval | 5.3 | |
Company Shareholders’ Meeting | 7.2(e) | |
Company Source Code | 5.15(k) | |
Company Subsidiary | 5.1(a) | |
Company Termination Fee | 11.4(a) | |
Confidentiality Agreement | 7.3(a) | |
Covered Persons | 8.5(a) | |
Delaware Merger Sub | Introduction | |
DGCL | Recitals | |
D&O Insurance | 8.5(d) | |
Designated Date | 8.11 | |
Dissenting Shares | 4.3(a) | |
Dissenting Stockholder | 4.3(a) | |
Effective Time of the Merger | 3.4 | |
Effective Time of the Reincorporation Merger | 1.4 | |
ESPP | 2.3 | |
ESS Delaware | Recitals | |
ESS Delaware Options | 2.2 | |
ESS Delaware Recommendation | 5.3(c) | |
ESS Delaware Stockholder Approval | 5.3 | |
Financial Statements | 5.6(b) | |
GAAP | 5.6(b) | |
Grant Date | 5.2(c) | |
Guarantee | 6.7) | |
Guarantor | 6.7 | |
Indemnification Agreements | 8.5(a) | |
Merger | Recitals | |
Merger Consideration | 4.1(a) | |
Merger Sub | Introduction | |
Option Consideration | 4.4(a) | |
Outside Date | 11.1(b)(ii) | |
Parent | Introduction | |
Parent Material Adverse Effect | 6.1 | |
Paying Agent | 6.2(a) | |
Permitted Liens | 5.14(e) | |
Preferred Stock | 5.2(a) | |
Proxy Statement | 7.2(a) | |
Purchase Right | 2.3 | |
Registration Statement | 7.2(a) | |
Reincorporation Closing | 1.3 | |
Reincorporation Closing Date | 1.3 | |
Reincorporation Merger | Recitals |
A-39
Table of Contents
Term | Section | |
SEC | Article V | |
Solvent | 6.7 | |
Surviving Corporation | 3.1 | |
Third Party Representative | 7.3(a) | |
Voting Debt | 5.2(a) |
A-40
Table of Contents
A-41
Table of Contents
By | /s/ John C. Michaelson |
Title: | President |
By | /s/ John C. Michaelson |
Title: | President |
By | /s/ Robert L. Blair |
Title: | President and Chief Executive Officer |
By | /s/ Robert L. Blair |
Title: | President and Chief Executive Officer |
A-42
Table of Contents
B-1
Table of Contents
B-2
Table of Contents
B-3
Table of Contents
B-4
Table of Contents
California Offices:3000 Sand Hill Road, Building 2 • Suite 190, Menlo Park, CA 94025 (650) 854-9111
One Ferry Building, Suite 240, San Francisco, CA 94111 (415) 262-4860
C-1-1
Table of Contents
C-1-2
Table of Contents
C-1-3
Table of Contents
1. | reviewed the Proxy Statement and the Merger Agreement; | |
2. | reviewed ESS’s Annual Reports to Shareholders and Annual Reports onForm 10-K for the fiscal years ended December 31, 2005 through 2007, and its Quarterly Report on Form 10-Q for the period ended March 31, 2008; | |
3. | reviewed certain operating and financial information, including projections, provided to us by management relating to ESS’s business and prospects; | |
4. | met with certain members of ESS’s senior management to discuss its operations, historical financial statements and future prospects; | |
5. | discussed information concerning ESS with outside advisors to ESS; | |
6. | reviewed the historical market prices and trading volume of the common shares of ESS; and | |
7. | conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. |
C-2-1
Table of Contents
By: /s/ G. E. Matthews |
C-2-2
Table of Contents
D-1
Table of Contents
Orrick, Herrington & Sutcliffe LLP
1040 Marsh Road
Menlo Park, CA 94025
D-2
Table of Contents
Table of Contents
Page | ||||||
ARTICLE I CORPORATE OFFICES | E-1 | |||||
1.1 | Registered Office | E-1 | ||||
1.2 | Other Offices | E-1 | ||||
ARTICLE II MEETINGS OF STOCKHOLDERS | E-1 | |||||
2.1 | Place Of Meetings | E-1 | ||||
2.2 | Annual Meeting | E-1 | ||||
2.3 | Special Meeting | E-1 | ||||
2.4 | Notice Of Stockholders’ Meetings | E-2 | ||||
2.5 | Manner Of Giving Notice; Affidavit Of Notice | E-2 | ||||
2.6 | Quorum | E-2 | ||||
2.7 | Adjourned Meeting; Notice | E-2 | ||||
2.8 | Organization; Conduct of Business | E-2 | ||||
2.9 | Voting | E-2 | ||||
2.10 | Waiver Of Notice | E-3 | ||||
2.11 | Stockholder Action By Written Consent Without A Meeting | E-3 | ||||
2.12 | Record Date For Stockholder Notice; Voting; Giving Consents | E-3 | ||||
2.13 | Proxies | E-4 | ||||
ARTICLE III DIRECTORS | E-4 | |||||
3.1 | Powers | E-4 | ||||
3.2 | Number Of Directors | E-4 | ||||
3.3 | Election, Qualification And Term Of Office Of Directors | E-4 | ||||
3.4 | Resignation And Vacancies | E-5 | ||||
3.5 | Removal Of Directors | E-5 | ||||
3.6 | Fees And Compensation Of Directors | E-6 | ||||
3.7 | Chairman Of The Board Of Directors | E-6 | ||||
3.8 | Powers and Duties | E-6 | ||||
ARTICLE IV MEETINGS OF DIRECTORS | E-7 | |||||
4.1 | Place Of Meetings; Meetings By Telephone | E-7 | ||||
4.2 | Regular Meetings | E-8 | ||||
4.3 | Special Meetings; Notice | E-8 | ||||
4.4 | Quorum | E-8 | ||||
4.5 | Waiver Of Notice | E-8 | ||||
4.6 | Board Action By Written Consent Without A Meeting | E-9 | ||||
ARTICLE V COMMITTEES | E-9 | |||||
5.1 | Committees Of Directors | E-9 | ||||
5.2 | Committee Minutes | E-9 | ||||
5.3 | Meetings And Action Of Committees | E-9 | ||||
ARTICLE VI OFFICERS | E-10 | |||||
6.1 | Officers | E-10 | ||||
6.2 | Appointment Of Officers | E-10 | ||||
6.3 | Subordinate Officers | E-10 | ||||
6.4 | Term of Office and Compensation | E-10 | ||||
6.5 | Removal And Resignation Of Officers | E-10 |
E-i
Table of Contents
Page | ||||||
6.6 | Vacancies In Offices | E-10 | ||||
6.7 | Chief Executive Officer | E-10 | ||||
6.8 | Chairman of the Board | E-11 | ||||
6.9 | President | E-11 | ||||
5.8 | President Pro Tem | E-11 | ||||
6.11 | Vice Presidents | E-11 | ||||
6.12 | Secretary | E-11 | ||||
6.13 | Chief Financial Officer | E-12 | ||||
6.14 | Instruments in Writing | E-12 | ||||
6.15 | Authority And Duties Of Officers | E-13 | ||||
ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS | E-13 | |||||
7.1 | Indemnification Of Directors And Officers | E-13 | ||||
7.2 | Indemnification Of Others | E-13 | ||||
7.3 | Payment Of Expenses In Advance | E-13 | ||||
7.4 | Indemnity Not Exclusive | E-13 | ||||
7.5 | Insurance | E-14 | ||||
7.6 | Conflicts | E-14 | ||||
7.7 | Effect of Amendment | E-14 | ||||
ARTICLE VIII RECORDS AND REPORTS | E-14 | |||||
8.1 | Maintenance And Inspection Of Records | E-14 | ||||
8.2 | Inspection By Directors | E-15 | ||||
ARTICLE IX GENERAL MATTERS | E-15 | |||||
9.1 | Checks | E-15 | ||||
9.2 | Execution Of Corporate Contracts And Instruments | E-15 | ||||
9.3 | Business Combinations with Interested Stockholders | E-15 | ||||
9.4 | Stock Held By the Corporation | E-15 | ||||
9.5 | Stock Certificates; Partly Paid Shares | E-15 | ||||
9.6 | Special Designation On Certificates | E-16 | ||||
9.7 | Lost Certificates | E-16 | ||||
9.8 | Construction; Definitions | E-16 | ||||
9.9 | Dividends | E-16 | ||||
9.10 | Fiscal Year | E-16 | ||||
9.11 | Seal | E-16 | ||||
9.12 | Transfer Of Stock | E-16 | ||||
9.13 | Stock Transfer Agreements | E-17 | ||||
9.14 | Registered Stockholders | E-17 | ||||
9.15 | Facsimile Signature | E-17 | ||||
ARTICLE X AMENDMENTS | E-17 | |||||
10.1 | By Stockholders | E-17 | ||||
10.2 | By the Board of Directors | E-17 | ||||
10.3 | Certification and Inspection of Bylaws | E-17 |
E-ii
Table of Contents
E-1
Table of Contents
E-2
Table of Contents
E-3
Table of Contents
E-4
Table of Contents
E-5
Table of Contents
E-6
Table of Contents
E-7
Table of Contents
E-8
Table of Contents
E-9
Table of Contents
E-10
Table of Contents
E-11
Table of Contents
E-12
Table of Contents
E-13
Table of Contents
E-14
Table of Contents
E-15
Table of Contents
E-16
Table of Contents
E-17