UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary proxy statement
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Confidential, for use of the Commission only (as permitted by Rule 14a-6(e)(2))
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Definitive proxy statement
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Definitive additional materials
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Soliciting material pursuant to §240.14a-12
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ESS Technology, Inc.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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(2)
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Aggregate number of securities to which transaction applies:
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(3)
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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):
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(4)
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Proposed maximum aggregate value of transaction:
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(5)
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Total fee paid:
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Fee paid previously with preliminary materials.
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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.
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(1)
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Amount Previously Paid: $2,278.34
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(2)
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Form, Schedule or Registration Statement No.: 333-150234
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(3)
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Filing Party: Echo Technology (Deleware) Inc.
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(4)
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Date Filed: 4-14-08
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JOINT
PROXY STATEMENT/PROSPECTUS
MERGER PROPOSAL YOUR VOTE IS IMPORTANT
ESS
TECHNOLOGY, INC.
48401 Fremont Boulevard
Fremont, CA 94538
May 27, 2008
To Our Shareholders:
You are cordially invited to attend the annual meeting of
shareholders of ESS Technology, Inc., or ESS, a California
corporation, at the Fremont Marriott, located at 46100 Landing
Parkway, Fremont, CA 94538, on June 27, 2008 at 9:00 a.m.
local time.
At the meeting, our shareholders will be asked to approve the
sale of ESS to an affiliate of Imperium Partners Group, LLC, or
Imperium, for $1.64 per share in cash, without interest. 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 first must reincorporate from
California into Delaware through a reincorporation merger with
our wholly owned subsidiary, Echo Technology (Delaware), Inc.,
or Echo, and which we refer to after the time of the
reincorporation merger as ESS Delaware. If the reincorporation
merger is approved by our shareholders, your ESS common stock
will automatically be converted into ESS Delaware common stock
in the reincorporation merger and you will become a stockholder
of ESS Delaware. Immediately following the consummation of the
reincorporation merger, ESS Delaware will be acquired by an
affiliate of Imperium by merging a merger subsidiary owned by
that affiliate of Imperium into ESS Delaware, which we refer to
as the cash-out merger. Under the merger agreement governing the
sale to Imperium, which we refer to as the merger agreement, at
the time of the cash-out merger, your newly issued shares of ESS
Delaware common stock, other than those as to which you properly
exercise appraisal rights, will be converted into the right to
receive $1.64 in cash per share, without interest.
At the annual meeting, you will also be asked to elect directors
to the board of directors of ESS. The ESS board of directors has
nominated 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. If our
shareholders approve the sale to Imperium, the directors on our
board of directors will resign or be replaced in connection with
the mergers.
Our common stock is listed on the NASDAQ Global Market under the
symbol ESST. Echo Technology (Delaware), Inc.s
common stock is not currently listed on any stock exchange. As
soon as practicable following the closing of the reincorporation
merger, we intend to notify the Nasdaq Stock Market of the
reincorporation of ESS to change its place of organization from
California to Delaware.
In order to approve the sale to Imperium, our shareholders must
both approve the reincorporation merger at the meeting and
provide a sufficient number of advance proxies at or prior to
the annual meeting to allow approval of the cash-out merger
immediately following the consummation of the reincorporation
merger. We encourage you to carefully read the accompanying
joint proxy statement/prospectus, which includes additional
detail on the structure of the reincorporation merger and the
cash-out merger and how to vote your shares.
Our board of directors recommends that our shareholders vote
FOR
approval of the principal terms of the
reincorporation merger. Our board of directors also recommends
that our shareholders vote
FOR
each of our
nominees for election to the board of directors and that our
shareholders vote
FOR
the proposal to grant
discretionary authority to our management to vote your shares to
adjourn or postpone the annual meeting, if necessary, to solicit
additional proxies 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 merger
and/or
to
solicit additional advance proxies relating to the adoption of
the merger agreement by the stockholders of ESS Delaware.
In addition, our board of directors recommends that our
shareholders provide an advance proxy authorizing the execution
and delivery of a written consent adopting the merger agreement
with respect to the shares of common stock of ESS Delaware you
would receive in the reincorporation merger. The board of
directors of Echo Technology (Delaware), Inc. also recommends
that the stockholders of ESS Delaware adopt the merger
agreement.
We encourage you to carefully read the accompanying joint
proxy statement/prospectus before voting, including the section
entitled
Risk Factors
beginning on
page 12
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Your vote is very important.
Whether or not
you plan to attend the annual meeting, please take the time to
vote by completing and mailing the enclosed proxy card and
advance proxy card. If your shares are held in street
name, you must instruct your broker in order to vote.
Sincerely,
Robert L. Blair
Chief Executive Officer
ESS Technology, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THIS
TRANSACTION OR THE SECURITIES TO BE ISSUED PURSUANT TO THE
REINCORPORATION MERGER, OR DETERMINED IF THE JOINT PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The accompanying joint proxy statement/prospectus is dated
May 27, 2008, and is first being mailed to shareholders of
ESS on or about May 27, 2008.
ADDITIONAL
INFORMATION
The accompanying joint proxy statement/prospectus incorporates
important business and financial information about ESS from
documents that ESS has filed with the Securities and Exchange
Commission, which we refer to as the SEC, that are not included
in or delivered with the joint proxy statement/prospectus. For a
list of documents incorporated by reference into this joint
proxy statement/prospectus, see
Where You Can Find More
Information
beginning on page 154.
You can obtain the documents incorporated by reference into this
joint proxy statement/prospectus by accessing the SEC website
maintained at www.sec.gov. ESS will also provide you with copies
of the documents incorporated by reference into this joint proxy
statement/prospectus, without charge, from ESS website,
http://www.esstech.com,
or upon written or oral request to:
ESS
TECHNOLOGY, INC.
48401
Fremont Boulevard
Fremont, CA 94538
Attention: Investor Relations
Telephone:
(510) 492-1088
Please request documents from ESS no later than June 20,
2008.
Information contained on ESS website does not constitute
part of the accompanying joint proxy statement/prospectus.
ESS
TECHNOLOGY, INC.
48401 Fremont Boulevard
Fremont, CA 94538
(510) 492-1088
NOTICE OF
ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 27, 2008
Dear Shareholders of ESS Technology, Inc.:
You are cordially invited to an annual meeting of shareholders
of ESS Technology, Inc., a California corporation, at the
Fremont Marriott, located at 46100 Landing Parkway, Fremont,
California 94538, on June 27, 2008 at 9:00 am local
time. Only shareholders who hold shares of our common stock at
the close of business on May 20, 2008, the record date for
the annual meeting, are entitled to vote at the annual meeting
and any adjournments or postponements of the annual meeting.
At the annual meeting, you will be asked to consider and vote
upon the following proposals:
1. The principal terms of the reincorporation merger
pursuant to which ESS Technology, Inc. will reincorporate from
California into Delaware.
2. The election of directors of ESS Technology, Inc., a
California corporation.
3. Adjournment or postponement of the annual meeting to a
later date or dates, if necessary, to solicit additional proxies
if there are insufficient proxies given prior to the time of the
annual meeting 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 merger
and/or
additional advance proxies relating to the adoption of the
merger agreement by the stockholders of ESS Delaware described
below, which we refer to as the adjournment proposal.
In addition, we are also asking you to consider and approve the
sale of ESS to an affiliate of Imperium following the
reincorporation merger through the cash-out merger of a
subsidiary of that affiliate of Imperium with ESS by providing a
completed and executed copy of the advance proxy included with
the accompanying joint proxy statement/prospectus.
These proposals, as well as the advance proxy, are described
more fully in the accompanying joint proxy statement/prospectus.
Please give your careful attention to all of the information
included, or incorporated by reference, in the joint proxy
statement/prospectus.
Our board of directors recommends that our shareholders vote
FOR
approval of the principal terms of the
reincorporation merger. Our board of directors also recommends
that our shareholders vote
FOR
each of our
nominees for election to the board of directors and that our
shareholders vote
FOR
the proposal to grant
discretionary authority to our management to vote your shares to
adjourn or postpone the annual meeting, if necessary, to solicit
additional proxies 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 merger
and/or
to
solicit additional advance proxies relating to the adoption of
the merger agreement by the stockholders of ESS Delaware.
In addition, our board of directors recommends that our
shareholders provide an advance proxy authorizing the execution
and delivery of a written consent adopting the merger agreement
with respect to the shares of common stock of ESS Delaware you
would receive in the reincorporation merger. The board of
directors of Echo recommends that the stockholders of ESS
Delaware adopt the merger agreement.
The accompanying joint proxy statement/prospectus contains
detailed information about ESS, Echo, the director nominees, the
reincorporation merger and the cash-out merger. We urge you to
carefully read the joint proxy statement/prospectus in its
entirety. For specific instructions on how to vote your shares,
please refer to the section of the joint proxy
statement/prospectus entitled
The Annual Meeting and
the Written Consent
beginning on page 97.
Whether or not you plan to attend the annual meeting, please
vote your shares and provide an advance proxy authorizing the
persons named therein to include your shares in the written
consent adopting the merger agreement as soon as possible so
that your shares are represented at the meeting and in the
written consent adopting the merger agreement and approving the
cash-out merger. If you do not vote, it may make it more
difficult for us to approve the principal terms of the
reincorporation merger, elect new directors, and transact other
business at the annual meeting because your shares may not be
counted for purposes of determining whether a quorum is present
at the annual meeting. Since approval of the principal terms of
the reincorporation merger requires the affirmative vote of the
shares of ESS common stock outstanding as of the record date, a
failure to vote your shares or an abstention will have the same
effect as voting against the reincorporation merger. In
addition, since adoption of the merger agreement requires the
affirmative vote of the outstanding shares of ESS Delaware, a
failure to provide an advance proxy will have the same effect as
voting against the cash-out merger. As a result, failure to
provide an advance proxy may make it more difficult for ESS
Delaware to adopt the merger agreement and consummate the
cash-out merger following the reincorporation merger because
your shares will not be counted for purposes of determining
whether a sufficient number of advance proxies have been granted
to adopt the merger agreement. The cash-out merger is
conditioned upon the closing of the reincorporation merger and
we will not consummate the reincorporation merger unless we
receive a sufficient number of advance proxies to permit
consummation of the cash-out merger following the
reincorporation merger. Accordingly, you are urged to complete,
sign and date the enclosed proxy card and advance proxy and
return them. Your vote is important regardless of the number of
shares you own.
By Order of the ESS board of directors,
Robert L. Blair
Chief Executive Officer
Fremont, California
May 27, 2008
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FINANCIAL STATEMENTS
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F-1
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Agreement and Plan of Merger
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Section 262 of the Delaware General Corporation Law
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Fairness Opinion of Needham & Company, LLC
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Fairness Opinion of Sutter Securities Incorporated
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Certificate of Incorporation of ESS Delaware
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Bylaws of ESS Delaware
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iv
The following are some questions that you may have regarding
the annual meeting of ESS and the mergers and brief answers to
such questions. We urge you to read carefully the entirety of
this joint proxy statement/prospectus because the information in
this section does not provide all of the information that may be
important to you with respect to the approval of the principal
terms of the reincorporation merger, the issuance of ESS
Delaware common stock in connection with the reincorporation
merger, the adoption of the merger agreement, or the payment of
the merger consideration in connection with the cash-out merger.
Additional information is also contained in the annexes to, and
the documents incorporated by reference in, this joint proxy
statement/prospectus. In this joint proxy statement/prospectus,
as used with respect to the period prior to the consummation of
the reincorporation merger, the terms we,
us, our and the Company
refer to ESS Technology, Inc., a California corporation, which
we also refer to as ESS and, following the
reincorporation merger, the terms we,
us, our and the Company
refer to Echo Technology (Delaware), Inc., a Delaware
corporation, which will be the surviving corporation in the
reincorporation merger, and which we refer to as ESS
Delaware. We refer to Echo Technology (Delaware), Inc.
during the period prior to the consummation of the
reincorporation merger as Echo.
GENERAL
QUESTIONS AND ANSWERS RELATING TO THE ANNUAL MEETING OF
ESS
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Q:
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Why am I receiving this joint proxy statement/prospectus?
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A:
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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.
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Q:
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What is this joint proxy statement/prospectus?
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A:
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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.
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This joint proxy statement/prospectus contains important
information about:
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the reincorporation of ESS through its merger with
and into Echo, which we refer to as the reincorporation merger;
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the subsequent cash-out merger of an affiliate of
Imperium with and into ESS Delaware, which we refer to as the
cash-out merger;
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the election of directors to our board of directors;
and
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the annual meeting and the other business to be
conducted at the annual meeting.
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You should read this joint proxy statement/prospectus carefully.
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Q:
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When and where is the annual meeting of ESS shareholders?
(See page 97)
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A:
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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.
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Q:
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Who is soliciting my proxy? (See page 97)
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A:
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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.
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v
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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.
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Q:
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Who is paying for this solicitation? (See page 102)
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A:
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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.
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Q:
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How may I communicate with the ESS or Echo board of
directors? (See page 91)
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A:
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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.
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Q:
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Where can I find more information about ESS and Echo?
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A:
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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.
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GENERAL
QUESTIONS AND ANSWERS RELATING TO THE MERGERS
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Q:
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What is the reincorporation merger?
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A:
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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.
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Q:
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What is the cash-out merger? (See page 59)
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A:
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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.
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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.
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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.
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vi
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Q:
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When will the mergers be completed and what approvals are
required to complete the mergers? (See page 71)
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Record Date and
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Time (Date of
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Eligibility to Vote)
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Date of Vote
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Required Vote
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Time of Effectiveness
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Reincorporation Merger
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May 20, 2008
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June 27, 2008
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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
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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
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Cash-Out Merger
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Immediately following the effective time of the reincorporation
merger, which is expected to be before the opening of trading on
the NASDAQ Global Market
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The same date as the record date for the cash-out merger
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A majority of the outstanding shares of ESS Delaware common
stock entitled to vote must vote
FOR
the adoption of the merger agreement
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Immediately following the adoption of the merger agreement by
the stockholders (acting by written consent pursuant to the
advance proxies)
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Q:
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Why are we reincorporating? (See page 42)
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A:
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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.
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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.
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Q:
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Following the reincorporation merger, what will I receive
upon completion of the cash-out merger?
(See page 71)
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A:
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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.
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vii
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|
Q:
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Will you complete the reincorporation merger if the cash-out
merger cannot be completed? (See page 71)
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A:
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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.
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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.
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Q:
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Why am I being asked to vote on the mergers? (See
page 101)
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A:
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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.
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Q:
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What is an advance proxy? (See page 102)
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A:
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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.
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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.
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Q:
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What is the difference between a proxy and an advance proxy?
(See page 102)
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A:
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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.
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Q:
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What is the difference between an advance proxy and the
written consent? (See page 101)
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A:
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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.
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Q:
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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)
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A:
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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.
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viii
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Q:
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When do you expect the mergers to be completed? (See
page 71)
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A:
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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.
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Q:
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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?
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A:
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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.
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Q:
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Should I send in my stock certificates representing shares of
ESS common stock now? (See page 72)
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A:
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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.
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Q:
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Am I entitled to dissenters rights/appraisal rights in
connection with the mergers? (See page 54)
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A:
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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.
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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.
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Under California law, holders of ESS common stock are not
entitled to dissenters rights in connection with the
reincorporation merger.
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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)
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A:
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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.
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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
participants payroll withholding account to the purchase
of whole shares of ESS common stock in accordance with the terms
of the ESPP.
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Q:
|
|
Is it possible that the reincorporation merger will not be
voted on at the annual meeting? (See page 102)
|
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A:
|
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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.
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Q:
|
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Who can help answer my questions? (See page 154)
|
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A:
|
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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
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solicitation agent, MacKenzie, at
800-322-2885
(toll-free) or
212-929-5500
(collect), or write to MacKenzie, 105 Madison Avenue, New York,
New York 10016.
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GENERAL
QUESTIONS AND ANSWERS RELATING TO MATTERS TO BE CONSIDERED AT
THE ANNUAL MEETING OF ESS
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|
|
Q:
|
|
What matters will be voted upon at the annual meeting of
shareholders? (See page 97)
|
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A:
|
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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.
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Q:
|
|
Who are the director nominees? (See page 89)
|
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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.
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Q:
|
|
Why did ESS not hold its annual meeting of shareholders in
2007? (See page 12)
|
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A:
|
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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.
|
GENERAL
QUESTIONS AND ANSWERS RELATING TO VOTING AT THE ANNUAL MEETING
OF ESS AND SUBMITTING AN ADVANCE PROXY
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|
Q:
|
|
What is the record date for the annual meeting? (See
page 98)
|
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A:
|
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The record date for the annual meeting is May 20, 2008.
|
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Q:
|
|
What is the deadline for submitting a proxy and an advance
proxy? (See page 98)
|
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A:
|
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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.
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Q:
|
|
Can I attend the ESS annual meeting and vote at the meeting?
(See page 100)
|
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A:
|
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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.
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Q:
|
|
What constitutes a quorum for purposes of the annual meeting?
(See page 101)
|
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A:
|
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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.
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Q:
|
|
What vote is needed in order to elect directors or adjourn
the annual meeting? (See page 100)
|
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A:
|
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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
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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.
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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.
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Q:
|
|
How can I vote at the annual meeting? (See page 98)
|
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A:
|
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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.
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Q:
|
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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)
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A:
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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.
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Q:
|
|
What if I sell my shares of ESS after providing an advance
proxy? (See page 99)
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A:
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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.
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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.
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Q:
|
|
What if I hold my shares in street name? (See
page 102)
|
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A:
|
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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.
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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
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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.
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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.
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|
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:
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|
delivering a valid, later-dated proxy by mail,
telephone or Internet, in each case before the annual meeting;
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|
delivering a signed written notice to the Secretary
of ESS before the annual meeting; or
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|
appearing at the annual meeting and voting in person
by ballot. Your attendance at the annual meeting alone will not
revoke your proxy.
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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).
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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.
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Q:
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What happens if I do not indicate how my shares are to be
voted on my proxy or advance proxy card? (See page 100)
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A:
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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.
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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.
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Q:
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Why is my vote important? (See page 101)
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A:
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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.
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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.
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Q:
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What do I need to do now? (See page 98)
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A:
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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.
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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.
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xii
SUMMARY
This summary highlights selected information from this joint
proxy statement/prospectus and may not contain all of the
information that is important to you. To understand the mergers
fully, and for a more complete description of the legal terms of
the mergers, you should carefully read this entire joint proxy
statement/prospectus, the annexes attached to this joint proxy
statement/prospectus and the documents referred to or
incorporated by reference in this joint proxy
statement/prospectus. We have included page references in
parentheses to direct you to the appropriate place in this joint
proxy statement/prospectus for a more complete description of
the topics presented in this summary.
The
Mergers (See page 26)
General
On February 21, 2008, ESS, Echo, Parent, and Merger Sub
entered into the merger agreement. Under the merger agreement,
at the effective time of the reincorporation merger, ESS will be
merged with and into Echo with Echo surviving the
reincorporation merger as ESS Delaware. Immediately following
the consummation of the reincorporation merger, Merger Sub will
be merged with and into ESS Delaware in the cash-out merger with
ESS Delaware surviving the cash-out merger as the surviving
corporation.
Consideration
Received in the Mergers (See page 71)
Shareholders of ESS whose shares are converted in the
reincorporation merger into shares of ESS Delaware and who hold
those shares of ESS Delaware through the consummation of the
cash-out merger will be entitled to receive $1.64 per share in
cash, without interest, unless they properly exercise their
appraisal rights under Section 262 of the Delaware General
Corporation Law. For example, an ESS shareholder holding
1,000 shares of ESS common stock would have the right to
receive 1,000 shares of ESS Delaware common stock in the
reincorporation merger, which would be converted into the right
to receive $1,640 in cash if the shareholder continues to hold
those shares through the consummation of the cash-out merger.
Upon consummation of the cash-out merger, ESS Delaware will
become a wholly owned subsidiary of Parent.
The
Parties to the Merger Agreement
ESS Technology, Inc.
Echo Technology (Delaware), Inc.
48401 Fremont Boulevard
Fremont, CA 94538
(510) 492-1088
ESS Technology, Inc., or ESS, designs and markets
high-performance digital video processors for the consumer
market. ESS, headquartered in Fremont, California, has research
and development, sales, and technical support offices worldwide.
Echo Technology (Delaware), Inc., or Echo, is a wholly owned
subsidiary of ESS, formed by ESS in anticipation of the
reincorporation merger. Echo has de minimis assets and no
operations.
Semiconductor Holding Corporation
Echo Mergerco, Inc.
c/o Imperium
Partners Group, LLC
153 East 53rd Street, 29th Floor
New York, NY 10022
(212) 433-1360
Echo Mergerco, Inc., an affiliate of Imperium, or Merger Sub, is
a wholly owned subsidiary of Semiconductor Holding Corporation,
a Delaware corporation, or Parent. Both Merger Sub and Parent
were formed by an investment fund sponsored by Imperium Master
Fund, Ltd., which in turn is an affiliate of Imperium Partners
Group, LLC, or Imperium, in anticipation of the cash-out merger.
Merger Sub has de minimis assets and no operations. Imperium is
an institutional asset management firm based in New York City.
Imperium makes structured investments in public and private
growth companies with a focus on the technology and biotech
sectors.
1
Financing
(See page 74)
It is estimated that the total amount of funds necessary to
complete the mergers and the related transactions is
approximately $ 62.6 million, which includes approximately $
58.5 million to be paid out to stockholders of ESS Delaware
following the reincorporation merger and holders of other
equity-based interests in ESS Delaware, in each case following
the cash-out merger, with the remainder to be applied to pay
fees and expenses related to the mergers and the related
transactions. These payments are expected to be funded by a
combination of cash and short term investments held by ESS
Delaware at the time of the cash-out merger and equity
contributions by an entity sponsored by Imperium. The closing of
the mergers is not conditioned on Parent or Merger Sub obtaining
the proceeds of any financing.
Interests
of Directors and Executive Officers in the Mergers (See
page 53)
In considering the recommendation of the ESS board of directors
that you vote
FOR
the approval of the
principal terms of the reincorporation merger and that you
provide an advance proxy authorizing the execution and delivery
of a written consent adopting the merger agreement with respect
to the shares of common stock of ESS Delaware that you would
hold following the consummation of the reincorporation merger,
and the recommendation of the board of directors of Echo that
the stockholders of ESS Delaware adopt the merger agreement, you
should be aware that our directors and executive officers, and
the directors and executive officers of Echo may have interests
in the mergers that are in addition to or differ from interests
you may have as a shareholder of ESS or a stockholder of ESS
Delaware, including the following:
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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;
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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
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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.
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You should also be aware that, to our knowledge,
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One of Imperiums 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.
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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.
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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 Imperiums 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 Imperiums chief executive officer.
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was engaged as a co-manager for our initial public offering in
1995,
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had an advisory role in connection with the spin-off of our
subsidiary Vialta in 2001,
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worked as lead underwriter for our follow-on public offering in
2002, and
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had an advisory role in connection with our acquisitions of
Divio and Pictos Technologies in 2003.
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See
Proposal One The Reincorporation
Merger Advance Proxy The Cash-Out Merger
Interests of Directors and Executive Officers in the
Mergers
beginning on page 53.
The strategic transaction committee of our board of directors,
which we refer to as the strategic transaction committee, and
the strategic transaction committee of Echos board of
directors, which we refer to as the Echo strategic transaction
committee, and the boards of directors of both ESS and Echo were
aware of these interests and considered them, among other
matters, in approving the mergers and declaring the advisability
of the merger agreement.
Mr. Alexander was not present at the meeting of our board
of directors at which approval of the sale to Imperium and entry
into the merger agreement with affiliates of Imperium was
considered and approved. Mr. Blair was present at that
meeting of our board of directors, however, Mr. Blair
recused himself from the portion of that meeting during which
the sale to Imperium and entry into the merger agreement with
affiliates of Imperium was considered and approved, and
Mr. Blair abstained from voting thereon.
Share
Ownership of ESS Directors and Executive
Officers
As of the record date for the ESS annual meeting, ESS
directors, executive officers and their affiliates, as a group,
owned and were entitled to vote 26,727 shares of ESS common
stock, or less than 1% of the outstanding shares of ESS common
stock.
The directors and executive officers have informed us that they
intend to vote all of their shares of our common stock
FOR
the approval of the principal
terms of the reincorporation merger and
FOR
any adjournment of the annual
meeting, if necessary or appropriate, to solicit additional
proxies
and/or
advance proxies. In addition, the directors and executive
officers have informed us that they intend to provide advance
proxies with respect to all of their shares of our common stock.
Regulatory
Approvals (See page 82)
Except for the filing of a certificate of merger in Delaware and
the filing of an officers certificate and certain other
documents in California at or before the closing of the
reincorporation merger and the filing of a certificate of merger
in Delaware at or before the closing of the cash-out merger, we
are unaware of any material federal, state or foreign regulatory
requirements or approvals required for the execution of the
merger agreement or completion of the mergers.
Differences
between the Rights of ESS Shareholders and ESS Delaware
Stockholders (See page 59)
Holders of common stock of ESS immediately prior to the
effective time of the reincorporation merger will, at the
effective time of the reincorporation merger, become holders of
common stock of ESS Delaware, and their rights as stockholders
will be governed by the certificate of incorporation and bylaws
of ESS Delaware and the Delaware General Corporation Law.
Although they are designed to be as similar as possible, there
are, nevertheless, certain differences between ESS
articles of incorporation and ESS Delawares certificate of
incorporation and their respective bylaws, and there are a
number of differences between the Delaware General Corporation
Law and the California Corporations Code. See
Differences between the Rights of ESS Shareholders and
ESS Delaware Stockholders
beginning on page 59
for additional discussion of certain differences between the
charter documents of ESS and ESS Delaware and certain
differences between the Delaware General Corporation Law and
California Corporations Code.
3
Material
U.S. Federal Income Tax Consequences (See
page 58)
The reincorporation merger is intended to qualify as a
reorganization under Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the
Code). ESS tax counsel, Orrick,
Herrington & Sutcliffe LLP (Tax Counsel),
has opined that the reincorporation merger should constitute a
non-taxable transaction for holders of ESS common stock. Tax
Counsel has further opined that the cash-out merger will be a
fully taxable transaction to the holders of ESS Delaware common
stock. For a discussion of Tax Counsels opinion and the
United States federal income tax consequences of the
reincorporation merger and the cash-out merger, see
Material United States Federal Income Tax Consequences
to Shareholders of the Reincorporation Merger and the Cash-Out
Merger
, beginning on page 58.
The
Reincorporation Merger (See page 58)
Recommendation
of the ESS Board of Directors with Respect to the
Reincorporation Merger (See page 45)
After careful consideration and based in part on the
recommendation of the strategic transaction committee, the ESS
board of directors determined that entry into the merger
agreement and consummation of the transactions contemplated by
the merger agreement was fair to and in the best interests of
ESS and the shareholders of ESS, and our board of directors
approved and declared advisable the merger agreement and the
transactions contemplated by the merger agreement, including the
reincorporation merger.
Accordingly, our board of directors
recommends that our shareholders vote
FOR
approval of the principal terms of the reincorporation merger.
In addition, our board of directors recommends that our
shareholders provide an advance proxy authorizing the execution
and delivery of a written consent adopting the merger agreement
with respect to the shares of common stock of ESS Delaware you
would receive in the reincorporation merger.
In reaching its decision, our board of directors evaluated a
variety of business, financial and market factors and consulted
with legal and financial advisors. In considering the
recommendation of the ESS board of directors with respect to the
reincorporation merger, you should be aware that certain of our
directors and executive officers have interests in the merger
that are in addition to or differ from your interests as a
shareholder of ESS. See
Proposal One
The Reincorporation Merger Advance Proxy The
Cash-Out Merger Interests of Directors and Executive
Officers in the Mergers
beginning on page 26.
For the factors considered by our board of directors in reaching
its decision to approve the merger agreement and the
reincorporation merger, see
Proposal One The Reincorporation
Merger Advance Proxy The Cash-Out Merger
Reasons for the Mergers
beginning on page 26.
Listing
of ESS Delaware Common Stock on the NASDAQ Global Market (See
page 12)
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 can not 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.
Restrictions
on the Ability to Sell ESS Delaware Common Stock (See
page 83)
The shares of ESS Delaware common stock to be issued in
connection with the reincorporation merger will be registered
under the Securities Act of 1933, as amended, which we refer to
as the Securities Act, and will be freely transferable, except
as noted in the following paragraph and except for shares of ESS
Delaware common stock issued to any person who is deemed to be
an affiliate of ESS prior to the reincorporation
merger and except for shares of restricted ESS Delaware common
stock issued in exchange for ESS restricted common stock, which,
in each case, will be subject to the same restrictions on
transfer as were the shares of ESS restricted common stock for
which they were exchanged.
4
In order to ensure that, following the consummation of the
reincorporation merger, a sufficient number of effective advance
proxies have been received to authorize the adoption of the
merger agreement and that the shares of common stock of ESS
Delaware that are the subject of such advance proxies are not
transferred between the time of the consummation of the
reincorporation merger and the consummation of the cash-out
merger, each of ESS and Echo has agreed, to the extent
reasonably practicable and subject to compliance with all
applicable laws and rules and regulations of the NASDAQ Global
Market, to use its commercially reasonable efforts to cause
trading in shares of ESS Delaware common stock on the NASDAQ
Global Market (subsequent to listing thereof, if any) to be
suspended immediately following the effective time of the
reincorporation merger and to close the stock transfer books of
ESS Delaware immediately following the effective time of the
reincorporation merger so that thereafter there shall be no
further registration of transfers of shares of ESS Delaware
common stock on the records of ESS Delaware. If we are able to
cause trading in shares of ESS Delaware common stock on the
NASDAQ Global Market to be suspended immediately following the
effective time of the reincorporation merger
and/or
to
close the stock transfer books of ESS Delaware immediately
following the effective time of the reincorporation merger, your
ability to sell or otherwise transfer shares of ESS Delaware
common stock you would receive in the reincorporation merger
between the closing of the reincorporation merger and the
closing of the cash-out merger will be limited and you may not
be able to transfer any such shares of ESS Delaware common stock
at all during the time period between the consummation of the
two mergers. Please see
Risk Factors Risks
Associated with the Mergers 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
beginning on page 14.
Directors
and Officers Following the Reincorporation Merger
The directors and officers of ESS immediately prior to the
reincorporation merger will be the directors and officers of ESS
Delaware following the reincorporation merger (other than
Messrs. Alfred Stein, Peter Mok, David Lee and John Marsh,
who we expect to resign from the board of directors of ESS and
Echo prior to the consummation of the reincorporation merger).
The
Cash-Out Merger (See page 59)
Recommendation
of the Board of Directors of Echo with Respect to the Cash-Out
Merger (See page 59)
After careful consideration and based in part on the
recommendation of the Echo strategic transaction committee, the
board of directors of Echo determined that entry into the merger
agreement and consummation of the transactions contemplated by
the merger agreement was fair to and in the best interests of
Echo and its stockholders, and determined that, following the
reincorporation merger, entry into the merger agreement and
consummation of the transactions contemplated by the merger
agreement would be fair to and in the best interests of ESS
Delaware, as the surviving corporation in the reincorporation
merger, and the stockholders of ESS Delaware. The board of
directors of Echo approved and declared advisable the merger
agreement and the transactions contemplated by the merger
agreement, including the reincorporation merger and the cash-out
merger.
Accordingly, the board of directors of Echo
recommends that the stockholders of ESS Delaware adopt the
merger agreement.
In reaching its decision, the board of directors of Echo
evaluated a variety of business, financial and market factors
and consulted with legal and financial advisors. In considering
the recommendation of the board of directors of Echo with
respect to the cash-out merger, you should be aware that certain
of the directors and executive officers of Echo have interests
in the cash-out merger that are in addition to or differ from
your interests as a stockholder. See
Proposal One The Reincorporation
Merger Advance Proxy The Cash-Out Merger
Interests of Directors and Executive Officers in the
Mergers
beginning on page 53.
For the factors considered by the board of directors of Echo in
reaching its decision to approve the merger agreement and the
cash-out merger, see
Proposal One The
Reincorporation Merger Advance Proxy The Cash-Out
Merger Reasons for the Mergers
beginning
on page 43.
5
Procedure
for Receiving Merger Consideration (See
page 72)
Shortly after the effective time of the cash-out merger, a
paying agent will mail a letter of transmittal and instructions
to the former ESS Delaware stockholders. The letter of
transmittal and instructions will inform the former ESS Delaware
stockholders how to surrender the stock certificates formerly
representing shares of common stock of ESS Delaware in exchange
for the merger consideration. The letter of transmittal will
also notify stockholders of the effective date of the cash-out
merger and that appraisal rights are available to those
stockholders entitled to seek appraisal under Section 262
of the Delaware General Corporation Law.
You should not
return your stock certificates with the enclosed proxy card or
advance proxy, and you should not forward your stock
certificates to the paying agent without a properly completed
and signed letter of transmittal.
Date
of the Written Consent (See page 98)
We anticipate that the written consent will be executed and
delivered to ESS Delaware promptly following the consummation of
the reincorporation merger. Holders of ESS Delaware common stock
will have one vote for each share of common stock that they own
on the date the written consent is executed. Any advance proxy
executed by a holder of ESS who is not a stockholder of record
of ESS Delaware at the time the written consent is delivered
will be null and void and of no further force and effect.
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.
Opinions
of Needham & Company, LLC and Sutter Securities
Incorporated (See pages 46 and 50 and
Annexes C-1
and C-2)
At the joint meeting of the strategic transaction committee and
the Echo strategic transaction committee, or the strategic
transaction committees, on February 19, 2008, each of
Needham & Company and Sutter Securities Incorporated,
or Sutter, delivered its oral opinion, which opinions were later
confirmed in writing, to the strategic transaction committees
that, as of February 19, 2008, and based upon and subject
to the factors and assumptions set forth in its respective
opinion, the $1.64 per share in cash to be received by the
holders of ESS Delaware common stock following the
reincorporation merger pursuant to the merger agreement was fair
to such holders from a financial point of view.
The full text of the written opinion of Needham &
Company, dated February 19, 2008, and the written opinion
of Sutter, dated as of May 21, 2008, each of which sets
forth the assumptions made, matters considered and limitations
on the review undertaken in connection with the opinion, are
attached as
Annexes C-1
and C-2, respectively, to this joint proxy statement/prospectus.
Each of the written opinions of Needham & Company and
Sutter was addressed to the strategic transaction committees and
was provided to the board of directors of ESS and the board of
directors of Echo. The written opinion of Needham & Company
was directed to the fairness of the consideration to be received
by the holders of ESS Delaware common stock following the
reincorporation merger pursuant to the merger agreement. The
written opinion of Sutter was directed to the fairness of the
reincorporation merger and the cash-out merger, taken as a
whole, from a financial point of view to the shareholders of ESS
and to the stockholders of ESS Delaware. The written opinions of
Needham & Company and Sutter do not constitute a
recommendation to our shareholders as to how to vote at the
annual meeting or as to the cash-out merger.
Dissenters
Rights/Appraisal Rights (See page 54 and
Annex B)
Holders of common stock of ESS will not be entitled to appraisal
rights as a result of the reincorporation merger.
Stockholders of ESS Delaware will have the right to dissent from
the cash-out merger and receive a cash payment for the
judicially determined fair value of their shares of ESS Delaware
common stock plus interest, if any, on the amount determined to
be the fair value, pursuant to and in accordance with
Section 262 of the Delaware General Corporation Law.
Accordingly, if the reincorporation merger is consummated and
you receive shares of ESS Delaware common stock in that merger,
you may be entitled to exercise appraisal rights with respect to
your shares of common stock in connection with the cash-out
merger, provided you comply with the relevant provisions of
Delaware law. The judicially determined fair value of the shares
of ESS Delaware common stock under
6
Section 262 of the Delaware General Corporation Law could
be greater than, equal to or less than the $1.64 per share that
stockholders of ESS Delaware are entitled to receive in the
cash-out merger. Stockholders who wish to exercise their
appraisal rights must not complete an advance proxy with respect
to their shares of ESS Delaware common stock (or must validly
revoke any previously submitted advance proxy) to be issued in
the reincorporation merger (as any shares subject to an advance
proxy will be included in the written consent adopting the
merger agreement, and appraisal rights under Delaware law are
waived with respect to any shares that consent to the adoption
of the merger agreement), and you must strictly comply with all
of the procedures required by the Delaware General Corporation
Law. 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 submit an advance proxy to consent to the adoption of
the merger agent and approval of 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.
The
Merger Agreement
Conditions
to the Mergers (See page 83)
The completion of the reincorporation merger depends on the
satisfaction or waiver of a number of conditions, including the
following:
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the principal terms of the reincorporation merger must have been
approved by our shareholders;
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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;
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the filing or waiting periods applicable to the consummation of
the cash-out merger under the
Hart-Scott-Rodino
Act, if any, must have expired or been terminated;
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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;
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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;
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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;
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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;
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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
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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.
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Other than the conditions pertaining to the shareholder approval
and the receipt of a sufficient number of advance proxies by
ESS, the absence of governmental orders, the expiration or
termination of the
Hart-Scott-Rodino
Act waiting period (which is currently inapplicable to the
mergers) and the receipt of any other required governmental
7
approvals (none of which are currently required), either ESS, on
the one hand, or Parent, on the other hand, may elect to waive
conditions to their respective performance and complete the
reincorporation merger.
In addition, the completion of the cash-out merger depends on
the satisfaction or waiver of the following conditions:
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the consummation of the reincorporation merger must have
occurred;
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the written consent must have been executed and delivered in
accordance with applicable law; and
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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.
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Once the reincorporation merger has occurred, ESS Delaware has
agreed to cause the execution and delivery by the authorized
officers of ESS Delaware named in the advance proxy of the
written consent adopting the merger agreement on behalf of the
stockholders of ESS Delaware.
No
Solicitation of Competing Takeover Proposals (See
page 79)
Pursuant to the merger agreement, ESS immediately ceased any
merger or similar discussions or negotiations with all third
parties other than Parent, Merger Sub and Parents
representatives upon signing the merger agreement. ESS also
agreed, and agreed to cause each of its subsidiaries and its
representatives, not to:
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directly or indirectly solicit, initiate, or knowingly encourage
any third party takeover proposal;
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enter into any agreement or agreement in principle with respect
to a third party takeover proposal; or
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engage in any negotiations or discussions regarding, or furnish
or disclose to any third party any information with respect to,
any takeover proposal.
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However, the merger agreement provides that, prior to obtaining
approval of the principal terms of the reincorporation merger
from our shareholders, in response to an unsolicited bona fide
takeover proposal that our board of directors determines in good
faith constitutes, or could reasonably be expected to lead to, a
superior proposal, we may participate in discussions or
negotiations with the person making such takeover proposal
regarding such takeover proposal.
In addition, under certain limited circumstances, our board of
directors may withdraw or modify its recommendation that our
shareholders vote in favor of the principal terms of the
reincorporation merger, may approve, recommend or adopt a
superior proposal or may enter into an agreement with respect to
a superior proposal, provided that our board of directors has
determined in good faith that the failure to take such action is
reasonably likely to be inconsistent with its fiduciary duties
to our shareholders and that we comply with related provisions
in the merger agreement.
Termination
of the Merger Agreement (See page 85)
The merger agreement may be terminated, and the mergers may be
abandoned, at any time prior to the effective time of the
reincorporation merger, whether before or after approval of the
principal terms of the reincorporation merger by our
shareholders, in the following circumstances:
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by mutual written consent of Parent and ESS; or
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by either Parent or ESS, if:
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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;
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the reincorporation merger has not been consummated by
August 21, 2008; or
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8
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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
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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;
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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
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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
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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.
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Termination
Fees and Expenses (See page 86)
In connection with the termination of the merger agreement, we
will be required to pay to Parent and its affiliates a
termination fee of $1,981,000 and reimburse Parent for its
transaction-related expenses of up to $500,000 under certain
circumstances, including the acceptance of a superior proposal.
Price
Range of ESS Common Stock and Dividends (See
page 104)
Our common stock is listed on the NASDAQ Global Market under the
trading symbol ESST. The closing price of our common
stock on the NASDAQ Global Market on February 21, 2008,
which was the last trading day before we announced the merger,
was $1.20. On May 23, 2008, the last trading day before the
date of this joint proxy statement/prospectus, the closing price
of our common stock on the NASDAQ Global Market was $1.57.
Summary
Historical Financial Information (See page 9)
The following table sets forth certain summary historical
financial data for ESS for the years ended December 31,
2007 and December 31, 2006. The data presented below has
been derived from and should be read in conjunction with the
consolidated financial statements of ESS and the related notes
thereto set forth elsewhere in this joint proxy
statement/prospectus. See
Managements Discussion
and Analysis of Financial Condition and Results of
Operations
beginning on page 106 for a discussion
of matters that affect the comparability of the information
presented. All of the statements are in United States dollars.
Summary
Consolidated Historical Financial Date of the Company
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Year Ended
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Three Months Ended
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December 31,
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March 31,
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2007
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2006
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2008
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2007
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(In thousands, except per share data)
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Total net revenues
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$
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68,331
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$
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100,465
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$
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14,371
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$
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17,772
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Net income (loss)
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$
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3,122
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$
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(44,094
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)
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$
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(2,798
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)
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$
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4,603
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Per share net income (loss) diluted
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$
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0.09
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$
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(1.14
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)
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$
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(0.08
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)
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$
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0.13
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Weighted average number of shares outstanding, diluted
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35,527
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38,723
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35,545
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35,508
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9
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At December 31,
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At March 31,
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2007
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2006
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2008
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BALANCE SHEET DATA:
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Cash and cash equivalents
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$
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43,110
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$
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33,731
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$
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41,089
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Short-term investments
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6,837
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10,264
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8,047
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Accounts receivable, net
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5,403
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9,189
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7,676
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Other receivables
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482
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1,154
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428
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Inventory
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7,210
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8,278
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6,833
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Prepaid expenses and other assets
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823
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1,764
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899
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Total current assets
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63,865
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64,380
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64,972
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Property, plant and equipment, net
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12,609
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16,996
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12,015
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Non-current deferred tax asset
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5,874
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5,874
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Other assets
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9,025
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9,052
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7,992
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Total assets
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$
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91,373
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$
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90,428
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$
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90,853
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Current liabilities
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$
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7,947
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$
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43,405
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$
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10,645
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Non-current deferred tax liabilities
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35,661
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36,167
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Total liabilities
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$
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43,608
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$
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43,405
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$
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46,812
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Shareholders equity
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$
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47,765
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$
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47,023
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$
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44,041
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10
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents
incorporated by reference into this joint proxy
statement/prospectus contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties, as well as
assumptions, that, if they never materialize or prove incorrect,
could cause the results of ESS to differ materially from those
expressed or implied by such forward-looking statements.
Forward-looking statements generally are identified by the words
may, will, project,
might, expects, anticipates,
believes, intends,
estimates, should, could,
would, strategy, plan,
continue, pursue, or the negative of
these words or other words or expressions of similar meaning.
All statements other than statements of historical fact are
statements that could be deemed forward-looking statements. For
example, forward-looking statements include any statements of
the plans, strategies and objectives of management for future
operations, including the execution of integration and
restructuring plans and the anticipated timing of filings; any
statements concerning proposed new products, services or
developments; any statements regarding future economic
conditions or performance; statements of belief and any
statement of assumptions underlying any of the foregoing.
Forward looking statements may also include any statements of
the plans, strategies and objectives of management with respect
to the approval and closing of the reincorporation merger and
the cash-out merger, our continued listing on the NASDAQ Global
Market, our ability to list the shares of ESS Delaware on the
NASDAQ Global Market, our ability to solicit a sufficient number
of proxies and advance proxies to approve the mergers and other
matters related to the consummation of the mergers.
For a discussion of the factors that may cause our actual
results, performance or achievements to differ materially from
any future results, performance or achievements expressed or
implied in such forward-looking statements, see
Risk
Factors Risks Related to the Companys
Business
beginning on page 15. In addition, for a
discussion of risk associated with our ability to consummate the
mergers and the potential effect of the mergers on our business,
see
Risk Factors Risks Related to the
Mergers
beginning on page 12.
Risks associated with our ability to consummate the mergers and
the potential effect of the mergers on our business include:
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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;
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the risk that our stock price and future business operations
could be harmed if the mergers are not completed;
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the risk that uncertainty about the mergers and diversion of
management could harm ESS;
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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;
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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;
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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;
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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
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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.
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Additional factors that could cause actual results to differ
materially from those expressed in the forward-looking
statements are discussed in reports filed with the SEC by ESS.
See
Where You Can Find More Information
beginning on page 154 for a list of documents incorporated
herein by reference.
If any of these risks or uncertainties materializes or any of
these assumptions proves incorrect, the results of the Company
could differ materially from the forward-looking statements. All
forward-looking statements in this joint proxy
statement/prospectus are current only as of the date on which
the statements were made. We do not undertake any obligation to
publicly update any forward-looking statement to reflect events
or circumstances after the date on which any statement is made
or to reflect the occurrence of unanticipated events.
11
RISK
FACTORS
Shareholders of ESS should carefully consider the following
risk factors, in addition to the other information contained in
this joint proxy statement/prospectus, in connection with their
decision to approve the principal terms of the reincorporation
merger and to submit an advance proxy authorizing the execution
and delivery of the written consent of the stockholders of ESS
Delaware adopting the merger agreement.
Risks
Related to the Mergers
There
may be unexpected delays in the consummation of the mergers,
which would delay receipt of merger consideration by ESS
Delaware stockholders.
The mergers are expected to close in the second quarter of 2008.
However, certain events may delay the consummation of the
mergers, including difficulties in obtaining the approval of the
principal terms of the reincorporation merger by our
shareholders or in obtaining sufficient advance proxies to adopt
the merger agreement, delays in satisfaction of the closing
conditions to which the mergers are subject, delisting of our
shares by the NASDAQ Global Market or a determination by the
NASDAQ Stock Market Listing Qualifications Panel not to list the
shares of ESS Delaware to be issued in the reincorporation
merger. If one or more of these events occur, the receipt of the
cash-out merger consideration by ESS Delaware stockholders may
be delayed and the mergers and the sale to Imperium ultimately
may not be completed.
If the
mergers are not completed, ESS stock price and future
business operations could be harmed.
The mergers are subject to a number of conditions to closing,
including the approval by the shareholders of ESS of the
principal terms of the reincorporation merger and the consent of
the stockholders of ESS Delaware to the adoption of the merger
agreement, the accuracy of our representations and warranties,
compliance with covenants, and the absence of a material adverse
change in our business. In order to approve the reincorporation
merger, a majority of the outstanding shares of ESS common stock
entitled to vote at the annual meeting must vote to approve the
principal terms of the reincorporation merger. In order to
approve the cash-out merger, a majority of the outstanding
shares of common stock of ESS Delaware entitled to vote must
adopt the merger agreement. If the shareholders of ESS fail to
approve the reincorporation merger or fail to submit sufficient
advance proxies to execute and deliver the written consent
adopting the merger agreement, we will not be able to complete
the mergers and you will not receive the merger consideration.
As a result, there can be no assurance that the mergers will be
completed in a timely manner or at all.
If the mergers are not completed for any reason, the stock price
of ESS may decline, particularly if the current market price of
our common stock reflects a positive market assumption that the
mergers will be completed. Additionally, if the merger agreement
is terminated, ESS may be unable to find a partner willing to
engage in a similar transaction on terms as favorable as those
set forth in the merger agreement, or at all. This could limit
ESS ability to pursue its strategic goals.
Uncertainty
about the mergers and diversion of management could harm ESS,
whether or not the mergers are completed.
Uncertainty about the effect of our pending acquisition by
Imperium and uncertainty with respect to the completion of the
cash-out merger could adversely affect our business. This
uncertainty could lead to a loss of customers, a decline in
revenues, impairment in our ability to make necessary
operational improvements in our business, an inability to retain
or motivate current employees or attract new employees, and
deterioration in our results of operations. These adverse
affects may be enhanced by the diversion of management time and
attention toward completing 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.
In January 2008, the NASDAQ Stock Market staff notified us of
its decision to delist our common stock from the NASDAQ Global
Market as a result of our failure to hold our annual meeting of
shareholders in 2007 in
12
accordance with the NASDAQ Global Markets continued
listing requirements. Our hearing before the NASDAQ Stock Market
Hearings Panel to appeal the staffs decision was held in
February 2008. On April 2, 2008, the panel sent us a letter
informing us that we have until May 30, 2008 to solicit
proxies for and hold the annual meeting. If we do not hold our
meeting by May 30, 2008, NASDAQ may delist our common stock
regardless of whether our shareholders elect directors or
approve the sale to Imperium. Further, on April 2, 2008,
the NASDAQ Stock Market staff sent us a deficiency letter
notifying us that we are not in compliance with NASDAQs
audit committee requirement because we have only two directors
serving on our audit committee as a result of the passing away
of Mr. Bruce J. Alexander, a member of our board of
directors and audit committee, on March 25, 2008. The staff
informed us that we must demonstrate compliance with the three
independent member audit committee requirement no later than
September 22, 2008.
Our next annual shareholders meeting will be the annual
meeting outlined in this joint proxy statement/prospectus, which
we expect to hold in the second quarter of 2008. We cannot
guaranty that we will be able to hold the annual meeting prior
to May 30, 2008. In light of this uncertainty, we intend to
appeal the NASDAQ decision to the Nasdaq Listing and Hearing
Review Council, although this further appeal process will not
stay the delisting. With respect to the second NASDAQ matter, we
are searching for a third member to serve on our audit
committee, but if the cash-out merger is consummated before
September 22, 2008, we may not replace Mr. Alexander.
In addition, as soon as practicable following the closing of the
reincorporation merger, we intend to notify the Nasdaq Stock
Market of the reincorporation of ESS to change its place of
organization from California to Delaware. If our stock is
delisted from the NASDAQ Global Market or the NASDAQ Stock
Market determines not to list the shares of common stock of ESS
Delaware issued in the reincorporation merger, the mergers and
our sale to Imperium may be substantially delayed or may not be
completed at all. If our stock is no longer listed for trading
on a national stock exchange, the reincorporation merger, which
must be completed prior to closing of the cash-out merger, will
require compliance with the individual securities laws, or
blue sky laws, of each of the 50 states. Any
blue sky law compliance would be time consuming and expensive,
may not be possible, and could result in delay in the completion
of the cash-out merger or termination of the merger agreement.
In addition, if our stock is delisted from the NASDAQ Global
Market, and if the long-arm provision of Section 2115 of
the California Corporations Code is held to apply to ESS
Delaware, ESS Delaware may be subject to certain limitations on
distributions to stockholders that could apply to the cash-out
merger and if they did apply, would cause the cash-out merger to
be in violation of California law. Please see
Proposal One The Reincorporation
Merger; Advance Proxy The Cash-Out
Merger Reasons for the Reincorporation
Merger
beginning on page 42 below and
Differences between the Rights of ESS Shareholders and
ESS Delaware Stockholders
beginning on page 59.
Following
the reincorporation merger, your rights as a shareholder will be
governed by Delaware law instead of California law and you
should note the differences.
There are differences between the provisions in Delaware law and
California law governing the rights of shareholders that may
affect you. You should note the differences between Delaware law
and California law, including the laws regarding your appraisal
rights, in the section herein entitled
Differences
between the Rights of ESS Shareholders and ESS Delaware
Stockholders
beginning on page 67.
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.
Each of ESS and Echo has agreed, to the extent reasonably
practicable and subject to compliance with all applicable laws
and rules and regulations of the NASDAQ Global Market, to use
its commercially reasonable efforts to cause trading in shares
of ESS Delaware common stock on the NASDAQ Global Market
(subsequent to listing thereof, if any) to be suspended
immediately following the effective time of the reincorporation
merger and to close the stock transfer books of ESS Delaware
immediately following the effective time of the reincorporation
merger, preventing any transfers of shares of ESS Delaware
common stock on the records of ESS Delaware between the time of
the reincorporation merger and the time of the cash-out merger.
ESS and Echo have agreed to halt trading and to close the
transfer books of ESS Delaware in order to determine the holders
of record of ESS Delaware common stock immediately following the
consummation of the reincorporation merger, and to ensure that a
sufficient number of effective advance proxies have been
received to authorize the adoption of the merger agreement by
ESS Delawares stockholders immediately following the
consummation of the reincorporation
13
merger and to ensure that the shares of common stock of ESS
Delaware that are the subject of such advance proxies are not
transferred between the time of the consummation of the
reincorporation merger and the consummation of the cash-out
merger.
If we are able to cause trading in shares of ESS Delaware common
stock on the NASDAQ Global Market to be suspended immediately
following the effective time of the reincorporation merger
and/or
to
close the stock transfer books of ESS Delaware immediately
following the effective time of the reincorporation merger, your
ability to sell or otherwise transfer shares of ESS Delaware
common stock you would receive in the reincorporation merger
will be limited and you may not be able to transfer any such
shares of ESS Delaware common stock at all during the time
period between the closing of the reincorporation merger and the
closing of the cash-out merger. As a result, you may have
significantly reduced or no liquidity in your investment in ESS
Delaware between the time of the reincorporation merger and the
cash-out merger and you may not be able to sell your shares of
ESS Delaware in a timely manner or at all.
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.
ESS and Echos directors and executive officers have
interests in the mergers as individuals in addition to the
interests of ESS shareholders. See
Proposal One The Reincorporation
Merger Advance Proxy The Cash-Out Merger
Interests of Directors and Executive Officers in the
Mergers.
In
certain instances, the merger agreement requires payment of a
termination fee to Imperium and reimbursement of expenses of
Imperium. Payment of these amounts could adversely affect
ESS financial condition or reduce the likelihood that
another party proposes an alternative transaction to the
mergers.
Under the terms of the merger agreement, ESS may be required to
pay Imperium a termination fee of $1,981,000 plus reimbursement
of Imperiums costs of up to $500,000 if the merger
agreement is terminated under certain circumstances, including
the acceptance by ESS (or our board) of a superior proposal. The
termination fee and expense reimbursement provisions could
affect the structure, pricing and terms proposed by other
parties seeking to acquire or merge with ESS, including the
possibility that any such other party might choose not to make
an alternative transaction proposal to ESS as a result of the
termination fee and expense reimbursement provisions. In
addition, should the merger agreement be terminated in
circumstances under which such a termination fee and expense
reimbursement is payable, the payment of such a fee would reduce
the amount of cash available to ESS going forward. For a
description of the termination fee payable by ESS under the
merger agreement, see
The Merger Agreement
Fees and Expenses,
beginning on page 86.
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.
Any advance proxy submitted by a shareholder of ESS who then
sells or transfers their shares prior to the effective time of
the reincorporation merger will be null and void and we will not
be able to include that shareholders advance proxy in the
written consent. As a result, it may be difficult to obtain a
sufficient number of advance proxies to execute the written
consent adopting the merger agreement due to trading in our
common stock prior to the effective time of the reincorporation
merger and, even if we do receive advance proxies representing a
majority of the shares of ESS Delaware common stock, the
reincorporation merger and the cash-out merger may not be
consummated if advance proxies provided by ESS shareholders who
continue to own their shares of ESS immediately prior to the
effective time of the reincorporation merger represent less than
a majority of the shares of ESS Delaware common stock that would
be outstanding following the reincorporation merger.
Risks
Related to the Companys Business
We
have a history of losses and expect to continue to incur net
losses in the near-term.
We have experienced operating losses in each quarterly and
annual period since the quarter ended September 30, 2004.
We incurred net income of $3.1 million for the fiscal year
ended December 31, 2007 including the gain on sale
14
of technology and tangible assets of $10.4 million and net
losses of approximately $44.1 million, $99.6 million,
and $35.6 million for the fiscal years ended
December 31, 2006, 2005, and 2004, respectively. We had an
accumulated deficit of approximately $132.3 million as of
March 31, 2008. We will need to generate significant
increases in our revenues and margins to achieve or maintain
profitability or significantly reduce operating expenses or
both. There can be no certainty that our efforts to restructure
and reduce our operating expenses will reduce or eliminate these
losses; indeed, the reductions and restructuring could increase
losses due to reduced revenue levels. There can be no certainty
that these operating losses will not continue and consume our
working capital.
If our
new business strategy is unsuccessful, it could significantly
harm our business and operating results.
On September 18, 2006, we announced an ongoing review of
our business strategy. In particular, we announced a business
strategy to concentrate our standard DVD business activities on
serving a few large customers and to look for business partners
or acquirers for our high definition HD DVD and
Blu-ray
DVD
business and our camera phone business. On November 3,
2006, we entered into a DVD Technology License Agreement with
Silan for the exclusive license of certain standard definition
DVD technologies and also granted Silan a
non-exclusive
license for our remaining standard definition DVD technology. On
April 23, 2008, we entered into the
ESS-Silan
Audio and Video Technology License Agreement with Silan to amend
and restate the DVD Technology License Agreement, between the
Company and Silan, as amended, dated November 3, 2006. The
Company entered into the License Agreement in order to license
to Silan certain of ESSs audio and video technology for
the purpose of developing, designing, manufacturing,
distributing and selling products incorporating such technology
for which we will be owed royalties. However, as a result, we
will not receive any license revenue from Silan with respect to
our standard definition DVD technology previously licensed to
Silan. On February 16, 2007, we entered into Asset Purchase
Agreements with SiS to sell our
HD-DVD
and
Blu-ray
DVD
assets and technologies and on the same date announced we were
reducing operations of our camera phone business. In conjunction
with this strategic review we are currently maintaining our
remaining standard definition DVD business and entering into the
business of designing, manufacturing, and marketing analog
processor chips. If the market for our licensed VCD and/or DVD
businesses, our retained DVD standard definition businesses or
the market for our new product offerings is smaller than we
anticipated, our results of operations and businesses would be
adversely affected. In addition, one of our new analog products
for a new market we had hoped to enter in 2008 has been delayed
beyond the key Christmas and Chinese New Year seasons and we do
not expect to bring this new product to market until later in
2009. We expect this delay in bringing this new product to
market will delay our ability to derive revenues from such
product. Selling and/or licensing of our standard definition DVD
and high definition DVD businesses and shutting down our camera
phone business may also reduce the scale of our business and
income stream and result in our greater reliance on our
remaining businesses. Our strategy to expand our digital audio
and analog processor chip businesses is new and unproven.
Our
business strategy is currently going through significant
evaluation and change.
We announced on September 18, 2006 that our business
strategy has been going through a significant transition. This
transition and our current strategy may fail to stop our
operating losses, and we may take alternative measures.
As part of this transition, we may not be able to make our
current lines of business profitable and therefore may exit
them. We may not be able to identify or acquire or transition to
new lines of business that may be profitable, and we may not
have enough resources to transition to certain alternative lines
of business. We are also evaluating alternative business models,
markets, products, industries and technologies. We may determine
it is in the best interests of our shareholders to move us into
alternative lines of business, industries
and/or
markets other than those in which we have historically operated.
Our
business is highly dependent on the expansion of the consumer
electronics market and our ability to respond to changes in such
market.
Our focus has been developing products primarily for the
consumer electronics market. Due to the short life-cycle of the
products in this market, we must identify and capitalize on
market opportunities in a timely manner to
15
become a leader in these product areas. Historically, we have
had to respond to market trends, identify key products and
become the market leader for such products in order to succeed.
Unfortunately, we have been unable to maintain our market
position in recent periods. The DVD market and our role in that
market have shifted, and, as a result, in November 2006 we
granted a license for Silan to take over the design, manufacture
and sale of certain of our standard definition DVD products, and
we also recently sold and licensed our HD-DVD and Blu-ray DVD
technologies to SiS. We have historically and we expect to
continue to evaluate our strategies in our businesses to ensure
that we focus on the technologies and markets that will provide
us the best opportunities for the future. Nonetheless, our
strategy in potential new markets may not be successful. If the
markets for these products and applications decline or fail to
develop as expected, or if we are not successful in our efforts
to market and sell our products to manufacturers who incorporate
our chip into their products, we could exit our historic lines
of business and enter other lines of business outside of
semiconductors, and it could have a material adverse effect on
our business financial conditions and results of operations
We
operate in highly competitive markets.
The markets in which we operate are intensely competitive and
are characterized by rapid technological changes, rapid price
reductions and short product life cycles. Competition typically
occurs at the design stage, when customers evaluate alternative
design approaches requiring integrated circuits. Because of
short product life cycles, there are frequent design win
competitions for next-generation systems.
We expect competition to increase in the future from existing
competitors and from other companies that may enter our existing
or future markets with products that may be provided at lower
costs or provide higher levels of integration, higher
performance or additional features. In some cases, our
competitors have been acquired by even larger organizations,
giving them access to even greater resources with which to
compete. Advancements in technology can change the competitive
environment in ways that may be adverse to us. Unless we are
able to develop and deliver highly desirable products in a
timely manner continuously and achieve market domination in one
or more product lines, we will not be able to achieve long-term
sustainable success in this fast consolidating industry. If we
are only able to offer commodity products, our results of
operations and long-term success will suffer and we will fall
prey to stronger competitors. For example, todays
high-performance central processing units in PCs have enough
excess computing capacity to perform many of the functions that
formerly required a separate chip set, which has reduced demand
for our PC audio chips, among other chips. Moreover, our VCD and
standard definition DVD products have begun to experience
commodity like pricing pressures as new technologies evolve. The
announcements and commercial shipments of competitive products
could adversely affect sales of our products and may result in
increased price competition that would adversely affect the
average selling price (ASP) and margins of our
products.
The following factors may affect our ability to compete in our
highly competitive markets:
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The timing and success of our new product introductions and
those of our customers and competitors;
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The ability to control product cost and produce consistent yield
of our products;
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The ability to obtain adequate foundry capacity and sources of
raw materials;
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The price, quality and performance of our products and the
products of our competitors;
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The emergence of new multimedia standards;
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The development of technical innovations;
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The rate at which our customers integrate our products into
their products;
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The number and nature of our competitors in a given
market; and
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The protection of our intellectual property rights.
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We may
need additional funds to execute our business plan, and if we
are unable to obtain such funds, we may not be able to expand
our business, and if we do raise such funds, the
shareholders ownership in ESS may be subject to
dilution.
We may be required to obtain substantial additional capital to
finance our future growth, fund our ongoing research and
development activities and acquire new technologies or
companies. To the extent that our existing
16
sources of liquidity and cash flow from operations are
insufficient to fund our activities, we may need to seek
additional equity or debt financing from time to time.
Additional financing may not be available to us when needed or,
if available, it may not be available on terms favorable to us.
We may need to consummate a private placement or public offering
of our capital stock at a lower price than you paid for your
shares. If we raise additional capital through the issuance of
new securities at a lower price than you paid for your shares,
you will be subject to additional dilution. Further, such equity
securities may have rights, preferences or privileges senior to
those of our existing common stock.
To
compete in our industry, we may need to acquire other companies
and technologies and/or restructure our businesses, and we may
not be successful acquiring key targets, integrating our
acquisitions into our businesses or restructuring our businesses
effectively.
We believe the semiconductor industry is experiencing a general
industry consolidation. To remain competitive, a semiconductor
company must be able to offer high-demand products and renew its
product offerings in a timely manner. In order to meet such a
high turn over in product offerings, in addition to our own
research and development of new products, we regularly consider
strategic additions or deletions of our product offerings to
enhance our strategic position. To remain competitive in this
rapidly changing market, we need to constantly update our
product offering and realign our cost structure to bring to the
market more sophisticated and cost-effective products. However,
we may not be able to identify and consummate suitable
acquisitions and investments effectively. Conversely, we may not
be able to restructure and realign our businesses effectively.
Strategic transactions carry risks that could have a material
adverse effect on our business, financial condition and results
of operations, including:
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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;
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The failure to integrate acquired products and business with
existing products and corporate culture;
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The inability to restructure or realign our businesses
effectively and cost-efficiently;
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The inability to retain key employees from the acquired company;
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Diversion of management attention from other business concerns;
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The potential for large write-offs of intangible assets;
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Issuances of equity securities dilutive to our existing
shareholders;
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The incurrence of substantial debt and assumption of unknown
liabilities; and
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Our ability to properly access and maintain an effective
internal control environment over an acquired company in order
to comply with public reporting requirements.
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Our
quarterly operating results are subject to fluctuations that may
cause volatility or a decline in the price of our
stock.
Historically, our quarterly operating results have fluctuated
significantly. Our future quarterly operating results will
likely fluctuate from time to time and may not meet the
expectations of securities analysts and investors in a
particular future period. The price of our common stock could
decline due to such fluctuations. The following factors may
cause significant fluctuations in our future quarterly operating
results:
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Charges related to the net realizable value of inventories;
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Changes in demand or sales forecast for our products;
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Changes in the mix of products sold and our revenue mix;
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Changes in the cost of producing our products;
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The timely implementation of customer-specific hardware and
software requirements for specific design wins;
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Increasing pricing pressures and resulting reduction in the ASP
of any or all of our products;
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Availability and cost of foundry capacity;
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Gain or loss of significant customers;
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Seasonal customer demand;
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The cyclical nature of the semiconductor industry;
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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;
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The timing of significant customer orders
and/or
design wins;
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Charges related to the impairment of other intangible assets;
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Loss of key employees which could impact sales or the pace of
product development;
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The turns basis of most of our orders, which makes
backlog a poor indicator of the next quarters revenue;
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The potential for large adjustments due to resolution of
multi-year tax examinations;
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The lead time we normally receive for our orders, which makes it
difficult to predict sales until the end of the quarter;
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Availability and cost of raw materials;
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Significant increases in expenses associated with the expansion
of operations; and
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A shift in manufacturing of consumer electronic products away
from Asia.
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We
often purchase inventories based on sales forecasts and if
anticipated sales do not materialize, we may continue to
experience significant inventory charges.
We currently place non-cancelable orders to purchase our
products from independent foundries and other vendors on an
approximately three-month rolling basis, while our customers
generally place purchase orders (frequently with short lead
times) with us that may be cancelled without significant
penalty. Some of these customers may require us to demonstrate
our ability to deliver in response to their short lead-time. In
order to accommodate such customers, we have to commit to
certain inventories before we have a firm commitment from our
customers. If anticipated sales and shipments in any quarter are
cancelled, do not occur as quickly as expected or become subject
to declining ASPs, expense and inventory levels could be
disproportionately high and we may be required to record
significant inventory charges in our statement of operations in
a particular period. In accordance with our accounting policy,
we reduce the carrying value of our inventories for estimated
slow-moving, excess, obsolete, damaged or otherwise unmarketable
products by an amount based on forecasts of future demand and
market conditions. As our business grows, we may increasingly
rely on distributors, which may further impede our ability to
accurately forecast product orders. Additionally, we may venture
into new products with different supply chain and logistics
requirements which may in turn cause excess or shortage of
inventory.
Our
research and development investments may fail to enhance our
competitive position.
We invest a significant amount of time and resources in our
research and development activities to enhance and maintain our
competitive position. Technical innovations are inherently
complex and require long development cycles and the commitment
of extensive engineering resources. We incur substantial
research and development costs to confirm the technical
feasibility and commercial viability of a product that in the
end may not be successful. If we are not able to successfully
complete our research and development projects on a timely
basis, we may face competitive disadvantages. There is no
assurance that we will recover the development costs associated
with these projects or that we will be able to secure the
financial resources necessary to fund future research and
development efforts.
18
We have recently significantly reduced the size of our research
and development workforce and the remaining personnel may not be
adequate to enable us to successfully manage existing projects
or enter new product markets. Our margins may decrease to a
point where we will be unable to sustain the research and
development resources necessary to remain competitive.
Our
success within the semiconductor industry depends upon our
ability to develop new products in response to rapid
technological changes and evolving industry
standards.
The semiconductor industry is characterized by rapid
technological changes, evolving industry standards and product
obsolescence. Our success is highly dependent upon the
successful development and timely introduction of new products
at competitive prices and performance levels. Recently our
financial performance has suffered because we were late with
product introductions compared to our competition and we expect
this trend in our financial performance to continue until we
deliver new product offerings that are competitive and accepted
by the market. The success of new products depends on a number
of factors, including:
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Anticipation of market trends;
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Timely completion of design, development, and testing of both
the hardware and software for each product;
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Timely completion of customer specific design, development and
testing of both hardware and software for each design win;
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Market acceptance of our products and the products of our
customers;
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Offering new products at competitive prices;
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Meeting performance, quality and functionality requirements of
customers and OEMs; and
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Meeting the timing, volume and price requirements of customers
and OEMs.
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Our products are designed to conform to current specific
industry standards; however, we have no control over future
modifications to these standards. Manufacturers may not continue
to follow the current standards, which would make our products
less desirable to manufacturers and reduce our sales. Our
success is highly dependent upon our ability to develop new
products in response to these changing industry standards.
Our
sales may fluctuate due to seasonality and changes in customer
demand.
Since we are primarily focused on the consumer electronics
market, we are likely to be affected both by changes in consumer
demand and by seasonality in the sales of our products.
Historically, over half of consumer electronics products are
sold during the holiday seasons. Consequently, our results
during a period that covers a non-holiday season may vary
dramatically from a period that covers a holiday season.
Consumer electronics product sales have historically been much
higher during the holiday shopping seasons than during other
times of the year, although the manufacturers shipments
vary from quarter to quarter depending on a number of factors,
including retail levels and retail promotional activities. In
addition, consumer demand often varies from one product to
another in consecutive holiday seasons and is strongly
influenced by the overall state of the economy. Because the
consumer electronics market experiences substantial seasonal
fluctuations, seasonal trends may cause our quarterly operating
results to fluctuate significantly and our inability to forecast
these trends may adversely affect the market price of our common
stock. For instance, as ASPs for DVD products decline, customer
demands for VCD products, from which we enjoy a good product
margin, even under our recent arrangement to license our VCD
products, may shift to DVD products and ultimately render our
VCD products obsolete. In the future, if the market for our
products is not as strong during the holiday seasons, whether as
a result of changes in consumer tastes, changes in our mix of
products or because of an overall reduction in consumer demand
due to economic conditions, we may fail to meet expectations of
securities analysts and investors which could cause our stock
price to fall.
Our
products are subject to increasing pricing
pressures.
The markets for most of the applications for our chips are
characterized by intense price competition. The willingness of
OEMs to design our chips into their products depends, to a
significant extent, upon our ability to sell
19
our products at cost-effective prices. We expect the ASP of our
existing products (particularly our DVD decoder) to decline
significantly over their product lives as the markets for our
products mature, new products or technology emerge and
competition increases. If we are unable to reduce our costs
sufficiently to offset declines in product prices or are unable
to introduce more advanced products with higher margins, our
gross margins may decline in the future.
We may
lose business to competitors who have significant competitive
advantages.
Our existing and potential competitors consist, in part, of
large domestic and international companies that have
substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, greater
intellectual property rights, broader product lines and
longer-standing relationships with customers than we have. These
competitors may have more visibility into market trends, which
is critically important in an industry characterized by rapid
technological changes, evolving industry standards and product
obsolescence. Our competitors also include a number of
independent and emerging companies who may be able to better
adapt to changing market conditions and customer demand. In
addition, some of our current and potential competitors maintain
their own semiconductor fabrication facilities and could benefit
from certain capacity, cost and technical advantages. We expect
that market experience to date and the predicted growth of the
market will continue to attract and motivate more and stronger
competitors.
In the Video business, DVD and VCD players face significant
competition from
video-on-demand,
VCRs and other video formats. Further, VCD players, which tend
to be viewed as a less expensive alternative, are being replaced
by DVD players as DVD players come down in price. We expect that
the DVD platform will face competition from other platforms
including set-top-boxes, as well as multi-function game boxes
being manufactured and sold by large companies. Some of our
competitors may be more diversified than us and may supply chips
for multiple platforms. Any of these competitive factors could
reduce our sales and market share and may force us to lower our
prices, adversely affecting our business, financial condition
and results of operations.
As we focus on standard definition DVD technology and move away
from HD-DVD and Blu-ray DVD technologies, demand may shift in
such a way that we would no longer have the technology to
address the markets changing demand and be unable to
remain competitive.
Our
business is dependent upon retaining key personnel and
attracting new employees.
Our success depends to a significant degree upon the continued
contributions of our top management including Robert L. Blair,
our President and Chief Executive Officer (CEO).
Fred S.L. Chan, our Chairman of the Board, and James B. Boyd,
our Chief Financial Officer, recently resigned and Bruce J.
Alexander, who took over as our Chairman of the Board, recently
passed away. The loss of the services of Mr. Blair or any
of our other key executives could adversely affect our business.
We may not be able to retain our other key personnel and
searching for key personnel replacements could divert the
attention of other senior management and increase our operating
expenses. We currently do not maintain any key person life
insurance.
Additionally, to manage our future operations effectively, we
will need to hire and retain additional management personnel,
design personnel as well as hardware and software engineers. We
may have difficulty recruiting these employees or integrating
them into our business. The loss of services of any of our key
personnel, the inability to attract and retain qualified
personnel in the future, or delays in hiring required personnel,
particularly design personnel and software engineers, could make
it difficult to implement our key business strategies, such as
timely and effective product introductions.
Changes
in stock option accounting rules may adversely impact our
reported operating results prepared in accordance with generally
accepted accounting principles, our stock price and our
competitiveness in the employee marketplace.
Our success and competitiveness depend in large part on our
ability to attract, retain and motivate key employees. Achieving
this objective may be difficult due to many factors, including
fluctuations in global economic and industry conditions, changes
in our management or leadership, the effectiveness of our
compensation programs, including our equity-based programs, and
competitors hiring practices. In addition, we began
recording a charge to
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earnings for stock options and ESPP shares in our first fiscal
quarter of 2006. This requirement reduces the attractiveness of
certain equity-based compensation programs as the expense
associated with the grants decreases our profitability. We may
make certain adjustments to our broad-based equity compensation
programs. These changes may reduce the effectiveness of
compensation programs. If we do not successfully attract, retain
and motivate key employees as a result of these or other
factors, our ability to capitalize on our opportunities and our
operating results and may be materially and adversely affected.
We
rely on distributors for a significant portion of our revenues
and if these relationships deteriorate our financial results
could be adversely affected.
Sales through our then-current largest distributor FE Global (a
Singapore-based company) were approximately 18%, 32% and 37% of
our net revenues for the fiscal year ended December 31,
2007, 2006 and 2005, respectively. As previously announced, on
August 31, 2007, our distribution agreement with FE Global
was terminated, and we signed a new distribution agreement with
CKD (Hong Kong) High Tech Company Limited (CKD) who
will perform similar functions as those previously provided by
FE Global. In addition to FE Global, Weiking Industrial Company,
Ltd. (Weiking) accounted for 11% of our revenues in
2007. For the three months ended March 31, 2008, CKD and
Weiking each accounted for 15% of our revenues. Our distributors
are not subject to any minimum purchase requirements and can
discontinue marketing any of our products at any time. In
addition, our distributors have rights of return for unsold
products and rights to pricing allowances to compensate for
rapid, unexpected price changes. Therefore, we do not recognize
revenue until sold through to our end-customers. If our
relationship with our distributors deteriorates, our revenues
could fluctuate significantly as we experience disruption to our
sales and collection processes. We may increasingly rely on
distributors, which may reduce our exposure to future sales
opportunities. Although we believe that we could replace our
distributors, there can be no assurance that we could replace
them in a timely manner, or even if a replacement were found,
that the new distributor would be as effective in generating
revenue for us. The reduction, delay or cancellation of orders
from our distributors or the loss of a distributor could
materially and adversely affect our business, financial
condition and results of operations. In addition, any difficulty
in collecting amounts due from our distributors could harm our
financial condition.
Our
customer base is highly concentrated, so the loss of a major
customer could adversely affect our business.
A substantial portion of our net revenues has been derived from
sales to a small number of our customers. During the fiscal year
ended December 31, 2007, sales to our top five
end-customers across business segments (including end-customers
that buy our products from our former largest distributor FE
Global) accounted for approximately 66% of our net revenues.
During the three months ended March 31, 2008, sales to our
top five end-customers accounted for approximately 75% of our
net revenues. We expect this concentration of sales to continue
along with other changes in the composition of our customer
base. The reduction, delay or cancellation of orders from one or
more major customers or the loss of one or more major customers
could materially and adversely affect our business, financial
condition and results of operations. In addition, any difficulty
in collecting amounts due from one or more key customers could
harm our financial condition.
Because
we are dependent upon a limited number of suppliers, we could
experience delivery disruptions or unexpected product cost
increases.
We depend on a limited number of suppliers to obtain adequate
supplies of quality raw materials on a timely basis. We do not
generally have guaranteed supply arrangements with our
suppliers. If we have difficulty in obtaining materials in the
future, alternative suppliers may not be available, or if
available, these suppliers may not provide materials in a timely
manner or on favorable terms. If we cannot obtain adequate
materials for the manufacture of our products, we may be forced
to pay higher prices, experience delays and our relationships
with our customers may suffer.
In addition, we license certain technology from third parties
that is incorporated into many of our key products. If we are
unable to obtain or license the technology on commercially
reasonable terms and on a timely basis, we will not be able to
deliver products to our customers on competitive terms and in a
timely manner and our relationships with our customers may
suffer.
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We may
not be able to adequately protect our intellectual property
rights from unauthorized use and we may be subject to claims of
infringement of third-party intellectual property
rights.
To protect our intellectual property rights we rely on a
combination of patents, trademarks, copyrights and trade secret
laws and confidentiality procedures. We have numerous patents
granted in the United States with some corresponding foreign
patents. These patents will expire at various times. We cannot
assure you that patents will be issued from any of our pending
applications or applications in preparation or that any claims
allowed from pending applications or applications in preparation
will be of sufficient scope or strength. We may not be able to
obtain patent protection in all countries where our products may
be sold. Also, our competitors may be able to design around our
patents. The laws of some foreign countries may not protect our
products or intellectual property rights to the same extent, as
do the laws of the United States. We cannot assure you that the
actions we have taken to protect our intellectual property will
adequately prevent misappropriation of our technology or that
our competitors will not independently develop technologies that
are substantially equivalent or superior to our technology.
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights or
positions. Litigation by or against us could result in
significant expense and divert the efforts of our technical and
management personnel, whether or not such litigation results in
a favorable determination for us. Any claim, even if without
merit, may require us to spend significant resources to develop
non-infringing technology or enter into royalty or
cross-licensing arrangements, which may not be available to us
on acceptable terms, or at all. We may be required to pay
substantial damages or cease the use and sale of infringing
products, or both. In general, a successful claim of
infringement against us in connection with the use of our
technologies could adversely affect our business and our results
of operations could be significantly harmed. See
Business and Properties of the Company
-
Legal
Proceedings
beginning on page 133. We may
initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the
validity of our proprietary rights. In the event of an adverse
result in any such litigation our business could be materially
harmed.
We
have significant international sales and operations that are
subject to the special risks of doing business outside the
United States.
Substantially all of our sales are to customers (including
distributors) in China, Hong Kong, Taiwan, Indonesia and Korea.
During the fiscal year ended December 31, 2007, sales to
customers in China, Hong Kong, Taiwan, Indonesia and Korea were
approximately 87% of our net revenues. During the three months
ended March 31, 2008, sales to customers in China, Hong
Kong, Taiwan, Indonesia and Korea were approximately 89% of our
net revenues. If our sales in one of these countries or
territories, such as Korea, were to fall, our financial
condition could be materially impaired. We expect that
international sales will continue to represent a significant
portion of our net revenues. In addition, substantially all of
our products are manufactured, assembled and tested by
independent third parties in Asia. There are special risks
associated with conducting business outside of the United
States, including:
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Unexpected changes in legislative or regulatory requirements and
related compliance problems;
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Political, social and economic instability;
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Lack of adequate protection of our intellectual property rights;
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Changes in diplomatic and trade relationships, including changes
in most favored nations trading status;
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Tariffs, quotas and other trade barriers and restrictions;
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Longer payment cycles, greater difficulties in accounts
receivable collection and greater difficulties in ascertaining
the credit of our customers and potential business partners;
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Potentially adverse tax consequences, including withholding in
connection with the repatriation of earnings and restrictions on
the repatriation of earnings;
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Difficulties in obtaining export licenses for technologies;
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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
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Currency exchange risks.
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22
Our
products are manufactured by independent third
parties.
We rely on independent foundries to manufacture all of our
products. Substantially all of our products are currently
manufactured by TSMC, GSMC, and other independent Asian
foundries in Asia. Our reliance on these or other independent
foundries involves a number of risks, including:
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Possibility of an interruption or loss of manufacturing capacity;
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Reduced control over delivery schedules, manufacturing yields
and costs; and
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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.
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Any failure of these third-party foundries to deliver products
or otherwise perform as requested could damage our relationships
with our customers and harm our sales and financial results.
To address potential foundry capacity constraints in the future,
we may be required to enter into arrangements, including equity
investments in or loans to independent wafer manufacturers in
exchange for guaranteed production capacity, joint ventures to
own and operate foundries, or take or pay contracts
that commit us to purchase specified quantities of wafers over
extended periods. These arrangements could require us to commit
substantial capital or to grant licenses to our technology. If
we need to commit substantial capital, we may need to obtain
additional debt or equity financing, which could result in
dilution to our shareholders.
We
have extended sales cycles, which increase our costs in
obtaining orders and reduce the predictability of our
earnings.
Our potential customers often spend a significant amount of time
to evaluate, test and integrate our products. Our sales cycles
often last for several months and may last for up to a year or
more. These longer sales cycles require us to invest significant
resources prior to the generation of revenues and subject us to
greater risk that customers may not order our products as
anticipated. In addition, orders expected in one quarter could
shift to another because of the timing of customers
purchase decisions. Any cancellation or delay in ordering our
products after a lengthy sales cycle could adversely affect our
business.
Our
products are subject to recall risks.
The greater integration of functions and complexity of our
products increase the risk that our customers or end users could
discover latent defects or subtle faults in our products. These
discoveries could occur after substantial volumes of product
have been shipped, which could result in material recalls and
replacement costs. Product recalls could also divert the
attention of our engineering personnel from our product
development needs and could adversely impact our customer
relationships. In addition, we could be subject to product
liability claims that could distract management, increase costs
and delay the introduction of new products.
The
semiconductor industry is subject to cyclical variations in
product supply and demand.
The semiconductor industry is subject to cyclical variations in
product supply and demand, the timing, length and volatility of
which are difficult to predict. Downturns in the industry have
been characterized by abrupt fluctuations in product demand,
production over-capacity and accelerated decline of ASP. Upturns
in the industry have been characterized by rising costs of goods
sold and lack of production capacity at our suppliers. These
cyclical changes in demand and capacity, upward and downward,
could significantly harm our business. Our quarterly net
revenues and gross margin performance could be significantly
impacted by these cyclical variations. A prolonged downturn in
the semiconductor industry could materially and adversely impact
our business, financial condition and results of operations. We
cannot assure you that the market will improve from a cyclical
downturn or that cyclical performance will stabilize or improve.
23
The
value of our common stock may be adversely affected by market
volatility.
The price of our common stock fluctuates significantly. Many
factors influence the price of our common stock, including:
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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;
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Changes in accounting rules, particularly those related to the
expensing of stock options and accounting for uncertainty in
income taxes;
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The liquidity within the market for our common stock;
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Sales or purchases by us or by our officers, directors, other
insiders and large shareholders;
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Investor perceptions concerning the prospects of our business
and the semiconductor industry;
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Market conditions and investor sentiment affecting market prices
of equity securities of high technology companies; and
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General economic, political and market conditions, such as
recessions or international currency fluctuations.
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We are
incurring additional costs and devoting more management
resources to comply with increasing regulation of corporate
governance and disclosure.
We are spending an increased amount of management time and
external resources to analyze and comply with changing laws,
regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and the NASDAQ Global Market rules and listing
requirements. Devoting the necessary resources to comply with
evolving corporate governance and public disclosure standards
may result in increased general and administrative expenses and
attention to these compliance activities and divert
managements attention from our on-going business
operations.
Failure
to maintain effective internal controls could have a material
adverse effect on our business, operating results and stock
price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we are required to include a report of managements
assessment of the design and effectiveness of our internal
controls as part of our Annual Report on
Form 10-K.
In order to issue our report, our management must document both
the design for our internal control over financial reporting and
the testing processes, including those related to new systems
and programs, that support managements evaluation and
conclusion. During the course of testing our internal controls
each year, we may identify deficiencies which we may not be able
to remediate, document and retest in time, due to difficulties
including those arising from turnover of qualified personnel, to
meet the deadline for management to complete its report. Upon
the completion of our testing and documentation, certain
deficiencies may be discovered that will require remediation,
the costs of which could have a material adverse effect on our
results of operations. In addition, if we fail to maintain the
adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time we may not
be able to ensure that our management can conclude on an ongoing
basis that we have effective internal control over financial
reporting in accordance with Section 404. In the future, if
we are unable to assert that our internal control over financial
reporting is effective, we could lose investor confidence in the
accuracy and completeness of our financial reports, which in
turn could have an adverse effect on our stock price.
We are
exposed to fluctuations in the market values of our investments
and in interest rates.
At March 31, 2008, we had $49.1 million in cash, cash
equivalents and short-term investments. These balances
represented over 50% of our total assets. We invest our cash in
a variety of financial instruments, consisting principally of
investments in commercial paper, money market funds, and highly
liquid debt securities of
24
corporations, and the United States government and its agencies.
These investments are denominated in U.S. dollars. We do
not have any investments in auction rate securities.
Investments in both fixed interest rate and floating interest
rate instruments carry a degree of interest rate risk. Fixed
rate debt securities may have their market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates or if the decline in fair value of our publicly traded
equity investments is judged to be other-than-temporary. We may
suffer losses in principal if we are forced to sell securities
that decline in market value due to changes in interest rates.
However, because any debt securities we hold are classified as
available-for-sale, no gains or losses are
recognized due to changes in interest rates unless such
securities are sold prior to maturity. In addition, the credit
worthiness of the issuer, relative values of alternative
investments, the liquidity of the instrument, and other general
market conditions may affect the fair values of interest rate
sensitive investments.
25
PROPOSAL ONE
THE REINCORPORATION MERGER
ADVANCE PROXY THE CASH-OUT MERGER
The following is a summary of the material aspects of the
proposed mergers and related transactions. The following summary
may not contain all of the information that is important to you.
You are encouraged to read this entire joint proxy
statement/prospectus, including the section entitled Risk
Factors beginning on page 12, and the other documents
we refer to carefully for a more complete understanding of the
mergers and the related transactions.
Background
of the Mergers
Our board of directors and our senior management periodically
review and assess strategic alternatives available to us. We
announced in September 2006 that our board of directors and
management would conduct an ongoing strategic review of our
operations and business plan. Between the time of that
announcement and the second quarter of 2007, ESS sold its
advanced BluRay/HD-DVD technology for $13.5 million,
licensed certain standard definition DVD products for
$3 million plus future royalties, and substantially
terminated the production and sale of camera phone image
sensors. In connection with those activities, ESS reduced its
worldwide headcount from over 500 employees to the current
level, as of March 31, 2008, of 148 employees, an
approximately 70% reduction.
At a regularly scheduled meeting of our board of directors held
on April 21, 2007, Mr. Fred Chan, at that time the
chairman of our board of directors, and Mr. Robert Blair,
our chief executive officer, reported to our board of directors
on our current and future business strategies and prospects and
their views for the future of our operating businesses,
including the status of the video and audio semiconductor
industries generally, the difficulties facing United States
fabless semiconductor companies like ESS in general due to
increased competition from companies in Taiwan and China that
benefit from lower costs and structural financial advantages,
and the difficulties facing ESS from foreign competition in
particular due to a lack of financial and personnel resources
necessary to design efficiently new digital semiconductors with
their increased complexity and effectively compete in related
markets. Messrs. Chan and Blair discussed the effect on our
financial condition and results of operations resulting from the
cash required to continue to operate our video and analog
operations, the advisability of continuing such operations and
their concerns that continuing those operations would use a
significant amount of cash and other resources, particularly
given a relatively low likelihood of building a sustainable
business with our then current operations. Messrs. Chan and
Blair therefore expressed their view that we should consider
strategic alternatives available to us in addition to continuing
to operate our current business.
Following a discussion of the views of Messrs. Chan and
Blair by the members of our board of directors, Mr. Blair
and Mr. James Boyd, at that time our chief financial
officer, expressed to our board of directors that either or both
of them might be interested in joining or working with entities
that might be interested in purchasing ESS or a portion of its
business, including the video
and/or
the
analog product lines. Mr. Bruce Alexander, the then-current
chairman of our board of directors, also advised our board of
directors that in the future he might become engaged with a
party, Imperium, which might have an interest in acquiring ESS
or its business, although Mr. Alexander also noted that he
was not employed by or otherwise affiliated with Imperium. After
further discussion among the members of our board of directors,
and in view of the actual or apparent conflicts of interest that
could arise based on the fact that Messrs. Alexander, Blair
and/or
Boyd
might join or be employed by an acquirer of ESS in the future,
our board of directors determined to establish the strategic
transaction committee to consider any potential strategic
transactions involving ESS, including the sale of any or all of
our video product line our analog product line, our physical
assets and intellectual property or our entire company, and
authorized the strategic transaction committee to retain outside
experts, advisors and consultants at its discretion for the
purpose of analyzing strategic alternatives. Two members of our
board of directors, Mr. Alfred Stein and Mr. Peter
Mok, indicated that they would each remain independent from any
potential acquirer of ESS or its businesses and
Messrs. Stein and Mok were ultimately designated by our
board of directors as the members of the strategic transaction
committee, whom we refer to as the members, with Mr. Stein
named as chairman of the strategic transaction committee.
In early May of 2007, Messrs. Stein and Mok determined to
engage a financial advisor to assist the strategic transaction
committee in its evaluation of strategic alternatives and
Messrs. Stein and Mok interviewed
26
representatives of Needham & Company and
representatives of one other financial advisory firm. The
members ultimately determined that Needham & Company
was qualified to act as the financial advisor to the strategic
transaction committee, and to engage Needham &
Company, based on Needham & Companys experience
in the semiconductor industry generally, including with
companies similar to ESS, and Needham & Companys
work with ESS in particular, including Needham &
Companys engagement as a co-manager for ESS initial
public offering in 1995, Needham & Companys
advisory role in connection with the spin-off of ESS
subsidiary Vialta in 2001, Needham & Companys
work as lead underwriter for ESS follow-on public offering
in 2002, and Needham & Companys advisory role in
connection with ESS acquisitions of Divio and Pictos
Technologies in 2003.
Prior to engaging Needham & Company,
Messrs. Stein and Mok discussed the fact that
Needham & Company had represented ESS historically and
worked closely with management during its prior engagements, the
fact that Mr. Alexander was a former Needham &
Company partner and the fact that Mr. Alexander had
indicated to our board of directors that he might in the future
become engaged with Imperium and that one of Imperiums
founding partners and its chief executive officer was a former
partner and the former chief executive officer of
Needham & Companys asset management affiliate,
Needham Investment Management, LLC. Messrs. Stein and Mok
also discussed the need for assurance that Needham &
Company could operate independently of management and the other
members of our board of directors. In subsequent discussions in
early May of 2007, the strategic transaction committee discussed
with Needham & Company its ability to operate
independently of management and the other members of our board
of directors. After determining, based on these discussions,
that Needham & Company would be able to operate
independently, Messrs. Stein and Mok determined that
Needham & Company should be retained to act as the
financial advisor to the strategic transaction committee and
determined to commence negotiation of an engagement letter with
Needham & Company.
On May 25, 2007, the strategic transaction committee
entered into an engagement letter with Needham &
Company pursuant to which Needham & Company agreed to
act as financial advisor to assist the strategic transaction
committee in its financial analysis and consideration of
strategic alternatives available to ESS, including a sale of all
or a substantial portion of ESS or our business segments or a
liquidation of ESS. In addition, in May of 2007, the strategic
transaction committee determined to engage independent outside
counsel to assist with its evaluation of strategic alternatives
and Messrs. Stein and Mok interviewed representatives of
four different law firms, including Latham & Watkins
LLP, which we refer to as Latham. In late May of 2007, following
the strategic transaction committees engagement of
Needham & Company, Messrs. Stein and Mok
determined to engage Latham as independent counsel for the
strategic transaction committee based on Lathams
experience with similar transactions in the semiconductor
industry and related industries.
The strategic transaction committee held an organizational
meeting on May 30, 2007, which Needham & Company,
Latham and Mr. Blair attended. All meetings of the
strategic transaction committee were attended by conference call
unless otherwise noted. The members and certain advisors
discussed with Mr. Blair the recent history of ESS and
various potential strategic alternatives, including a sale of
ESS, a sale of our video
and/or
analog product lines coupled with a continuing business
licensing intellectual property rights and managing royalties, a
total liquidation of ESS, or a continuation of ESS current
business without undertaking a significant strategic
transaction. During the meeting, Mr. Blair confirmed his
understanding that the strategic transaction committee and
certain advisors would control ESS evaluation of any
potential strategic transaction and the process surrounding any
related solicitation of indications of interest in an
acquisition of ESS.
The strategic transaction committee met again on June 4,
2007, and the members discussed the timing and process for
canvassing the market with respect to a potential sale
transaction with representatives from Latham and
Needham & Company. The members and certain advisors
also reviewed a list prepared by Needham & Company of
parties which might be interested in an acquisition of ESS or
all or a portion of its business, which we refer to as bidders,
and an executive summary with respect to ESS and its business,
composed of publicly available information, to be distributed to
the potential bidders, drafts of each of which had been
presented to the members prior to the meeting. The members and
Latham discussed the role of the strategic transaction committee
in the process of evaluating strategic alternatives and the
powers that had been delegated to the strategic transaction
committee by our full board of directors. Latham agreed to work
with representatives of Orrick, Herrington & Sutcliffe
LLP, outside counsel to ESS, which we refer to as Orrick, to
propose a clarification of the scope of the role and powers of
the strategic transaction committee in the evaluation of
strategic alternatives for review and approval
27
by our full board of directors. A representative of Latham spoke
with the members concerning their fiduciary duties to ESS and
its shareholders under California law in connection with the
evaluation of strategic alternatives as well as the provisions
included in our charter and bylaws and provided by California
law that would make it more difficult for a third party to
complete an acquisition of ESS on an unsolicited basis. Latham
responded to questions from our strategic transaction committee
regarding their fiduciary duties and the provisions of our
charter and bylaws and of California law protecting ESS and,
following a discussion, the strategic transaction committee
determined not to recommend any related changes or additions to
our charter or bylaws at that time.
On June 6, 2007, our board of directors met by conference
call to clarify the role and powers of the strategic transaction
committee, and expressly delegated to the strategic transaction
committee all of the power and authority of our board of
directors, to the fullest extent permitted by law, to take any
and all actions with respect to any strategic alternatives
available to ESS, provided only that final approval of a
definitive agreement with respect to a strategic alternative, if
any, would be subject to approval by our board of directors. Our
board of directors also resolved to make one time payments to
Mr. Stein of $95,000 for his service as chairman of the
strategic transaction committee and to Mr. Mok of $76,000
for his service on the strategic transaction committee. Neither
payment was conditioned on the recommendation or consummation of
any strategic alternative.
On June 12, 2007, Mr. Stein met with Latham,
Needham & Company and Mr. Boyd, and, following a
discussion of certain additions and deletions to the list of
potential bidders that Needham & Company would
initially approach in the sale process, approved the list of
potential bidders and approved the distribution of an executive
summary and a form of confidentiality agreement to potential
bidders who showed interest in participating in the sale
process. Mr. Stein and certain advisors discussed both the
benefits and drawbacks to disclosing publicly that our board of
directors had formed the strategic transaction committee to
evaluate strategic alternatives, including the fact that while
public announcement of a transaction process would encourage any
party that might potentially be interested in an acquisition to
approach ESS and the fact that public announcement could also be
distracting and lead to uncertainties for management, our
employees and our business. Mr. Stein and certain advisors
also discussed the timing of a public announcement of the
formation of the strategic transaction committee and
Mr. Stein, subject to confirmation by Mr. Mok,
determined that the appointment of the strategic transaction
committee should be publicly disclosed and that any
communication with possible bidders would not start until that
public announcement was made.
On June 18, 2007, ESS announced that Mr. Boyd, at that
time our chief financial officer, had taken a full time position
with another company to act as its chief financial officer and
planned to resign from ESS on or about August 14, 2007.
On June 19, 2007, following discussions among the members
of our board of directors, Latham and Orrick, ESS publicly
announced that it had appointed the strategic transaction
committee to consider strategic alternatives for ESS, that the
strategic transaction committee had retained Needham &
Company and Latham and that, as part of its review of strategic
alternatives, the strategic transaction committee would
investigate a total liquidation of ESS.
Late in the day on June 19, 2007, following our
announcement of the appointment of the strategic transaction
committee, Needham & Company began contacting possible
bidders and in June and July of 2007 Needham & Company
approached approximately 78 parties (both strategic and
financial) to determine their interest in acquiring ESS or a
portion of its business. Between June 2007 and the end of
September 2007, Latham negotiated and ESS entered into
confidentiality agreements with 23 prospective bidders. During
that same period, Needham & Company distributed
informational materials, prepared by management and reviewed by
the strategic transaction committee, to prospective bidders that
had entered into confidentiality agreements and we offered
presentations by management to those same prospective bidders.
Beginning the week of July 16, 2007 through the middle of
October, our senior management met with 13 potential bidders,
either in person or telephonically, with representatives of
Needham & Company present at each presentation.
The strategic transaction committee met again on June 20,
2007. Representatives of Orrick and Mr. Alexander
participated in the meeting, in addition to the strategic
transaction committees advisors from Latham and
Needham & Company. The members of the strategic
transaction committee discussed with representatives from Latham
and Orrick and Mr. Alexander the possible role of any of
Messrs. Alexander, Chan and Blair in a potential strategic
transaction involving ESS. The participants also discussed the
need to exclude potentially interested
28
directors
and/or
management of ESS from the evaluation of strategic alternatives
by ESS and related matters immediately following any known
interest in a possible strategic transaction on the part of any
such director or officer.
The strategic transaction committee met with Latham and
Needham & Company on July 2, 2007 and discussed a
preliminary liquidation model for ESS which assumed a total
liquidation of ESS and was prepared by Needham &
Company based on assumptions, information and estimates provided
by management. The members of the strategic transaction
committee and representative from Latham asked specific
questions concerning certain assumptions used in the preliminary
liquidation model and Needham & Company agreed to
update the preliminary liquidation model as the strategic
transaction committees evaluation of potential strategic
alternatives progressed. On July 2, 2007, following the
meeting of the strategic transaction committee, our board of
directors, with Messrs. Alexander and Chan absent, met with
Latham and Orrick and received an update from the strategic
transaction committee on its evaluation of strategic
alternatives to date. The board of directors followed the
strategic transaction committees update with a general
discussion of strategic alternatives and the role of the
strategic transaction committee. On July 9, 2007, the
strategic transaction committee met with Latham and discussed
the status of initial contacts with potential bidders and
affirmed that, in order to control the submission of proposals
from bidders, protect ESS confidential information and
provide bidders with an equal opportunity to make proposals, ESS
should not admit any bidder into the strategic transaction
process unless that bidder had executed a confidentiality
agreement that contained a standstill provision in substantially
the form agreed to by other bidders in the strategic transaction
process.
On July 18, 2007, Mr. Chan, at that time the chairman
of our board of directors, resigned as a director stating that
the resignation would allow more time for the pursuit of
philanthropic interests, and was not for any reason related to
ESS business. Mr. Alexander was elected by our board
of directors to replace Mr. Chan as chairman.
On July 20, 2007, Needham & Company discussed
with Mr. Stein and Latham the status of Needham &
Companys contacts with potential bidders in connection
with a potential strategic transaction, discussed the reasons
that certain potential bidders had given for declining to
participate in the sale process, including the difficulties
facing United States fabless semiconductor companies like ESS
due to increased foreign competition, the cost of designing and
manufacturing new digital semiconductors and the significant
liabilities on our balance sheet, and agreed to continue to
update the strategic transaction committee concerning progress
with potential bidders.
The strategic transaction committee met with representatives
from Latham on July 30, 2007 and discussed the status of
the strategic transaction process as well as a proposed update
to the board of directors on the strategic transaction process
to date. The strategic transaction committee met again on
August 4, 2007 and on August 29, 2007 to receive
further updates from Needham & Company on the status
of the sale process. Needham & Company reiterated the
reasons that certain possible bidders had given for declining to
participate in the sale process, including the difficulties
facing United States fabless semiconductor companies like ESS
due to increased foreign competition, the cost of designing and
manufacturing new digital semiconductors and the significant
liabilities on our balance sheet. At the August 4, 2007
meeting, the strategic transaction committee requested that
Needham & Company prepare and Latham review an initial
letter soliciting indications of interest from bidders involved
in the sale process with the intention of receiving initial
indications of interest in early September 2007.
Needham & Company reported at the August 29, 2007
meeting that it had sent the initial letter requesting
indications of interest, in the form reviewed by the members of
the strategic transaction committee and Latham, to 10 potential
bidders who remained in the sale process, including Imperium. By
the end of September 2007, Needham & Company would
provide the initial letter requesting indications of interest to
an additional three potential bidders.
On August 15, 2007, Mr. Boyd resigned as our chief
financial officer and our board of directors appointed
Mr. John Marsh, then our corporate controller, as our chief
financial officer.
The strategic transaction committee met with representatives
from Latham on August 30, 2007 and discussed the initial
response from bidders with respect to a potential acquisition of
ESS or a portion of our business, and, in particular, the
interest in our analog product line as compared to the relative
lack of interest exhibited in our other business segments.
Latham and the strategic transaction committee discussed the
need to retain flexibility with respect to the strategic
alternatives available to ESS and the need to consider all
aspects of any potential strategic
29
transaction, including the cost of the process. The participants
then discussed entry into neutrality agreements with members of
our senior management, including Mr. Blair, Mr. Marsh,
and Mr. Martin Mallinson, head of our analog unit, a draft
of which had been circulated to the members of the strategic
transaction committee prior to the meeting. The strategic
transaction committee discussed the principal terms of the
neutrality agreement, which was intended to formalize guidelines
that had previously been given to management by the strategic
transaction committee on an informal basis, including (i) a
restriction on managements ability to agree with any
bidder on future employment terms and equity arrangements until
authorized by the strategic transaction committee or until a
final bidder was determined, (ii) a requirement that all
contact by management with bidders would be supervised by either
Needham & Company or Latham, (iii) a requirement
that management remain neutral with respect to all bidders and
refrain from offering opinions or advice to bidders regarding a
proposed transaction, and (iv) a requirement that
management would not negotiate with any person regarding a
proposal received in the strategic transaction process.
Following the discussion of the terms of the neutrality
agreement, the strategic transaction committee authorized Latham
to approach management in order to have the neutrality
agreements executed and authorized Latham to finalize the terms
of the neutrality agreements with management and its counsel. On
September 11, 2007, the strategic transaction committee met
with Latham and discussed the status of the neutrality agreement
with management. Messrs. Blair, Marsh and Mallinson each
executed a neutrality agreement dated September 11, 2007.
Between September 7, 2007 and September 13, 2007,
Needham & Company received initial indications of
interest from three bidders participating in the sale process,
including Imperium. Two of those indications of interest,
including the indication of interest received from Imperium and
an indication of interest from a second potential private equity
buyer that we refer to as the second bidder, related to
acquisitions of the entire company, and the third indication was
for an acquisition of only our video product line. The strategic
transaction committee met on September 14, 2007 to discuss
the indications of interest received by Needham &
Company, to receive an update from Needham & Company
on the sale process and to discuss the status of
Needham & Companys contacts with potential
bidders. The members and certain advisors discussed the terms of
the initial indications of interest in detail, including the
indication made by Imperium which contained a preliminary
proposed purchase price for ESS of $1.50 to $1.60 per share.
Needham & Company and the strategic transaction
committee also discussed in detail the proposal for the
acquisition of only our video product line. The strategic
transaction committee noted that the offer did not contemplate a
fixed purchase price for our video product line but instead was
for payment of royalties based on the success of our video
products and that, were ESS to accept that proposal, it would be
left as a public corporation with a smaller set of remaining
operations and a significant number of liabilities.
Needham & Company reported to the members that the
acquisition proposals received to date, and discussions with
other bidders who had signed confidentiality agreements,
suggested that a sale of the company as a whole would likely be
more favorable to the companys shareholders then a sale of
a portion of our business. Needham & Company and the
strategic transaction committee noted that the two offers
received with respect to an acquisition of ESS were more
attractive offers than the proposal to acquire only our video
product line, both in terms of the immediate cash consideration
offered (which would not be dependent on future royalty streams)
and the fact that ESS would be able to offer its shareholders
the opportunity to make a decision with respect to a sale of the
entire company and a cash payment for their shares. The
strategic transaction committee determined that it was not
interested at that time in pursuing a sale of only the video
product line and requested that Needham & Company seek
a proposal for the acquisition of the entire company from the
applicable bidder, rather then a proposal for the acquisition of
only the video product line. Following the discussion of the
indications of interest received, the strategic transaction
committee approved opening of an online due diligence data site
with respect to ESS for the two bidders that had submitted an
initial indication of interest with respect to an acquisition of
the entire company. Latham reminded the participants that
bidders should not be provided access to management without a
representative from Needham & Company or Latham
present.
Needham & Company and ESS opened the online diligence
data room on September 17, 2007. On September 28, 2007
the strategic transaction committee met again to discuss the
status of the strategic transaction process and the progress of
the bidders in due diligence. Needham & Company noted
that the bidder who initially provided an indication of interest
with respect to an acquisition of only the video portion of our
business had advised Needham & Company that it was not
interested in submitting a proposal for the acquisition of our
entire company and that Needham & Company had sent out
one additional letter requesting an initial indication of
interest. On October 3, 2007, Needham & Company
distributed a draft definitive merger agreement, which was
prepared by
30
Latham and reviewed by the members, Orrick and our senior
management, to Imperium and the second bidder for their review
and comment in connection with submission of full proposals to
acquire ESS.
On October 3, 2007 our board of directors met and discussed
a letter of intent presented to our board of directors by
management for the sale of our headquarters buildings in
Fremont, California to TC Fund Property Acquisitions, Inc.,
which we refer to as TC Fund. At that meeting, our board of
directors determined to pursue the sale of our headquarters on
the terms contemplated by the letter of intent. Following the
meeting of our board of directors, the strategic transaction
committee met with Latham and discussed the sale of our
headquarters and its relation to the sale process and the timing
of any strategic transaction, as well as the timing of the
disclosure to the public of any definitive agreement that we
might reach with TC Fund to sell our headquarters.
The strategic transaction committee met four additional times in
the first two weeks of October, on October 5,
October 6, October 9 and October 10, 2007. During
those meetings, the strategic transaction committee discussed
with representatives from Latham and Needham & Company
the status of Needham & Companys contacts with
possible bidders in connection with a potential strategic
transaction and the progress of bidders involved in due
diligence. The strategic transaction committee also discussed
the timing for providing access to management for each bidder
that had submitted an indication of interest so that the bidder
could discuss on a preliminary basis employment or other
arrangements with management in the event of a sale, and the
need to keep participating bidders on relatively equal timing
with respect to access to management The strategic transaction
committee repeated its instruction to its financial advisors
that bidders should not be granted access to management without
a representative from Needham & Company or Latham
present in order to ensure that management treated the various
bidders in a consistent and fair manner and did not show
favoritism towards any particular bidder.
The strategic transaction committee met again on
October 12, 2007 and discussed the status of the strategic
transaction process generally, the progress of Imperium and the
second bidder in the due diligence process, each of those
bidders informational meetings with management, and
Needham & Companys understanding, based on
communications from these bidders, that firm proposals to
acquire ESS and full
mark-ups
of
the draft definitive merger agreement would be delivered to the
strategic transaction committee at the end of the week by
Imperium and in the middle of the following week by the second
bidder.
On October 17, 2007, Needham & Company received a
proposal from Imperium to acquire ESS for $1.65 per share,
together with a
mark-up,
prepared by Imperiums counsel, of the draft merger
agreement. The strategic transaction committee met with Latham
on October 19, 2007 and discussed Imperiums proposal
as well as the
mark-up
of
the draft merger agreement and the fact that the Imperium
proposal was the only firm proposal received by ESS to date. At
the October 19, 2007 meeting the members also noted that,
given the informal advisory relationship between
Mr. Alexander and Imperium, the strategic transaction
committee would need to keep its evaluation of strategic
alternatives and the sale process independent of
Mr. Alexander. The members and Latham then had an extended
discussion regarding the fact that Imperiums proposal
would expire on October 22, 2007 and the members affirmed
the need to make sure that proposals had been received from all
of the participants still involved in the sale process and the
need to avoid any appearance of favoritism with respect to one
bidder over any other bidder, regardless of the deadline
provided by Imperium for the expiration of its proposal. The
participants then discussed other strategic alternatives
available to ESS, including a continuation of ESS current
business, a total liquidation of ESS and a self-tender for
ESS shares. The members noted that they needed to revisit
the preliminary calculations of the amount of consideration that
could be offered to our shareholders in a liquidation or a
self-tender prior to proceeding with any other strategic
alternative. The strategic transaction committee and certain of
its advisors also discussed the potential sale of ESS
headquarters to TC Fund and the potential timing of that sale
and the public announcement thereof in relation to the
evaluation of strategic alternatives.
Our board of directors met at our headquarters with Orrick,
Latham and Needham & Company on October 21, 2007
and, during that meeting, determined that ESS should attempt to
negotiate a definitive agreement with TC Fund regarding the
sale of the our headquarters and that ESS should wait to proceed
with any particular strategic alternative until the potential
sale of our headquarters as well as our third quarter results
had been publicly disclosed. Our board of directors made its
decision, in part, based upon a desire to ensure that both the
potential sale of our headquarters and our third quarter results
were reflected in the market price of our common stock prior to
proceeding with any particular strategic alternative. Following
the meeting of our board of directors on October 21,
31
2007, the strategic transaction committee met with Latham and
Needham & Company. The members and certain of their
advisors discussed the status of Needham &
Companys contacts with bidders, the bid and the initial
indications of interest received to date, the fact that only one
bidder had presented a firm proposal and a full
mark-up
of
the draft merger agreement by the bid deadline and the
possibility of receiving any additional bids.
Needham & Company described to the members one
additional indication of interest that it had received for a
purchase of only our analog product line. The strategic
transaction committee and Needham & Company discussed
the fact that the offer placed a low value on the analog product
line and, were ESS to accept the proposal, it would be left as a
public corporation with limited remaining operations and a
significant number of liabilities on its balance sheet. The
strategic transaction committee determined that it was not
interested at that time in pursuing a sale of only the analog
product line and requested that Needham & Company seek
a proposal for the acquisition of the entire company from the
applicable bidder, rather then a proposal for the acquisition of
just the analog product line. The participants next discussed
the decision of our board of directors to wait to proceed with
any particular strategic alternative until the potential sale of
our headquarters as well as our third quarter results had been
publicly disclosed. In light of the decision to disclose the
potential sale of our headquarters and our third quarter
results, the members determined that they were not prepared to
enter into exclusive negotiations with Imperium at that time.
The members agreed to respond to Imperium by indicating interest
on the part of the strategic transaction committee in continuing
to discuss a potential sale and a desire to begin to negotiate a
definitive merger agreement. In addition, the members asked
Needham & Company to approach the second bidder in
order to reaffirm that they had previously submitted its best
and final purchase price and to request that the second bidder
submit a full markup of the draft merger agreement.
On October 24, 2007, following a request by
Needham & Company, the second bidder reaffirmed its
initial purchase price proposal in an
e-mail
to
Needham & Company, which was lower then the purchase
price proposed by Imperium in its October 17, 2007
proposal, and the second bidder provided Needham &
Company with its initial position on a number of the material
terms contained in the draft merger agreement, but did not
provide a full markup of the draft merger agreement at that time.
On October 26, 2007, the strategic transaction committee
met with Latham and Needham & Company and informed
Needham & Company of the retention by the strategic
transaction committee of Sutter as a second independent
financial advisory firm and noted that Sutter did not have any
prior relationship with ESS or with Needham & Company.
Latham also noted that it had discussed the retention of Sutter
with the members separately on several occasions during the
previous week and had circulated a draft of an engagement letter
with Sutter to the members. The members and Latham discussed the
fact that one of Imperiums founding partners and its chief
executive officer had close associations with Mr. Alexander
and was a former partner and the former chief executive officer
of an affiliate of Needham & Company and that
Mr. Alexander, who had an informal advisory relationship
with Imperium but who had told the members and Latham that he
was not employed by Imperium and had no formal relationship with
Imperium, was also a former partner of Needham &
Company. The members and Latham also discussed the fact that
Mr. Blair had disclosed that he had developed a friendship
with the chief executive officer of Imperium, whom
Mr. Blair had first met when Imperiums chief
executive officer was working for an affiliate of
Needham & Company during our spin-off of our former
subsidiary, Vialta, in 2000 and that Mr. Blair had also
worked with Imperiums chief executive officer, then a
partner at an affiliate of Needham & Company, during
our follow-on public offering in January 2002. Latham noted that
Sutter would be retained in order to conduct an additional
liquidation analysis with respect to ESS and, due to the
potential for the appearance of conflicts of interest among
Messrs. Alexander and Blair
and/or
Needham & Company in the event of a sale of ESS to
Imperium, to render a fairness opinion if requested by the
strategic transaction committee with respect to such a
transaction. After further discussion with Latham and
Needham & Company, the members determined to retain
Sutter on substantially the terms set forth in the draft
engagement letter that had previously been circulated to the
members. Following the discussion regarding Sutter,
Needham & Company informed the strategic transaction
committee that the bidder who had provided an indication of
interest with respect to an acquisition of only the analog
portion of our business had indicated that it was not interested
in submitting a proposal for the acquisition of our entire
company. Later in the day on October 26, 2007, the
strategic transaction committee entered into the engagement
letter with Sutter pursuant to which Sutter agreed to act as a
financial advisor to assist the strategic transaction committee
in its financial analysis and consideration of the various
strategic alternatives available to ESS.
32
In addition, on October 26, 2007, we entered into an
agreement with TC Fund to sell our headquarters for an aggregate
amount of $26.3 million, subject to certain conditions
including a
30-day
due
diligence approval period. On October 30, 2007 we publicly
disclosed both our third quarter results for fiscal year 2007
and our entry into the agreement with TC Fund to sell our
headquarters.
The strategic transaction committee met on October 31, 2007
with Latham and Needham & Company and
Needham & Company discussed the increase in the per
share price of our common stock following the announcement of
third quarter earnings and the signing of the agreement with TC
Fund with respect to the sale of our headquarters. Latham noted
that a representative of Sutter had met with Mr. Blair on
October 26, 2007 and that Sutter had started work on a
second liquidation analysis with respect to ESS. The members,
Latham and Needham & Company then discussed certain
strategic options available to ESS, among them a sale of ESS, a
liquidation, a shareholder dividend and a share repurchase. The
strategic transaction committee also requested that its
financial advisors approach Imperium during the following week
to gauge Imperiums continuing interest in an acquisition
of ESS, as Imperiums proposal to acquire ESS had expired
on October 22, 2007.
On November 10, 2007, following a number of requests from
Needham & Company, the second bidder submitted a
markup of the draft merger agreement to Needham &
Company.
The strategic transaction committee next met on
November 12, 2007 with representatives of Latham and
Sutter. Sutter began the meeting with a summary of its review to
date, based on assumptions, information and estimates provided
by management, of the range of potential returns to our
shareholders in the event that the strategic transaction
committee determined to recommend a total liquidation of ESS.
Sutter discussed its preliminary liquidation model in detail
with the strategic transaction committee and noted that,
although the potential results of a liquidation of ESS shown in
its preliminary liquidation model did indicate a return to
shareholders in excess of the range initially indicated in the
preliminary liquidation model discussed with Needham &
Company (which had also been based on assumptions, information
and estimates provided by management), Sutter believed that even
if a liquidation were to proceed in a manner and on a schedule
favorable to ESS the proceeds to stockholders would, in most
cases, be less than the current price offered by Imperium in the
sale process, which was the highest price offered by any bidder
for our shares. Sutter also noted that the completion of a
liquidation of ESS would take at least three years and that, as
a result, at least a portion of the amounts payable to
shareholders in the liquidation would be significantly delayed
relative to the proceeds that could be received in a sale
transaction. The strategic transaction committee, Latham and
Sutter then discussed the possibility of a tender offer by ESS
for its own shares, including risks related to our analog
product line going forward and the need to retain senior
management, as well as the attractiveness of a tender offer
versus a sale or liquidation. Sutter left the meeting following
its presentation and Needham & Company joined.
Needham & Company began by noting that the second
bidder had submitted a full markup of the draft merger agreement
and that, while the second bidder had not increased their price
and remained significantly below the price offered by Imperium,
the markup did signify continuing interest at the lower price.
The strategic transaction committee, Latham and
Needham & Company discussed next steps in the sale
process and discussed a timetable for receiving best and final
bids from both Imperium and the second bidder by the end of
November.
The strategic transaction committee met with Latham on
November 14, 2007 and with Latham and Sutter on
November 16, 2007 and, at both meetings, discussed the
strategic transaction process in general. At the
November 16, 2007 meeting, Sutter discussed an updated
version of its review of the potential results of a liquidation
of ESS, which continued to support selection by the strategic
transaction committee of an alternative to a complete
liquidation of ESS and Sutter noted that only in a limited
number of scenarios would shareholders receive a greater return
on their shares in a liquidation than they would through
acceptance of an offer to purchase ESS at Imperiums
current bid price and that, even in a best case scenario, the
liquidation would not be completed until 2010 and that ESS would
need to continue to operate during that time. The members and
Sutter also discussed the difficulty and uncertainty surrounding
the achievement of a best case scenario in a liquidation,
particularly given the significant costs associated with winding
up ESS business. The members, Latham and Sutter next
discussed a sale of ESS versus a tender offer by ESS for its own
shares.
On November 21, 2007, both Imperium and the second bidder
were asked to submit their final proposals for an acquisition of
ESS Delaware by November 23, 2007 and were told that the
strategic transaction committee planned
33
to respond to those proposals by November 27, 2007. On
November 23, 2007, Imperium resubmitted its proposal to
acquire all of the outstanding shares of ESS for $1.65 per
share, noting that its proposal would expire on
November 28, 2007. The second bidder reaffirmed its prior
proposal to Needham & Company in a telephone call but
did not submit a revised proposal at that time.
On November 26, 2007, which was the final day of the
30-day
due
diligence approval period contained in our agreement with TC
Fund, we received notice from TC Fund that TC Fund had
terminated the agreement to purchase our headquarters. TC Fund
cited continued uncertainty in the real estate market as a
reason for its termination of the agreement. Later in the day on
November 26, 2007 the strategic transaction committee met
with Latham, Needham & Company and Sutter to discuss
TC Funds termination of the agreement. The members, Latham
and Needham & Company discussed the potential effects
of the TC Funds unwillingness to acquire our headquarters
at the current price on the sale process and on the various
strategic options available to the strategic transaction
committee. The members acknowledged that the decision of how to
respond to TC Fund should be made by our board of directors and
determined that Needham & Company and Latham should
inform the two remaining bidders in the sale process that TC
Fund had determined to terminate its acquisition of our
headquarters, that if TC Fund purchased our headquarters at
all it would likely be at a lower price and that, in light of
the termination of the sale of our headquarters, the strategic
transaction committee would reengage with one or more of the
bidders following further discussions between ESS and TC Fund
with respect to a sale of our headquarters.
Following the meeting of the strategic transaction committee on
November 26, 2007, and at the direction of the strategic
transaction committee Needham & Company notified
Imperium and the second bidder that TC Fund had determined to
terminate its acquisition of our headquarters, and that if TC
Fund purchased our headquarters at all it would likely be at a
lower price. Needham & Company informed each of
Imperium and the second bidder that negotiations concerning the
sale of our headquarters were ongoing, that the strategic
transaction committee expected to update the bidder as to the
status of the sale as soon as more information became available
and that the strategic transaction committee expected to
reengage in the sale process once negotiations with respect to a
sale of our headquarters had progressed.
On December 3, 2007, ESS received confirmation that TC Fund
would still be interested in an acquisition of our headquarters
for several million dollars less than initially offered. The
following day, the strategic transaction committee, Latham,
Orrick and Mr. Blair discussed the revised proposal from TC
Fund. During the discussion the members reaffirmed that the sale
of the headquarters was a decision to be made by our board of
directors and not the strategic transaction committee. The
members and Mr. Blair agreed that ESS should continue to
pursue a better price for the property. Following TC Funds
termination of the agreement to acquire our headquarters, we
remained in contact with TC Fund concerning a possible sale of
our headquarters property and, since termination of the
agreement with TC Fund, have also pursued other alternatives
with respect to our headquarters, including a sale to another
third party or a lease of all or a portion of the headquarters
property. As of the date of this proxy statement/prospectus, we
have not entered into any further agreements to sell or lease
all or any portion of our headquarters. Under the terms of the
merger agreement, Imperium has the right to consent to the
approval of any agreement to sell our headquarters.
The strategic transaction committee met with Latham on
December 6, 2007 and again discussed the role of
Mr. Alexander in the strategic transaction process and his
informal relationship as an advisor to Imperium. Given the
potential for a conflict of interest and
Mr. Alexanders relationship with Imperium, the
strategic transaction committee determined to recommend that
Mr. Alexander recuse himself from business of our board of
directors that could have an effect on the terms of the offer
made by Imperium or otherwise give the appearance that Imperium
could have had access to sensitive information related to ESS
that was not disclosed to other participants in the sale
process. The members and Latham then discussed the status of the
sale process and the ongoing review of strategic alternatives,
including the positive and negative attributes of a sale of ESS
as opposed to a self tender offer, the current proposals from
Imperium and the second bidder, the amount of consideration that
could be offered for all outstanding shares of ESS in a sale
against only a portion of the outstanding shares in a self
tender due to restrictions on the amount of distributions to
shareholders in share repurchases or dividends under California
law, the relative increase in costs of continuing to operate as
a smaller public company following a self tender offer, the
relative value and liquidity of any shares that were not
repurchased in a self tender offer, concerns relating to
management retention following a self tender offer and the
certainty of closing either type of transaction. Following the
34
discussion and in light of the higher per share purchase price
offered by Imperium for an acquisition of ESS, the members asked
Latham to approach Imperium to schedule a meeting to discuss
Imperiums proposal and how best to move forward towards a
full and final offer for consideration by the strategic
transaction committee, assuming that ESS was unable to reach
agreement with TC Fund regarding a sale of our headquarters.
Latham approached Imperiums counsel later in the day on
December 6, 2007 to inquire about Imperiums
continuing interest in an acquisition of ESS and, on
December 10, 2007 representatives of Latham and
Needham & Company met in person with representatives
of Imperium to discuss Imperiums proposal to acquire ESS.
Mr. Alexander attended that meeting and subsequent meetings
with Imperium as an advisor to Imperium, and not as a member of
our board of directors.
On December 11, 2007, the strategic transaction committee
met with Latham and Needham & Company and discussed
the previous days meeting with Imperium. Latham told the
members that Imperium remained interested in an acquisition of
ESS and that Imperium had indicated a willingness to move
forward with completion of their due diligence and negotiation
of definitive documentation and to consider an increased
purchase price if ESS granted Imperium an exclusive right to
negotiate. The members, Latham and Needham & Company
then discussed the positives and negatives of giving Imperium
exclusivity, including the fact that Imperium had offered a
higher price for an acquisition of the entire company than any
other participant in the sale process and the fact that the
strategic transaction committee would not be able to examine
other strategic alternatives during any exclusivity period.
Following the discussion, the members determined to grant
Imperium a
14-day
exclusivity period in order to allow Imperium to complete its
diligence investigation of ESS, negotiate a definitive
acquisition agreement and submit a final proposal to acquire
ESS. Latham and the members also discussed the role of
Mr. Alexander in the sale process and his participation in
both diligence discussions and negotiations as an advisor to
Imperium. The strategic transaction committee reaffirmed its
recommendation that Mr. Alexander be excluded not only from
the strategic transaction committees evaluation of
strategic alternatives but also from any business of our board
of directors that could have an effect on the terms of the offer
made by Imperium or otherwise give the appearance that the
Imperium could have had access to sensitive information related
to ESS that was not disclosed to other participants in the sale
process.
Later in the day on December 11, 2007, ESS and Imperium
entered into an agreement granting Imperium the exclusive right
to negotiate with ESS regarding an acquisition for a
14-day
period. On the morning of December 12, 2007,
representatives of Latham and Needham & Company again
met in person with representatives of Imperium and with
representatives of Imperiums counsel to discuss
Imperiums proposal to acquire ESS in more detail and to
discuss Imperiums comments on the draft merger agreement.
Following that meeting, on the evening of December 12,
2007, Latham distributed a revised draft of the merger agreement
to Imperium and its counsel.
Between December 12, 2007 and December 20, 2007,
Imperium and its counsel conducted additional due diligence on
ESS. On the morning of December 20, 2007, representatives
of Latham and Needham & Company met in person with
representatives of Imperium as well as Messrs. Blair and
Marsh and representatives from Orrick. At that meeting, the
participants discussed Imperiums diligence findings to
date and related questions from Imperium and its counsel. During
the meeting, Imperium noted that, prior to entry into a
definitive merger agreement, it would need to receive an
estimate of the fees and expenses of ESS related to the sale
process through the closing of a sale. On the afternoon of
December 20, 2007, the strategic transaction committee met
with Latham and discussed the diligence meeting that had taken
place earlier in the day with Imperium as well as matters
relating to the legal structure of an acquisition of ESS by
Imperium, including the reasons for structuring a sale of ESS
through the reincorporation merger followed by the cash-out
merger, as provided in the merger agreement. See
Proposal One The Reincorporation
Merger Advance Proxy the Cash-Out Merger
The Mergers and Issuance of Common Stock
Reasons for the Reincorporation
Merger
beginning on page 42 of this joint proxy
statement/prospectus. The members and Latham also discussed a
request by Imperium to enter into negotiations with certain
employees of ESS with respect to employment contracts that would
take effect upon closing of a sale. The members determined that
any such discussions with employees should only take place
following receipt of a final definitive proposal from Imperium
and then only with the strategic transaction committees
approval.
On December 21, 2007, representatives of Imperium and its
counsel conducted a
follow-up
diligence call with representatives from certain of our advisors
and, later that day, Orrick provided an initial draft of the
disclosure
35
schedules to the merger agreement to Imperium and its counsel.
Latham updated the strategic transaction committee regarding the
December 21, 2007 diligence call at a meeting held on
December 22, 2007, and the members and Latham discussed a
request from Imperium for an extension of its exclusivity period
in light of the ongoing diligence process and the upcoming
holidays. Latham noted that Imperium had indicated that it would
stop work towards a final definitive proposal to acquire ESS at
the end of the current exclusivity period if an extension were
not granted. The members and Latham discussed the desire to
reach a final definitive proposal from Imperium and also noted
their concerns over the significant delay between the opening of
the online diligence data room and Imperiums completion of
the diligence process. Following that discussion, the members
determined to extend exclusivity with Imperium through
January 8, 2008. On December 24, 2007, ESS and
Imperium entered into an extension of the agreement granting
Imperium the exclusive right to negotiate with ESS regarding an
acquisition through January 8, 2008. In addition, Latham
distributed further revised drafts of the merger agreement to
Imperiums counsel on December 24, 2007 and on
January 8, 2008 reflecting comments received from
management and from Orrick.
The strategic transaction committee met with Latham on
January 7, 2008 to discuss open diligence requests from
Imperium, including an outstanding request for an estimate of
our costs through closing of a sale transaction and requests for
a summary of the tax treatment of a sale of our headquarters and
for an updated draft of the disclosure schedules. Latham noted
that Imperium would not submit a revised proposal until it had
received the requested items and Latham and the members
discussed a request by Imperium for an additional extension of
their exclusivity period in light of the open diligence
requests. Following the discussion, the members approved an
extension of exclusivity with Imperium through January 14,
2008. The strategic transaction committee and Latham again
discussed Mr. Alexanders role in the sale process,
and the strategic transaction committee instructed Latham to
emphasize to Imperiums counsel that
Mr. Alexanders participation in the sale process was
solely on behalf of Imperium as an advisor to Imperium, that the
special committee understood that Mr. Alexander was not
employed by Imperium and did not have a formal relationship with
Imperium, and that Mr. Alexander was not permitted to
participate in any aspect of the sale process on behalf of ESS,
a message that Latham communicated to Imperiums counsel
later that day. On January 8, 2008, ESS and Imperium
entered into an extension of the agreement granting Imperium the
exclusive right to negotiate with ESS regarding an acquisition
through the open of business on January 14, 2008 and, later
that day, the requested summary of the tax treatment of a sale
of our headquarters was delivered to Imperium. On
January 9, 2008, Orrick provided an updated draft of the
disclosure schedules to the merger agreement to Imperiums
counsel and on January 10, 2008 Latham provided an estimate
of our third party fees between signing of the merger agreement
and closing of the mergers to Imperium.
On January 13, 2008, Imperium provided the strategic
transaction committee with a revised proposal to acquire all of
the outstanding shares of common stock of ESS for $1.55 per
share. The strategic transaction committee met with Latham,
Needham & Company and Sutter on January 14, 2008,
to discuss the revised proposal. Latham summarized the revised
proposal for the members, noting that the revised purchase price
of $1.55 per share represented a reduction from Imperiums
proposal submitted in November 2007 of $0.10 per share, or
approximately 6%, and that the revised proposal added several
new conditions to the closing of a sale and retained a number of
closing conditions that Latham and Needham & Company
had told Imperium in previous meetings were very problematic in
their bid. Latham also noted that many of the closing conditions
contained in Imperiums revised proposal would either not
be achieved based on ESS current financial forecasts, were
not customary in public sale transactions
and/or
would
subject the sale to a high level of risk that the conditions to
closing would not be satisfied, giving Imperium the opportunity
not to close the sale or to demand a reduced price. Latham also
noted that Imperium had included a substantial termination fee
and expanded the situations in which the fee was payable, which,
taken together with the conditionality of the proposal, would
result in a relatively high likelihood that ESS would be
required to pay the fee. In addition, Imperium had offered
insufficient financial and performance support for the proposed
newly formed shell entities, Parent and Merger Sub, that would
agree to acquire ESS, whether in the form of a guarantee, equity
commitment or otherwise. Imperium had also indicated that it
would require the strategic transaction committee to agree to a
30 day extension of exclusivity in order to continue
negotiations with respect to a sale. The participants agreed
that Imperium had significantly decreased the attractiveness of
its offer from both an economic and a contractual perspective
from the proposal submitted in November 2007.
36
At the January 14, 2008 meeting, the members and some of
their advisors next discussed alternatives to a sale of ESS,
including a self-tender offer for our common stock or a
continuation of ESS current business without undertaking a
significant strategic transaction. Latham noted that in the case
of a self-tender offer, sufficient cash would need to be left in
ESS to permit ongoing operations and to offset any liabilities
and that, as a result of those factors and limitations of
distributions in the form of share repurchases or dividends
under California law, the amount of cash that could be used in a
self tender offer would be limited. The members and some of
their advisors then discussed the difficulties facing ESS
current business, the viability of a self tender offer and of
continuing to operate ESS following a self tender offer, the
relative value and liquidity of any shares that were not
repurchased in a self tender offer, the need to sell our
headquarters in order to have sufficient cash to launch a tender
offer, potential ways to structure a tender offer and the
potential effects on management retention of a decision not to
sell ESS. Needham & Company noted that the only other
potential remaining bidder, the second bidder, had offered
consideration below the consideration offered by Imperium in its
revised proposal. Following the discussion of strategic
alternatives, the members directed Latham to contact
Imperiums counsel and inform it that the strategic
transaction committee had found that the revised offer from
Imperium was not acceptable to ESS, that the strategic
transaction committee would not extend Imperiums
exclusivity and that Imperiums proposed merger agreement
would require significant changes, particularly with respect to
conditionality, the termination fee and the absence of financial
or performance support from Imperium, but that the strategic
transaction committee was willing to continue discussions with
Imperium if Imperium would significantly improve its proposal.
Latham conveyed the strategic transaction committees
message to Imperium later that day.
The strategic transaction committee met with Latham,
Needham & Company and Sutter again on January 15,
2008, to discuss the other strategic alternatives available to
ESS. The participants discussed a number of alternatives,
including continuing the sale process with Imperium, launching
an issuer self-tender offer and continuing ESS current
business without undertaking a significant strategic
transaction. The participants also asked Needham &
Company to approach the second bidder to see if the second
bidder would improve its terms. Later that week,
Needham & Company approached the second bidder to
determine whether the second bidder would be interested in
submitting a revised acquisition proposal and the second bidder
began to conduct limited additional diligence on ESS.
On January 18, 2008, the strategic transaction committee
met with Latham, Needham & Company and Sutter. A
representative from Latham described a request received from
Mr. Alexander, on behalf of Imperium, for Latham to meet
with Mr. Alexander and discuss Imperiums revised
proposal to acquire ESS. Needham & Company also
updated the strategic transaction committee on its contact with
the second bidder, which had indicated that it could submit a
revised proposal to acquire ESS by early the following week.
Following a discussion of the proposals that the strategic
transaction committee had received to date, the members directed
Latham to meet with Mr. Alexander and Needham &
Company to continue to work with the second bidder towards a
revised proposal, and requested that Needham & Company
provide updated diligence information with respect to ESS to
both bidders. The discussion among the participants then turned
to other strategic alternatives, including continuing the sale
process, launching a self-tender offer and continuing our
current business without undertaking a significant strategic
transaction. The participants also discussed management
retention concerns and the recent performance of ESS, including
difficulties with new product development, the loss of a
significant licensing revenue stream and the decline in the
potential sale price for our headquarters.
On January 21, 2008, Needham & Company and Latham
spoke on a conference call with the second bidder to address
certain preliminary due diligence questions and, later that day,
the second bidder submitted a revised proposal for the
acquisition of ESS together with a revised markup of the draft
merger agreement. The second bidder also submitted a further
revised markup on of the merger agreement on January 22,
2008 following additional input on their initial revised
proposal from Needham & Company. The revised proposal
included a base purchase price of $1.47 per share for all of our
outstanding common stock, subject to a number of forward looking
adjustments with respect to the aggregate consideration offered,
including a decrease in the amount of the aggregate
consideration payable to shareholders by the amount that cash
held by ESS at closing was less than a threshold amount, an
increase to the aggregate consideration offered by the net
amount of proceeds from a sale of our headquarters over a
certain threshold amount and a decrease to the aggregate
consideration offered by the ultimate aggregate amount that our
transaction related expenses exceeded a certain threshold
amount. Based on information
37
and estimates provided by management at the time of the
proposal, the strategic transaction committee estimated that the
range for a final per share purchase price from the second
bidder, after giving effect to those forward looking
adjustments, would have been approximately $1.50 to $1.51 per
share, although that range could vary significantly based on
actual results.
On January 24, 2008, a representative from Latham met with
Mr. Alexander and Mr. Alexander informed Latham that
Imperium would like to meet with Latham and Needham &
Company to discuss Imperiums proposal to acquire ESS and
that Imperium was prepared to discuss compromises with respect
to its acquisition proposal on a number of points of concern for
the strategic transaction committee. The strategic transaction
committee met with Latham, Needham & Company and
Sutter later that day and Latham updated the strategic
transaction committee on its meeting with Mr. Alexander.
The members, Latham and Needham & Company also
discussed the revised proposal received from the second bidder,
noting that the proposal received from the second bidder was
currently more favorable with respect to contract terms than
Imperiums proposal, including with respect to
conditionality of closing and deal protection provisions,
although, subject to the forward looking adjustments discussed
above, likely not as favorable with respect to the amount of
cash consideration. The members and some of their advisors then
discussed certain other terms of the second bidders
proposal, including the fact that the second bidder had not yet
commenced its full due diligence process, had requested a
30 day exclusivity period, had included a minimum working
capital closing condition in its proposal and had offered a
purchase price that was subject to a number of variables that
would only be determined following signing of a definitive
agreement and therefore would be outside of ESS control.
Following the discussion, the members directed Latham and
Needham & Company to meet with representatives of
Imperium and to continue to negotiate with the second bidder and
attempt to improve the terms of both bidders proposals.
The members directed Latham and Needham & Company to
focus on certainty of closing as well as the consideration being
offered in their negotiations.
On January 25, 2008, Latham and Needham & Company
met in person with representatives of Imperium to outline the
strategic transaction committees concerns regarding
Imperiums proposal received on January 13, 2008, and
on the morning of January 26, 2008, the strategic
transaction committee met with Latham, Needham &
Company and Sutter to discuss the previous days meeting
with Imperium. Latham and Needham & Company emphasized
to Imperium the need for significant revisions to
Imperiums proposal, among them the elimination of many of
the closing conditions Imperium had requested, the limitation of
the situations in which ESS would be required to pay a
termination fee and reimburse expenses of Imperium, a reduction
of the amount of Imperiums proposed termination fee from
approximately 5.2% of the aggregate merger consideration plus an
unlimited expense reimbursement, and the provision of a
guarantee of the obligations of Imperiums newly formed
acquisition vehicles, Parent and Merger Sub, under the merger
agreement. Latham informed the members that Latham and
Needham & Company had a meeting scheduled for later
that morning with representatives of Imperium to further discuss
revisions to Imperiums proposal. The strategic transaction
committee and some of its advisors then discussed the revised
proposal received from the second bidder and noted that a
response to the second bidders proposed markup of the
merger agreement had been prepared and would be sent to the
second bidder by Needham & Company.
Needham & Company and Sutter then left the meeting and
the members and Latham discussed other strategic alternatives
available to ESS, including the possibility of a self tender
offer, and certain matters with respect to management, including
retention and compensation in light of the various strategic
alternatives available.
Later on the morning of January 26, 2008, Latham and
Needham & Company met with representatives of Imperium
and its counsel to discuss the specific concerns of the
strategic transaction committee with Imperiums last
proposed markup of the merger agreement as well as continuing
concerns with respect to Imperiums proposed purchase price
for ESS. Latham, Imperium and Imperiums counsel also
discussed the structural reasons for the reincorporation merger
followed by the cash-out merger. Following the meeting, Latham
distributed a revised draft of the merger agreement to Imperium
and its counsel. A revised draft of the merger agreement was
provided to the second bidder that same day, emphasizing the
strategic transaction committees desire to have a fixed
purchase price that was not subject to forward looking
adjustments outside of ESS control, the strategic
transaction committees concern with certainty of closing
once a definitive agreement was signed and a need for the second
bidder to offer a guarantee of the performance of its
acquisition vehicles under the merger agreement.
The strategic transaction committee met with Latham,
Needham & Company and Sutter again on the morning of
January 29, 2008. Latham and Needham & Company
noted that they were working with the second bidder to
38
schedule a conference call to discuss the second bidders
proposal, the strategic transaction committees response
and any open diligence points. Latham also informed the members
that it had received a call from Imperiums counsel noting
that there were still one or two open issues with respect to a
revised proposal from Imperium and that Imperium expected to
have its revised proposal to the strategic transaction committee
soon. Latham and Needham & Company then briefly
summarized for the members the meetings with Imperium that had
taken place on January 26, 2008, and noted that, on a
preliminary basis, Imperium had orally agreed to the elimination
of many of the closing conditions that the strategic transaction
committee had objected to in Imperiums last proposal, a
reduction of the size of the termination fee, a limitation as to
the situations in which the termination fee would be payable and
the receipt of a guarantee from Imperium of the obligations of
its newly formed acquisition vehicles under the merger agreement.
Needham & Company and Latham spoke with the second
bidder regarding its proposal on the morning of January 31,
2008. Later that day, the second bidder submitted a letter
containing its final proposal for an acquisition of ESS,
including a purchase price of $1.47 per share subject to an
increase by the net amount of proceeds received from a sale of
our headquarters in excess of a certain threshold amount. In
addition, on the evening of January 31, 2008, Imperium
delivered its revised acquisition proposal to Latham.
Imperiums revised proposal included a purchase price of
$1.65 per share for all of the outstanding shares of our common
stock, was not subject to adjustment, and addressed some but not
all of the concerns raised by the strategic transaction
committee with respect to Imperiums January 13, 2008
proposal.
Latham, Needham & Company and Sutter met with the
strategic transaction committee on the morning of
February 6, 2008 and discussed the revised proposals
received from both bidders. The participants noted that Imperium
had submitted a proposal that included an increased purchase
price of $1.65 per share, the same price initially proposed by
Imperium, and that Imperium had eliminated all of the conditions
to closing to which the strategic transaction committee had
objected, limited the situations in which a termination fee
would be payable and reduced the termination fee to
approximately 3.4% of the aggregate merger consideration plus a
reimbursement of Imperiums reasonable expenses incurred in
connection with the sale up to $500,000. However, the
participants also noted that Imperium continued to insist upon
certain non-standard deal protection provisions, including
payment of the termination fee on a no vote by our
shareholders with respect to the sale followed by a self-tender
offer for our shares within 9 months following termination,
and to insist that it was not comfortable giving an
unconditional guarantee of up to $10 million of the
obligations of Imperiums acquisition vehicles, Parent and
Merger Sub, without requiring ESS to obtain a final and
non-appealable judgment against the acquisition vehicles prior
to enforcing the limited guarantee against Imperium. The members
agreed that, while significant progress had been made with
respect to Imperiums proposal, any transaction that did
not include an immediately enforceable limited guarantee and
standard deal protection provisions was very unlikely to be
acceptable to the strategic transaction committee. The strategic
transaction committee and some of its advisors then discussed
the continuing difficulty in finalizing a transaction proposal
with Imperium and the possibility of pursuing other strategic
alternatives. At the end of the discussion, the members directed
Latham to contact Imperiums counsel and inform it that
Imperium needed to improve its proposal by removing the
non-standard deal protection terms and by agreeing to provide a
customary limited guarantee of the performance of its
acquisition vehicles, and Latham did so following the meeting.
At the February 6, 2008 meeting, Latham and
Needham & Company also summarized the conference call
they had had with the second bidder on January 31, 2008,
and the second bidders final acquisition proposal received
following that conference call. Latham and Needham &
Company noted that, while the second bidder had improved the
terms of their proposal, including an elimination of several of
the forward looking adjustments to the purchase price offered
(subject to a requirement that we enter into a final agreement
to sell our headquarters prior to execution of a definitive
merger agreement), the purchase price offered by the second
bidder of $1.47 per share plus any proceeds from the sale of our
headquarters in excess of a certain threshold amount net of
expenses and taxes likely remained to be significantly below the
purchase price per share currently being offered by Imperium.
The advisors also noted that the second bidder had provided that
our failure to maintain a specified minimum cash balance and
minimum working capital as of the closing of the sale and our
failure to remain within a maximum amount of transaction expense
as of the closing would be taken into account in determining
whether a material adverse effect had occurred with respect to
our business, and that the second bidder had indicated that it
was not interested in
39
pursuing further negotiations with the strategic transaction
committee unless the strategic transaction committee agreed to
grant a 20 day exclusivity period to the second bidder to
allow it to conduct diligence on ESS and to finalize transaction
terms and the strategic transaction committee agreed to pay the
second bidder a fee of $500,000 in the event that we did not
enter into an definitive agreement to sell ESS to the second
bidder and then sold or liquidated ESS prior to
September 30, 2008. The strategic transaction committee,
Latham and Needham & Company discussed the second
bidders revised proposal and the strategic transaction
committee determined that, given that the second bidders
proposed purchase price was lower then Imperiums proposed
purchase price, that the second bidder was approximately
20 days from being able to enter into a definitive
agreement and that the second bidder had required exclusivity
and agreement to a fee in the event we entered into a
transaction with another party in order to move forward, it did
not make sense to proceed with negotiations with the second
bidder at that time.
On February 11, 2008, Latham spoke by telephone with
representatives of Imperium and its counsel. During their
discussion, Imperium indicated that it would provide an
immediately enforceable limited guarantee of up to
$10 million of the obligations of its acquisition vehicles,
Parent and Merger Sub, under the merger agreement and agreed
that it would not require us to pay a termination fee on a
no vote by our shareholders with respect to a sale
of ESS followed by a self-tender offer for our shares within the
9 months following a termination of the merger agreement.
However, Imperium, in response to continuing and increasing
concerns about the prospects of our business, including our
difficulties with new product development, the loss of a
significant licensing revenue stream and the decline in the
potential sale price for our headquarters, proposed to lower the
merger consideration offered to our shareholders to
approximately $1.60 per share. Following further discussions
between Latham and the representatives of Imperium and its
counsel with respect to Imperiums proposal and the
prospects of our business, Latham agreed that it would convey to
the strategic transaction committee a revised proposal from
Imperium to acquire all of our outstanding common stock for
$1.64 per share, which the Imperium representatives stated was
Imperiums best and final offer.
Latham distributed a revised draft of the merger agreement to
Imperiums counsel on February 15, 2008 incorporating
changes based upon the revised proposal made by Imperium as well
as changes related to the structural implementation of the
reincorporation merger followed by the cash-out merger. See
Proposal One The Reincorporation
Merger Advance Proxy The Cash-Out
Merger Reasons for the Reincorporation
Merger
beginning on page 42 of this proxy
statement/prospectus. On that same day, Orrick provided an
updated draft of the disclosure schedules to the merger
agreement to Imperium. During the next several days, Latham,
Orrick and Imperiums counsel worked with us to finalize
the terms of the merger agreement, disclosure schedules and
related documentation.
The ESS strategic transaction committee and the Delaware
strategic transaction committee met with Latham,
Needham & Company and Sutter at our headquarters on
February 19, 2008 to consider the strategic alternatives
available to ESS, including Imperiums proposal to acquire
all of our outstanding common stock through the mergers. Latham
began the meeting by noting that since the last meeting of the
strategic transaction committee, the strategic transaction
committees financial and legal advisors had continued
their discussions with Imperium and Imperiums counsel
concerning the terms of a definitive agreement to acquire ESS
and an improvement in the terms of Imperiums offer.
Latham, Needham & Company, Sutter and the members
discussed Imperiums revised proposal to acquire ESS for
$1.64 per share in cash, and their interactions with Imperium
and its counsel over the preceding week. Latham referred the
members to the draft of the merger agreement and of the limited
guarantee from an affiliated fund of Imperium that had been
provided to the members prior to the meeting and noted that
significant progress had been made with Imperium since the last
versions of those documents were distributed to the members.
Latham then discussed with the members their fiduciary duties
under both California law and Delaware law as members of the
strategic transaction committees and as members of the board of
directors of each of ESS and Echo. Following the discussion of
fiduciary duties, Latham and the members reviewed the structure
of the mergers and the key terms of the proposed definitive
merger agreement and the related limited guarantee that had been
negotiated with Imperium, and Latham responded to questions from
the members on the legal terms of the offer and the related
definitive agreements. Latham noted that, in the event that the
strategic transaction committees and the board of directors of
each of ESS and Echo decided to proceed with a transaction with
Imperium, a number of steps would still need to be taken prior
to executing the definitive documentation, including completion
of the disclosure schedules to the merger agreement, agreement
upon the final transaction structure and discussions between
40
Imperium and certain of our employees concerning their future
employment in the event of an acquisition by Imperium. Latham
and the members also discussed descriptions of
Messrs. Alexanders and Blairs informal
relationships with Imperium that had been prepared by Orrick.
The members noted that Mr. Alexander had acted as an
informal advisor to Imperium, was not employed by Imperium and
had not received any compensation from Imperium to date or
agreed on the terms of any relationship with, or compensation
from, Imperium but that Mr. Alexander did expect that he
might in the future formalize a relationship with, and receive
compensation from, Imperium. The members also noted that with
the strategic transaction committees prior permission,
Mr. Blair had discussed very generally on one occasion with
Imperium the rough terms of possible equity compensation
arrangements for management and other employees of the surviving
corporation following the cash-out merger, but that no equity
compensation arrangements for employees had been finalized and
that Mr. Blair had not had any additional discussions with
Imperium about any of the specific details of his compensation
or potential equity compensation for employees generally as of
February 19, 2008.
Following the presentation from Latham, the representative from
Sutter left the room and Needham & Company reviewed
the financial terms of Imperiums final proposal for the
acquisition of ESS and discussed with the members
Needham & Companys financial analysis of the
Imperium proposal, including a discussion of the possible value
to shareholders of a liquidation of ESS based on assumptions,
information and estimates provided to Needham &
Company by management. The representative from Sutter then
returned to the meeting and the representatives from
Needham & Company left the meeting. Sutter reviewed
the financial terms of Imperiums final proposal for the
acquisition of ESS and discussed with the members Sutters
financial analysis with respect to ESS, including a discussion
of the possible value to shareholders of a liquidation of ESS
and the merits and disadvantages of a self tender-offer.
The representatives of Needham & Company were invited
back into the meeting and the members and their legal and
financial advisors then discussed the relative merits of the
various strategic alternatives available to ESS, including a
sale of ESS, a self-tender offer, a total liquidation of ESS and
continuing to operate our business without undertaking any
significant strategic transaction. Following the presentations
by its financial advisors and the ensuing discussions, the
members noted that it was very unlikely that our shareholders
would receive greater value through a liquidation of ESS then
they would through the offer made by Imperium and that, due to
restrictions on distributions to shareholders under California
law, a self-tender offer would not allow ESS to repurchase all
or almost all of our outstanding shares, leaving a significant
portion of our shareholders without any opportunity to receive
cash consideration in exchange for their holdings and leaving
ESS as a public company with a significantly smaller
capitalization and a limited market for our common stock and
with a significant amount of liabilities on our balance sheet.
In addition, the members discussed with their legal and
financial advisors the deterioration in our business over the
past several years, the recent decreases in the purchase price
offered for our headquarters, the delay with respect to the
design for one of our new chips and that the problem with the
design remained unknown, the recent termination of the payment
of royalties by one of our licensees under its license agreement
with us and the resulting loss of near term and possibly longer
term revenues, and the costs of remaining a publicly traded
company.
Following the discussion among the members and representatives
of Latham, Needham & Company and Sutter each delivered
to the strategic transaction committee an oral opinion, to the
effect that, as of the date of the meeting and based upon and
subject to the factors and assumptions set forth in their
respective written opinions to be delivered following the
meeting, the $1.64 per share merger consideration to be received
by the stockholders of ESS Delaware (as the surviving entity
following the reincorporation merger) in the proposed cash-out
merger was fair, from a financial point of view, to such
stockholders. The full text of the written opinions of
Needham & Company and Sutter, which set forth the
assumptions made, procedures followed, matters considered and
limitations on the review undertaken with such opinions, are
attached as
Annex C-1
and
Annex C-2
to this proxy statement/prospectus.
After further discussion, the strategic transaction committee
unanimously adopted resolutions declaring the mergers advisable
and in the best interests of our shareholders, recommending the
submission of the proposed sale to entities sponsored by
Imperium to our board of directors and recommending that our
board of directors approve and declare the merger agreement, the
reincorporation merger advisable and in the best interests of
our shareholders and resolve to recommend to our shareholders
the approval of the principal terms of the reincorporation
merger. In addition, the Delaware strategic transaction
committee unanimously adopted resolutions declaring the mergers
41
advisable and in the best interests of both ESS, as its sole
stockholder, and, following the reincorporation merger, the
stockholders of ESS Delaware, recommending the submission of the
proposed sale to entities sponsored by Imperium to the board of
directors of Echo and recommending that the board of directors
of Echo approve and declare the merger agreement, the mergers
and the other transactions contemplated by the merger agreement
advisable and in the best interests of ESS, as its sole
stockholder and, following the reincorporation merger, the
stockholders of ESS Delaware and resolve to recommend to ESS
adoption of the merger agreement with respect to the
reincorporation merger, and to the stockholders of ESS Delaware
the adoption of the merger agreement with respect to the
cash-out merger.
The full board of directors of each of ESS, with the exception
of Mr. Alexander who did not attend the meeting, and of
Echo, were then convened. Following commencement of the
meetings, Mr. Blair withdrew from the meetings and noted to
the members that he would be abstaining from any vote related to
a potential strategic transaction with Imperium and would not
participate in any discussion thereof. Mr. Stein, as chair
of the strategic transaction committees, then reported the
resolutions of each of the strategic transaction committees to
the respective boards of directors. Following
Mr. Steins report, our board of directors adopted
resolutions approving and declaring the merger agreement, the
reincorporation merger and the other transactions contemplated
by the merger agreement advisable and in the best interests of
our shareholders and recommending to our shareholders that they
approve the principal terms of the reincorporation merger and
the other transactions contemplated by the merger agreement. In
addition, the board of directors of Echo adopted resolutions
approving and declaring the merger agreement, the mergers and
the other transactions contemplated by the merger agreement
advisable and in the best interests of ESS, as its sole
stockholder and, following the reincorporation merger, the
stockholders of ESS Delaware and recommending to ESS the
adoption of the merger agreement with respect to the
reincorporation merger, and to the stockholders of ESS Delaware
the adoption of the merger agreement with respect to the
cash-out merger.
Over the course of February 19, 20 and 21, 2008, management
worked with Latham, Orrick, Imperium and Imperiums counsel
to finalize the transaction structure and the disclosure
schedules to the merger agreement. The parties agreed upon the
final transaction structure for Imperiums acquisition of
ESS following the close of business on February 21, 2008.
The merger agreement was executed by ESS, Echo, Parent and
Merger Sub following the close of business on February 21,
2008. On February 22, 2008, prior to the commencement of
trading on NASDAQ, ESS and Imperium issued a joint press release
announcing the merger agreement.
Reasons
for the Reincorporation Merger
The strategic transaction committee first considered a potential
reincorporation of ESS from California into Delaware when
presented with expressions of interest from third parties in
acquiring us for cash, much of which would be provided by
ESS own cash resources. See
Proposal
One The Reincorporation Merger Advance
Proxy The Cash-Out
Merger Background of the Mergers
beginning on page 26.
The consideration of reincorporation arises from the possibility
that, under California law, the payment of the merger
consideration to our shareholders in the cash-out merger might
be deemed to be a repurchase by ESS of its outstanding shares of
common stock since part of the consideration payable in
connection with any such merger of ESS would come from ESS
own cash resources. If so characterized, 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.
The proposed purchase price of $1.64 per share of common stock
under the terms of the merger agreement would exceed the amount
permitted to be distributed to our shareholders under
Section 500 if the merger consideration were characterized
as a distribution based on our current analysis of
the provisions of Section 500 in relation to ESS. 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
42
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. In addition, Delaware
is the state in which the great majority of large United States
corporations are incorporated and Delaware courts are known for
their sophistication, consistency, speed and efficiency in
applying those laws and the depth of judicial precedent to help
guide actions by corporations.
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. Our board of directors has approved the reincorporation
merger and recommends that our shareholders approve the
principal terms of the reincorporation merger. For the reasons
described above, the cash-out merger and the right to payment of
$1.64 per share to holders of ESS Delaware common stock is
conditioned upon, among other things, shareholder approval and
consummation of the reincorporation merger. If our shareholders
do not approve the reincorporation merger, we will not be able
to consummate the cash-out merger or the reincorporation merger,
and you will not receive the merger consideration.
There are other differences between California and Delaware
corporate law. For information regarding certain significant
difference between California law and Delaware law, see
Differences between the Rights of ESS Shareholders and
ESS Delaware Stockholders
Significant
Differences between the Corporation Laws of California and
Delaware Dividends and Repurchases of Shares
beginning on page 69.
Reasons
for the Mergers
Our board of directors and the board of directors of Echo, in
reaching their decisions to approve the merger agreement, the
mergers and the other transactions contemplated by the merger
agreement and to recommend that our shareholders vote to approve
the principal terms of the reincorporation merger and that,
following the reincorporation merger, the stockholders of ESS
Delaware vote to adopt the merger agreement, respectively,
consulted with their financial and legal advisors and also
considered a number of potentially positive factors, including
the following material factors:
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the value of the $1.64 per share cash consideration to be paid
to our shareholders upon consummation of the mergers;
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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;
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current financial market conditions and the current and
historical market prices of our common stock;
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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;
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managements 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;
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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;
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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
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43
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for the shares of common stock of ESS and that accepting the
Imperium merger proposal would be in the best interests of
ESS stockholders;
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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;
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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 Companys Financial
Advisors Opinion of Needham & Company,
LLC
beginning on page 46 and
Annex C-1
to this proxy statement/prospectus); and
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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 Companys
Financial Advisors Opinion of Sutter
Incorporated
beginning on page 50 and
Annex C-2
to this join proxy statement/prospectus);
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the terms of the merger agreement and the related agreements,
including:
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the limited number and customary nature of the conditions to the
Parents and Merger Subs obligation to consummate the
mergers, including the absence of any financing condition;
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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;
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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;
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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;
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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;
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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
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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).
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44
Our board of directors and the board of directors of Echo also
considered and balanced against the potentially positive factors
a number of potentially negative factors concerning the mergers,
including the following material factors:
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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;
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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;
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the fees and expenses associated with completing or attempting
to complete the mergers;
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the fact that our shareholders will be cashed out and will not
participate in any future earnings or growth of ESS Delaware;
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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;
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the fact that the merger consideration consists of cash and will
therefore be taxable to our stockholders for U.S. federal
income tax purposes;
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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;
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the risk of diverting management focus and resources from other
strategic opportunities and from operational matters while
working to implement the merger; and
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the other risks and uncertainties discussed above under
Risk Factors
beginning on page 12.
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During its consideration of the proposed mergers, each board of
directors was also aware that all of our directors and executive
officers have interests in the merger that are in addition to or
differ from those of our shareholders generally, as described
under
Proposal One The Reincorporation
Merger Advance Proxy The Cash-Out Merger
Interests of Directors and Executive Officers in the
Mergers
beginning on page 53.
After taking into account all of the factors set forth above, as
well as others, our board of directors and the board of
directors of Echo determined that the potentially positive
factors outweighed the potentially negative factors.
Furthermore, our board of directors and the board of directors
of Echo have determined the merger agreement and the mergers to
be in the best interests of our shareholders and the stockholder
of ESS Delaware following the reincorporation merger,
respectively, and declared the merger agreement advisable.
Our board of directors recommends that our shareholders vote
FOR
approval of the principal terms of the
reincorporation merger. In addition, our board of directors
recommends that our shareholders provide an advance proxy
authorizing the execution and delivery of a written consent
adopting the merger agreement with respect to the shares of
common stock of ESS Delaware you would receive in the
reincorporation merger. The board of directors of Echo has also
approved the merger agreement, the merger and the other
transactions contemplated by the merger agreement and recommends
that the stockholders of ESS Delaware adopt the merger
agreement.
The foregoing discussion of items that our board of directors
and the board of directors of Echo considered is not intended to
be exhaustive, but includes material items that each board of
directors considered. The boards of directors did not assign
relative weights to the above factors or the other factors
considered by them. In addition, the boards of directors did not
reach any specific conclusion on each factor considered, but
conducted an overall analysis of these factors. Individual
members of the boards of directors may have considered different
factors than those described above and may have given different
weights to different factors.
Recommendation
of our Board of Directors with Respect to the Reincorporation
Merger
On February 19, 2008, after evaluating a variety of
business, financial and market factors and consulting with their
legal and financial advisors, and after due discussion and due
consideration of the recommendation of the strategic transaction
committees, our board of directors approved and declared
advisable the merger agreement and the transactions contemplated
by the merger agreement, including the reincorporation merger
and the other
45
transactions contemplated by the merger agreement and determined
that entry into the merger agreement and consummation of the
transactions contemplated by the merger agreement was fair to
and in the best interests of ESS and our shareholders.
Accordingly, our board of directors recommends that our
shareholders vote
FOR
approval of the
principal terms of the reincorporation merger. In addition, our
board of directors recommends that our shareholders provide an
advance proxy authorizing the execution and delivery of a
written consent adopting the merger agreement with respect to
the shares of common stock of ESS Delaware you would receive in
the reincorporation merger.
Recommendation
of the Board of Directors of Echo with Respect to the Cash-Out
Merger
In addition, on February 19, 2008, after evaluating a
variety of business, financial and market factors and consulting
with their legal and financial advisors, and after due
discussion and due consideration of the recommendation of the
strategic transaction committees, the board of directors of Echo
approved and declared advisable the merger agreement and the
transactions contemplated by the merger agreement, including the
reincorporation merger and the cash-out merger, and declared
that entry into the merger agreement and consummation of the
transactions contemplated by the merger agreement was fair to
and in the best interests of the Echo stockholders and
determined that, following the reincorporation merger, entry
into the merger agreement and consummation of the transactions
contemplated by the merger agreement would be fair to and in the
best interests of ESS Delaware, as the surviving corporation of
the reincorporation merger, and the stockholders of ESS Delaware.
Accordingly, the board of directors of Echo recommends that
the stockholders of ESS Delaware adopt the merger agreement.
Opinions
of the Companys Financial Advisors
Opinion
of Needham & Company, LLC
The strategic transaction committee retained Needham &
Company to act as its financial advisor in connection with the
exploration of one or more strategic transactions for ESS and to
render an opinion as to the fairness, from a financial point of
view, to the holders of ESS Delaware common stock of the merger
consideration to be received by those holders following the
consummation of the reincorporation merger pursuant to the
merger agreement. The merger consideration was determined
through arms length negotiations between the strategic
transaction committee and Imperium, and not by
Needham & Company, although Needham &
Company provided advice to the strategic transaction committee
during these negotiations.
On February 19, 2008, Needham & Company delivered
to the strategic transaction committees its written opinion,
dated February 19, 2008, that, as of that date and based
upon and subject to the assumptions and other matters described
in the opinion, the merger consideration of $1.64 in cash per
share to be received by the holders of ESS Delaware common stock
pursuant to the merger agreement was fair to those holders from
a financial point of view.
The Needham & Company
opinion is addressed to the strategic transaction committees,
relates only to the fairness, from a financial point of view, of
the merger consideration to the holders of ESS Delaware common
stock as of the date of the opinion, and does not constitute a
recommendation to any shareholder of ESS as to how that
shareholder should vote with respect to the reincorporation
merger or the cash-out merger. The Needham & Company
opinion does not express an opinion with respect to ESS
underlying business decision to engage in the cash-out merger or
the relative merits of the cash-out merger as compared to other
business strategies that might be available to ESS.
The complete text of the Needham & Company opinion,
which sets forth the assumptions made, matters considered, and
limitations on and scope of the review undertaken by
Needham & Company, is attached to this proxy
statement/prospectus as
Annex C-1.
The summary of the Needham & Company opinion set forth
in this proxy statement/prospectus is qualified in its entirety
by reference to the Needham & Company opinion.
You
should read the Needham & Company opinion carefully
and in its entirety for a description of the procedures
followed, the factors considered, and the assumptions made by
Needham & Company.
46
In arriving at its opinion, Needham & Company, among
other things:
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reviewed a draft of the merger agreement dated February 18,
2008;
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reviewed certain publicly available information concerning ESS
and certain other relevant financial and operating data of ESS
furnished to Needham & Company by ESS;
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reviewed the historical stock prices and trading volumes of ESS
common stock;
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held discussions with members of ESS management concerning the
current operations of and future business prospects of ESS;
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reviewed certain financial forecasts with respect to ESS
prepared by ESS management and held discussions with members of
ESS management concerning those forecasts;
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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;
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reviewed the financial terms of certain other business
combinations that Needham & Company deemed generally
relevant; and
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performed and considered such other studies, analyses, inquiries
and investigations as Needham & Company deemed
appropriate.
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In connection with its review and in arriving at its opinion,
Needham & Company assumed and relied on the accuracy
and completeness of all of the financial, accounting, legal, tax
and other information discussed with or reviewed by
Needham & Company for purposes of the opinion and
neither attempted to verify independently nor assumed
responsibility for verifying any of such information. In
addition, Needham & Company assumed that the cash-out
merger would be consummated upon the terms and subject to the
conditions set forth in the draft merger agreement dated
February 18, 2008, without waiver, modification or
amendment of any material term, condition or agreement thereof.
Needham & Company assumed that the financial forecasts
for ESS provided to it by ESS management were reasonably
prepared on bases reflecting the best currently available
estimates and judgments of management, at the time of
preparation, of the future operating and financial performance
of ESS. Needham & Company expressed no opinion with
respect to any of such forecasts or the assumptions on which
they were based. Needham & Company did not assume any
responsibility for or make or obtain any independent evaluation,
appraisal or physical inspection of the assets or liabilities of
ESS or Parent and did not evaluate the solvency or fair value of
ESS under any state or federal laws relating to bankruptcy,
insolvency or similar matters. Needham &
Companys opinion states that it was based on economic,
monetary and market conditions existing as of its date and that
Needham & Company assume no responsibility to update
or revise its opinion based upon circumstances and events
occurring after the date thereof.
In preparing its opinion, Needham & Company performed
a variety of financial and comparative analyses. The following
paragraphs summarize the material financial analyses performed
by Needham & Company in arriving at its opinion. The
order of analyses described does not represent relative
importance or weight given to those analyses by
Needham & Company. Some of the summaries of the
financial analyses include information presented in tabular
format. The tables are not intended to stand alone, and in order
to more fully understand the financial analyses used by
Needham & Company, the tables must be read together
with the full text of each summary. The following quantitative
information, to the extent it is based on market data, is,
except as otherwise indicated, based on market data as it
existed on or prior to February 19, 2008, and is not
necessarily indicative of current or future market conditions.
Selected Company Analysis.
Using publicly
available information, Needham & Company compared
selected historical and projected financial and market data
ratios for us to the corresponding data and ratios of publicly
traded companies that Needham & Company deemed
relevant. These companies, which we refer to as the selected
companies, consisted of the following:
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Centillium Communications Inc.,
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Leadis Technology Inc.,
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47
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Pixelworks Inc.,
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SigmaTel Inc., and
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Vimicro International Corp.
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The following table sets forth information concerning the
following multiples for the selected companies and for us:
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enterprise value as a multiple of actual and estimated calendar
year 2007 revenues;
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enterprise value as a multiple of projected calendar year 2008
revenues; and
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market value as a multiple of book value.
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Needham & Company calculated multiples for the
selected companies based on the closing stock prices of those
companies on February 15, 2008 and estimated 2007 and 2008
revenue projections reported by independent research analyst
reports. The multiples in the table below under the heading
Merger Consideration were calculated based on the
enterprise value for ESS implied by the per share merger
consideration offered in the mergers (the total merger
consideration payable for all of our outstanding shares, minus
our net cash) and, in the case of our projected 2008 revenues,
forecasts by our management.
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Merger
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Low
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High
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Consideration
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Enterprise value as a multiple of actual and estimated calendar
year 2007 revenues
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(0.2
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)x
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0.6x
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0.2x
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Enterprise value as a multiple of projected calendar year 2008
revenues
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(0.1
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)x
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0.6x
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0.2x
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Market value as a multiple of book value
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0.8
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x
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1.5x
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1.2x
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Needham & Company noted that the ratios of the
enterprise value for ESS implied by the per share merger
consideration offered in the mergers to our 2007 revenues, our
projected 2008 revenues and our book value were each within the
ranges of the multiples for the other selected companies.
Selected Merger and Acquisition
Analysis.
Needham & Company analyzed
publicly available financial information for the following
selected merger and acquisition transactions, which represent
transactions completed since January 1, 2007 that involved
target companies that were involved in the consumer
semiconductor industry and that Needham & Company
deemed relevant:
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Acquirer
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Target
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Date Announced
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Freescale Semiconductor
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SigmaTel, Inc.
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February 2008
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Ikanos Communications Inc.
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Centillium Communications Inc.
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January 2008
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DSL technology and assets
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STMicroelectronics NV
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Genesis Microchip, Inc.
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December 2007
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Magnum Semiconductor, Inc.
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LSI Logic Consumer Products Group
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June 2007
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For each of the transactions identified above,
Needham & Company calculated the ratio of the
enterprise value implied by the consideration offered in the
transaction to the target companys latest twelve
months revenue, and compared these ratios to the ratio of
the implied multiple of enterprise value being paid for us in
the proposed mergers to our latest twelve months revenue, as set
forth in the following table:
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Enterprise Value/
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Transaction
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LTM Revenue
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Freescale Semiconductor/SigmaTel
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0.3x
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Ikanos/Centillium
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0.4x
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STMicroelectronics/Genesis Microchip
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0.7x
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Magnum Semiconductor/LSI Logic
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0.3x
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Merger (Imperium/ESS)
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0.1x
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48
Needham & Company observed that the implied multiple
of enterprise value being paid for us in the proposed merger to
our latest 12 months revenue was 0.1x, which was below the
selected transaction multiples.
Premium Paid Analysis.
Needham &
Company analyzed publicly available financial information for
seven merger and acquisition transactions involving selected
technology companies announced since January 1, 2006 with
transaction values of between $25 million and
$100 million, where the target company was traded on NASDAQ
and the target had announced that it was exploring strategic
alternatives prior to announcement of the transaction. These
transactions were:
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Target
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Acquirer
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Date Announced
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Carrier Access Corp.
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Turin Networks, Inc.
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December 2007
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CompuDyne Corp.
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CompuDyne Corp./Private Group
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August 2007
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EasyLink Services Corp.
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Internet Commerce Group
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May 2007
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Applied Innovation, Inc.
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KEG Holdings, Inc.
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February 2007
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Tut Systems, Inc.
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Motorola, Inc.
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December 2006
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Strategic Distribution, Inc.
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Platinum Equity LLC
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January 2007
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Onyx Software Corp.
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M2m Holdings Inc.
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June 2006
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In examining these transactions, Needham & Company
analyzed the premium of consideration offered to the acquired
companys stock price one day, seven days, 30 days,
60 days and 90 days prior to the announcement of the
transaction. Needham & Company calculated premiums for
our company as of February 15, 2008 based on the merger
consideration of $1.64 for each share of our common stock. The
following table sets forth information concerning the stock
price premiums in the selected transactions and the stock price
premium implied by the cash-out merger.
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Selected Transactions
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Merger
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Low
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High
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at $1.64
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One day stock price premium
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(2.1
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)%
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32.3
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%
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35.5
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%
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Seven day stock price premium
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(1.8
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)%
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31.1
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%
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33.3
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%
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30 day stock price premium
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(12.9
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)%
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25.2
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%
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35.5
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%
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60 day stock price premium
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(26.6
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)%
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32.1
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%
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21.5
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%
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90 day stock price premium
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(32.6
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)%
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26.3
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%
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10.1
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%
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Needham & Company noted that the premiums to our
closing stock price on February 15, 2008, and during the
seven and 30 calendar days ending on February 15, 2008,
were above the high end of the
1-day,
7-day
and
30-day
premiums paid in the selected technology transactions, and that
the premiums to our closing stock price during the 60 and 90
calendar days ending on February 15, 2008 were within the
range of the 60 and
90-day
premiums paid in the selected technology transactions.
Discounted Cash Flow
Analysis.
Needham & Company performed a
discounted cash flow analysis to estimate the present value of
the free cash flows of ESS through the fiscal year ending
December 31, 2012 based on ESS managements financial
projections, using both a base case forecast and a
low forecast prepared by management. The base
case differed from the low forecast in that
the base case assumes the introduction of certain new DVD chips
while the low forecast assumes no new DVD chips.
Needham & Company calculated ranges of the present
value of estimated free cash flow from 2008 through 2012 based
on ESS managements financial projections, and of the
estimated terminal value, in each case using discount rates of
11.1% to 15.1%. Ranges of terminal value were calculated by
Needham & Company by multiplying managements
fiscal year 2012 estimated revenue by a selected range of
multiples ranging from 0.10x to 0.60x. The present values of the
estimated free cash flow and estimated terminal value were added
to ESS net cash as of December 31, 2007, and the
result was divided
49
by shares outstanding, to derive implied equity value per share.
Needham & Companys analysis indicated the
following ranges of implied equity value per share for ESS, as
compared to the per share merger consideration:
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Per Share
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Illustrative Implied Equity Value per Share
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Merger Consideration
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Base case
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Low forecast
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$1.07-$1.53
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$0.84-$1.29
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$
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1.64
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No company, transaction or business used in the Selected
Company Analysis, Selected Merger and Acquisition
Analysis or Premium Paid Analysis as a
comparison is identical to ESS or the mergers. Accordingly,
Needham & Companys analysis was not entirely
mathematical; rather, it involved complex considerations and
judgments concerning differences in the financial and operating
characteristics and other factors that could affect the
acquisition, public trading or other values of the selected
companies or selected transactions or the company or transaction
to which they are being compared.
The summary set forth above does not purport to be a complete
description of the analyses performed by Needham &
Company in connection with the rendering of its opinion. The
preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most
appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the
particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. Accordingly,
Needham & Company believes that its analyses must be
considered as a whole and that selecting portions of its
analyses or the factors it considered, without considering all
analyses and factors, could create a misleading or incomplete
view of the process underlying its analyses and opinion.
Needham & Company did not attribute any specific
weight to any factor or analysis considered by it. The fact that
any specific analysis has been referred to in the summary above
is not meant to indicate that such analysis was given greater
weight than any other analysis.
In performing its analyses, Needham & Company made
numerous assumptions with respect to industry performance,
general business and economic and other matters, many of which
are beyond the control of ESS. Any estimates contained in these
analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be
significantly more or less favorable. Additionally, analyses
relating to the values of businesses or assets do not purport to
be appraisals or necessarily reflect the prices at which
businesses or assets may actually be sold or the prices at which
any securities have traded or may trade at any time in the
future. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty. Needham &
Companys opinion and its related analyses were only one of
many factors considered by the strategic transaction committees
and our boards in their evaluation of the mergers and should not
be viewed as determinative of the views of the strategic
transaction committees, the ESS board of directors, the Echo
board of directors or management of ESS or Echo with respect to
the merger consideration or the mergers.
Needham & Company was retained by the strategic
transaction committee of the board of directors of ESS to act as
financial advisor in connection with the mergers and to render
the opinion, and, pursuant to the terms of an engagement letter
between ESS and Needham & Company, ESS has agreed to
pay Needham & Company a fee for its services equal to
2.7% of the aggregate merger consideration paid in the cash-out
merger, or approximately $1.6 million, $250,000 of which
was payable upon Needham & Companys delivery of
its written opinion to the strategic transaction committees and
the balance of which is payable contingent upon completion of
the mergers. In addition, ESS has agreed to indemnify
Needham & Company for certain liabilities arising out
of their role as financial advisor and out of the rendering of
the opinion and to reimburse Needham & Company for its
out-of-pocket expenses.
Needham & Company is a nationally recognized
investment banking firm. As part of its investment banking
business, Needham & Company regularly engaged in the
valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other
purposes. Needham & Company has in the past provided
investment banking and financial advisory services to ESS and
has received customary fees for those services.
Needham & Company may in the future provide investment
banking and financial advisory services to Parent or Imperium
unrelated to the cash-out merger, for which services
Needham & Company would expect to receive
compensation. In the ordinary course of business,
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Needham & Company may actively trade the equity
securities of ESS for their own account or for the accounts of
customers or affiliates and, accordingly, may at any time hold a
long or short position in such securities.
Opinion
of Sutter Securities Incorporated
The strategic transaction committee retained Sutter to advise it
in connection with a transaction intended to maximize ESS
shareholder value and to render, if requested, an opinion as to
the fairness of the reincorporation merger and the cash-out
merger, taken as a whole, from a financial point of view, to the
shareholders of ESS and to conduct an analysis of the amount
which could be distributed to our shareholders in the event that
ESS were liquidated.
At the meeting of the strategic transaction committees held on
February 19, 2008, Sutter summarized the substance of its
written opinion to be rendered to the strategic transaction
committees and orally informed the strategic transaction
committees that, in accordance with that written opinion and
based on certain assumptions made, matters considered and the
review undertaken by Sutter, the reincorporation merger and the
cash-out merger pursuant to which stockholders of ESS Delaware
would be entitled to receive $1.64 per share in cash pursuant to
the cash-out merger, taken as a whole, were fair, from a
financial point of view, to the public shareholders of ESS and
to the public stockholders of ESS Delaware. Sutter delivered its
written opinion, dated February 19, 2008, and Sutter has
also delivered an updated version of its written opinion, dated
as of the date of May 21, 2008, to the strategic
transaction committees. The full text of the Sutter updated
written opinion is attached to this proxy statement/prospectus
as
Annex C-2.
Sutter provided the opinion for the information and assistance
of the strategic transaction committees in connection with their
consideration of the mergers.
The Sutter opinion is not a
recommendation as to how any shareholder of ESS or stockholder
of ESS Delaware following the consummation of the
reincorporation merger should vote with respect to the
reincorporation merger or the cash merger. You should read the
Sutter opinion carefully in its entirety for a description of
the assumptions made, matters considered and limitations on the
review undertaken. The summary of the Sutter opinion set forth
herein is qualified in its entirety by reference to the full
text of the Sutter opinion.
In the course of Sutters analyses for rendering its
updated opinion, it:
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reviewed the proxy statement in substantially the form to be
sent to the shareholders of ESS and the merger agreement;
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reviewed ESS Annual Reports to Shareholders and Annual
Reports on
Form 10-K
for the fiscal years ended December 31, 2005, 2006 and
2007, and its Quarterly Reports on Form
10-Q
for the
period ended March 31, 2008;
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reviewed certain operating and financial information, including
projections, provided to Sutter by management relating to
ESS business and prospects;
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met with certain members of ESS senior management to
discuss our operations, historical financial statements and
future prospects;
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discussed information concerning ESS with outside advisors to
ESS;
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reviewed the historical market prices and trading volume of
shares of ESS common stock; and
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conducted such other studies, analyses, inquiries and
investigations as Sutter deemed appropriate.
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In the course of its review, Sutter relied upon and assumed the
accuracy and completeness of the financial and other information
provided to Sutter by ESS and Sutter did not independently
verify any of the information provided to it by ESS. With
respect to ESS projected financial results, Sutter assumed
that they had been reasonably prepared on bases reflecting the
best available estimates and judgment of the management of ESS.
Sutter did not assume any responsibility for the information or
projections provided to it and Sutter further relied upon the
assurances of the management of ESS that they were unaware of
any facts that would make the information or projections
provided to Sutter incomplete or misleading. In arriving at its
opinion, Sutter did not perform or obtain any independent
appraisal of the assets of ESS. The Sutter opinion was approved
by Sutters Fairness Committee. Sutters opinion was
necessarily based on economic, market and other conditions, and
the information made available to it as of the
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date thereof. Sutter expressed no opinion with respect to the
fairness of the amount of compensation received by any officers,
directors or employees of ESS relative to the consideration to
be received by the public stockholders of ESS Delaware.
The following is a brief summary of the financial analyses
performed by Sutter in connection with providing its oral
opinion to the strategic transaction committees with respect to
the reincorporation merger and the cash-out merger, taken as a
whole. The tables included below are not intended to stand alone
and should be read together with the full text of Sutters
summary in order to more fully understand the financial analyses
performed by Sutter.
Liquidation Analysis.
Sutter performed an
analysis to estimate the liquidation value of ESS based on the
preliminary balance sheet of ESS as of December 31, 2007.
In preparing its analysis, Sutter estimated the probable
liquidation value of certain non-cash assets of ESS, assumed
that, based on estimates provided by ESS management, ESS
would recognize $19.5 million in net proceeds from the sale
of our headquarters, excluded certain deferred tax liabilities
of ESS that might be payable upon a liquidation, and relied upon
an estimate of approximately $14.0 million of aggregate
expenses related to liquidating ESS that was provided by
ESS management, including expenses related to severance,
liquidation costs and operating expenses during liquidation.
Based upon its analysis, Sutter determined that ESS had a
probable liquidation value of $55.2 million, or, based upon
approximately 35,522,000 shares outstanding as of
December 31, 2007, $1.55 per share for each share of our
common stock, as compared to the merger consideration of $1.64
per share.
Share Repurchase Analysis.
Sutter performed an
analysis of the number of shares of ESS outstanding common
stock that could be purchased in a self tender offer using
assumed aggregate amounts paid for those shares ranging from
$30.0 million to $45.0 million, against approximately
$50.0 million of available cash and short term investments
at December 31, 2007 excluding the proceeds from any sale
of our headquarters, and a range of purchase prices from $1.64
per share to $1.76 per share, against the consideration offered
in the cash merger of $1.64 per share. Sutter noted that, based
upon its assumptions, ESS would be able to repurchase between
approximately 77% ($45 million at $1.64) and 48%
($30 million at $1.76) of our outstanding shares of common
stock in a self-tender offer and that our ability to repurchase
shares might be limited by applicable provisions of California
law. See
Reasons for the Reincorporation
Merger
beginning on page 42 of this proxy
statement/prospectus. Sutter also noted that, while shareholders
who tendered their shares of ESS common stock into a self tender
offer would receive a fair price, our remaining shareholders
would continue to hold shares that would be likely to trade at a
materially lower price in a thin market, and that the long-range
potential of these shares would be dependent on the future
success of our new analog chip products.
Discounted Cash Flow Analysis.
Sutter
performed a discounted cash flow analysis to estimate the
present value of the free cash flows of ESS through the fiscal
year ending December 31, 2013. The analysis was based on
the financial projections of ESS management, and included
both a high and low forecast. Sutter
noted that, because ESS projections for both its
high and low forecasts through
December 31, 2012 showed a rundown toward zero of its
current products, substantial losses in the 2009 through 2011
fiscal years and a negative free cash flow in the 2012 fiscal
year, a discounted cash flow analysis through December 31,
2012 would produce a terminal value using a growth model of zero
due to ESS projection of an operating loss and negative
free cash flow in the 2012 fiscal year. However, because of the
amount of cash ESS would then hold, ESS would still have a
positive equity value. In order to produce a more meaningful
analysis, Sutter extended managements projections for one
year, through December 31, 2013, assuming continued growth
of our analog product line at the rate shown in
managements projections for fiscal years 2011 and 2012.
This assumption resulted in positive operating income and free
cash flow, and Sutter performed its discounted cash flow
analysis using the extended projections. However, because the
majority of ESS value is derived from the cash that ESS
holds, the results did not produce a wide dispersion of
calculated values. Sutters analysis produced the following
ranges of discounted cash flow value per share for ESS, in each
case as compared to the merger consideration of $1.64 per share:
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High Forecast
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Low Forecast
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Base Case through 2012
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$
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1.40
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$
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1.21
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Base Case extended through 2013
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$
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1.65
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$
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1.50
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Using the estimated valuation ranges set forth in the table
above, Sutter also performed probability-weighted calculations
assuming likelihoods of success for each scenario between 25%
and 75%, which produced the
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following probability-weighted mean discounted cash flow values
per share, in each case as compared to the merger consideration
of $1.64 per share:
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Probability of Success of New Products
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High Forecast
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Low Forecast
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75%
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$
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1.59
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$
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1.43
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50%
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$
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1.52
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$
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1.36
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25%
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$
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1.46
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$
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1.29
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The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the
summary set forth above, without considering the analysis as a
whole, could create an incomplete view of the processes
underlying Sutters opinion. In arriving at its opinion,
Sutter considered the results of all such analyses. The analyses
were prepared solely for purposes of providing its opinion as to
the fairness of the reincorporation merger and the cash-out
merger, taken as a whole, from a financial point of view, to the
public shareholders of ESS and to the public stockholders of ESS
Delaware. As described above, the Sutters opinion and
presentation to the strategic transaction committees was one of
many factors taken into consideration by the strategic
transaction committees in making their respective determinations
to approve the mergers. The foregoing summary does not purport
to be a complete description of the analyses performed by Sutter.
The strategic transaction committee engaged Sutter because of
the record and the experience of Sutter and its principals in
rendering fairness opinions. Sutter, as part of its investment
banking business, is regularly engaged in the valuation of
businesses and securities. Sutter has not acted as financial
advisor to ESS in connection with the mergers and has not
previously been engaged by ESS. In addition, Sutter has not had
and does not contemplate entering into any material relationship
with any party to the mergers in which Sutter received any
compensation, although Sutter may in the future provide
financial advisory or other services to parties to the mergers
that are unrelated to the mergers and may receive compensation
therefore. Pursuant to the terms of an engagement letter between
ESS and Sutter, dated October 23, 2007, ESS has agreed to
pay Sutter an aggregate cash fee for its services of $175,000.
Of such fee, $50,000 was payable upon execution of the
engagement letter, $75,000 was payable at the time Sutter
informed ESS that it was prepared to render its opinion and the
balance of $50,000 was payable at the time of the filing of this
proxy statement/prospectus. No portion of Sutters fee is
contingent upon completion of the mergers. In addition, ESS has
agreed to reimburse Sutter for reasonable out-of-pocket expenses
and to indemnify Sutter for certain liabilities arising out of
its services to ESS and the rendering of the Sutter opinion.
Interests
of Directors and Executive Officers in the Mergers
In considering the recommendation of the ESS board of directors
that you vote
FOR
the approval of the
principal terms of the reincorporation merger and that you
provide an advance proxy authorizing the execution and delivery
of a written consent adopting the merger agreement with respect
to the shares of common stock of ESS Delaware that you would
hold following the consummation of the reincorporation merger,
and the recommendation of the board of directors of Echo that
the stockholders of ESS Delaware adopt the merger agreement, you
should be aware that our directors and executive officers, and
the directors and executive officers of Echo may have interests
in the mergers that are in addition to or differ from interests
you may have as a shareholder of ESS or a stockholder of ESS
Delaware, including the following:
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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;
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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
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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
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arrangements with the surviving corporation or Imperium and may
participate in the equity of the surviving corporation.
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You should also be aware that, to our knowledge,
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One of Imperiums 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.
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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.
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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 Imperiums 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
Imperiums chief executive officer.
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Needham & Company,
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was engaged as a co-manager for our initial public offering in
1995,
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had an advisory role in connection with the spin-off of our
subsidiary Vialta in 2001,
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worked as lead underwriter for our follow-on public offering in
2002, and
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had an advisory role in connection with our acquisitions of
Divio and Pictos Technologies in 2003.
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The strategic transaction committees and the boards of directors
of both ESS and Echo were aware of these interests and
considered them, among other matters, in approving the mergers
and declaring the advisability of the merger agreement.
Mr. Alexander was not present at the meeting of our board
of directors at which approval of the sale to Imperium and entry
into the merger agreement with affiliates of Imperium was
considered and approved. Mr. Blair was present at that
meeting of our board of directors, however, Mr. Blair
recused himself from the portion of that meeting during which
the sale to Imperium and entry into the merger agreement with
affiliates of Imperium was considered and approved, and
Mr. Blair abstained from voting thereon.
Accounting
Treatment of the Mergers
The reincorporation merger will have no accounting impact on ESS
or its shareholders. The cash-out merger will be accounted for
under the purchase method of accounting, under which the total
consideration paid in the cash-out merger will be allocated
among ESS Delawares consolidated assets and liabilities
based on the fair values of the assets acquired and liabilities
assumed.
Employment
Arrangements
As of the date of this joint proxy statement/prospectus, neither
Mr. Blair nor Mr. Marsh, nor, to our knowledge, any of
our other employees, have an agreement to be employed by
Imperium or ESS Delaware following the cash-out merger.
Dissenters
Rights/Appraisal Rights
Holders of shares of ESS Delaware common stock whose shares were
not included in the written consent for the adoption of the
merger agreement by the designee thereof and who properly demand
appraisal of their shares will be entitled to appraisal rights
in connection with the cash-out merger under Section 262 of
the Delaware General Corporation Law, which we refer to as
Section 262. As used in this section, the term
stockholders refers
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to the holders of shares of common stock of ESS Delaware
entitled to seek appraisal rights under Section 262, and
the term surviving corporation refers to the
corporation surviving the cash-out merger.
The following discussion is not a complete statement of the
law pertaining to appraisal rights under the Delaware General
Corporation Law and is qualified in its entirety by
Section 262, the full text of which is attached to this
joint proxy statement/prospectus as Annex B. The following
summary does not constitute any legal or other advice nor does
it constitute a recommendation that stockholders exercise their
appraisal rights under Section 262. Failure to comply
strictly with the procedures set forth in Section 262 will
result in the loss of appraisal rights.
Under Section 262(d)(2), holders of shares of ESS Delaware
common stock whose shares are not included in the written
consent for the adoption of the merger agreement, and who
otherwise follow the procedures set forth in Section 262,
will be entitled to have their shares appraised by the Delaware
Court of Chancery, which we refer to as the Court of Chancery,
and to receive payment in cash of the fair value of
the shares, exclusive of any element of value arising from the
accomplishment or expectation of the cash-out merger, as
determined by the Court of Chancery, together with interest, if
any, to be paid upon the amount determined to be the fair value.
If you provide (and do not subsequently revoke) an advance
proxy, the shares of ESS Delaware common stock you would receive
in the reincorporation merger will be included in the written
consent, and you will not be entitled to seek an appraisal of
those shares under Section 262. ESS shareholders who vote
for the reincorporation merger, but who do not submit an advance
proxy to consent to the adoption of the merger agreement and
approval of the cash-out merger, will be entitled to appraisal
rights in connection with the cash-out merger pursuant to
Section 262.
Under Section 262(d)(2), where a merger agreement is
approved by written consent of the stockholders pursuant to
Section 228 of the Delaware General Corporation Law, a
constituent corporation, prior to the effective date of the
merger, or the surviving corporation, within 10 days after
the effective date of the merger, must notify each of its
stockholders entitled to appraisal rights that appraisal rights
are available and include in the notice a copy of
Section 262. Following the action by written consent
adopting the merger agreement with respect to the cash-out
merger, the surviving corporation, within 10 days after the
effective date of the cash-out merger, will notify each
stockholder of ESS Delaware entitled to appraisal rights under
Section 262(d)(2) of the effective date of the cash-out
merger and that appraisal rights are available to such
stockholder and include in the notice a copy of
Section 262. Any holder of common stock of ESS Delaware who
wishes to exercise appraisal rights, or who wishes to preserve
such holders right to do so, should review the following
discussion and Annex B carefully because failure to timely
and properly comply with the procedures specified will result in
the loss of appraisal rights. Moreover, because of the
complexity of the procedures for exercising the right to seek
appraisal of shares of common stock, ESS and Echo believe that
if a stockholder considers exercising such rights, such
stockholder should seek the advice of legal counsel.
Filing Written Demand.
Any holder of common
stock of ESS Delaware wishing to exercise appraisal rights must
deliver to the surviving corporation, within 20 days after
the date of the mailing of the notice required by
Section 262(d)(2), a written demand for the appraisal of
the stockholders shares, and that stockholder must not
have given (and not subsequently revoked) an advance proxy
authorizing the shares of ESS Delaware common stock to be
received by such holder in the cash-out merger to be included in
the written consent authorizing the adoption of the merger
agreement. Failure to provide an advance proxy, or the
revocation of any previously provided advance proxy, will not in
and of itself constitute a written demand for appraisal
satisfying the requirements of Section 262. Instead, any
holder of common stock of ESS Delaware wishing to exercise
appraisal rights must separately submit a demand for appraisal
to ESS Delaware, as the surviving corporation, which must
reasonably inform the surviving corporation of the identity of
the holder as well as the intention of the holder to demand an
appraisal of the fair value of the common stock of
ESS Delaware held by the holder. Such demand should also specify
the stockholders name and mailing address and the number
of shares covered by the demand. Stockholders who elect to
exercise appraisal rights must mail or deliver their written
demands to the surviving corporation at the following address:
c/o ESS Technology, Inc., 48401 Fremont Boulevard, Fremont,
California 94538 Attention: Robert L. Blair.
A holder of common stock of ESS Delaware wishing to exercise
appraisal rights must hold the shares of record on the effective
date of the cash-out merger and hold the shares of record on the
date the written demand for appraisal is made, since appraisal
rights will be lost if the shares are transferred prior to the
effective date of the cash-out merger or prior to the date such
demand is made. Only a holder of record of common stock of ESS
Delaware is entitled to demand an appraisal of the shares
registered in that holders name. A demand for appraisal in
respect of shares of
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common stock of ESS Delaware should be executed by or on behalf
of the holder of record, fully and correctly, as the
holders name appears on the holders stock
certificates. If the shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution
of the demand should be made in that capacity, and if the shares
are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by
or on behalf of all joint owners. An authorized agent, including
an agent for two or more joint owners, may execute a demand for
appraisal on behalf of a holder of record; however, the agent
must identify the record owner or owners and expressly disclose
that, in executing the demand, the agent is acting as agent for
the record owner or owners. A record owner (such as a broker,
bank or nominee) who holds common stock of ESS Delaware as a
nominee for others, may exercise appraisal rights with respect
to the shares held for one or more beneficial owners while not
exercising the rights with respect to the shares held for other
beneficial owners as to which the holder is the record owner; in
such case, however, the written demand should set forth the
number of shares as to which appraisal is sought and where no
number of shares is expressly mentioned the demand will be
presumed to cover all common stock of ESS Delaware held in the
name of the record owner. Stockholders who hold their shares in
brokerage accounts or other nominee forms and who wish to
exercise appraisal rights are urged to consult with their
brokers to determine the appropriate procedures for the making
of a demand for appraisal by such a nominee.
At any time within 60 days after the effective date of the
cash-out merger, any stockholder who has not commenced an
appraisal proceeding or joined that proceeding as a named party
may withdraw his, her or its demand for appraisal and accept the
consideration offered pursuant to the merger agreement by
delivering to the surviving corporation written withdrawal of
the demand for appraisal. However, any such attempt to withdraw
the demand made more than 60 days after the effective date
of the cash-out merger will require approval of the surviving
corporation. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery will be dismissed without
the approval of the Court of Chancery, and such approval may be
conditioned upon such terms as the Court of Chancery deems just;
provided, however, that any stockholder who has not commenced an
appraisal proceeding or joined that proceeding as a named party
may withdraw his, her or its demand for appraisal and accept the
merger consideration offered pursuant to the merger agreement
within 60 days after the effective date of the cash-out
merger. If the surviving corporation does not approve a request
to withdraw a demand for appraisal when that approval is
required, or, except with respect to any stockholder who
withdraws such stockholders right to appraisal in
accordance with the proviso in the immediately preceding
sentence, if the Court of Chancery does not approve the
dismissal of an appraisal proceeding, the stockholder will be
entitled to receive only the appraised value determined in any
such appraisal proceeding, which value could be less than, equal
to or more than the consideration being offered pursuant to the
merger agreement.
Filing a Petition for Appraisal.
Within
120 days after the effective date of the cash-out merger,
the surviving corporation or any holder of common stock of ESS
Delaware who has complied with Section 262 and who is
otherwise entitled to appraisal rights under Section 262
may commence an appraisal proceeding by filing a petition in the
Delaware Court of Chancery demanding a determination of the
value of the shares held by all stockholders entitled to
appraisal rights. Neither ESS Delaware nor the surviving
corporation is under any obligation to and has no present
intention to file a petition for appraisal and holders of common
stock of ESS Delaware should not assume that ESS Delaware or the
surviving corporation will file a petition. Accordingly, it is
the obligation of the holders of common stock of ESS Delaware to
initiate all necessary action to perfect their appraisal rights
in respect of shares of common stock of ESS Delaware within the
time prescribed in Section 262. It is not necessary that
each stockholder asserting appraisal rights file a petition for
appraisal in the Court of Chancery. Rather a single valid
petition will suffice for the petitioning and non-petitioning
stockholders who have properly demanded appraisal.
Within 120 days after the effective date of the cash-out
merger, any holder of common stock of ESS Delaware who has
complied with the requirements for exercise of appraisal rights
will be entitled, upon written request, to receive from the
surviving corporation a statement setting forth the aggregate
number of shares not voted in favor of the adoption of the
merger agreement and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. The statement must be mailed within 10 days after a
written request therefor has been received by the surviving
corporation or within 10 days after the expiration of the
period for delivery of demands for appraisal, whichever is
later. Notwithstanding the foregoing, a person who is the
beneficial owner of shares of common stock of ESS Delaware held
either in a voting trust or by a nominee on behalf of such
person may, in such persons own name, file a petition or
request from the surviving corporation the statement described
in this paragraph.
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If a petition for an appraisal is timely filed by a holder of
shares of common stock of ESS Delaware and a copy thereof is
served upon the surviving corporation, the surviving corporation
will then be obligated within 20 days to file with the
Delaware Register in Chancery a duly verified list containing
the names and addresses of all stockholders who have demanded an
appraisal of their shares and with whom agreements as to the
value of their shares have not been reached. At the hearing on
the petition, the Court of Chancery will determine those
stockholders who are entitled to an appraisal of their shares
and may require the stockholders who demanded payment for their
shares to submit their stock certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal
proceeding; and if any stockholder fails to comply with the
direction, the Court of Chancery may dismiss the proceedings as
to the stockholder.
Determination of Fair Value.
After the Court
of Chancery determines the holders of common stock of ESS
Delaware entitled to appraisal, the appraisal proceeding shall
be conducted in accordance with the rules of the Court of
Chancery, including any rules specifically governing appraisal
proceedings. Through such proceeding, the Court of Chancery
shall determine the fair value of the shares,
exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with
interest, if any, to be paid upon the amount determined to be
the fair value. Unless the Court of Chancery in its discretion
determines otherwise for good cause shown, interest from the
effective date of the cash-out merger through the date of
payment of the judgment shall be compounded quarterly and shall
accrue at 5% over the Federal Reserve discount rate (including
any surcharge) as established from time to time during the
period between the effective date of the cash-out merger and the
date of payment of the judgment. In determining fair value, the
Court of Chancery will take into account all relevant factors.
In
Weinberger v. UOP, Inc.,
the Delaware Supreme
Court discussed the factors that could be considered in
determining fair value in an appraisal proceedings, stating that
proof of value by any techniques or methods which are
generally considered acceptable in the financial community and
otherwise admissible in court should be considered and
that fair price obviously requires consideration of all
relevant factors involving the value of a company. The
Delaware Supreme Court stated that in making this determination
of fair value the court must consider market value, asset
value, dividends, earnings prospects, the nature of the
enterprise and any other facts which were known or which would
be ascertained as of the date of merger which throw any light on
future prospects of the merged corporation... In addition,
the Delaware courts have decided that the statutory appraisal
remedy, depending on factual circumstances, may or may not be a
dissenting stockholders exclusive remedy.
Stockholders considering seeking appraisal should be aware that
the fair value of their shares as so determined by the Court of
Chancery could be more than, the same as or less than the
consideration they would receive pursuant to the cash-out merger
if they did not seek appraisal of their shares and that an
investment banking opinion as to fairness from a financial point
of view is not necessarily an opinion as to fair value under
Section 262. Although ESS and Echo believe that the merger
consideration is fair, no representation is made as to the
outcome of the appraisal of fair value as determined by the
Court of Chancery, and stockholders should recognize that such
an appraisal could result in a determination of a value higher
or lower than, or the same as, the merger consideration. Neither
Parent, ESS nor Echo anticipate offering more than the
applicable merger consideration to any stockholder of ESS
Delaware exercising appraisal rights, and reserve the right to
assert, in any appraisal proceeding, that for purposes of
Section 262, the fair value of a share of
common stock of ESS Delaware is less than the applicable merger
consideration.
If a petition for appraisal is not timely filed, then the right
to an appraisal will cease. The costs of the appraisal
proceeding (which do not include attorneys fees and fees
and expenses of experts) may be determined by the Court of
Chancery and taxed upon the parties as the Court of Chancery
deems equitable under the circumstances. Upon application of any
stockholder in connection with the appraisal proceeding, the
Court of Chancery may order that all or a portion of the
expenses incurred by a stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorneys fees and the fees and expenses of experts, be
charged pro rata against the value of all the shares entitled to
be appraised. In the absence of such determination or
assessment, each party bears its own expenses.
57
Any stockholder who has duly demanded appraisal in compliance
with Section 262 will not be entitled to vote for any
purpose the shares of common stock subject to such demand or to
receive payment of dividends or other distributions on such
shares of common stock, except for dividends or other
distributions payable to holders of record of shares as of a
record date that is before the effective time of the cash-out
merger.
If any stockholder who demands appraisal of shares of common
stock of ESS Delaware under Section 262 fails to perfect,
successfully withdraws or loses such holders right to
appraisal, the stockholders shares of common stock of ESS
Delaware will be deemed to have been converted at the effective
date of the cash-out merger into the right to receive the merger
consideration pursuant to the merger agreement, without
interest. A stockholder will fail to perfect, or effectively
lose, the holders right to appraisal if no petition for
appraisal is filed within 120 days after the effective date
of the cash-out merger. In addition, as indicated above, a
stockholder may withdraw his, her or its demand for appraisal in
accordance with Section 262 and accept the merger
consideration offered pursuant to the merger agreement.
Failure to comply strictly with all of the procedures set forth
in Section 262 will result in the loss of a
stockholders statutory appraisal rights.
58
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS OF
THE REINCORPORATION MERGER AND THE CASH-OUT MERGER
General
In the opinion of Orrick, Herrington & Sutcliffe LLP,
counsel to ESS (Tax Counsel), the following
discussion correctly describes the material United States
federal income tax consequences arising from and relating to the
reincorporation merger and the cash-out merger that are
generally applicable to U.S. Shareholders of ESS. For this
purpose, U.S. Shareholders are beneficial
owners of ESS common stock who are United States citizens or
residents, domestic corporations, estates subject to United
States federal income tax on their income regardless of source,
and trusts, but only if (i) a court within the United
States is able to exercise primary supervision over the
administration of such trust and one or more United States
fiduciaries have the authority to control all substantial
decisions of the trust or (ii) the trust has a valid
election in effect under applicable Treasury Regulations to be
treated as a U.S. person. This discussion is applicable
only to U.S. Shareholders who hold their ESS common stock
and, following the reincorporation merger, their ESS Delaware
common stock as a capital asset within the meaning
of Section 1221 of the Internal Revenue Code and who have
no actual or constructive ownership of ESS Delaware after the
cash-out merger. This discussion does not address all aspects of
United States federal income taxation that may be relevant to a
particular U.S. Shareholder (including, without limitation,
potential application of the alternative minimum tax), or to
certain types of shareholders subject to special treatment under
the United States federal income tax laws (for example, banks,
life insurance companies, tax-exempt organizations,
broker-dealers, shareholders who received their ESS common stock
as compensation, United States expatriates, traders in
securities that elect to mark to market, shareholders that are
partnerships or other pass-through entities or shareholders who
hold their stock as part of a hedge, straddle, constructive sale
or conversion transaction). This discussion also does not
address (i) the tax consequences to U.S. stockholders
who exercise dissenters/appraisal rights or (ii) any
aspect of state, local or foreign tax laws.
This opinion is based on United States laws, regulations,
rulings and decisions currently in effect, all of which are
subject to change, possibly with retroactive effect. No advance
income tax ruling has been sought or obtained from the United
States Internal Revenue Service (the IRS) regarding
the tax consequences of any of the transactions described
herein. Accordingly, it is possible that the United States
federal income tax consequences of the reincorporation merger
and the cash merger may differ from those described below.
THE FOLLOWING OPINION DOES NOT DISCUSS ALL ASPECTS OF FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR SHAREHOLDER
IN LIGHT OF SUCH HOLDERS PARTICULAR CIRCUMSTANCES AND
INCOME TAX SITUATION. SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF THE TRANSACTIONS DESCRIBED HEREIN INCLUDING THE APPLICATION
OF STATE, LOCAL AND FOREIGN TAX LAWS AND POSSIBLE FUTURE CHANGES
IN FEDERAL TAX LAWS.
The
Reincorporation Merger
For United States federal income tax purposes, the
reincorporation merger will result in an exchange by our
shareholders of their ESS common stock for ESS Delaware common
stock. Tax Counsel is of the opinion that the reincorporation
merger should qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
This conclusion is based on certain factual assumptions and
reliance on representations from ESS and ESS Delaware. Such
assumptions and representations include: (i) the
registration statement correctly reflects ESS principal
purposes and reasons for the reincorporation merger, including
the fact that ESS, as a California corporation, is subject to
certain limitations on distributions that may apply to the
cash-out merger transaction which makes the reincorporation
merger necessary prior to the consummation of the cash-out
merger; (ii) there is no plan or intention on the part of
any shareholder of ESS to sell, exchange or otherwise dispose of
the ESS Delaware common stock received in the reincorporation
merger, other than in the cash-out merger;
(iii) immediately following the reincorporation merger, ESS
Delaware will possess the same assets and liabilities, except
for assets used to pay expenses incurred in connection with the
reincorporation merger, as those possessed by ESS immediately
prior to the reincorporation merger; (iv) assets used to
pay expenses and all redemptions and distributions (except for
regular, normal dividends) made by ESS immediately preceding the
reincorporation merger will, in the aggregate, constitute less
than one percent of the net assets of ESS; (v) dissenting
shareholders
59
will own less than one percent of the ESS common stock; and
(vi) immediately following the reincorporation merger, the
shareholders of ESS will own all of the outstanding ESS Delaware
common stock and will own such stock solely by reason of their
ownership of the ESS common stock immediately prior to the
reincorporation merger.
Assuming the reincorporation merger qualifies as a
reorganization, the following will be the material
United States federal income tax consequences of the
reincorporation merger to a U.S. Shareholder:
(1) The U.S. Shareholder will recognize no gain or
loss on the exchange of ESS common stock solely for ESS Delaware
common stock;
(2) The aggregate tax basis of the ESS Delaware common
stock received by a U.S. Shareholder will be the same as
the aggregate tax basis of the ESS common stock surrendered in
exchange therefor; and
(3) The holding period of the ESS Delaware common stock
received in the reincorporation merger will include the holding
period of ESS common stock surrendered in exchange therefor.
The
Cash-Out Merger
Tax counsel is of the opinion that the receipt of cash by a
U.S. Shareholder for ESS Delaware common stock pursuant to
the cash-out merger will be a taxable transaction for United
States federal income tax purposes (and also may be a taxable
transaction under applicable state, local or foreign income tax
laws). For United States federal income tax purposes, a
U.S. Shareholder will recognize gain or loss equal to the
difference, if any, between the cash received by the
U.S. Shareholder in the cash-out merger and the
U.S. Shareholders tax basis in the ESS Delaware
common stock. Gain or loss will be calculated separately for
each block of ESS Delaware common stock exchanged for cash in
the cash-out merger (generally ESS Delaware common stock that
was received in exchange for ESS common stock acquired at the
same cost in a single transaction). Such gain or loss generally
will be capital gain or loss, and will be long-term capital gain
or loss if the ESS Delaware common stock (taking into account
the holding period of the ESS common stock) has been held for
more than one year. The deductibility of capital losses is
restricted and, in general, may only be used to reduce capital
gains to the extent thereof. However, individual taxpayers
generally may deduct annually $3,000 of capital losses in excess
of their capital gains.
The consideration received in the cash-out merger by a
noncorporate U.S. Shareholder may be subject to backup
withholding at a 28% rate. Backup withholding generally will
apply only if the U.S. Shareholder fails to furnish a
correct social security number or other taxpayer identification
number, or otherwise fails to comply with applicable backup
withholding rules and certification requirements. Corporations
generally are exempt from backup withholding. Each
U.S. Shareholder should complete and sign the
Form W-9
that will be part of the letter of transmittal to be returned to
the paying agent in order to provide the information and
certification necessary to avoid backup withholding, unless an
applicable exemption exists and is otherwise proved in a manner
satisfactory to the paying agent.
60
DIFFERENCES
BETWEEN THE RIGHTS OF ESS SHAREHOLDERS AND ESS DELAWARE
STOCKHOLDERS
If the reincorporation merger is consummated, shares of ESS
common stock will be automatically converted into shares of ESS
Delaware common stock. We believe the description below
summarizes the material differences between your rights as an
ESS shareholder prior to the reincorporation merger and the
rights you would have as an ESS Delaware stockholder following
the reincorporation merger, but it may not contain all of the
information important to you. The description is qualified in
its entirety by reference to the full text of the current
amended and restated articles of incorporation of ESS, which we
refer to as the California articles, and the current amended and
restated bylaws of ESS, which we refer to as the California
bylaws, and the proposed certificate of incorporation of ESS
Delaware, a copy of which is attached hereto as Annex D,
which we refer to as the Delaware certificate, and the proposed
bylaws of ESS Delaware, a copy of which is attached hereto as
Annex E, which we refer to as the Delaware bylaws and the
respective corporation laws of California and Delaware. A copy
of the California articles and California bylaws are on file
with the SEC and are available from ESS upon request. See
Where You Can Find More Information
beginning
on page 154.
Your rights as an ESS shareholder prior to the reincorporation
merger are governed by the California Corporations Code and the
California articles and California bylaws. If the
reincorporation merger is consummated, your rights as an ESS
Delaware stockholder will be governed by the Delaware General
Corporation Law and the Delaware certificate and the Delaware
bylaws. Approval by our shareholders of the principal terms of
the reincorporation merger will automatically result in the
adoption of all the provisions set forth in the Delaware
certificate and Delaware bylaws upon consummation of the
reincorporation merger.
The
Charters and Bylaws of ESS and ESS Delaware
There are significant similarities between the proposed charter
documents of ESS Delaware (the Delaware certificate and the
Delaware bylaws) and the current charter documents of ESS (the
California articles and the California bylaws). For example,
both the Delaware certificate and the California articles
authorize the issuance of up to 100,000,000 shares of
common stock and 10,000,000 shares of undesignated
preferred stock and both the Delaware certificate and the
California articles each provide that the board is entitled to
determine the rights, preferences, privileges and restrictions
of the authorized and unissued preferred stock at the time of
issuance.
In general, it has been our boards intention to make
minimal substantive changes in the rights of our shareholders in
preparing the Delaware certificate. Although permitted by law in
both states, neither the Delaware certificate nor the California
articles provide for a classified board of directors, which
would divide the board into multiple classes, with each director
serving for a multiple-year term and only a portion of the total
number of directors being elected at each annual meeting.
In preparing the Delaware certificate and the Delaware bylaws,
we have also included certain provisions that enable the
stockholders of ESS Delaware to have rights similar to those
that they have automatically as shareholders of a California
corporation, but that are not granted automatically under
Delaware law. In particular, under California law, holders of
10% of our shares have a statutory right to call special
meetings of shareholders. The Delaware General Corporation Law,
however, does not provide for this right automatically, but
instead provides that the certificate of incorporation or bylaws
of a corporation may confer upon stockholders the right to call
a special meeting of stockholders. Accordingly, the Delaware
bylaws continue this right for our shareholders explicitly.
Size of
the Board of Directors
California law provides that the authorized number of directors
of a corporation may be fixed in the corporations articles
of incorporation or bylaws, or a range may be established for
the authorized number of directors, with the board itself given
authority to fix the exact authorized number of directors within
such range. The California bylaws specify a range of five to
nine for the authorized number of directors and authorize the
board to fix the exact authorized number of directors within the
range. Changes in the authorized number of directors on our
board of directors outside these limits can be made only with
the approval of holders of a majority of the outstanding voting
stock of ESS. In addition, under California law, the authorized
number of directors cannot be reduced below five if a number of
shares equal to or greater than sixteen and two-thirds percent
(16
2
/
3
%)
of the total outstanding shares are voted in opposition to such
a reduction. The authorized number of directors of ESS is
currently set at five.
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Delaware law provides that the authorized number of directors of
a corporation, or the range of authorized directors, may be
fixed by, or in the manner provided in, the corporations
bylaws, unless the certificate of incorporation fixes the number
of directors, in which case a change in the number of directors
shall be made only by amendment to the certificate of
incorporation, which generally requires approval by the board of
directors and the stockholders. Similar to the California
bylaws, the Delaware bylaws specify a range of five to nine for
the authorized number of directors and authorize the board to
fix the exact authorized number of directors within that range.
Changes in the authorized number of directors on the ESS
Delaware board of directors outside those limits can be made
only by an amendment to the Delaware bylaws approved by holders
of a majority of the outstanding voting stock of ESS Delaware.
In addition, under the Delaware bylaws, as in the California
bylaws, the authorized number of directors cannot be reduced
below five if a number of shares equal to or greater than
sixteen and two-thirds percent
(16
2
/
3
%)
of the total outstanding shares are voted in opposition to such
a reduction.
Cumulative
Voting
Cumulative voting entitles a shareholder to cast, in any
election of directors, a number of votes equal to the number of
directors to be elected at the election multiplied by the number
of shares registered in such shareholders name. The
shareholder may cast all of such votes for a single nominee or
may distribute them among any two or more nominees. Under
California law, shareholders of a corporation have the right to
cumulative voting, unless the corporation elects otherwise (and
provided that the corporation has shares listed on the New York
or American Stock Exchanges or traded on the NASDAQ Stock
Market). Under Delaware law, cumulative voting in the election
of directors is not permitted unless specifically provided for
in the corporations certificate of incorporation.
Cumulative voting with respect to directors of ESS is prohibited
under the California articles. Accordingly, the Delaware
certificate does not provide for cumulative voting with respect
to directors of ESS Delaware, and stockholders of ESS Delaware
will not be entitled to elect directors using cumulative voting.
Stockholder
Voting; Elections
On all matters submitted to a vote of shareholders of ESS, the
shareholder is entitled to one vote for each share of capital
stock held by such shareholder, unless otherwise restricted by
the California articles or applicable law. Except as where
otherwise required in the California bylaws or by law, a
majority of the shares represented and voting at a duly held
meeting at which a quorum is present shall be the act of the
shareholders. Similarly, on all matters submitted to a vote of
stockholders of ESS Delaware, the stockholders will be entitled
to one vote for each share of capital stock held by such
stockholder. All elections will be determined by a plurality of
votes cast, and except as otherwise required by law, the
Delaware certificate or Delaware bylaws, all other matters will
be determined by a majority of the votes cast.
Board of
Directors Quorum and Vote Requirements
Under both the California bylaws and the proposed Delaware
bylaws, at all meetings of the boards of directors of ESS and
ESS Delaware, respectively, the presence of a majority of the
total authorized number of directors constitutes a quorum for
the transaction of business. Except as otherwise required by
law, in the case of both ESS and ESS Delaware, the vote of a
majority of the directors present at any meeting at which a
quorum is present constitutes the act of the board of directors.
Additionally, any action required or permitted to be taken at a
meeting of the ESS board of directors or the ESS Delaware board
of directors, respectively, may be taken without a meeting if
all members of the board of directors consent thereto in writing
(or, in the case of ESS Delaware, by electronic transmission),
and that writing or those writings are filed with the minutes or
proceedings of the board of directors.
Shareholder
Meetings
The California bylaws and the proposed Delaware bylaws contain
similar requirements with respect to calling and conducting
meetings of ESS shareholders and meetings of ESS
Delawares stockholders, respectively. The annual meeting
of the ESS shareholders may be held at any place within or
outside the State of California and at a time designated by the
board of directors. Similarly, the annual meeting of the ESS
Delaware stockholders may be held at any place within or outside
the State of Delaware and at a time designated by the board of
directors.
Special meetings of the shareholders of ESS may be called at any
time by the president, the chairman of the board, the board of
directors or by two or more of the members thereof or by one or
more shareholders holding
62
shares in the aggregate entitled to cast not less than 10% of
the votes at that meeting. Special meetings of the stockholders
of ESS Delaware may be called at any time by the board of
directors, the chairman of the board, the president or by one or
more stockholders holding shares in the aggregate entitled to
cast not less than 10% of the votes at that meeting.
The presence in person or by proxy of the holders of record of a
majority of shares entitled to vote at a meeting of the ESS
shareholders or the ESS Delaware stockholders constitutes a
quorum for the transaction of business at the applicable meeting.
Action of
Shareholders by Written Consent
Under the California bylaws, any action required or permitted to
be taken at any annual or special meeting of the ESS
shareholders may be taken without a meeting, without prior
notice, and without a vote if a consent in writing setting forth
the action so taken is:
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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
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the action otherwise complies with applicable law.
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Under the Delaware General Corporation Law, unless otherwise
provided in the certificate of incorporation, any action
required or permitted to be taken at any annual or special
meeting of stockholders of a corporation, may be taken without a
meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall
be 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 shall be
delivered to the corporation by delivery to its registered
office in the State of Delaware, its principal place of business
or an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are
recorded. The Delaware certificate does not prohibit or restrict
the right of stockholders to act by written consent, and the
Delaware bylaws expressly provide for the taking of stockholder
action by written consent in accordance with the Delaware
General Corporation Law.
Filling
Vacancies on the Board of Directors
Under California law, any vacancy on a corporations board,
other than one created by removal of a director by the
corporations shareholders, may be filled by the board
itself. Even if the number of directors still in office is less
than a quorum, the vacancy may be filled by the affirmative vote
of a majority of the directors present at a duly called and held
meeting, by the unanimous written consent of the directors then
in office or by a sole remaining director. A vacancy created by
removal of a director by the corporations shareholders may
be filled by the board only if so authorized by the
corporations articles of incorporation or by a bylaw
provision approved by the corporations shareholders.
Under Delaware law, unless otherwise provided in the certificate
of incorporation or bylaws:
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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
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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.
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If at any time a corporation shall have no directors in office,
then any officer or any stockholder or an executor,
administrator, trustee or guardian of a stockholder, or other
fiduciary with like responsibility, may call a special meeting
of stockholders in accordance with the certificate of
incorporation or bylaws, or may apply to the Delaware Court of
Chancery for a decree summarily ordering an election. If, at the
time of filling any vacancy or newly created directorship, the
directors then in office shall constitute less than a majority
of the whole board (as constituted prior to any such increase),
the Court of Chancery may, upon application of any stockholder
holding 10% of the outstanding voting stock entitled to vote in
an election of directors, summarily order an election to be held
to fill the vacancies or newly created directorships (or to
replace directors chosen by the board to fill any such
63
vacancies or newly created directorships). According to the ESS
Delaware bylaws, except for a vacancy created by removal of a
director by the corporations stockholders, which may only
be filled by a vote of ESS Delaware stockholders, any vacancy or
newly created directorship may be filled by a person selected by
a majority of the remaining directors then in office or by a
sole remaining director.
ESS has chosen not to alter the default provisions of its state
of incorporation with respect to filling vacancies on its board
of directors. Therefore, while the board of ESS has the power to
fill vacancies on the board itself generally, neither the
California articles nor the California bylaws permit the board
to fill vacancies created by the removal of a director by
ESS shareholders. Similarly, while the board of ESS
Delaware will have the power to fill vacancies on the board
itself generally, the Delaware bylaws will provide that only the
stockholders of ESS Delaware may fill any vacancy created by the
removal of a director by the stockholders of ESS Delaware.
Monetary
Liability of Directors
The California articles and the Delaware certificate provide for
the elimination of personal monetary liability of the directors
of ESS and ESS Delaware, respectively, to the fullest extent
permissible under the laws of the respective states. However,
due to differences between California and Delaware law, the
provision eliminating monetary liability of directors set forth
in the Delaware certificate may be more expansive than the
corresponding provision in the California articles. For a more
detailed explanation of the foregoing, see
Significant Differences between the
Corporation Laws of California and Delaware
Limitation of Liability and Indemnification
, beginning
on page 65 below.
Bylaw
Amendments
Both the California bylaws and the proposed Delaware bylaws
provide that they may be amended either by the holders of a
majority of the outstanding shares entitled to vote or by the
affirmative vote of the board, except that the board cannot
unilaterally amend the provision of the bylaws that governs the
range of directors, as discussed under
Significant Differences between the
Corporation Laws of California and
Delaware Size of the Board of
Directors
beginning on page 60 above.
Significant
Differences between the Corporation Laws of California and
Delaware
The following provides a summary of major substantive
differences between the corporation laws of California and
Delaware. It is not an exhaustive description of all of the
differences between the laws of the two states. Accordingly, all
statements herein are qualified in their entirety by reference
to the California Corporations Code and the Delaware General
Corporation Law, respectively.
Shareholder
Voting in Acquisitions
California and Delaware laws are substantially similar in terms
of when shareholder approval is required for a corporation to
undertake various types of acquisition transactions. Both
California and Delaware law generally require that a majority of
the shareholders of both the acquiring and target corporations
approve a statutory merger. In addition, both California and
Delaware law require that a sale of all or substantially all of
the assets of a corporation be approved by a majority of the
outstanding voting shares of the corporation selling its assets.
Delaware law does not require a shareholder vote of the
surviving corporation in a merger (unless provided otherwise in
the corporations certificate of incorporation) if:
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The merger agreement does not amend the existing certificate of
incorporation;
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Each share of stock of the surviving corporation outstanding
immediately before the transaction is an identical outstanding
share after the merger; and
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Either:
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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
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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.
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64
California law contains a similar exception to its voting
requirements for reorganizations, where shareholders or the
corporation itself immediately prior to the reorganization will
own immediately after the reorganization equity securities
constituting more than five-sixths (5/6) of the voting power of
the surviving or acquiring corporation or its parent entity.
Limitations
on Certain Business Combinations
Delaware, like a number of states, has adopted special laws
designed to make certain kinds of unfriendly
corporate takeovers, or other non-board approved transactions
involving a corporation and one or more of its significant
shareholders, more difficult.
Under Section 203 of the Delaware General Corporation Law,
a Delaware corporation subject to that statute is prohibited
from engaging in a business combination with an
interested stockholder for three years following the
date that that person or entity becomes an interested
stockholder. With certain exceptions, an interested stockholder
is a person or entity that owns, individually or with or through
other persons or entities, fifteen percent (15%) or more of the
corporations outstanding voting stock (including rights to
acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion
or exchange rights, and also stock as to which the person has
voting rights only). The three-year moratorium imposed by
Section 203 on business combinations does not apply if:
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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;
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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
corporations 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
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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
(66
2
/
3
%)
of the outstanding voting stock not owned by the interested
stockholder.
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The restrictions on business combinations contained in
Section 203 will not apply if, among other reasons, the
corporation elects in its original certificate of incorporation
not to be governed by that section or if the corporation, by
action of its stockholders, adopts an amendment to its
certificate of incorporation or bylaws expressly electing not to
be governed by Section 203 (and any such amendment so
adopted shall be effective immediately in the case of a
corporation that both has never had a class of voting stock that
is listed on a national securities exchange or held of record by
more than 2,000 stockholders). Between the effective time of the
reincorporation merger and the effective time of the cash-out
merger, the board does not intend for ESS Delaware to be
governed by Section 203. The Delaware certificate provides
that ESS Delaware shall not be governed by Section 203.
California law does not have a section similar to Delaware
Section 203, but it does have different provisions that may
limit a corporations ability to engage in certain business
combinations. California law requires that, in a merger of a
corporation with a shareholder (or its affiliate) who holds more
than fifty percent (50%) but less than ninety percent (90%) of
the corporations common stock, the other shareholders of
the corporation must receive common stock in the transaction,
unless all the corporations shareholders consent to the
transaction. This provision of California law may have the
effect of making a cash-out merger by a majority
shareholder (possibly as the second step in a two-step merger)
more difficult to accomplish. Although Delaware law does not
parallel California law in this respect, under some
circumstances Section 203 does provide similar protection
to shareholders against coercive two-tiered bids for a
corporation in which the shareholders are not treated equally.
California law also provides that, except in certain
circumstances, when a tender offer or a proposal for a
reorganization or sale of assets is made by an interested party
(generally a controlling or managing party of the corporation),
the interested party must provide the other shareholders with an
affirmative written opinion as to the fairness of the
consideration to be paid to the shareholders. This fairness
opinion requirement does not apply to
65
corporations that have fewer than 100 shareholders of
record or to a transaction that has been qualified under
California state securities laws. Furthermore, if a tender of
shares or a vote is sought pursuant to an interested
partys proposal and a later proposal is made by another
party at least 10 days prior to the date of acceptance of
the interested partys proposal, the shareholders must be
informed of the later offer and be afforded a reasonable
opportunity to withdraw their vote, consent or proxy, and to
withdraw any tendered shares. Delaware law has no comparable
provision.
Removal
of Directors
In general, under California law, any director, or the entire
board of directors, may be removed, with or without cause, with
the approval of a majority of the outstanding shares entitled to
vote. In the case of a corporation with cumulative voting or
whose board is classified, however, no individual director may
be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the
director under cumulative voting rules. In addition,
shareholders holding at least ten percent (10%) of the
outstanding shares of any class may bring suit to remove any
director in case of fraudulent or dishonest acts or gross abuse
of authority or discretion.
Under Delaware law, any director, or the entire board of
directors, of a corporation that does not have a classified
board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding
shares entitled to vote at an election of directors. In the case
of a Delaware corporation whose board is classified, unless the
certificate of incorporation provides otherwise, stockholders
may effect such removal only for cause. In addition, as in
California, if a Delaware corporation has cumulative voting, and
if less than the entire board is to be removed, a director may
not be removed without cause by a majority of the outstanding
shares if the votes cast against such removal would be
sufficient to elect the director under cumulative voting rules.
The California articles and California bylaws do not provide for
a classified board of directors or cumulative voting. As a
result, directors of ESS may currently be removed, with or
without cause, with the approval of a majority of the
outstanding shares entitled to vote. Similarly, ESS Delaware
will have neither a classified board nor cumulative voting, and
the directors of ESS Delaware following the reincorporation
merger will be subject to removal with or without cause, with
the approval of a majority of the outstanding shares entitled to
vote at an election of directors.
Limitation
of Liability and Indemnification
California and Delaware have similar laws respecting the
liability of directors of a corporation and the indemnification
by the corporation of its officers, directors, employees and
other agents for damages they incur. The laws of both states
also permit corporations to adopt a provision in their charters
eliminating the liability of a director to the corporation or
its shareholders for monetary damages for breach of the
directors fiduciary duty of care. Nonetheless, as
discussed below, there are certain differences between the laws
of the two states respecting indemnification and limitation of
liability. In general, however, Delaware law is somewhat broader
in allowing corporations to indemnify and limit the liability of
corporate agents, which the board believes, among other things,
helps Delaware corporations in attracting and retaining outside
directors.
The Delaware General Corporation Law was amended in 1986 in
response to widespread concern about the ability of Delaware
corporations to attract capable directors in light of
then-current difficulties in obtaining and maintaining directors
and officers insurance. The legislative commentary to the law
states that it is intended to allow Delaware corporations
to provide substitute protection, in various forms, to their
directors and to limit director liability under certain
circumstances.
Elimination
of Director Personal Liability for Monetary
Damages
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to include a provision in its certificate
of incorporation which limits or eliminates the personal
liability of a director for monetary damages arising from
breaches of his or her fiduciary duties to the corporation or
its stockholders, provided that no such provision may eliminate
or limit director monetary liability for:
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Breaches of the directors duty of loyalty to the
corporation or its stockholders;
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Acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law;
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The payment of unlawful dividends or unlawful stock repurchases
or redemptions; or
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Transactions in which the director received an improper personal
benefit.
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California law contains similar authorization for a corporation
to eliminate the personal liability of directors for monetary
damages, except where such liability is based on:
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intentional misconduct or knowing and culpable violation of law;
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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;
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receipt of an improper personal benefit;
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acts or omissions that show reckless disregard for the
directors duty to the corporation or its shareholders,
where the director in the ordinary course of performing a
directors duties should be aware of a risk of serious
injury to the corporation or its shareholders;
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acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the directors
duty to the corporation and its shareholders;
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transactions between the corporation and a director who has a
material financial interest in such transaction; and
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liability for improper distributions, loans or guarantees.
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In the present case, the current California articles eliminate
the liability of directors to ESS for monetary damages to the
fullest extent permissible under California law. The Delaware
certificate similarly eliminates the liability of directors to
ESS Delaware for monetary damages to the fullest extent
permissible under Delaware law. As a result, following the
reincorporation merger, directors of ESS Delaware cannot not be
held liable for monetary damages even for gross negligence or
lack of due care in carrying out their fiduciary duties as
directors, so long as that gross negligence or lack of due care
does not involve bad faith, a knowing violation of law, the
payment of unlawful dividends or unlawful stock redemptions, a
breach of their duty of loyalty, or their receipt of an improper
personal benefit.
Indemnification
California law requires indemnification of expenses when the
indemnified individual has defended successfully the action
brought against that individual on the merits. Delaware law
requires indemnification of expenses when the individual being
indemnified has successfully defended any action, claim, issue
or matter therein, on the merits or otherwise. Delaware law
generally permits indemnification of expenses, including
attorneys fees, actually and reasonably incurred in the
defense or settlement of a derivative or third-party action,
provided the person seeking indemnification is determined to
have acted in good faith and in a manner reasonably believed to
be in best interests of the corporation (and such determination
must be made, with respect to a person who is an officer or
director at the time of such determination, by a majority vote
of the disinterested directors, by a committee of such
directors, by independent counsel or by the stockholders).
Unless otherwise determined by the court, however, no
indemnification may be made in respect of any action or suit
brought by or in the right of the corporation (e.g., a
derivative action) in which such person is adjudged liable to
the corporation. Expenses incurred by an officer or director in
defending an action may be paid in advance under Delaware law or
California law, if the director or officer undertakes to repay
such amounts if it is ultimately determined that he or she is
not entitled to indemnification, provided that, under Delaware
law, the requirement to provide such an undertaking only applies
to current officers and directors. In addition, the laws of both
states authorize a corporation to purchase indemnity insurance
for the benefit of its officers, directors, employees and agents
whether or not the corporation would have the power to indemnify
against the liability covered by the policy.
California law permits a California corporation to provide
rights to indemnification beyond those provided under California
law to the extent such additional indemnification is authorized
in the corporations articles of incorporation. Therefore,
if so authorized, rights to indemnification may be provided
pursuant to agreements or bylaw provisions which make mandatory
the permissive indemnification provided by California law. The
California articles authorize indemnification beyond that
expressly mandated by California law. Delaware law does not
require authorizing provisions in the certificate of
incorporation. Delaware law also provides that the
indemnification and advancement of expenses provided by, or
granted pursuant to, the Delaware General
67
Corporation Law shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to
action in such persons official capacity and as to action
in another capacity while holding such office.
Inspection
of Shareholder Lists and Books and Records
Both California and Delaware law allow any shareholder to
inspect a corporations shareholder list for a purpose
reasonably related to the persons interest as a
shareholder. California law provides, in addition, for an
absolute right to inspect and copy the corporations
shareholder list by persons holding an aggregate of five percent
(5%) or more of the corporations voting shares, or
shareholders holding an aggregate of one percent (1%) or more of
such shares who have contested the election of directors.
Delaware law also allows the shareholders to inspect the list of
shareholders entitled to vote at a meeting within a
ten-day
period preceding a shareholders meeting for any purpose
germane to the meeting. Delaware law, however, contains no
provisions comparable to the absolute right of inspection
provided by California law to certain shareholders.
Under California law any shareholder may examine the accounting
books and records and the minutes of the shareholders and the
board and its committees, provided that the inspection is for a
purpose reasonably related to the shareholders interests
as a shareholder. The Delaware statute may be slightly more
favorable to shareholders in this respect, in that a stockholder
with a proper purpose is not limited to inspecting accounting
books and records and minutes, and may examine other records as
well. In addition, California law limits the right of inspection
of shareholder lists to record shareholders, whereas Delaware
has extended that right to beneficial owners of shares.
Appraisal
Rights
Under both California and Delaware law, a shareholder of a
corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to
appraisal rights, by which the shareholder may demand to receive
cash in the amount determined to be the fair value of his or her
shares in lieu of the consideration he or she would otherwise
receive in the transaction. In Delaware, except as otherwise
provided by the certificate of incorporation, appraisal rights
are only available in connection with specified mergers or
consolidations involving the corporation.
Under Delaware law, fair value is determined without reference
to any element of value arising from the accomplishment or
expectation of the merger or consolidation, and appraisal rights
are generally not available:
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with respect to the sale, lease or exchange of all or
substantially all of the assets of a corporation;
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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
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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.
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The limitations on the availability of appraisal rights under
California law are different from those under Delaware law.
Shareholders of a California corporation whose shares are listed
on a national securities exchange generally do not have such
appraisal rights unless the holders of at least five percent
(5%) of the class of outstanding shares claim the right or the
corporation or any law restricts the transfer of the shares to
be received. Appraisal rights are also not available if the
shareholders of a corporation or the corporation itself, or
both, immediately prior to the reorganization will own
immediately after the reorganization equity securities
representing more than five-sixths (5/6) of the voting power of
the surviving or acquiring corporation or its parent entity. On
the other hand, California law generally affords appraisal
rights in a sale of all or substantially all assets type of
reorganization, while Delaware law does not.
68
In addition, there are procedural differences in exercising
appraisal rights under California and Delaware law. These
differences include, but are not limited to the following:
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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
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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.
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See
Dissenters Rights/Appraisal Rights
beginning on page 54 of this joint proxy
statement/prospectus and Section 262 of the Delaware
General Corporation Law, which is attached to this joint proxy
statement/prospectus as Annex B.
Dissolution
Under California law, the holders of fifty percent (50%) or more
of a corporations total voting power may authorize the
corporations dissolution, with or without the approval of
the corporations board of directors, and this right may
not be modified by the articles of incorporation. Under Delaware
law, unless the board of directors approves the proposal to
dissolve, the dissolution must be unanimously approved by all
the shareholders entitled to vote on the matter. Only if the
dissolution is initially approved by the board of directors may
the dissolution be approved by a simple majority of the
outstanding shares of the Delaware corporations stock
entitled to vote. In addition, Delaware law allows a Delaware
corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with such a
board-initiated dissolution. However, the Delaware certificate
contains no such supermajority voting requirement.
Interested
Director Transactions
Under both California and Delaware law, certain contracts or
transactions in which one or more of a corporations
directors (or, in Delaware, directors or officers) has an
interest are not void or voidable solely because of such
interest provided that certain conditions, such as obtaining the
required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the
conditions are similar under California and Delaware law. Under
California law, (1) either the shareholders or the board of
directors must approve any such contract or transaction after
full disclosure of the material facts, and, in the case of board
approval, the contract or transaction must also be just
and reasonable (in California), or (2) the contract
or transaction must have been just and reasonable or fair as to
the corporation at the time it was approved. In the latter case,
California law explicitly places the burden of proof on the
interested director. Under California law, to shift the burden
of proof on the validity of the contract by shareholder
approval, the interested director would not be entitled to vote
his or her shares at a shareholder meeting with respect to any
action regarding such contract or transaction. To shift the
burden of proof on the validity of the contract by board
approval under California law, the contract or transaction must
be approved by a majority vote of a quorum of the directors,
without counting the vote of any interested directors (except
that interested directors may be counted for purposes of
establishing a quorum). Under Delaware law, any such contract or
transaction will not be void or voidable solely as a result of
the director or officers interest if: (1) the
material facts as to the directors or officers
relationship or interest and as to the contract or transaction
are disclosed or are known to the board of directors, and the
board in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors
be less than a quorum; or (2) the material facts as to the
directors or officers relationship or interest and
as to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon, and the contract or
transaction
69
is specifically approved in good faith by vote of
the shareholders; or (3) the contract or transaction is
fair as to the corporation as of the time it is authorized,
approved or ratified, by the board of directors or the
shareholders.
Under Delaware law, the party seeking to demonstrate that a
contract or transaction involving an interested director or
officer should not be void or voidable solely as a result of the
interest must demonstrate compliance with one of the three
safe-harbor provisions listed above. Therefore, certain
transactions that the board of directors of ESS might not be
able to approve because of the number of interested directors
could be approved by a majority of the disinterested directors
of ESS Delaware, although less than a majority of a quorum, and
would thus not be found void or voidable solely as a result of
the interest. Neither ESS nor ESS Delaware is aware of any plans
to propose any transaction involving directors that could not be
so approved for purposes of removing the specter of voidability
under California law but that would qualify for the safe harbor
protection against being declared void or voidable under
Delaware law.
Shareholder
Derivative Suits
California law provides that a shareholder bringing a derivative
action on behalf of a corporation need not have been a
shareholder at the time of the transaction in question, if
certain tests are met. Under Delaware law, a shareholder may
bring a derivative action on behalf of the corporation only if
the shareholder was a shareholder of the corporation at the time
of the transaction in question or if his or her stock thereafter
came to be owned by him or her by operation of law.
California law also provides that the corporation or the
defendant in a derivative suit may make a motion to the court
for an order requiring the plaintiff shareholder to furnish a
security bond. Delaware does not have a similar bonding
requirement.
Dividends
and Repurchases of Shares
Delaware law is more flexible than California law with respect
to declaring and paying dividends and implementing share
repurchase programs. Delaware law permits a corporation to
declare and pay dividends out of surplus (which is
generally defined as the amount by which the fair value of the
corporations net assets exceeds the sum of its liabilities
and stated capital) or, if there is no surplus, out of net
profits for the fiscal year in which the dividend is declared
and/or
for
the preceding fiscal year, so long as the capital of the
corporation following the payment of the dividend is not less
than the aggregate amount of the capital represented by the
issued and outstanding stock of all classes having a preference
upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase
its shares if the capital of the corporation would not be
impaired following the transaction.
Under Section 500 of the California Corporations Code, a
corporation may not make any distribution to its shareholders
unless either:
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the corporations retained earnings immediately prior to
the proposed distribution equal or exceed the amount of the
proposed distribution; or
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immediately after giving effect to the distribution, the
corporations assets (exclusive of goodwill, capitalized
research and development expenses and deferred charges) would be
at least equal to one and one fourth
(1
1
/
4
)
times its liabilities (not including deferred taxes, deferred
income and other deferred credits), and the corporations
current assets would be at least equal to its current
liabilities (or one and one fourth
(1
1
/
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).
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Under the California Corporations Code, a distribution to
its shareholders is defined as the transfer of cash or
property by a corporation to its shareholders without
consideration, whether by way of dividend or otherwise, except a
dividend in shares of the corporation, or the purchase or
redemption of its shares for cash or property, including the
transfer, purchase, or redemption by a subsidiary of the
corporation.
These tests are applied to California corporations on a
consolidated basis.
Application
of the California General Corporation Law to Delaware
Corporations
Under Section 2115 of the California Corporations Code,
corporations not organized under California law but which have
significant contacts with California may be subject to a number
of provisions of the California Corporations Code. However, an
exemption from Section 2115 is provided for corporations
whose shares are listed
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on a major national securities exchange, such as the NASDAQ
Global Market. ESS has agreed to use its commercially reasonable
efforts to provide that, following the proposed reincorporation
merger, the common stock of ESS Delaware will continue to be
listed on the NASDAQ Global Market, and, accordingly, we
currently expect that ESS Delaware will be exempt from
Section 2115. However, we cannot assure you that ESS
Delaware will be able to list its shares on the NASDAQ Global
Market. For more information 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
.
Notwithstanding the above exemption from Section 2115,
between the closing of the reincorporation merger and the
closing of the cash-out merger ESS Delaware will remain subject
to the California Corporate Disclosure Act. This act applies to
publicly traded corporations incorporated in California or
qualified to do business in California. The Act requires
significant annual disclosures to the California Secretary of
State, although substantial portions of the requirements cover
the same general categories of information that are included in
SEC filings.
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THE
MERGER AGREEMENT
The merger agreement is the legal document that governs the
mergers. The following is a summary of the material provisions
of the merger agreement but it may not contain all of the
information about the merger agreement that is important to you.
This summary is qualified in its entirety by reference to the
merger agreement, a copy of which is attached as
Annex A
to this joint proxy statement/prospectus and
is incorporated into this joint proxy statement/prospectus by
reference. You should read the merger agreement in its entirety,
as it is the legal document that governs the mergers and the
provisions of the merger agreement are not easily summarized.
The
Mergers
On February 21, 2008, ESS, Echo, Parent and Merger Sub
entered into the merger agreement. Under the merger agreement,
ESS will be merged with and into Echo with Echo surviving the
reincorporation merger as ESS Delaware. Immediately following
the consummation of the reincorporation merger, Merger Sub will
be merged with and into ESS Delaware with ESS Delaware surviving
the cash-out merger as the surviving corporation.
Consideration
Received in the Mergers
Shareholders of ESS who hold their shares through the
consummation of the cash-out merger will be entitled to receive
$1.64 per share in cash, without interest, unless the
shareholders did not deliver an advance proxy (or subsequently
revoked a previously delivered advanced proxy), did not
otherwise consent to the cash-out merger and properly exercised
their appraisal rights under Section 262 of the Delaware
General Corporation Law. Upon consummation of the cash-out
merger, ESS will have become a wholly owned subsidiary of Parent.
When the
Mergers Will be Completed
We are working to complete the mergers as soon as possible. We
anticipate completion of the mergers in the second quarter of
2008, subject to approval of the principal terms of the
reincorporation merger by our shareholders and the satisfaction
of the other closing conditions in the merger agreement. The
effective time of the reincorporation merger will occur at the
time that a certificate of merger is filed with the Secretary of
State of the State of Delaware merging ESS with and into Echo.
The effective time of the cash-out merger will occur at the time
that a certificate of merger is filed with the Secretary of
State of the State of Delaware merging Merger Sub with and into
ESS Delaware.
Effects
of the Mergers
The merger agreement provides for the reincorporation of ESS
from California to Delaware in the reincorporation merger
followed by the sale of ESS to affiliates of Imperium in the
cash-out merger.
The reincorporation merger.
In the
reincorporation merger, ESS will be merged with and into Echo,
with Echo as the surviving corporation. If the principal terms
of the reincorporation merger are approved by our shareholders
and the other conditions to closing of the reincorporation
merger are satisfied, ESS will merge with and into Echo and the
separate corporate existence of ESS will cease. Echo will
survive the merger as ESS Delaware. Each share of ESS you own
immediately prior to the effective time of the reincorporation
merger will, at the effective time of the reincorporation
merger, automatically be converted into one share of ESS
Delaware common stock.
Approximately 35.6 million shares of ESS Delaware common
stock will be issued to ESS shareholders in connection with the
reincorporation merger.
Upon consummation of the reincorporation merger, we will become
a Delaware corporation and will be subject to the Delaware
General Corporation Law rather than the California Corporations
Code, to which we are subject as a California corporation.
The cash-out merger.
If the reincorporation
merger has been consummated, then ESS will have received a
sufficient number of advance proxies from its shareholders to
permit execution and delivery, immediately following the
consummation of the reincorporation merger, of the written
consent adopting the merger agreement on behalf of the ESS
Delaware stockholders. Immediately following the effective time
of the reincorporation merger, the persons named in the advance
proxies will execute and deliver the written consent. If the
written consent is executed and delivered and the other
conditions to the closing of the cash-out merger are satisfied,
Merger Sub will merge
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with and into ESS Delaware in the cash-out merger immediately
following the consummation of the reincorporation merger. Upon
consummation of the cash-out merger, the separate corporate
existence of Merger Sub will cease, and ESS Delaware will
survive the merger as the surviving corporation and a wholly
owned subsidiary of Parent.
Upon completion of the cash-out merger, each share of ESS
Delaware common stock outstanding immediately prior to the
effective time of the cash-out merger, other than
(1) shares of ESS Delaware common stock owned by Parent,
Merger Sub or any of their respective wholly owned subsidiaries,
(2) shares of ESS Delaware common stock held by ESS
Delaware or any subsidiary of ESS Delaware or held in the
treasury of ESS Delaware, and (3) shares held by
stockholders of ESS Delaware who properly demand statutory
appraisal rights, will be automatically converted into the right
to receive the merger consideration of $1.64 in cash, without
interest, per share of ESS Delaware common stock, upon surrender
of such share of ESS Delaware common stock in the manner
provided in the merger agreement. Parent will pay approximately
$58.5 million in aggregate cash-out merger consideration to
the stockholders of ESS Delaware in the cash-out merger. 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.
From and after the effective time of the cash-out merger, all
shares of ESS Delaware common stock outstanding immediately
prior to the effective time of the cash-out merger will be
converted into the right to receive the merger consideration,
will no longer be outstanding and will automatically be
cancelled and will cease to exist and, other than shares held by
stockholders of ESS Delaware who properly demand statutory
appraisal rights, each holder of shares of common stock of ESS
Delaware shall cease to have any rights with respect thereto,
except the right to receive the merger consideration, without
interest, upon surrender of such share of ESS Delaware common
stock in the manner provided in the merger agreement. Each share
of ESS Delaware common stock owned by Parent, Merger Sub or any
of their respective wholly owned subsidiaries and shares of ESS
Delaware common stock held by ESS Delaware or any subsidiary of
ESS Delaware or held in the treasury of ESS Delaware will be
cancelled and will cease to exist, and no consideration will be
delivered in exchange therefor.
The merger consideration will be adjusted appropriately to
reflect the effect of any stock split, reverse stock split,
stock dividend (including any dividend or distribution of
securities convertible into ESS common stock or ESS Delaware
common stock), cash dividend, reorganization, recapitalization,
reclassification, combination, exchange of shares or other like
change with respect to ESS common stock or ESS Delaware common
stock occurring on or after the date of the merger agreement and
prior to the effective time of the reincorporation merger or the
effective time of the cash-out merger, as applicable.
Each holder of ESS Delaware common stock who is entitled to
demand and properly demands appraisal of such shares and who
complies with Section 262 of the Delaware General
Corporation Law shall not receive the merger consideration but
instead shall receive the consideration that may be due to the
holder under Section 262. However, if such holder withdraws
or otherwise loses such holders right to appraisal, the
shares of ESS Delaware common stock held by such holder will be
cancelled and converted into and represent solely the right to
receive the merger consideration, without interest thereon, in
accordance with the merger agreement. ESS Delaware has agreed to
give Parent prompt notice of any written demands for appraisal,
attempted withdrawals of such demands and any other instrument
received by ESS Delaware relating to stockholders rights
of appraisal, and to give Parent the right to participate in all
negotiations and proceedings with respect to any such demand or
instrument. See
Proposal One The
Reincorporation Merger; Advance Proxy The Cash-Out
Merger Dissenters Rights/Appraisal
Rights
beginning on page 54 of this joint proxy
statement/prospectus for additional information.
Procedure
for Receiving Merger Consideration
Shortly after the effective time of the cash-out merger, a bank
or trust company selected by Parent, which we refer to as the
paying agent, will mail a letter of transmittal and instructions
to the former ESS Delaware stockholders. The letter of
transmittal and instructions will inform the former ESS Delaware
stockholders how to surrender their former stock certificates in
exchange for the merger consideration. Stock certificates
representing shares of common stock of ESS will, by virtue of
the reincorporation merger, automatically represent shares of
common stock of ESS Delaware, and it will not be necessary for
shareholders of ESS to surrender or exchange their existing
stock certificates for stock certificates representing shares of
ESS Delaware prior to submitting their stock certificates in
exchange for the merger consideration in accordance with the
letter of transmittal and instructions provided by the paying
agent. The letter of transmittal will also notify the former ESS
Delaware stockholders of the
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effective date of the cash-out merger and that appraisal rights
are available under the terms of Section 262 of the
Delaware General Corporation Law.
You should not return your stock certificates with the
enclosed proxy card or advance proxy, and you should not forward
your stock certificates to the paying agent without a properly
completed and signed letter of transmittal.
You will not be entitled to receive the merger consideration
until you surrender your stock certificate or certificates to
the paying agent, together with a properly completed and signed
letter of transmittal and any other documents as may reasonably
be required by the paying agent. No interest will be paid to you
or will accrue for your benefit on the cash payable upon
surrender of your stock certificate or certificates.
If payment of the merger consideration is to be made to a person
other than the person in whose name the stock certificate
surrendered in exchange for such merger consideration is
registered, it will be a condition precedent of payment that the
certificate so surrendered is properly endorsed and otherwise in
proper form for the transfer and that the person requesting such
payment will have paid any transfer or other similar taxes
required by reason of the payment of the merger consideration to
a person other than the registered holder of the surrendered
stock certificate and will have established to the satisfaction
of surviving corporation that such tax either has been paid or
is not required to be paid.
Each of surviving corporation, Parent, Merger Sub and the paying
agent will be entitled to deduct and withhold from the
consideration payable under the merger agreement such amounts as
it is required to deduct and withhold with respect to the
payment of such consideration under any applicable tax laws. To
the extent any amounts are so withheld, such amounts will be
treated for all purposes under the merger agreement as having
been paid to the person in respect of which such deduction and
withholding was made.
At the effective time of the cash-out merger, the stock transfer
books of ESS Delaware will be closed and there will be no
further registration of transfers of outstanding shares of ESS
Delaware common stock. If, after the effective time of the
cash-out merger, certificates formerly representing shares of
common stock of ESS Delaware are presented to the surviving
corporation for any reason, they will be cancelled and exchanged
for the merger consideration, without interest.
In the event that any ESS Delaware stock certificates have been
lost, stolen or destroyed, the paying agent shall issue in
exchange for such lost, stolen or destroyed certificates, upon
the making of an affidavit of the fact by the holder thereof,
the merger consideration payable pursuant to the terms of the
merger agreement; provided, however, that Parent may, in its
discretion and as a condition precedent to the payment of the
merger consideration, require the owners of such lost, stolen or
destroyed certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be
made against Parent, the surviving corporation or the paying
agent with respect to the certificates alleged to have been
lost, stolen or destroyed.
None of Parent, the surviving corporation or the paying agent
will be liable to any stockholder for any portion of the merger
consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. At any
time following six months after the closing date of the cash-out
merger, the surviving corporation may require the paying agent
to deliver to the surviving corporation any remaining cash held
by the paying agent for delivery and payment to former
stockholders of ESS Delaware pursuant to the merger agreement.
Thereafter, former stockholders of ESS Delaware may look only to
the surviving corporation for any merger consideration to which
they may be entitled upon surrender of their shares of ESS
Delaware common stock.
Financing
It is estimated that the total amount of funds necessary to
complete the mergers and the related transactions is
approximately $62.6 million, which includes approximately
$58.5 million to be paid out to stockholders of ESS
Delaware and holders of other equity-based interests in ESS
Delaware, in each case following the cash-out merger, with the
remainder to be applied to pay fees and expenses related to the
mergers and the related transactions. These payments are
expected to be funded by a combination of cash and short term
investments held by ESS Delaware at the time of the cash-out
merger and equity contributions by an entity sponsored by
Imperium.
ESS does not currently have sufficient cash and short term
investments on its balance sheet to pay the amount of the
cash-out merger consideration payable to stockholders of ESS
Delaware in the cash-out merger and to pay
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fees and expenses related to the mergers and the related
transactions. Part of this funding may be provided by a sale of
our headquarters prior to the consummation of the cash-out
merger (and any sale of our headquarters is subject to the prior
approval of Parent). However, the closing of the mergers is not
conditioned on Parent or Merger Sub obtaining the proceeds of
any such sale.
Treatment
of Stock Options and Employee Stock Purchase Plan
At the effective time of the reincorporation merger, each
outstanding option to purchase shares of ESS common stock,
whether or not then vested or exercisable, will be automatically
converted into an option to purchase a number of shares of ESS
Delaware common stock equal to the number of shares of ESS
common stock that were subject to such option immediately prior
to the reincorporation merger. Each option to purchase shares of
ESS Delaware common stock will otherwise have the same terms and
conditions applicable under the option to purchase shares of ESS
common stock from which it converted (including, without
limitation, the exercise price per share and vesting schedule).
At the effective time of the cash-out merger, each outstanding
option to purchase ESS Delaware 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, as a result of the
foregoing, 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 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 participants payroll withholding account
to the purchase of whole shares of ESS common stock in
accordance with the terms of the ESPP. No further offering
periods will commence under the ESPP after the last business day
prior to the closing of the reincorporation merger and the ESPP
will terminate upon consummation of the reincorporation merger.
Representations
and Warranties
The merger agreement contains representations and warranties
made by ESS, Parent and Merger Sub regarding aspects of their
respective businesses, financial condition, subsidiaries and
structure, as well as other facts pertinent to the mergers. The
assertions embodied in the representations and warranties
contained in the merger agreement are qualified by information
in a confidential disclosure schedule provided by ESS to Parent
in connection with the signing of the merger agreement. This
disclosure schedule contains information that modifies,
qualifies and creates exceptions to the representations and
warranties set forth in the merger agreement. Moreover, certain
representations and warranties in the merger agreement were used
for the purpose of allocating risk between ESS and Parent rather
than establishing matters as facts. In addition, information
concerning the subject matter of these representations and
warranties may have changed since the execution of the merger
agreement. Accordingly, you should not rely on the
representations and warranties in the merger agreement as
characterizations of the actual state of facts about ESS or
Parent or Merger Sub.
We make various representations and warranties in the merger
agreement, including with respect to, among other things:
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organization, standing and qualifications to do business;
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our subsidiaries and our equity interest in them;
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our capital structure;
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our authority and Echos authority to enter into and
consummate the transactions contemplated by the merger agreement;
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governmental consents and approvals required for the
transactions contemplated by the merger agreement;
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that the mergers do not violate our charter documents, laws or
contracts;
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our filings and reports with the SEC;
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our internal controls and procedures;
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the absence of certain changes to our business and the absence
of undisclosed liabilities;
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the absence of litigation;
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employee benefit matters;
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tax matters;
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our material contracts;
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real and personal property;
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intellectual property matters;
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matters relating to employee benefit plans and labor and
employment matters;
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compliance with applicable laws;
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the accuracy of information supplied for inclusion or
incorporation by reference in this joint proxy
statement/prospectus;
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insurance matters;
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environmental matters;
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ESS ownership and operation of Echo;
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the fairness opinions of Needham & Company and Sutter;
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the absence of undisclosed brokers fees;
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affiliate transactions; and
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anti-takeover statutes.
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Many of our representations and warranties are qualified by a
material adverse effect standard. For the purposes
of the merger agreement, a company material adverse
effect means any event, change, occurrence or development
that has a material adverse effect on the business, results of
operations or financial condition of ESS and our subsidiaries,
taken as a whole. However, the following items are not
considered in determining whether a company material
adverse effect has occurred or is reasonably likely to
occur:
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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;
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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;
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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;
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conditions arising out of acts of terrorism, war, weather
conditions or other force majeure events;
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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;
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changes in the price or trading volume of our stock, in and of
itself;
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any failure to meet any published analyst estimates or
expectations, in and of itself;
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any failure to meet internal projections or forecasts, in and of
itself; and
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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.
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In addition, Parent and Merger Sub made representations and
warranties to ESS, including with respect to, among other things:
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their organization, standing and qualification to do business;
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their authority to enter into and consummate the transactions
contemplated by the merger agreement;
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governmental consents and approvals required for the
transactions contemplated by the merger agreement;
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that the mergers do not violate Parents or Merger
Subs charter documents, laws or contracts;
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the availability of sufficient funds to consummate the
transactions contemplated by the merger agreement;
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the accuracy of information supplied for inclusion or
incorporation by reference in this joint proxy
statement/prospectus;
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the enforceability of the guarantee provided by an affiliate of
Imperium;
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the solvency of the surviving corporation;
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Parents ownership and operation of Merger Sub; and
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the absence of any required stockholder votes (other than the
vote of Parent as sole stockholder of Merger Sub) to approve the
merger agreement.
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The representations and warranties contained in the merger
agreement will not survive the cash-out merger, but they form
the basis of certain conditions to ESS and Parents
obligations to complete the merger.
Covenants
Interim
Operations of ESS
Except as contemplated by the merger agreement, ESS (and, after
the effective time of the reincorporation merger, ESS Delaware)
has agreed that, until completion of the cash-out merger or
termination of the merger agreement, it will and will cause it
subsidiaries to, except as required or permitted by the merger
or unless Parent otherwise consents in writing, (1) conduct
its business in the ordinary course, (2) use commercially
reasonable efforts to preserve intact its present business
operations, (3) use commercially reasonable efforts to
maintain satisfactory relations with and keep available services
of their current officers and other key employees,
(4) maintain in effect all material foreign, federal, state
and local licenses, approvals and authorizations, including all
material licenses and permits that are required to carry on its
business and (5) use commercially reasonable efforts to
preserve existing relationships with customers, lenders,
suppliers, distributors and others having business relationships
with it.
Under the merger agreement, ESS (and, after the effective time
of the reincorporation merger, ESS Delaware) also agreed that,
until completion of the cash-out merger or termination of the
merger agreement, except as required or permitted by the merger
agreement or unless Parent otherwise consents in writing, ESS
(and, after the effective time of the reincorporation merger,
ESS Delaware) will not, and will cause its subsidiaries not to:
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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;
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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);
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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;
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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;
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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
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issuances of common stock pursuant to the exercise of options of
ESS outstanding as of the date of the merger agreement;
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grants of options in accordance with ESS stock plans in an
amount not to exceed 10,000 shares of common stock; or
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issuances of common stock to participants in the ESPP;
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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);
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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;
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(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;
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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,
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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;
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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;
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make any loans to any officers, directors, employees, affiliates
or agents or consultants;
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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;
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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
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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change any of the accounting methods materially affecting
assets, liabilities or business, except for such changes
required by GAAP or
Regulation 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;
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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;
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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;
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adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of ESS (other than the mergers); and
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enter into any written agreement, contract, commitment or
arrangement to do any of the foregoing, or authorize in writing
any of the foregoing.
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No
Solicitation of Competing Takeover Proposals
Pursuant to the merger agreement, ESS agreed that it would, and
would cause each of its subsidiaries and representatives to,
immediately cease and cause to be terminated any discussions or
negotiations with any third parties and such third partys
representative, other than Parent, Merger Sub and Parents
representatives, that were ongoing as of February 21, 2008,
with respect to any takeover proposal.
ESS also agreed that it would not, and would cause each of its
subsidiaries and would instruct each of its representatives not
to:
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directly or indirectly solicit, initiate, or knowingly encourage
any takeover proposal;
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enter into any agreement or agreement in principle with respect
to a takeover proposal; or
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engage in any negotiations or discussions regarding, or furnish
or disclose to any third party any information with respect to,
any takeover proposal.
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However, the merger agreement provides that, prior to obtaining
approval of the principal terms of the reincorporation merger
from our shareholders, in response to a bona fide takeover
proposal that was not solicited in violation of the
non-solicitation obligations described above and that our board
determines in good faith constitutes, or could reasonably be
expected to lead to, a superior proposal, we may provide access
to our properties, contracts, personnel, and books and records
and furnish information, data or draft agreements to the third
party making such takeover proposal and its representatives if
the board receives a confidentiality agreement from such third
party containing terms no less favorable to us, including
standstill provisions, than the terms of the confidentiality
letter
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agreement, dated June 25, 2007 between Imperium and ESS;
and we may participate in discussions or negotiations with the
third party making such takeover proposal and its
representatives regarding such takeover proposal and provide
such person with information regarding ESS.
For purposes of the merger agreement, a takeover proposal is
defined as any inquiry, proposal or offer from any third party
relating to, in a single transaction or series of related
transactions,
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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
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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).
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In addition, for purposes of the merger agreement, a superior
proposal is defined as a bona fide takeover proposal (for this
purpose, substituting 50% for each reference to 20% in the
definition of takeover proposal) which our board
determines in good faith is reasonably likely to be consummated
and if consummated, would result in a transaction more favorable
to the holders of our common stock than the mergers, taking into
account such factors as the board deems appropriate, including
the third party making the takeover proposal and the legal,
financial, regulatory, fiduciary and other aspects of the merger
agreement and such takeover proposal, including any conditions
relating to financing, regulatory approvals or other events or
circumstances. A superior proposal may be a transaction where
the consideration per share to be received by the holders of our
common stock is comprised of cash
and/or
other
property or securities.
In addition, if our board of directors has determined in good
faith that the failure to take such action is reasonably likely
to be inconsistent with the fiduciary duties of the members of
the board under applicable law, our board may:
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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;
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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
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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).
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Notwithstanding anything to the contrary in the merger
agreement, neither we nor our board of directors are prohibited
from:
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taking or disclosing to our shareholders a position contemplated
by
Rule 14d-9
or
Rule 14e-2
promulgated under the Exchange Act; or
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making any disclosure to our shareholders if, in the good faith
judgment of our board, such disclosure would be reasonably
necessary under applicable law.
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Other
Covenants
The merger agreement contains a number of other covenants by
ESS, Echo, Parent and Merger Sub:
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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.
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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
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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.
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Notification of Certain Matters.
ESS and
Parent each agreed to give prompt written notice to the other of:
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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,
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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
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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.
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In addition, ESS and Parent agree to promptly notify each other
in writing of any pending or threatened suit or other proceeding
or investigation by any governmental authority or any other
person that challenges or seeks damages in connection with the
transactions contemplated by the merger agreement or seeks to
restrain or prohibit the consummation of the transactions
contemplated by the merger agreement. ESS also agrees to give
Parent an opportunity to consult regarding the defense or
settlement of any such action or proceeding.
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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.
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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.
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Public Announcements.
ESS and Parent each
agreed to receive the other partys 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.
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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 corporations obligations
thereunder.
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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.
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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 under
Rule 16b-3
promulgated under the Exchange Act.
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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
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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.
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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.
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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.
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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.
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Indemnification
and Insurance
As described above, the merger agreement provides that for a
period of six years following the effective time of the cash-out
merger, Parent and the surviving corporation will honor and
fulfill the obligations of ESS and its subsidiaries to indemnify
current and former directors, officers and other employees of
ESS to the fullest extent permissible under the California
articles and California bylaws and the equivalent documents of
our subsidiaries as in effect on the date of the merger
agreement and under any indemnification agreements then in
effect between such individuals and ESS or any of its
subsidiaries for acts or omissions occurring on or prior to the
completion of the cash-out merger, including in connection with
the approval of the merger agreement and the transactions
contemplated by the merger agreement. In addition, the
indemnification agreements in place between ESS or its
subsidiaries and our current and former directors, officers and
employees will survive the mergers by their terms and will
become obligations of the surviving corporation and its
subsidiaries. In addition, our current executive officers and
directors are expected to enter into indemnification agreements
with ESS Delaware.
For a period of six years after the effective time of the
cash-out merger, the certificate of incorporation and bylaws of
the surviving corporation will contain provisions with respect
to indemnification, advancement of expenses and exculpation that
are no less favorable to the indemnified parties as those in the
California articles and the California bylaws in effect as of
the date of the merger agreement.
As described above under
The Merger
Agreement-Covenants-Other Covenants
, ESS has agreed to
obtain a prepaid policy at or prior to the effective time of the
reincorporation merger providing for directors and
officers insurance coverage of equivalent amount and on no
more favorable terms than that provide by the directors
and officers insurance policy of ESS in place on the date
of the merger agreement for an aggregate period of at least six
years and covering claims arising from events that occur on or
before the effective time of the cash-out merger.
Employee
Benefits
At the effective time of the reincorporation merger, ESS
Delaware has agreed to assume and continue the stock plans and
benefit plans of ESS and its subsidiaries.
Parent and surviving corporation have agreed that, for a period
of at least one year following the effective time of the
cash-out merger, they will provide substantially comparable
employment plans or arrangements to those in effect immediately
prior to the effective time of the cash-out merger for current
or former employees, officers or directors of ESS Delaware or
any subsidiary in a manner to be determined in the discretion of
Parent. Additionally, to the extent legally permitted, employees
of ESS Delaware or any subsidiary will receive credit for
purposes of eligibility to participate and vesting under any
employee pension benefit plan, program or arrangement
established or maintained by surviving corporation or its
subsidiaries for service accrued prior to the effective time of
the cash-out merger.
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Parent has also agreed to honor certain change in control and
other agreements between ESS Delaware, as successor to ESS, and
certain of its officers and employees. Unless otherwise
requested by Parent, ESS Delaware has agreed to terminate all
401(k) plans effective as of and contingent upon the effective
time of the cash-out merger.
Regulatory
Approvals
ESS, Echo, Parent and Merger Sub agreed to use commercially
reasonable efforts to, among other things:
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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
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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.
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ESS and Parent agreed to furnish the other party with all
information necessary for any such application or other filing
to be made in connection with the transactions contemplated by
the merger agreement and to promptly inform the other party of
any material communication with and any proposed understanding,
undertaking or agreement with, any governmental authority
regarding any such application or filing. Additionally, ESS and
Parent agreed that if either party intends to independently
participate in any meeting with any governmental authority in
respect of any such filings, investigation or inquiry, then the
party will give the other party reasonable prior notice of such
meeting and invite representatives of the other party to
participate in the meeting unless prohibited by such
governmental authority. ESS and Parent also agreed to coordinate
and cooperate with each other in connection with any analyses,
appearances, presentations, memoranda, briefs, arguments,
opinions and proposals made or submitted by or on behalf of any
party in connection with all meetings, actions and proceedings
under or relating to any such application or filing. ESS and
Parent also agree that neither ESS nor Parent will be required
to sell, hold separate or otherwise dispose of or conduct their
business in a specified manner in connection with the receipt of
any necessary governmental approvals or clearances.
Restrictions
on the Ability to Sell ESS Delaware Common Stock
The shares of ESS Delaware common stock to be issued in
connection with the reincorporation merger will be registered
under the Securities Act and will be freely transferable, except
as noted in the following paragraph and except for (i) shares of
ESS Delaware common stock issued to any person who is deemed to
be an affiliate of ESS prior to the reincorporation
merger and (ii) shares of restricted ESS Delaware common stock
issued in exchange for ESS restricted common stock, which, in
each case, will be subject to the same restrictions on transfer
as were the shares of ESS restricted common stock for which they
were exchanged.
In order to ensure that, following the consummation of the
reincorporation merger, a sufficient number of effective advance
proxies have been received to authorize the adoption of the
merger agreement and that the shares of common stock of ESS
Delaware that are the subject of such advance proxies are not
transferred between the time of the consummation of the
reincorporation merger and the consummation of the cash-out
merger, each of ESS and Echo has agreed, to the extent
reasonably practicable and subject to compliance with all
applicable laws and rules and regulations of the NASDAQ Global
Market, to use its commercially reasonable efforts to cause
trading in shares of ESS Delaware common stock on the NASDAQ
Global Market (subsequent to listing thereof, if any) to be
suspended immediately following the effective time of the
reincorporation merger and to close the stock transfer books of
ESS Delaware immediately following the effective time of the
reincorporation merger so that thereafter there shall be no
further registration of transfers of shares of ESS Delaware
common stock on the records of ESS Delaware. If we are able to
cause trading in shares of ESS Delaware common stock on the
NASDAQ Global Market to be suspended immediately following the
effective time of the reincorporation merger
and/or
to
close the stock transfer books of ESS Delaware immediately
following the effective time of the reincorporation merger, your
ability to sell or otherwise transfer shares of ESS Delaware
common stock you would receive in the reincorporation merger
between the closing of the reincorporation merger and the
closing of the cash-out merger will be limited and you may not
be able to transfer any such shares of ESS Delaware common stock
at all during the time period between the consummation of the
two mergers. Please see
Risk Factors Risks
Related to the Mergers Your
83
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
beginning on page 14
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Conditions
to the Mergers
The completion of the reincorporation merger depends on the
satisfaction or waiver of a number of conditions, including the
following:
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the principal terms of the reincorporation merger must have been
approved by our shareholders;
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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;
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the filing or waiting periods applicable to the consummation of
the cash-out merger under the
Hart-Scott-Rodino
Act, if any, must have expired or been terminated;
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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;
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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;
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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;
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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;
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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;
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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;
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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
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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);
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ESS must have delivered an officers 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
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Parent and Merger Sub must have delivered an officers
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.
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Other than the conditions pertaining to the shareholder approval
and the receipt of a sufficient number of advance proxies by
ESS, the absence of governmental orders, the expiration or
termination of the
Hart-Scott-Rodino
Act waiting period (which is currently inapplicable to the
mergers) and the receipt of any other required governmental
approvals (none of which are currently required), either ESS, on
the one hand, or Parent, on the other hand, may elect to waive
conditions to their respective performance and complete the
reincorporation merger.
In addition, the completion of the cash-out merger depends on
the satisfaction or waiver of the following conditions:
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the consummation of the reincorporation merger must have
occurred;
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the written consent must have been delivered in accordance with
applicable law; and
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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.
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Once the reincorporation merger has occurred, ESS Delaware has
agreed to cause the execution and delivery by the authorized
officers of ESS Delaware named in the advance proxy, of the
written consent adopting the merger agreement with respect to
the cash-out merger on behalf of the stockholders of ESS
Delaware.
Termination
of the Merger Agreement
The merger agreement may be terminated, and the mergers may be
abandoned, at any time prior to the effective time of the
reincorporation merger, whether before or after approval of the
principal terms of the reincorporation merger by our
shareholders, in the following circumstances:
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by mutual written consent of Parent and ESS;
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by either Parent or ESS, if:
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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;
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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
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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;
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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;
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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
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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
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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.
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Fees and
Expenses
ESS has agreed to pay a termination fee to Parent of $1,981,000
plus reimbursement of Parents and its affiliates
reasonable expenses incurred in connection with the transactions
contemplated by the merger agreement up to, but not in excess
of, $500,000, as promptly as practicable (and, in any event,
within two business days following termination) if the merger
agreement is terminated in the following circumstances:
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if, prior to obtaining the approval of our shareholders of the
principal terms of the reincorporation merger,
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our board has received a superior proposal,
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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
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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.
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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:
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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
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if, prior to the obtaining of the approval of our shareholders
of the principal terms of the reincorporation merger,
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our board has changed is recommendation to our shareholders with
respect to their approval of the principal terms of the
reincorporation merger,
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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
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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.
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Additionally, if the merger agreement is terminated:
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by ESS or Parent because:
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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
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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
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at any time after the date of the merger agreement and prior to
the occurrence of the action or event that gave rise to
Parents right to terminate the merger agreement for the
reasons described above, any third party has publicly made,
proposed, communicated or disclosed an intention to make a bona
fide takeover proposal, and such bona fide takeover proposal was
not retracted or rescinded prior to the occurrence of the action
or event that gave rise to Parents right to terminate the
merger agreement for the reasons described above; or
within nine months of the termination of the merger agreement,
we enter into a definitive agreement with any third party with
respect to a takeover proposal or any takeover proposal is
consummated by such third party; or
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if, prior to the obtaining of the approval of our shareholders
of the principal terms of the reincorporation merger,
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our board has changed is recommendation to our shareholders with
respect to their approval of the principal terms of the
reincorporation merger,
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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
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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,
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87
then, upon consummation of such takeover proposal, we must pay
to Parent the termination fee and reimbursement of expenses
described above.
If paid, the termination fee will be the sole and exclusive
remedy of Parent, Merger Sub and their affiliates against ESS
and any of its subsidiaries and representatives for any loss or
damage suffered as a result of the breach of any representation,
warranty or covenant contained in the merger agreement by ESS,
its subsidiaries or any representative of ESS and for the
failure of the reincorporation merger and the cash-out merger to
be consummated.
Limited
Guarantee
Pursuant to a limited guarantee, dated as of February 21,
2008, between Imperium Master Fund, Ltd., an affiliate of
Imperium, and ESS, Imperium Master Fund, Ltd. has guaranteed the
performance of the obligations of Parent and Merger Sub under
the merger agreement, including any payment obligation resulting
from the breach or non-performance of any representation,
warranty or covenant contained in the merger agreement by Parent
or Merger Sub. However, in no event will Imperium Master Fund,
Ltd.s liability under the limited guarantee exceed
$10,000,000. The limited guarantee may not be revoked or
terminated and will remain in full force and effect and be
binding on Imperium Master Fund, Ltd. and its successors until
all of Parents and Merger Subs obligations under the
merger agreement have been satisfied in full. However, the
limited guarantee will terminate as of the earlier of the
effective time of the cash-out merger or February 21, 2010,
unless ESS has asserted a claim under the limited guarantee.
Amendment,
Extension and Waiver
Subject to applicable law, this merger agreement may be amended,
modified and supplemented in any and all respects, whether
before or after any vote of our shareholders contemplated by the
merger agreement, by written agreement of ESS, Echo, Parent and
Merger Sub. However, after the approval of the principal terms
of the reincorporation merger and the cash-out merger by our
shareholders and the stockholders of ESS Delaware, respectively,
no amendment to the merger agreement may be made which by law
requires further approval by such shareholders or stockholders,
respectively, without obtaining such further approval.
At any time before the effective time of the cash-out merger,
any party to the merger agreement may, to the extent legally
allowed:
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extend the time for the performance of any of the obligations or
other acts of the other parties to the merger agreement;
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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;
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waive compliance with any of the agreements or conditions
contained in the merger agreement for the benefits of such party.
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Any agreement on the part of a party to the merger agreement to
any such extension or waiver is only valid if set forth in an
instrument in writing signed on behalf of such party. Any delay
in exercising any right under the merger agreement does not
constitute a waiver of such right.
REQUIRED
VOTE
If a quorum is present, completion of the reincorporation merger
requires approval of the principal terms of the reincorporation
merger by the affirmative vote of the holders of a majority of
the shares of our common stock entitled to vote at annual
meeting. Since approval of the principal terms of the
reincorporation merger requires the affirmative vote of the
shares outstanding as of the record date, a failure to vote your
shares of our common stock or an abstention will have the same
effect as voting against the reincorporation merger.
Completion of the cash-out merger requires the adoption of the
merger agreement by the affirmative vote of the holders of a
majority of the outstanding shares of ESS Delaware common stock.
Since adoption of the merger agreement requires the affirmative
vote of the outstanding shares of common stock of ESS Delaware,
a failure to
88
provide an advance proxy prior to the time of the
reincorporation merger will have the same effect as voting
against the cash-out merger.
RECOMMENDATION
OF THE ESS BOARD OF DIRECTORS
The board of directors of ESS recommends that our shareholders
vote
FOR
approval of the principal
terms of the reincorporation merger. In addition, our board of
directors recommends that our shareholders provide an advance
proxy authorizing the execution and delivery of a written
consent adopting the merger agreement with respect to the shares
of common stock of ESS Delaware you would receive in the
reincorporation merger. The board of directors of Echo
Technology (Delaware), Inc. also recommends that the
stockholders of ESS Delaware adopt the merger agreement.
PROPOSAL TWO
ELECTION OF DIRECTORS
General
The board of directors of ESS has nominated 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 board of directors. Each of ESS nominees has consented
to serve as a director if elected.
ESS bylaws currently provide that the number of authorized
directors shall not be less than five or more than nine. The
size of ESS board of directors is currently set at five
members. The five nominees receiving the highest number of votes
of the shares of ESS common stock present in person or
represented by proxy at the annual meeting and voting on the
election of directors will be elected. All duly submitted and
unrevoked proxies will be voted for the nominees for director
selected by the ESS board of directors, except where
authorization to vote in favor of the election of directors is
withheld. If any nominee should become unavailable for election
for any presently unforeseen reason, the persons designated as
proxies will have full discretion to vote for another person
designated by the board of directors of ESS. Proxies cannot be
voted for a greater number of persons than the number of
nominees for the office of director named in this joint proxy
statement/prospectus.
Directors are elected to serve until the next annual meeting of
shareholders and until their successors have been elected and
qualified. For information regarding directors and officers of
ESS following the reincorporation merger, see
Directors
and Officers Following the Reincorporation Merger
beginning on page 136 of this joint proxy
statement/prospectus.
Information
About the Nominees
Certain information about the director nominees as of
May 20, 2008 is set forth below:
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Director
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Name of Nominee
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Age
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Principal Occupation
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Since
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Robert L. Blair
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60
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President and Chief Executive Officer of the Company
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1999
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Peter T. Mok(1)(2)(3)
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54
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President and Chief Executive Officer of KLM Capital Management,
Inc.
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1993
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Alfred J. Stein(1)(2)(3)
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75
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Director of Advanced Power Technology
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2003
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John A. Marsh
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49
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Vice President and Chief Financial Officer of the Company
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2008
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David S. Lee(1)
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70
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Chairman of the Board for eOn Communication Corporation,
Cortelco, Inc., Spark Technology Corporation and Symbio Group
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2008
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(1)
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Member of the Audit Committee of the board of directors.
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(2)
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Member of the Compensation Committee of the board of directors.
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89
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(3)
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Member of the Corporate Governance and Nominating Committee of
the board of directors.
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Robert L. Blair
has been our President and Chief
Executive Officer since September 1999. Mr. Blair was
elected as a director in 1999. Mr. Blair served as our
Executive Vice President of Operations and member of the Office
of the President from April 1997 to September 1999. From
December 1994 to March 1997, he was our Vice President of
Operations. From December 1991 to November 1994, he was Senior
Vice President of Operations (Software Packaging &
Printing Division) of Logistix Corporation, a software turnkey
company, and from 1989 to November 1991, he was Vice President
and co-owner of Rock Canyon Investments, a real estate
development-planning firm in California. From 1986 to 1989, he
held various positions at Xidex Corporation, a computer diskette
manufacturer, including President and General Manager at XEMAG,
a division of Xidex Corporation. From 1973 to 1986, he held
several positions including Vice President, High Reliability
Operations at Precision Monolithics, Inc.
Peter T. Mok
has served as a director since May
1993. Mr. Mok is currently the President and
Chief Executive Officer of KLM Capital Management, Inc., a
venture capital management company, and has served in that
capacity since July 1996. From July 1994 to July 1996,
Mr. Mok was Senior Manager, Investment Banking, of DBS Ltd.
From June 1992 to July 1994, he was Senior Vice President,
Manager and a director of Transpac Capital, Inc., a venture
capital management company that is a wholly owned subsidiary of
Transpac. Mr. Mok holds a B.S. degree in Business
Administration from San Jose State University. Mr. Mok
also serves on the boards of several private companies.
Alfred J. Stein
has served as a director since April
2003. Mr. Stein is an independent consultant to technology
companies and has spent more than 45 years in the
semiconductor industry. From 1982 until 1999 Mr. Stein
served as Chairman of the Board and Chief Executive Officer of
VLSI Technology, Inc., which was acquired by Philips Electronics
in 1999. Previously, Mr. Stein served as Chief Executive
Officer of Arrow Electronics, Vice President and Assistant
General Manager of Motorolas semiconductor unit, and Vice
President and General Manager for the Electronics Devices
Division of Texas Instruments. Currently, Mr. Stein serves
on the board of Simtek Corp. and some private
start-up
companies. Mr. Stein holds a B.S. degree in physics from
St. Marys University of Texas and an M.S. degree in
mathematics from Southern Methodist University.
John A. Marsh
has been our Chief Financial Officer
since August 2007 and was elected as a director in
May 2008. Mr. Marsh has more than 20 years of
experience in senior-level finance positions and joined us in
April 2001 as our International Controller. In September 2004,
Mr. Marsh became the Corporate Controller. From October
2006 to January 2007, Mr. Marsh was the North American
Controller for VeriFone, Inc. Prior to joining ESS, he held
senior management positions in finance with SSE Telecom, Inc.
from November 1999 to April 2001 and Cylink Corporation from
January 1997 to January 1999; previously, he held finance and
accounting positions with National Semiconductor Corporation. He
received a Bachelor of Science degree in business administration
from San Jose State University and is a certified public
accountant.
David S. Lee
was elected a director in May 2008 and
previously served on the Board of Directors from March 2000
through December 18, 2006. He is currently the Chairman of
the Board for eOn Communication Corporation, Cortelco, Inc.,
Spark Technology Corporation and the Symbio Group. He also
serves as Senior Advisor to Silver Lake. Prior to that, he
served as President and Chairman of Data Technology Corporation
which he acquired and merged with Qume Corporation in 1988. From
1983 to 1985, he served as Vice President of ITT and as Group
Executive and Chairman of its Business Information Systems
Group. Mr. Lee held positions of Executive Vice President of ITT
Qume from 1978 to 1981 and President from 1981 to 1983.
Mr. Lee co-founded Qume Corporation in 1973 and served as
Executive Vice President until it was bought by ITT Corporation
in 1978. Mr. Lee currently serves on the Board of Directors
for the following business related ventures: Linear Technology
Corporation, Daily Wellness Co., as well as numerous
non-business related ventures. He was an advisor to both
President Bush and President Clinton through the Advisory
Committee on Trade Policy and Negotiation and additionally to
Governor Pete Wilson through the California Economic Development
Corporation. He was a member of the Presidents Council on
the 21st Century Workforce, appointed by President George
W. Bush. Mr. Lee is also Regent Emeritus for the University
of California.
There is no family relationship between any of the nominees or
between any of the nominees and any executive officer of ESS.
There are no business relationships between any of the nominees
and ESS.
90
Corporate
Governance
Governance
Principles
All of ESS corporate governance materials, including the
committee charters and the Code of Ethics, are published on the
governance section of ESS website at
http://www.esstech.com.
The ESS board of directors regularly reviews corporate
governance developments and modifies these principles, charters
and practices as warranted. Any modifications are reflected on
our website.
Director
Independence
It is the objective of the ESS board of directors that at least
a majority of the board of directors should consist of
independent directors. For a director to be considered
independent, the ESS board of directors must determine that the
director does not have any direct or indirect material
relationship with ESS that would impair his or her independence.
The ESS board of directors has established guidelines to assist
it in determining director independence, which conform to the
independence requirements in the rules of the NASDAQ Global
Market. The ESS board of directors will consider all relevant
facts and circumstances, including the items disclosed under
Transactions with Management and Others below, in
making an independence determination. The ESS board of directors
has determined that the following directors satisfy the
independence requirements of the rules of the NASDAQ Global
Market: Bruce J. Alexander (while serving in 2007 and the first
quarter of 2008), Peter T. Mok, Alfred J. Stein and David S. Lee.
The ESS board of directors currently has a standing Compensation
Committee, Corporate Governance and Nominating Committee, and
Audit Committee established in accordance with
Section 3(a)(58) of the Securities Exchange Act. All
members of the Audit, Compensation and Corporate Governance and
Nominating Committees must be independent directors. Members of
the Audit Committee must also satisfy an additional SEC
independence requirement, which provides that they may not
accept directly or indirectly any consulting, advisory or other
compensatory fee from ESS or any of its subsidiaries other than
their directors compensation. The ESS board of directors
has affirmatively determined that all members of the Audit,
Compensation and Corporate Governance and Nominating Committees
satisfy the relevant NASDAQ Global Market and SEC independence
requirements.
Code
of Ethics
ESS has adopted a Code of Ethics that applies to its principal
executive officer, principal financial and accounting officer,
controller and certain other senior financial management. The
Code of Ethics is posted on our website at
http://www.esstech.com.
If any substantive amendments are made to the Code of Ethics or
grant of any waiver, including any implicit waiver, from a
provision of the Code of Ethics to ESS Chief Executive
Officer, Chief Financial Officer or Controller, we will disclose
the nature of such amendment or waiver on our website or in a
report on
Form 8-K.
Shareholder
Communications
Our board of directors welcomes communications from our
shareholders. Shareholders may send communications to the ESS
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 board of directors or to any one of our directors in
care of the Chief Executive Officer is forwarded to the
addressee without review. The independent directors of the ESS
board of directors review and approve the shareholder
communication process periodically to ensure effective
communication with shareholders.
Director
Attendance at Annual Meetings
Our policy is to encourage the members of our board of directors
to attend our annual meetings. All six members of our board of
directors attended the 2006 Annual Meeting of Shareholders.
91
Executive
Sessions
Since 2004 independent directors have met in at least two
regularly scheduled executive sessions each year. The sessions
are scheduled and chaired by the Chairman of the Corporate
Governance and Nominating Committee. Any independent director
may request that an additional executive session be scheduled.
Board
of Directors Meetings
Our board of directors held 17 meetings in 2007, including
telephone conference meetings, and each of the directors
attended 75% or more of the aggregate number of meetings of the
board of directors and the meetings of the committees of the
board of directors on which he served during 2007. Our board of
directors took action by unanimous written consent once in 2007.
Board
of Directors Committee Charters and Meetings
Each of the ESS board of directors Audit Committee,
Compensation Committee, and Corporate Governance and Nominating
Committee operates under a written charter approved by the ESS
board of directors. The charters of the Audit Committee, the
Compensation Committee and the Nominating Committee are
available on our website at
http://www.esstech.com.
Audit
Committee
The Audit Committee of the board of directors consisted of three
independent, non-employee directors: Bruce J. Alexander, Peter
T. Mok and Alfred J. Stein. Since August 2007, Peter T. Mok has
served as the Chairman of the Audit Committee, replacing Gary L.
Fischer, a former board and audit committee member who resigned
on May 21, 2007. In March 2008, Mr. Alexander passed
away. On April 2, 2008, the NASDAQ Stock Market staff sent
us a deficiency letter notifying us that we are not in
compliance with NASDAQs audit committee requirement
because we have only two directors serving on our audit
committee as a result of the passing away of Mr. Bruce J.
Alexander, a member of our board of directors and audit
committee, on March 25, 2008. The staff informed us that we
must demonstrate compliance with the three independent member
audit committee requirement no later than September 22,
2008. In May 2008, our board of directors appointed David
S. Lee to our audit committee to replace Mr. Alexander.
Each Audit Committee member qualifies as an audit committee
financial expert as defined by SEC rules. The Audit Committee
held eight meetings in 2007. The Audit Committee has determined
that the provision of non-audit services by the independent
registered public accounting firm in 2007 is compatible with
maintaining the independent registered public accounting
firms independence. The Audit Committees
responsibilities are to:
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appoint, compensate, oversee, evaluate and replace, if
necessary, the independent registered public accounting firm;
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review and approve the scope of the annual internal and external
audit;
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review and pre-approve the engagement of our independent
registered public accounting firm to perform audit and non-audit
services and the related fees;
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meet independently with our internal auditing staff, independent
registered public accounting firm and senior management;
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review disclosures from our independent registered public
accounting firm regarding Independence Standards Board Standard
No. 1;
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review the integrity of our financial reporting process;
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review our financial statements and SEC filings and disclosures;
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monitor compliance with our Code of Ethics; and
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establish procedures for the confidential and anonymous receipt,
retention and treatment of complaints regarding our accounting,
internal controls and auditing matters.
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92
Compensation
Committee
In 2007, the Compensation Committee of the board of directors
consisted of two independent, non-employee directors, Peter T.
Mok and Alfred J. Stein, the Chairman of the Compensation
Committee. The Compensation Committee held one meeting in 2007.
The Compensation Committee took action by unanimous written
consent two times in 2007. The Compensation Committee reviews
and approves compensation and benefits for our key executive
officers based on their performance, administers our stock
purchase and equity incentive plans and makes recommendations to
the ESS board of directors regarding such matters. The
Compensation Discussion and Analysis included in this joint
proxy statement/prospectus includes additional information
regarding the Compensation Committees processes and
procedures for considering and determining executive officer
compensation.
Corporate
Governance and Nominating Committee
In 2007, the Corporate Governance and Nominating Committee of
the ESS board of directors consisted of two independent,
non-employee directors, Alfred J. Stein and Peter T. Mok, the
Chairman of the Corporate Governance and Nominating Committee.
The Corporate Governance and Nominating Committee held one
meeting in 2007. The Corporate Governance and Nominating
Committee makes recommendations to the ESS board of directors
regarding the size and composition of the ESS board of
directors, the compensation of new and existing directors and
the size and composition of the various ESS board of directors
committees and other corporate governance matters. The Corporate
Governance and Nominating Committee will consider nominees
proposed by shareholders. Any shareholder who wishes to
recommend a prospective nominee for the board of directors for
the Corporate Governance and Nominating Committees
consideration may do so by giving the candidates name and
qualifications in writing to the Assistant Secretary of ESS. See
Deadline for Receipt of Shareholder Proposals
beginning on page 48 for further discussion of the
requirements for submitting a shareholder proposal.
In selecting candidates for the ESS board of directors, the
Corporate Governance and Nominating Committee strives for a
variety of experience and background that adds depth and breadth
to the overall character of the ESS board of directors. Every
effort is made to complement and supplement skills within the
existing ESS board of directors and strengthen any identified
needs. In selecting the nominees, the ESS board of directors
evaluates prospective nominees against minimum standards and
qualifications such as business experience, independence,
character and acumen of candidates to collectively establish a
number of areas of core competency of the ESS board of
directors, including business judgment, management, accounting
and finance, industry and technology knowledge, knowledge of
international markets and marketing. Further criteria include a
candidates personal and professional ethics, integrity and
values, as well as the willingness to devote sufficient time to
attend meetings and participate effectively on the ESS board of
directors.
In addition to considering candidates suggested by shareholders,
the Corporate Governance and Nominating Committee considers
potential candidates recommended by current directors, company
officers, employees and others. The Corporate Governance and
Nominating Committee screens all potential candidates in the
same manner regardless of the source of the recommendation. The
Corporate Governance and Nominating Committees review is
typically based on written materials provided with respect to
the potential candidate. The Corporate Governance and Nominating
Committee determines whether the candidate meets our minimum
qualifications and specific qualities and skills for directors
and whether requesting additional information or an interview is
appropriate.
Strategic
Transaction Committee
In June 2007, the ESS board of directors formed a strategic
transaction committee in order to consider any potential
strategic transactions involving ESS, including the sale of any
or all of the ESS video product line, analog product line,
physical assets and intellectual property or the entire company.
The strategic transaction committee consists of two independent,
non-employee directors, Peter T. Mok and Alfred J. Stein.
Mr. Stein is the chairman of the strategic transaction
committee. When the strategic transaction committee was formed,
Messrs. Stein and Mok indicated that they would each remain
independent from any potential acquirer of ESS or its businesses.
93
Compensation
of Directors
The employee directors are reimbursed for their reasonable
expenses in attending meetings of the board of directors and do
not receive cash compensation for their services. The
non-employee directors received the quarterly retainer and
meeting fees indicated below. The non-employee directors are
also reimbursed for their reasonable expenses in attending
meetings of the board of directors.
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Quarterly Retainer
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$
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5,000
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Scheduled Meeting Fee*
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$
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2,000
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Special Meeting Fee**
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$
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500
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Additional Quarterly Committee Retainer:
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Audit Committee Chair
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$
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4,000
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Audit Committee Member
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$
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2,000
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Other Committee Chair
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$
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1,000
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Other Committee Member
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$
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500
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Strategic Transaction Committee Compensation+
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Strategic Transaction Committee Chair
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$
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95,000
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Strategic Transaction Committee Member
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$
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76,000
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*
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$1,000 for each scheduled meeting attended via conference call.
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**
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For each special meeting, attended in person or via conference
call, where board actions are required.
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+
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Compensation is a one time payment that is not conditioned upon
the recommendation or consummation of a strategic transaction.
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Non-employee directors of ESS are automatically granted options
to purchase shares of ESS common stock pursuant to the
terms of our 1995 Directors Stock Option Plan (the
Directors Plan). Each non-employee director, upon
becoming a member of the ESS board of directors, is granted an
option to purchase 40,000 shares of common stock under the
Directors Plan (the Initial Grant). Thereafter, on
the date of the annual meeting of shareholders each year, each
non-employee director who will continue as a director is
automatically granted an additional option to purchase
10,000 shares of common stock under the Directors Plan (the
Subsequent Grant), provided the director has then
served for six (6) months. Options granted under the
Directors Plan have an exercise price equal to the fair market
value of our common stock on the date of grant with a term of
ten years. The fair market value of the common stock is
determined based on the closing sales price on the NASDAQ Global
Market on the date of grant. Initial Grants become exercisable
with respect to 25% of the shares on the first anniversary of
the date of grant and with respect to 1/48th of the shares
on the same date of each succeeding month. Subsequent Grants
vest and become exercisable with respect to 1/48th of the
shares on the same date as the date of grant each month
following the grant.
On the date of each annual meeting of shareholders, each member
of the Audit Committee (including the Chairman) is granted an
additional option to purchase 5,000 shares of common stock,
vesting ratably over 12 months so long as he or she
continuously serves as a member of the Audit Committee. In
addition, the Chairman of the Audit Committee is granted an
additional option to purchase 5,000 shares of common stock,
vesting ratably over 12 months so long as he or she
continuously serves as a member of the Audit Committee. When a
director joins the Audit Committee between annual meetings of
shareholders, he or she will receive a pro rated Audit Committee
grant based on the number of months he or she serves on the
committee prior to receiving his or her first annual grant.
These options have an exercise price equal to the fair market
value of our common stock on the date of grant with a term of
ten years. The fair market value of the common stock is
determined based on the closing sales price on the NASDAQ Global
Market on the date of grant.
94
DIRECTOR
COMPENSATION
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Change in
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Pension
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Fees Earned
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Non-Equity
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Value and
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or Paid
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Stock
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Option
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Incentive Plan
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Nonqualified
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All Other
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in Cash
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Awards
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Awards
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Compensation
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Deferred
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Compensation
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Total
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Name(1)
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($)
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($)
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($)(2)(3)
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($)
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Earnings
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($)
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($)
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Bruce J. Alexander
|
|
$
|
37,000
|
|
|
|
|
|
|
$
|
8,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,026
|
|
Gary L. Fischer
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|
$
|
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)
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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.
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(2)
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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.
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(3)
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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.
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(4)
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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.
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REQUIRED
VOTE
If a quorum is present, the nominees receiving the highest
number of affirmative votes of shares of ESS common stock
present and voting at the annual meeting in person or by proxy
and voting on the election of directors shall be elected as
directors.
RECOMMENDATION
OF THE ESS BOARD OF DIRECTORS
The board of directors of ESS recommends a vote
FOR
the election of each of the
directors nominated by our board of directors.
95
PROPOSAL THREE
ADJOURNMENT OR POSTPONEMENT OF ANNUAL MEETING
If ESS fails to receive a sufficient number of votes to
constitute a quorum to hold the annual meeting or to approve the
reincorporation merger or if it fails to receive a sufficient
number of advance proxies authorizing the execution of the
written consent of stockholders of ESS Delaware adopting the
merger agreement, ESS may propose to adjourn or postpone the
annual meeting, whether or not a quorum is present, for a period
of not more than 30 days:
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to constitute a quorum for purposes of the meeting or
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to solicit additional proxies in favor of the approval of the
principal terms of the reincorporation merger
and/or
to
solicit advance proxies authorizing the execution of the written
consent of the stockholders of ESS Delaware adopting the merger
agreement.
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ESS currently does not intend to propose adjournment or
postponement at the annual meeting if there are sufficient votes
to approve the reincorporation merger and the cash-out merger.
If approval of the proposal to adjourn or postpone the annual
meeting for the purpose of soliciting additional proxies is
submitted to ESS shareholders for approval, such approval
requires the affirmative vote of a majority of the votes cast at
the annual meeting by the holders of shares of ESS common
stock present or represented by proxy and entitled to vote
thereon.
REQUIRED
VOTE
If a quorum is present, the affirmative vote of a majority of
the shares of ESS common stock present and voting at the annual
meeting in person or by proxy is required to approve the
adjournment proposal.
RECOMMENDATION
OF THE ESS BOARD OF DIRECTORS
The ESS board of directors recommends that ESS
shareholders vote
FOR
the proposal to
adjourn or postpone the annual meeting, if necessary, to solicit
additional proxies if there are insufficient votes in favor of
approval of the reincorporation merger or if ESS does not
receive a sufficient number of advance proxies authorizing the
execution of the written consent adopting the merger agreement.
96
THE
ANNUAL MEETING AND THE WRITTEN CONSENT
General
ESS is furnishing this joint proxy statement/prospectus to
ESS shareholders in connection with the solicitation of
proxies by ESS board of directors for use at the annual
meeting of ESS shareholders, including any adjournment or
postponement of the annual meeting.
Date,
Time and Place of the Annual Meeting
The annual meeting of ESS shareholders will be held at the
Fremont Marriott, located at 46100 Landing Parkway, Fremont, CA
94538, on June 27, 2008 at 9:00 a.m. local time.
Time of
Execution of Written Consent
The written consent adopting the merger agreement will be
executed immediately following the consummation of the
reincorporation merger.
Purposes
of the Annual Meeting
ESS is holding the annual meeting to consider the
reincorporation merger and to elect directors to the board of
directors of ESS. In addition, ESS shareholders will be asked to
consider and vote upon a proposal to grant ESS management
the discretionary authority to adjourn or postpone the annual
meeting for a period of not more than 30 days, in order to
enable ESS board of directors to solicit additional
proxies in favor of the reincorporation merger and the cash-out
merger if necessary and to vote upon any other business that may
properly come before the annual meeting.
Purposes
of the Advance Proxy and the Written Consent
The purpose of the advance proxy and the written consent is to
adopt and approve the merger agreement to effect the cash-out
merger.
A copy of the merger agreement is attached to this
statement/prospectus as Annex A. ESS shareholders are
encouraged to read the merger agreement in its entirety.
The matters to be considered at the ESS annual meeting are of
great importance to ESS shareholders. Accordingly, you are urged
to read and carefully consider the information presented in this
joint proxy statement/prospectus, and to complete, date, sign
and promptly return the enclosed proxy card and advance proxy
card in the enclosed pre-addressed postage-paid envelope.
Recommendation
of ESS and Echos Boards of Directors
Our board of directors recommends that our shareholders vote
FOR
approval of the principal terms of the
reincorporation merger. In addition, our board of directors
recommends that our shareholders provide an advance proxy
authorizing the execution and delivery of a written consent
adopting the merger agreement with respect to the shares of
common stock of ESS Delaware you would receive in the
reincorporation merger. Our board of directors also recommends
that our shareholders vote
FOR
each of our
nominees for election to the board of directors and that our
shareholders vote
FOR
the proposal to grant
discretionary authority to our management to vote your shares to
adjourn or postpone the annual meeting, if necessary, to solicit
additional proxies 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 merger
and/or
to
solicit additional advance proxies relating to the adoption of
the merger agreement by the stockholders of ESS Delaware. The
board of directors of Echo recommends that the stockholders of
ESS Delaware adopt the merger agreement.
97
Admission
to the Annual Meeting
Only ESS shareholders as of the close of business on the record
date, and other persons holding valid proxies for the annual
meeting are entitled to attend the annual meeting. Shareholders
and their proxies must present valid government-issued photo
identification to attend the annual meeting. Shareholders who
are not record holders but hold shares through a broker, bank or
other nominee (i.e., in street name) will need to
provide proof of beneficial ownership 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 their most recent
account statement prior to the record date, or other similar
evidence of ownership. Anyone who does not provide valid
government-issued photo identification or comply with the other
procedures outlined above upon request may not be admitted to
the annual meeting.
Record
Date and Outstanding Shares
For
the Annual Meeting
You are entitled to vote at the annual meeting if you owned
shares of our common stock at the close of business on
May 20, 2008, the record date for the annual meeting. You
will have one vote for each share of our common stock that you
owned on the record date. As of the record date, there were
approximately 35.6 million shares of our common stock
outstanding and entitled to be voted. To the extent a person has
transferred any shares of ESS common stock after the record date
and the transferee of such shares establishes that such
transferee owns such shares and demands not later than
10 days before the annual meeting to be included in the
list of shareholders eligible to vote at the annual meeting,
such transferee will be entitled to vote such shares at the
annual meeting.
On the record date, there were approximately 154 holders of
record of the 35,563,908 shares of ESS common stock then
issued and outstanding. Each share of ESS common stock entitles
the holder thereof to one vote on each matter submitted for
shareholder approval. See Beneficial Ownership of
Securities for information regarding persons known to the
management of ESS to be the beneficial owners of more than five
percent of the outstanding ESS common stock. A complete list of
registered shareholders entitled to notice of, and to vote at,
the annual meeting will be available for examination at the
offices of ESS, 48401 Fremont Boulevard, Fremont, California
94538, during normal business hours by any shareholder, for any
purpose germane to the annual meeting for a period of
10 days prior thereto.
For
the Written Consent
It is anticipated that the board of directors of Echo will fix
the effective date of the reincorporation merger as the date the
written consent is executed. In addition, it is anticipated that
the written consent will be executed and delivered to ESS
Delaware immediately following the consummation of the
reincorporation merger. Holders of ESS Delaware common stock
will have one vote for each share of common stock that they own
on the date the written consent is executed. Any advance proxy
executed by a holder of ESS who is not a stockholder of record
of ESS Delaware at the time the written consent is delivered
will be null and void and of no further force and effect.
Accordingly, shareholders of ESS who would like the shares of
ESS Delaware common stock they would receive in the cash-out
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.
Voting
and Revocation of Proxies and Advance Proxies
For
Use at the Annual Meeting
Shareholders of ESS as of the record date may submit a proxy
with respect to the election of directors, the reincorporation
merger and the adjournment proposal by one of the following
methods:
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complete, sign and date the enclosed proxy card and return it in
the prepaid envelope provided;
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call the toll-free telephone number on the proxy card and follow
the recorded instructions; or
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98
|
|
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access ESS secure website registration page through the
Internet at
http://www.proxyvoting.com/esst,
as identified on the proxy card, and follow the instructions.
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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.
Shareholders of ESS who hold their shares in street
name may cause the shares of ESS common stock that they
beneficially own to be represented and voted at the annual
meeting by following the instructions provided by the broker,
bank or other holder of record of your shares, including by one
of the following methods:
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complete, sign, date and return your voting instruction card in
the enclosed pre-addressed envelope; or
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|
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|
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.
|
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.
In order to be counted, proxies submitted by telephone or the
Internet must be received by 8:59 p.m. pacific time on
June 26, 2008. Proxies submitted by mail must be received
prior to the start of the annual meeting.
For
Use in Connection with the Written Consent
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, in the 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. If the
reincorporation merger is consummated, the written consent will
be executed and delivered to ESS Delaware by the person or
persons named in the advance proxy promptly following the
consummation of the reincorporation merger. 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 of the written consent will be included in
the written consent adopting the merger agreement. Any advance
proxy executed by a holder of ESS who is not a stockholder of
record of ESS Delaware at the time the written consent is
delivered will be null and void and of no further force and
effect.
Stockholders of ESS Delaware as of the date the written consent
is executed may provide an advance proxy with respect to the
adoption of the merger agreement by one of the following methods:
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complete, sign and date the enclosed advance proxy card and
return it in the prepaid envelope provided;
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|
call the toll-free telephone number on the advance proxy card
and follow the recorded instructions; or
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access ESS secure website registration page through the
Internet at
http://www.proxyvoting.com/echo,
as identified on the advance proxy card, and follow the
instructions.
|
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.
Stockholders of ESS Delaware who hold their shares in
street name may cause the shares of ESS common stock
that they beneficially own to be voted in an advance proxy by
following the instructions provided by the broker, bank or other
holder of record of your, including by one of the following
methods:
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complete, sign, date and return your voting instruction card in
the enclosed pre-addressed envelope; or
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99
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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.
|
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.
In order to be counted, advance proxies submitted by telephone
or the Internet must be received by 8:59 p.m. pacific time
on June 26, 2008. Advance proxies submitted by mail must be
received prior to the start of the annual meeting.
Revocation
of Proxies and Advance Proxies
If you are a record holder of ESS common stock you can change
your vote at any time before your proxy card is voted at the
annual meeting by:
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delivering a valid, later-dated proxy by mail, or a later-dated
proxy by telephone or Internet, in each case before the annual
meeting;
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delivering a signed written notice to the Secretary of ESS
before the annual meeting;
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by appearing at the annual meeting and voting in person by
ballot. Your attendance at the annual meeting alone will not
revoke your proxy.
|
If you are not a record holder of shares of ESS common stock and
have instructed a broker or bank to vote your shares by
executing a voting instruction card or by using the telephone or
Internet, you must follow directions from your broker or bank to
change those instructions.
If you are a record holder of shares of ESS common stock and
would be the record owner of the shares of ESS Delaware common
stock you would receive in the reincorporation merger, 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 you are not a record holder of shares of ESS common stock and
would not be a record holder of shares of ESS Delaware common
stock, and have instructed a broker or bank to provide an
advance proxy on your behalf, you must follow directions from
your broker or bank to revoke your advance proxy.
Vote
Required
To
Elect Directors, Approve The Reincorporation Merger and Approve
the Adjournment Proposal at the Annual Meeting
ESS bylaws provide that the authorized number of directors
shall not be less than five or more than nine. The size of our
board of directors is currently set at five members. The five
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.
Completion of the reincorporation merger requires approval of
the principal terms of the reincorporation merger by the
affirmative vote of the holders of a majority of the shares of
our common stock entitled to vote at the annual meeting. Since
approval of the principal terms of the reincorporation merger
requires the affirmative vote of the shares outstanding as of
the record date, a failure to vote your shares of our common
stock or an abstention will have the same effect as voting
against the reincorporation merger.
Approval of the adjournment proposal requires the vote of a
majority of the shares of ESS stock present in person or by
proxy at the annual meeting.
100
As of the record date for the annual meeting, the directors and
executive officers of ESS beneficially owned, in the aggregate,
26,727 shares of our common stock, or less than 1% of the
then-outstanding shares of our common stock. The directors and
executive officers have informed us that they intend to vote all
of their shares of our common stock
FOR
the approval of the principal terms of the
reincorporation merger and
FOR
any
adjournment of the annual meeting, if necessary or appropriate,
to solicit additional proxies
and/or
advance proxies.
To
Approve the Cash-Out Merger by Execution of the Written
Consent
Completion of the cash-out merger requires the adoption of the
merger agreement by the affirmative vote of the holders of a
majority of the outstanding shares of ESS Delaware common stock.
Since adoption of the merger agreement requires the affirmative
vote of the outstanding shares of common stock of ESS Delaware,
a failure to provide an advance proxy prior to the time of the
reincorporation merger will have the same effect as voting
against the cash-out merger. In addition, if you sell or
transfer your shares of ESS after you have provided an advance
proxy but before the effective date of the reincorporation
merger, those shares will not be included in the written consent
of stockholders of ESS Delaware adopting the merger agreement
executed and delivered by the proxyholders named in the advance
proxy, unless your transferee independently provides an advance
proxy.
As of the record date for the annual meeting, the directors and
executive officers of ESS beneficially owned, in the aggregate,
26,727 shares of our common stock, or less than 1% of the
then-outstanding shares of our common stock. The directors and
executive officers have informed us that they intend to provide
advance proxies with respect to all of the shares of ESS
Delaware common stock that they would own upon consummation of
the reincorporation merger to cause those shares to be included
in the written consent adopting the merger agreement.
Quorum,
Abstentions and Broker Non-Votes
A quorum of shareholders is required to transact business at the
annual meeting of our shareholders. 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. Our
transfer agent, Mellon Investor Services, LLC, will act as
inspector of elections at the annual meeting and will ascertain
whether a quorum is present, tabulate the votes and determine
the voting results on all matters presented to our shareholders
at the annual meeting. If a quorum is not present, we expect
that the annual meeting will be adjourned to allow additional
time to obtain additional proxies or votes, and at any
subsequent reconvening of the annual meeting, all proxies will
be voted in the same manner as the proxies would have been voted
at the original convening of the annual meeting, except for any
proxies that have been effectively revoked or withdrawn prior to
the reconvening of the annual meeting.
If you hold shares of ESS common stock in street
name through a bank, broker or other nominee holder, the
nominee holder may only vote your shares in accordance with your
instructions. 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 if you do not
give specific instructions to your nominee holder as to how you
want your shares voted, which will result in what is called a
broker non-vote. For the election of directors and
the adjournment proposal, your broker has discretion to vote
your shares on these routine matters. When voted on
routine matters, broker non-votes are counted toward
determining the outcome of that routine matter. All
shares of ESS common stock represented at the annual meeting,
including broker non-votes and abstentions, will be counted for
purposes of determining the presence of a quorum.
In order to approve the principal terms of the reincorporation
merger, the holders of a majority of the shares of ESS common
stock entitled to vote at the annual meeting must vote to
approve the reincorporation merger. As a result, abstentions,
the failure to vote and broker non-votes will all have the same
effect as a vote against the reincorporation merger. In order to
approve the cash-out merger, a majority of the outstanding
shares of common stock of ESS Delaware entitled to vote must
adopt the merger agreement. As a result, your failure to provide
an advance proxy will have the same effect as a vote against the
cash-out merger.
101
Shareholders
Entitled to Vote
Registered Shareholders.
If your shares are
registered directly in your name with our transfer agent, you
are considered, with respect to those shares, the shareholder of
record, and these proxy materials are being sent to you by ESS.
As the shareholder of record, you have the right to grant your
voting proxy directly to the individuals listed on the proxy
card or to vote in person at the annual meeting.
Street Name Shareholders.
If your
shares are held in a stock brokerage account or by a bank or
other nominee, you are considered the beneficial owner of shares
held in street name. These proxy materials are being forwarded
to you by your broker or nominee, who is considered, with
respect to those shares, the record holder. As the beneficial
owner, you have the right to direct your broker or nominee how
to vote, and you are also invited to attend the annual meeting.
However, since you are not the record holder, you may not vote
these shares in person at the annual meeting unless you follow
your brokers procedures for obtaining a legal proxy. Your
broker or nominee has enclosed a voting instruction card for you
to use.
Shareholders may receive more than one set of voting materials,
including multiple copies of this joint proxy
statement/prospectus and multiple proxy cards, advance proxies
or voting instruction cards. For example, shareholders who hold
shares in more than one brokerage account may receive a separate
voting instruction card for each brokerage account in which
shares are held. Shareholders of record whose shares are
registered in more than one name will receive more than one
proxy card. You should complete, sign, date and return each
proxy card, advance proxy and voting instruction card they
receive for the annual meeting.
Adjournment
and Postponement
Notwithstanding the proposal to grant discretionary authority to
our management to adjourn or postpone the annual meeting, our
bylaws provide that an annual meeting of shareholders may be
adjourned if a quorum is not present or represented at any
meeting of our shareholders by a majority of the shareholders
entitled to vote at such meeting, present in person or
represented by proxy. When an annual meeting is adjourned to
another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the
annual meeting at which the adjournment is taken. At the
adjourned meeting, we may transact any business which might have
been transacted at the original meeting. If the adjournment is
for more than 30 days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting.
Voting by
the Companys Directors and Executive Officers
As of the record date for the annual meeting, our directors,
executive officers and their affiliates, as a group, owned and
were entitled to vote 26,727 shares of ESS common stock, or
less than 1% of the outstanding shares of ESS common stock.
Other
Matters
ESS board of directors is not aware of any other business
to be brought before the annual meeting or any adjournment or
postponement of the annual meeting.
If, however, other matters are properly brought before the
annual meeting (including any proposal to adjourn the annual
meeting) or an adjournment or postponement thereof, the persons
appointed as proxies will have discretionary authority to vote
the shares of ESS common stock represented by duly executed
proxies in accordance with their discretion and judgment.
Solicitation
of Proxies and Advance Proxies
ESS will pay for the solicitation of proxies and advance
proxies. In addition to solicitation by mail, certain directors,
officers and employees of ESS and certain directors, officers
and employees of Echo also may solicit proxies and advance
proxies on behalf of each of our boards of directors by mail,
telephone, email, fax or in person. Arrangements will also be
made with brokerage firms and other custodians, nominees and
fiduciaries who hold of record voting securities of ESS for the
forwarding of solicitation materials to the beneficial owners
thereof. ESS will
102
reimburse such brokers, custodians, nominees and fiduciaries for
the reasonable out-of-pocket expenses incurred by them in
connection therewith. ESS has retained MacKenzie to assist it in
soliciting proxies and advance proxies, and we expect that we
will pay MacKenzie not more than $25,000, plus a final fee that
we are to agree upon with MacKenzie upon the completion of
solicitation of proxies and reasonable out-of-pocket expenses.
ESS estimates that the total expenditures in connection with the
proxy and advance proxy solicitation will be approximately
$10,000. ESS also may use several of its regular employees, who
will not receive additional remuneration, to solicit proxies and
advance proxies from ESS shareholders, either personally or by
telephone, telegram, facsimile or special delivery letter.
Inspector
of Elections
Annual
Meeting
ESS will appoint one or more inspectors of election to act at
the annual meeting and to make a written report on the annual
meeting. Prior to the annual meeting, the election inspectors
will sign an oath to perform their duties in an impartial manner
and to the best of their abilities. The inspectors will
ascertain the number of shares of ESS common stock outstanding
and the voting power of each of such shares, determine the
shares represented at the annual meeting and the validity of
proxies and ballots, count all votes and ballots and perform
certain other duties.
Written
Consent
The election inspectors will ascertain the number of shares of
ESS common stock outstanding and record holders thereof as of
the record date of the reincorporation merger and, prior to the
closing of the reincorporation merger, the number of advance
proxies submitted by those shareholders and the validity thereof
and perform certain other duties.
Shareholders
Sharing an Address
The SEC has adopted rules that permit companies and
intermediaries (e.g., brokers) to satisfy the delivery
requirements for proxy statements with respect to two or more
shareholders sharing the same address by delivering a single
proxy statement addressed to those shareholders and a number of
brokers with account holders who are ESS shareholders have
elected to household proxy materials. A single proxy
statement will be delivered to multiple shareholders sharing an
address unless contrary instructions have been received from the
affected shareholders. However, each shareholder who
participates in householding will continue to receive a separate
proxy card. Once you have received notice from your broker that
they will be householding communications to your
address, householding will continue until you are
notified otherwise or until you revoke your consent. If, at any
time, you no longer wish to participate in
householding and would prefer to receive a separate
joint proxy statement/prospectus, please notify your broker or
direct your written request to Investor Relations, ESS
Technology, Inc., 48401 Fremont Boulevard, Fremont, California
94538, or by telephone at
(510) 492-1088.
Shareholders who currently receive multiple copies of our proxy
statement at their address and would like to request
householding of their communications should contact
their broker.
Electronic
Delivery of Proxy Materials and Annual Report
If you received your annual meeting materials by mail, we
encourage you to conserve natural resources, as well as
significantly reduce printing and mailing costs, by signing up
to receive your shareholder communications via
e-mail.
With
electronic delivery, you will be notified via
e-mail
as
soon as the annual report and the proxy statement are available
on the Internet, and you can easily submit your shareholder
votes online. Electronic delivery can also help reduce the
number of bulky documents in your personal files and eliminate
duplicate mailings. Please check the information provided in the
proxy materials mailed to you by your stockbroker, bank, or
other nominee regarding the availability of this service. Your
electronic delivery enrollment will be effective until you
cancel it.
103
PRICE
RANGE OF ESS COMMON STOCK AND DIVIDENDS
Price
Range of ESS Common Stock
ESS common stock is traded in the United States on the NASDAQ
Global Market under the symbol ESST. On
February 21, 2008, the last trading day prior to our public
announcement of the cash-out merger, the closing sales price for
ESS common stock was $1.20. On May 23, 2008, the closing
sales price for ESS common stock was $1.57. The following table
sets forth, for the calendar periods indicated through
May 23, 2008, the range of high and low closing prices for
ESS common stock as reported by the NASDAQ Global Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
As of March 1, 2008, the number of registered holders of
ESS common stock was approximately 156. Since most shareholders
are listed under their brokerage firms names, the actual
number of beneficial shareholders is higher.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
Dividend
Policy
We have never declared or paid cash dividends. We currently
intend to retain all available funds and any future earnings for
use in the operation of our business and do not anticipate
paying any cash dividends in the foreseeable future.
104
SELECTED
FINANCIAL DATA OF ESS
The selected consolidated statement of operations data for the
years ended December 31, 2007, 2006 and 2005 and the
selected consolidated balance sheet data as of December 31,
2007 and 2006 are derived from the audited consolidated
financial statements of ESS. The consolidated financial
statements of ESS as of December 31, 2007 and 2006 and for
the three years in the period ended December 31, 2007, and
the report of PricewaterhouseCoopers LLP thereon are included
elsewhere in this joint proxy statement/prospectus. The selected
consolidated statement of operations data for the years ended
December 31, 2004 and 2003 and the selected consolidated
balance sheet data as of December 31, 2005, 2004 and 2003
are derived from audited consolidated financial statements,
which are not included in this joint proxy statement/prospectus.
The selected consolidated statement of operations data for the
three months ended March 31, 2008 and 2007 and the selected
consolidated balance sheet data as of March 31, 2008 are derived
from the unaudited condensed consolidated financial statements
of ESS included elsewhere in this joint proxy
statement/prospectus. We have prepared this unaudited
information on the same basis as the audited financial
statements and have included all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a
fair statement of our financial position and operating results
for such a period. The selected financial data should be read in
conjunction with the information set forth herein under
Managements Discussion and Analysis of Financial
Condition and Results of Operations. All amounts are in
U.S. Dollars.
Echo was formed in connection with the reincorporation merger.
Echo currently has de minimis assets and no operations.
Following the reincorporation merger, ESS Delawares
financial information will be that of ESS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information contained in or incorporated by reference
in the following Managements Discussion and Analysis of
Financial Condition and Results of Operations contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements include statements
concerning the future of our industry, its product development,
business strategy, future acquisitions, the continued acceptance
and growth of our products, and our dependence on significant
customers. Actual results may differ materially from those
projected in the forward-looking statements as a result of
various factors including those discussed in the section
entitled Risk Factors, and elsewhere in this joint
proxy statement/prospectus. In some cases, these statements can
be identified by terminologies such as may,
will, expect, anticipate,
estimate, continue, other similar terms
or the negative of these terms. Although we believe that the
assumptions underlying the forward-looking statements contained
in this joint proxy statement/prospectus are reasonable, they
may be inaccurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the
inclusion of such statements should not be regarded as a
representation by us or any other person that the results or
conditions described in such statements will be achieved. We
undertake no obligation to revise or update publicly any
forward-looking statements for any reason.
Executive
Overview
ESS was incorporated in California in 1984 and became a public
company in 1995. We have historically operated in two primary
business segments, Video and Digital Imaging, both in the
semiconductor industry serving the consumer electronics and
digital media marketplace.
In our Video business, we design, develop and market highly
integrated analog and digital processor chips and digital
amplifiers. Our digital processor chips drive digital video and
audio devices, including DVD players, Video CD (VCD)
players, consumer digital audio players and digital media
players. We continue to sell certain legacy products we have in
inventory including chips for use in recordable DVD players,
modems, other communication devices and PC audio products. On
September 18, 2006 we announced an ongoing strategic review
of our operations and business plan. In connection with this
strategic review, on November 3, 2006, we licensed to
Hangzhou Silan Microelectronics Co., Ltd. (Silan)
the development, manufacture and sale of our next generation
standard definition DVD chips, the Phoenix II and LMX II,
and also granted Silan a non-exclusive license for our standard
definition DVD technology. On April 23, 2008, we entered
into the ESS-Silan Audio and Video Technology License Agreement
(the License Agreement) with Silan to amend and
restate the ESS-Silan DVD Technology License Agreement, between
the Company and Silan, as amended, dated November 3, 2006.
The Company entered into the License Agreement in order to
license to Silan certain of ESSs audio and video
technology for the purpose of developing, designing,
manufacturing, distributing and selling products incorporating
such technology for which we will be owed royalties. Silan no
longer has a license to incorporate our technology in
standard-definition DVD products. On February 16, 2007, we
sold to Silicon Integrated Systems Corporation and its
affiliates (SiS) our tangible and intangible assets
relating to the development of high definition DVD chips based
on next generation blue laser technology. Also, in connection
with this restructuring strategy, during the first quarter of
2007 we substantially terminated the production and sale of our
camera phone image sensors, which were the only remaining
products of our Digital Imaging segment. We plan to license our
image sensor patents in exchange for royalties, but we will no
longer sell imaging sensor semiconductor chips. We continue to
design, develop and market highly integrated analog and digital
processor chips and digital amplifiers, including chips for
standard definition DVD players primarily for the Korean market,
and chips for digital audio players and digital media players
for all markets. We are now concentrating on our standard
definition DVD chip business and evaluating opportunities to
develop profitable operations.
We market our products worldwide through our direct sales force,
distributors and sales representatives. Substantially all of our
sales are to distributors, direct customers and end-customers in
China, Hong Kong, Taiwan, Japan, Korea, Indonesia and Singapore.
We employ sales and support personnel located outside of the
United States in China, Hong Kong, Taiwan and Korea to support
these international sales efforts. We expect that international
sales will continue to represent a significant portion of our
net revenues. In addition, substantially all of our products are
manufactured, assembled and tested by independent third parties
in Asia. We also have a number of employees engaged in research
and development efforts outside of the United States. There are
unique risks associated with conducting business outside of the
United States.
106
On February 21, 2008, ESS Technology, Inc., a California
corporation (ESS), Echo Technology (Delaware), Inc.,
a Delaware corporation and a wholly owned subsidiary of ESS
(Echo), Semiconductor Holding Corporation, a
Delaware corporation and wholly owned subsidiary of Imperium
Master Fund, Ltd. (Parent), and Echo Mergerco, Inc.,
a Delaware corporation and a wholly owned subsidiary of Parent
(Merger Subsidiary) entered into an Agreement and
Plan of Merger (the Merger Agreement) pursuant to
which (i) ESS will, subject to the satisfaction or waiver
of the conditions set forth in the Merger Agreement, merge with
and into Echo (the Reincorporation Merger), the
separate corporate existence of ESS shall cease and Echo shall
be the successor or surviving corporation of the merger
(ESS Delaware), and (ii) following the
Reincorporation Merger, Merger Subsidiary will, subject to the
satisfaction or waiver of the conditions set forth in the Merger
Agreement, including the consummation of the Reincorporation
Merger, merge with and into ESS Delaware (the
Merger), the separate corporate existence of Merger
Subsidiary shall cease and ESS Delaware shall be the successor
or surviving corporation of the merger and wholly owned
subsidiary of the Parent.
Upon the consummation of the Reincorporation Merger, ESS will
become a Delaware corporation, each share of ESS common stock
will be converted into one share of ESS Delaware common stock
and each option to acquire ESS common stock granted pursuant to
ESS stock plans and outstanding immediately prior to the
consummation of the Reincorporation Merger, whether vested or
unvested, exercisable or unexercisable, will be automatically
converted into the right to receive an option to acquire one
share of ESS Delaware common stock for each share of ESS common
stock subject to such option, on the same terms and conditions
applicable to the option to purchase ESS common stock (each, an
ESS Delaware Option).
Upon the consummation of the Merger, (i) ESS Delaware will
become a wholly owned subsidiary of Parent and (ii) each
share of ESS Delaware common stock will be converted into the
right to receive $1.64 in cash, unless the stockholder properly
exercises appraisal rights. In addition, each ESS Delaware
Option, whether vested or unvested, exercisable or
unexercisable, will be converted into the right to receive an
amount in cash equal to the product obtained by multiplying
(x) the aggregate number of shares of ESS Delaware common
stock subject to such ESS Delaware Option and (y) the
excess, if any, of the Merger Consideration less the exercise
price per share of ESS Delaware common stock subject to such ESS
Delaware Option, after which it shall be cancelled and
extinguished.
The parties to the Merger Agreement intend to consummate the
Merger as soon as practicable after the Reincorporation Merger
and ESS will not consummate the Reincorporation Merger unless
the parties are in a position to consummate the Merger. ESS and
Echo have made customary representations and warranties in the
Merger Agreement and agreed to certain customary covenants,
including covenants regarding operation of the business of ESS
and its subsidiaries, including Echo, prior to the closing and
covenants prohibiting ESS from soliciting, or providing
information or entering into discussions regarding, proposals
relating to alternative business combination transactions,
except in limited circumstances to permit the board of directors
of ESS to comply with its fiduciary duties under applicable law.
The transactions contemplated by the Merger Agreement are
subject to ESS shareholder approval, delivery of ESS
audited financial statements for the year ended
December 31, 2007 and other customary closing conditions.
The Merger Agreement contains certain termination rights for
both ESS and Parent and further provides that, upon termination
of the Merger Agreement under certain circumstances, ESS may be
obligated to pay Parent a termination fee of $1,981,000 plus
reimbursement of Parents and its affiliates
reasonable expenses incurred in connection with the transactions
contemplated by the Merger Agreement up to, but not in excess
of, $500,000.
The Merger Agreement contains representations and warranties by
ESS and Echo, on the one hand, and by Parent and Merger
Subsidiary, on the other hand, made solely for the benefit of
the other. The assertions embodied in those representations and
warranties are qualified by information in confidential
disclosure schedules that the parties have exchanged in
connection with signing the Merger Agreement. The disclosure
schedules contain information that modifies, qualifies and
creates exceptions to the representations and warranties set
forth in the Merger Agreement. Moreover, certain representations
and warranties in the Merger Agreement were made as of a
specified date, may be subject to a contractual standard of
materiality different from what might be viewed as material to
shareholders, or may have been used for the purpose of
allocating risk between ESS and Echo, on the one hand, and
Parent and Merger Subsidiary, on the other hand. Accordingly,
the representations and warranties and
107
other disclosures in the Merger Agreement should not be relied
on by any persons as characterizations of the actual state of
facts about ESS, Echo, Parent or Merger Subsidiary at the time
they were made or otherwise.
Critical
Accounting Policies and Estimates
Use of
Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States (GAAP). These accounting principles require
us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which
we rely are reasonable based upon information available to us at
the time that these estimates, judgments and assumptions are
made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the
financial statements, as well as the reported amounts of
revenues and expenses during the periods presented. To the
extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial
statements will be affected. The significant accounting policies
that we believe are the most critical in understanding and
evaluating our reported financial results include the following:
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Revenue Recognition
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Inventories and Inventory Reserves
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Impairment of Long-Lived Assets
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Income Taxes
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Legal Contingencies
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Stock-based Compensation
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In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require managements judgment in its application. There are
also cases in which managements judgment is required in
selecting appropriate accounting treatment among available
alternatives under GAAP. Our management has reviewed these
critical accounting policies and related disclosures with our
Audit Committee. See notes to consolidated financial statements
included in this joint proxy statement/prospectus for additional
information regarding our accounting policies and other
disclosures required by GAAP.
Revenue
Recognition
Revenue is primarily generated by product sales and is
recognized at the time of shipment when persuasive evidence of
an arrangement exists, the price is fixed or determinable and
collection of the resulting receivable is reasonably assured,
except for products sold to certain distributors with certain
rights of return for unsold products and rights to pricing
adjustments, in which case, revenue is deferred until such a
distributor resells the products to a third party. Such deferred
revenue related to distributor sales, net of deferred cost of
goods sold are recorded as deferred margin included in accrued
expenses on our balance sheets. License and royalty revenue is
recognized as the services provided have been completed, or
based on the units sold and reported to us by the third party
licensee provided collection of the resulting receivable is
reasonably assured.
We provide for rebates based on current contractual terms and
future returns based on historical experiences at the time
revenue is recognized as reductions to product revenue. Actual
amounts may be different from managements estimates. Such
differences, if any, are recorded in the period they become
known.
Inventories
and Inventory Reserves
Our inventory is comprised of raw materials,
work-in-process
and finished goods, all of which are manufactured by third-party
contractors. Inventory is valued at the lower of standard cost
(which approximates actual cost on a
first-in,
first-out basis) or market. We reduce the carrying value of
inventory for estimated slow-moving, excess, obsolete, damaged
or otherwise unmarketable products by an amount based on
forecasts of future demand and market conditions.
108
We evaluate excess or obsolete inventory primarily by estimating
demand for individual products within specific time horizons,
typically one year or less. We generally provide a 100% reserve
for the cost of products with on-hand and committed quantities
in excess of the estimated demand after considering factors such
as product life cycles. Once established, reserves for excess or
obsolete inventory are only released when the reserved products
are scrapped or sold. We also evaluate the carrying value of
inventory at the lower of standard cost or market on an
individual product basis, and these evaluations are based on the
difference between net realizable value and standard cost. Net
realizable value is the forecasted selling price of the product
less the estimated costs of completion and disposal. When
necessary, we will reduce the carrying value of inventory to net
realizable value.
The estimates of future demand, forecasted sales prices and
market conditions used in the valuation of inventory form the
basis for our published and internal earnings forecast. If
actual results are substantially lower than the forecast, we may
be required to record additional write-downs of product
inventory in future periods and this may have a negative impact
on gross margins.
Impairment
of Long-Lived Assets
We review long-lived assets and certain identifiable intangibles
assets to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. We evaluate any possible
impairment of long-lived assets and certain intangible assets
using estimates of undiscounted future cash flows. If an
impairment loss is to be recognized, it is measured as the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Management evaluates the fair value of
its long-lived assets and certain intangibles assets using
primarily the estimated discounted future cash flows method.
Management uses other alternative valuation techniques whenever
the estimated discounted future cash flows method is not
appropriate.
Income
Taxes
We account for income taxes under an asset and liability
approach that requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of timing differences between the carrying amounts and the tax
bases of assets and liabilities. U.S. deferred income taxes
are not provided on un-remitted earnings of our foreign
subsidiaries as such earnings are considered permanently
invested. Assumptions underlying recognition of deferred tax
assets and non-recognition of U.S. income tax on
un-remitted earnings can change if our business plan is not
achieved or if Congress adopts changes in the Internal Revenue
Code of 1986, as amended.
Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). This interpretation clarifies the
criteria for recognizing income tax benefits under FASB
Statement No. 109, Accounting for Income Taxes, and
requires additional disclosures about uncertain tax positions.
Under FIN 48 the financial statement recognition of the
benefit for a tax position is dependent upon the benefit being
more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the tax
benefit is then measured and recognized at the largest amount
that is greater than 50 percent likely of being realized
upon ultimate settlement.
Legal
Contingencies
From time to time, we are subject to legal proceedings and
claims, including claims of alleged infringement of patents,
trademarks, copyrights and other intellectual property rights
and other claims arising out of the ordinary course of business.
Further, we have previously been engaged in certain shareholder
class action and derivative lawsuits.
These contingencies require management judgment in order to
assess the likelihood of any adverse judgments or outcomes and
the potential range of probable losses. Liabilities for legal
matters are accrued for when it is probable that a liability has
been incurred and the amount of the liability can be reasonably
estimated, based upon current law and existing information.
Estimates of contingencies may change in the future due to new
developments or changes in legal approach.
109
Stock-based
Compensation
Effective January 1, 2006, we adopted the provisions of
SFAS No. 123(R), which requires us to measure all
employee stock-based compensation awards using a fair value
method and record such expense in our consolidated financial
statements. We estimate the fair value of stock options using a
Black-Scholes valuation model, consistent with the provisions of
SFAS No. 123(R), Staff Accounting
Bulletin No. 107 and our prior period pro forma
disclosures of net earnings, including stock-based compensation
(determined under a fair value method as prescribed by
SFAS No. 123). The Black-Scholes valuation model
requires the input of subjective assumptions, including the
options expected life, the price volatility of the
underlying stock, and forfeiture rate. These assumptions used in
calculating the fair value of share-based payment awards
represent managements best estimates, but these estimates
involve inherent uncertainties and the application of
managements judgment. We elected to adopt the modified
prospective application transition method as provided by
SFAS No. 123(R).
Recent
Accounting Pronouncements and Adoption of New Accounting
Pronouncements
Effective January 1, 2008, the Company adopted SFAS
No. 157, Fair Value Measurements
(SFAS 157). In February 2008, the FASB issued
FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157, which
provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in
the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of
SFAS 157 with respect to its financial assets and
liabilities only. SFAS 157 defines fair value, establishes
a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under
SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes
a fair value hierarchy based on three levels of inputs, of which
the first two are considered observable and the last
unobservable, that may be used to measure fair value which are
the following:
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Level 1 Quoted prices in active markets for
identical assets or liabilities
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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.
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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
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The adoption of this statement did not have a material impact on
the Companys consolidated results of operations and
financial condition.
Effective January 1, 2008, the Company adopted SFAS No. 159
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
allows an entity the irrevocable option to elect fair value for
the initial and subsequent measurement for specified financial
assets and liabilities on a contract-by-contract basis. The
Company did not elect to adopt the fair value option under this
Statement.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141(R)). Under
SFAS No. 141(R), an entity is required to recognize
the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair value
on the acquisition date. It further requires that
acquisition-related costs be recognized separately from the
acquisition and expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition
date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition,
acquired in-process research and development (IPR&D) is
capitalized as an intangible asset and amortized over its
estimated useful life. The adoption of SFAS No. 141(R)
will change our accounting treatment for business combinations
on a prospective basis beginning in the first quarter of fiscal
year 2009.
110
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
changes the accounting and reporting for minority interests,
which will be recharacterized as non-controlling interests and
classified as a component of equity. SFAS No. 160 is
effective for us on a prospective basis for business
combinations with an acquisition date beginning in the first
quarter of fiscal year 2009. As of December 29, 2007, we
did not have any minority interests. The adoption of
SFAS No. 160 is not expected to impact our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133
(SFAS No. 161). The standard requires
additional quantitative disclosures (provided in tabular form)
and qualitative disclosures for derivative instruments. The
required disclosures include how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows; relative volume of
derivative activity; the objectives and strategies for using
derivative instruments; the accounting treatment for those
derivative instruments formally designated as the hedging
instrument in a hedge relationship; and the existence and nature
of credit-related contingent features for derivatives.
SFAS No. 161 does not change the accounting treatment
for derivative instruments. SFAS No. 161 is effective
for us in the first quarter of fiscal year 2009.
Comparison
of three months ended March 31, 2008 and March 31,
2007
Results
of Operations
The following table sets forth certain operating data as a
percentage of net revenues:
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Three Months Ended March 31,
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2008
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2007
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(In thousands, except percentage data)
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Net revenues
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$
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14,371
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100.0
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%
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$
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17,772
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100.0
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%
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Cost of revenues
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9,143
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63.6
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10,400
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58.5
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Gross profit
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5,228
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36.4
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7,372
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41.5
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Operating expenses:
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Research and development
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3,023
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21.0
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4,591
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25.8
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Selling, general and administrative
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4,941
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34.4
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4,940
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27.8
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Impairment of property, plant and equipment
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n/a
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859
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4.8
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Gain on sale of technology and tangible assets
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n/a
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(8,481
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)
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(47.7
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Operating income (loss)
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(2,736
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(19.0
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)
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5,463
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30.8
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Non-operating income (loss), net
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477
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3.3
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(86
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(0.5
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Income (loss) before income taxes
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(2,259
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(15.7
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)
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5,377
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30.3
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Provision for income taxes
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539
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3.8
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774
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4.4
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Net income (loss)
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$
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(2,798
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(19.5
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)%
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$
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4,603
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25.9
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%
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Net
Revenues
Net revenues were $14.4 million for the three months ended
March 31, 2008, a decrease of $3.4 million, or 19.1%,
compared to $17.8 million for the three months ended
March 31, 2007, primarily due to decreased revenues from
DVD products.
111
The following table summarizes percentage of net revenues by our
two business segments and their major product categories:
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Three
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Months
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Ended March 31,
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2008
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2007
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Video Business:
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DVD
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79
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%
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78
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%
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VCD
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9
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%
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6
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%
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License & royalty
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(2
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)%
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4
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%
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Other
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14
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%
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11
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%
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Total Video Business
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100
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%
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99
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%
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Digital Imaging Business
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1
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%
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Total
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100
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%
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100
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%
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Video business revenues included revenues from DVD, VCD,
Recordable products, license and royalty payments for DVD
technology, and others.
DVD revenue consists of revenue from sales of DVD player chip
and recordable chips, which includes integrated encoder and
decoder. DVD revenue was $11.4 million for the three months
ended March 31, 2008, a decrease of $2.5 million, or
18.0%, from revenue of $13.9 million for the three months
ended March 31, 2007, primarily due to lower sales volume,
and partially offset by the increase in average selling price
(ASP). Sales volume decreased by 28.9% while ASP
increased by 15.2%. We sold approximately 3.2 million units
and 4.5 million units for the three months ended
March 31, 2008 and 2007, respectively. We plan to continue
sales in certain niche markets of the larger DVD market but do
not intend to compete for a very large portion of the overall
DVD market; therefore, our market share has decreased from the
first quarter of 2007 and we anticipate relatively flat revenue
in 2008.
VCD revenue includes revenue from sales of VCD chips. VCD
revenue was $1.3 million for the three months ended
March 31, 2008, an increase of $0.2 million, or 18.2%,
from revenue of $1.1 million for the three months ended
March 31, 2007, primarily due to the slight increases in
both sales volume and ASP. In September 2005, we licensed to
Silan the right to manufacture and market our VCD technology to
customers in China and India. In 2007, Silan started shipping a
new integrated version, utilizing Silans front-end optical
controller and our back-end video processor VCD chip for which
they pay us a royalty. Royalty revenue from this agreement has
to date been insignificant. We expect VCD revenues, including
licence revenue will decrease in 2008 as the VCD market
continues to be replaced with lower end DVD units.
License and royalty revenue was $0.8 million for the three
months ended March 31, 2007. License and royalty revenue
consists of payments from Silan to whom we had licensed the
right to produce and distribute our next-generation standard
definition DVD chips. Under this agreement, we accrued
$0.3 million in royalty obligations to Silan as a reduction
in license and royalty revenue during the three months ended
March 31, 2008. On April 23, 2008, this license was
replaced by the ESS-Silan Audio and Video Technology License
Agreement. Silan no longer has a license to incorporate our
technology in standard-definition DVD products and we are not
obligated to pay Silan any further royalty.
Other revenue includes revenue from legacy products which
includes sales of PC Audio chips, communication, consumer
digital media and miscellaneous chips. Other revenue was
$1.9 million for each of the three months ended
March 31, 2008 and 2007.
Digital Imaging revenue includes revenue from sales of image
sensor chips and image processor chips. There were no shipments
of Digital Imaging products for the three months ended
March 31, 2008. For the three months ended March 31,
2007, Digital Imaging revenue was $0.1 million. As part of
our reorganization plan previously discussed, on
February 16, 2007, we reduced operation of our camera phone
image sensor business. We plan to
112
pursue licensing of our patents for image sensor technology but
we will no longer design, develop and market imaging sensor
chips. We do not expect any revenue from this segment in 2008.
International revenue accounted for almost all of net revenues
for the three months ended March 31, 2008 and 2007. Our
international sales are denominated in U.S. dollars.
Gross
Profit
Gross profit was $5.2 million or 36.4% of net revenue for
the three months ended March 31, 2008 compared to a gross
profit of $7.4 million or 41.5% of net revenue for the
three months ended March 31, 2007. Gross profit for the
first quarter of 2007 includes license and royalty income of
$0.8 million. License and royalty revenues have no related
cost of sales. During the three months ended March 31, 2008
and 2007, we recognized approximately $0.6 million and
$2.4 million, respectively, of revenue on products for
which the inventory costs were written off in a prior period.
Further, during the three months ended March 31, 2007, we
provided new or increased inventory write-offs of approximately
$2.5 million on other unsold products in inventory. Accrued
adverse purchase commitments of approximately $1.5 million
as of December 31, 2006 were reversed in the first quarter
of 2007 when it was determined that payment of these amounts
would not be required. Excluding license and royalty revenue and
adjustments to inventory and related purchase commitments
reserves, gross profit as a percentage of product revenue has
increased in the first quarter of 2008 as compared to the same
period last year. Contributing to the increase in gross margin
were overall increased ASPs and a decrease in average cost per
unit. ASPs increased due to the decision to substantially reduce
shipments to customers in China due to competitiveness and due
to increased shipments of the newer Phoenix I and
Phoenix II DVD products.
Research
and Development Expenses
Research and development expenses were $3.0 million, or
21.0% of net revenues, for the three months ended March 31,
2008 compared to $4.6 million, or 25.8% of net revenues,
for the three months ended March 31, 2007. The
$1.6 million, or 34.8%, decrease in research and
development was primarily due to $1.7 million decrease in
salaries and fringe benefits due to lower headcount,
$0.6 million decrease in depreciation, $0.1 million
decrease in rent expenses, and partially offset by
$0.5 million increase in mask and engineering test
materials expenses. We expect research and development expenses
to remain relatively flat in 2008.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$4.9 million, or 34.4% of net revenues, for the three
months ended March 31, 2008 compared to $4.9 million,
or 27.8% of net revenues, for the three months ended
March 31, 2007. Legal and professional fees increased by
$1.4 million primarily due to expenses related to the
proposed merger with Imperium Master Fund, Ltd. This increase
was offset by the $0.8 million decrease in salaries and
fringe benefits due to lower headcount, $0.5 million
decrease in depreciation and other administrative expenses, and
$0.2 million decrease in consulting and ourside services.
Impairment
of Property, Plant and Equipment
In connection with the substantial termination of the production
and sale of our camera phone image sensors in the first quarter
of 2007, we recognized a $0.9 million impairment charge on
property, plant and equipment related to these products.
Gain
on Sale of Technology and Tangible Assets
On February 16, 2007, we entered into asset purchase
agreements with SiS, pursuant to which we transferred employees,
sold certain tangible assets, and sold and licensed intellectual
property related to our HD-DVD and Blu-ray DVD technologies for
aggregate proceeds of approximately $13.5 million. Of this
amount, $9.5 million was received during the first quarter
of 2007. The gain of $8.5 million recognized in the first
quarter 2007 includes the proceeds received, net of the book
value of assets sold and certain transaction expenses related to
the sale. We have not recognized any revenue related to HD-DVD
or Blu-ray DVD products in any period.
113
Non-operating
Income (Loss), Net
Net non-operating income was $0.5 million for the three
months ended March 31, 2008 compared to net non-operating
loss of $0.1 million for the three months ended
March 31, 2007. Net non-operating income for the three
months ended March 31, 2008 mainly consisted of interest
income and foreign currency exchange gain. For the three months
ended March 31, 2007, non-operating loss consisted
primarily of interest income and a $0.5 million impairment
charge on a long-term investment.
Provision
for (Benefit from) Income Taxes
Our income tax expense was $0.5 million for the three
months ended March 31, 2008 compared to $0.8 million
for the three months ended March 31, 2007. The tax expense
for the current quarter was primarily the result of foreign
taxes and interest accrued on uncertain tax balances. The tax
provision for the three months ended March 31, 2008
includes interest of $0.5 million on income tax liabilities.
Comparison
of Year ended December 31, 2007 and December 31,
2006
Results
of Operations
The following table sets forth our results of operations for the
fiscal years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues
Net revenues were $68.3 million in 2007 and
$100.5 million in 2006. Net revenues decreased by
$32.2 million, or 32.0%, from 2006 to 2007, due to
decreased revenues in all product categories in both of our
business segments except revenue from legacy products which
include PC Audio chips, communication modem, consumer digital
media and other miscellaneous chips.
114
The following table summarizes percentage of net revenue by our
two business segments and their major product categories:
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
Video business revenues included revenues from DVD, VCD,
Recordable, License and Royalty payments for DVD technologies
and Other.
DVD revenue includes revenue from sales of DVD decoder chips and
recordable chips. DVD revenues were $53.7 million in 2007,
a decrease of $14.4 million, or 21.1%, from 2006 to 2007,
primarily due to lower overall sales volume and partially offset
by the improvement in average selling price (ASP).
Sales volume decreased by 8.2% and ASP increased by 10.0%. We
sold approximately 15.6 million units and 17.0 million
units in 2007 and 2006, respectively. We plan to continue sales
in certain niche markets of the larger DVD market but do not
intend to compete for a very large portion of the overall DVD
market, therefore, our market share continues to decrease with
relatively flat revenue in 2008. On November 3, 2006, we
licensed to Hangzhou Silan Microelectronics Co., Ltd.
(Silan) the development, manufacture and sale of our
next generation standard definition DVD chips, the
Phoenix II and LMX II, and also granted Silan a
non-exclusive license for our standard definition DVD
technology, although Silan has recently notified us that it does
not intend to proceed with the development, manufacture and sale
of any of the chips or technology we licensed to Silan and we
have sent Silan a notice to cure this breach of our agreements.
VCD revenue includes revenue from sales of VCD chips. We have
experienced a significant decline in our VCD business over the
last few years. VCD revenues were $4.8 million in 2007, a
decrease of $13.4 million, or 73.6%, from 2006 to 2007,
primarily due to lower sales volume. Sales volume decreased by
12.2 million units, or 83.6%, to 2.4 million units
from 14.6 million units in 2006. The decline in VCD
business is due to the replacement of the VCD market with lower
priced DVD units. In September 2005, we licensed to Silan the
right to manufacture and market our VCD technology to customers
in China and India. In 2007, Silan started shipping a new
integrated version, utilizing Silans front-end optical
controller and our back-end video processor VCD chip for which
they pay us a royalty. Royalty revenue from this agreement has
to date been insignificant. We expect VCD revenues, including
license revenue will continue to decrease in 2008 as the VCD
market continues to be replaced with lower end DVD units.
License and royalty consists of license payments from Silan and
NEC Electronics Corporation (NEC). License and
royalty revenue were $0.8 million and $2.7 million for
the year ended December 31, 2007 and 2006, respectively.
The $0.8 million in 2007 was from Silan. The
$2.7 million in 2006 consists of $2.3 million from
Silan and $0.4 million from NEC for using certain of our TV
audio decoder technology. All payments from Silan were related
to the DVD Technology License Agreement that we entered in
November 2006.
Other revenue includes revenues from legacy products which
includes sales of PC Audio chips, communication, consumer
digital media and other miscellaneous chips. Other revenue was
$8.9 million in 2007, an increase of $2.1 million, or
30.9%, from 2006 to 2007 primarily due to higher sales volume of
consumer digital media products. Units sold for other revenue
products increased by 75.0%. We sold approximately
2.1 million units and 1.2 million units in 2007 and
2006, respectively.
115
Digital Imaging revenues were comprised of revenues from sales
of image sensor chips, image processor chips and camera lens
modules. Digital Imaging revenues were $0.2 million in
2007, a decrease of $4.6 million, or 95.7%, from 2006 to
2007. As part of our reorganization plan previously discussed,
on February 16, 2007, we reduced operation of our camera
phone image sensor business. We plan to pursue licensing of our
patents for image sensor technology but we will no longer
design, develop and market imaging sensor chips. We do not
expect any revenue from this segment in 2008.
International revenues accounted for approximately 100% of the
revenue in both 2007 and 2006. All of our international sales
are denominated in U.S. dollars. We expect that
international sales will continue to remain a high percentage of
our net revenues in the foreseeable future.
Gross
Profit
Gross profit was $25.7 million or 37.6% of net revenue for
the year ended December 31, 2007 compared to a gross profit
of $2.8 million or 2.8% of net revenue for the year ended
December 31, 2006. Gross profit for the years ended
December 31, 2007 and 2006 include license and royalty
income of $0.8 million and $2.7 million, respectively.
License and royalty revenues had no related cost of sales.
During the year ended December 31, 2007, we recognized
approximately $6.2 million of revenue on products for which
the inventory costs were fully reserved in a prior year.
Further, during 2007 we provided new or increased inventory
reserves of approximately $1.3 million on other unsold
products in inventory. Accrued adverse purchase commitments of
approximately $1.5 million as of December 13, 2006
were released in 2007 when it was determined that this amount
would not be required. For the year ended December 31,
2006, we recognized approximately $6.2 million of revenue
on products for which inventory costs were fully reserved in a
prior year. Further, during 2006 we provided new or increased
inventory reserves of approximately $14.6 million on other
unsold products in inventory. Also, contributing to the increase
in gross margin in fiscal 2007 were increased ASPs and a
decrease in average cost per unit. ASPs increased due to the
decision to substantially reduce shipments to customers in China
due to competitiveness and due to increased shipments of the
newer Phoenix I DVD products. The relative increase in Phoenix I
shipments as compared to older Vibratto II DVD products has
also reduced average cost per unit both due to lower
manufacturing costs and elimination of royalties payable on
shipment of Vibratto II products. Further, as a result of
our downsizing, ESS has significantly reduced fixed overhead
expenses.
Research
and Development Expenses
Research and development expenses were $12.6 million, or
18.4% of net revenues in 2007 and $36.0 million, or 35.9%
of net revenues in 2006. The $23.4 million, or 65.0%,
decrease in research and development from 2006 to 2007 was
primarily due to the strategic review announced previously and
is comprised of the followings: $13.3 million decrease in
salaries and fringe benefits, $1.3 million decrease in
stock-based compensation expense under SFAS 123(R),
$2.6 million decrease in engineering test materials and
operating supplies, $1.9 million decrease in depreciation,
$1.3 million decrease in mask sets, $0.9 million
decrease in facility related expenses, and an approximate
$1.1 million decrease in other expenses. Excluding
approximately $2.8 million of expenses incurred by our
Digital Imaging segment in early 2007, we expect research and
development expenses to remain relatively flat in 2008.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$18.2 million, or 26.7% of net revenues in 2007 and
$27.6 million, or 27.4% of net revenues in 2006. The
$9.4 million, or 34.1%, decrease in selling, general and
administrative expenses from 2006 to 2007 was primarily due to
the strategic review announced previously and is substantially
all a result of a decrease in compensation expense, including
expense resulting from SFAS 123(R). We expect selling,
general and administrative expenses to remain relatively flat in
2008.
Impairment
of Property, Plant and Equipment
In connection with the strategic review of operations and
business plan announced in September 2006, we substantially
terminated the operations of our camera phone image sensor
business during the first quarter of 2007.
116
As a result, we have recorded a $0.9 million impairment
charge for property, plant and equipment related to our image
sensor business.
Gain
on Sale of Technology and Tangible Assets
On February 16, 2007, we entered into asset purchase
agreements with SiS, pursuant to which we transferred employees,
sold certain tangible assets and licensed intellectual property
related to our HD-DVD and Blu-ray DVD technologies for aggregate
proceeds of approximately $13.5 million. Of this amount,
$9.5 million was received during the first quarter of 2007,
$2.0 million was received during the second quarter upon
SiS final certification of all transferred and licensed
technology, with the remaining $2.0 million subject to
adjustment upon settlement of any escrow claims by SiS through
August 16, 2008. The gain recognized during the year ended
December 31, 2007 includes the proceeds received, net of
the book value of assets sold and certain transaction expenses
related to the sale. We have not recognized any revenue related
to HD-DVD or Blu-ray DVD products in any period.
Non-operating
Income (Loss), Net
Non-operating income, net was $1.7 million in 2007 compared
to non-operating loss, net was $0.7 million in 2006. In
2007, non-operating income, net consisted primarily of interest
income of $2.0 million and currency exchange gain of
$0.3 million, partially offset by investment write-down of
$0.6 million. In 2006, non-operating loss, net consisted
primarily of investment write-downs of $3.5 million of
which $3.0 million related to the investment in Best Elite
International Limited, partially offset by interest income of
$2.6 million.
Provision
for (Benefit from) Income Taxes
Our effective tax provision was $3.1 million, or 50.1% for
2007 compared to a tax benefit of $17.3 million, or 28.2%
for 2006. The primary reason for the change in our effective tax
rate for 2007 was additional interest expense on unrecognized
tax benefits recorded during 2007 and a benefit recognized
during 2006 related to the expiration of the statute of
limitations on various uncertain tax positions.
Our effective tax provision rate of 50.1% for 2007 was higher
than the federal and state statutory rate of 40% due to interest
expense on unrecognized tax benefits offset, in part, by foreign
income taxed at lower rates. The effective tax benefit rate of
28.2% for 2006 was lower than the combined federal and state
statutory rate primarily as a result of foreign losses which
could not be benefited, partially offset by benefits related to
U.S. tax losses and research and development tax credits.
Effective January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). This interpretation clarifies the
criteria for recognizing income tax benefits under FASB
Statement No. 109, Accounting for Income Taxes, and
requires additional disclosures about uncertain tax positions.
Under FIN 48 the financial statement recognition of the
benefit for a tax position is dependent upon the benefit being
more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the tax
benefit is then measured and recognized at the largest amount
that is greater than 50 percent likely of being realized
upon ultimate settlement.
Our general policy is to permanently reinvest the net earnings
of our foreign subsidiaries. Accordingly, these earnings have
not been subject to U.S. income taxes. Under certain
circumstances, if we were to repatriate this cash, or a portion
thereof, to the U.S., we could be required to pay
U.S. income taxes on the transfer; however, it is not
practicable to determine the amount of this liability.
117
Comparison
of Year ended December 31, 2006 and December 31,
2005
Results
of Operations
The following table sets forth our results of operations for the
fiscal years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues
Net revenues were $100.5 million in 2006 and
$181.9 million in 2005. Net revenues decreased by
$81.4 million, or 44.8%, from 2005 to 2006, due to
decreased revenues in all product categories in both of our
business segments except revenue from legacy products which
include PC Audio chips, communication modem, consumer digital
media and other miscellaneous chips.
The following table summarizes percentage of net revenue by our
two business segments and their major product categories:
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
Video business revenues included revenues from DVD, VCD,
Recordable, License and Royalty payments for DVD technologies
and Other.
DVD revenue includes revenue from sales of DVD decoder chips and
recordable chips. DVD revenues were $68.1 million in 2006,
a decrease of $35.2 million, or 34.1%, from 2005 to 2006,
primarily due to lower overall unit sales as a result of intense
competition, partially offset by a higher average selling price
(ASP). Sales volume decreased by 43.3% whereas ASP
increased by 16.2%. We sold approximately 22.8 million
units and 40.2 million
118
units in 2006 and 2005, respectively. In 2006, we recognized
$2.7 million in license revenue and in 2005 we recognized
$20.0 million in royalty revenue from MediaTek for a
copyright infringement settlement.
VCD revenue includes revenue from sales of VCD chips. We have
experienced a significant decline in our VCD business over the
last few years. VCD revenues were $18.2 million in 2006, a
decrease of $13.3 million, or 42.2%, from 2005 to 2006,
primarily due to lower overall ASP and sales volume. ASP
decreased by 25.0% and units sold decreased by 23.0%. We sold
approximately 15.1 million units of our VCD chip products
in 2006 as compared to approximately 19.6 million units in
2005. The decline in VCD business is due to the replacement of
the VCD market with lower priced DVD units. In September 2005,
we entered into the Silan-ESS Cooperation in VCD Agreement with
Silan, where we license to Silan the right to produce and
distribute our VCD backend decoding chips in China and India and
to collaborate with Silan to produce a single-chip VCD product,
where we will share with Silan the gross margin of each
single-chip VCD sold in the future.
License and royalty revenue consists of license payments from
Silan and NEC Electronics Corporation (NEC), and
royalty payments from MediaTek. The license and royalty revenue
was $2.7 million for the year ended December 31, 2006
and consists of $2.3 million from Silan related to the DVD
Technology License Agreement that we entered in November 2006
and $0.4 million from NEC for using certain of our TV audio
decoder technology. Silan has recently notified us of its
intention not to proceed under the DVD Technology License
Agreement and we have sent Silan a demand to cure. Royalty
revenue was $20.0 million from MediaTek for the year ended
December 31, 2005. Under the settlement agreement between
ESS and MediaTek dated June 11, 2003 for a non-exclusive
license to our proprietary DVD user interface and other key DVD
software, MediaTek was obligated to pay us ongoing royalties
with a quarterly cap of $5.0 million and lifetime cap of
$45.0 million. All contractual payments have been received
from MediaTek as of December 31, 2005.
In addition, we also have other revenue from legacy and other
products which includes sales of PC Audio chips, communication,
consumer digital media and other miscellaneous chips. Other
revenue was $7.0 million in 2006, an increase of
$2.3 million, or 48.9%, from 2005 to 2006 primarily due to
higher sales volume. Units sold for other revenue products
increased by 50.0%. We sold approximately 1.2 million units
and 0.8 million units in 2006 and 2005, respectively.
Digital Imaging revenues were comprised of revenues from sales
of image sensor chips, image processor chips and camera lens
modules. Digital Imaging revenues were $4.7 million in
2006, a decrease of $17.7 million, or 79.0%, from 2005 to
2006, primarily due to lower sales volume and ASP as a result of
our decision to exit lower resolution products and focus on the
development of higher resolution products. For the year ended
December 31, 2006, units sold decreased by 67.9% and ASP
decreased by 33.2% from 2005. We sold approximately
2.5 million units and 7.8 million units in 2006 and
2005, respectively. As part of our new business strategy
previously discussed, on February 16, 2007, we reduced
operation of our camera phone image sensor business. We plan to
pursue licensing of our patents for image sensor technology but
we will no longer design, develop and market imaging sensor
chips.
International revenues accounted for approximately 100% of the
revenue in 2006 and almost all of the revenue in 2005. All of
our international sales are denominated in U.S. dollars. We
expect that international sales will continue to remain a high
percentage of our net revenues in the foreseeable future.
Gross
Profit
Gross profit was $2.8 million or 2.8% of net revenue for
the year ended December 31, 2006 compared to a gross profit
of $12.6 million or 6.9% of net revenue for the year ended
December 31, 2005. The decrease in gross profit was
primarily due to a decrease of $20.0 million in MediaTek
royalty revenue from 2005 to 2006. For the years ended
December 31, 2006 and 2005, new or increased inventory
reserves exceeded revenue derived from products fully reserved
in a prior year. The net effect on gross profit was a decrease
of approximately $8.5 million for 2006 and
$2.3 million for 2005.
119
Research
and Development Expenses
Research and development expenses were $36.0 million, or
35.9% of net revenues in 2006 and $34.0 million, or 18.6%
of net revenues in 2005. Research and development expenses
increased by $2.0 million, or 6.1%, from 2005 to 2006,
primarily due to the $1.9 million increase in accrued bonus
expense, $1.7 million increase in stock-based compensation
expense under SFAS No. 123(R), $0.5 million
increase in consulting and outside services, and
$0.2 million increase in travel expense, which was
partially offset by $1.0 million decrease in salaries
expense resulting from the shift of research and development
headcount to Asia, $1.0 million decrease in mask sets and
$0.4 million decrease in depreciation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses were
$27.6 million, or 27.4% of net revenues in 2006 and
$35.0 million, or 19.2% of net revenues in 2005. Selling,
general and administrative expenses decreased by
$7.4 million, or 21.2%, from 2005 to 2006, primarily due to
the $3.0 million decrease in legal expenses as more
expenses were incurred in 2005 related to the litigation with
Brent Townshend over unfair competition and patent misuse, as
well as patent filing, $2.5 million decrease in outside
commission due to lower revenue, $2.2 million decrease in
salaries and fringe benefits due to lower headcount,
$1.3 million decrease in amortization of intangible assets
as they became fully amortized during 2006, and
$1.1 million decrease in other expenses; which was
partially offset by $1.7 million increase in stock-based
compensation expense under SFAS No. 123(R),
$0.6 million increase in depreciation expense related to
the newly upgraded Oracle software version 11i at the beginning
of 2006, and $0.2 million increase in consulting and
contract labor.
Impairment
of Goodwill and Intangible Assets
In 2005, our review of intangible assets in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS No. 144) indicated
that other intangible assets associated with the acquisition of
Divio, Inc. of $1.3 million had been impaired. In addition,
we conducted an annual goodwill impairment review during the
fourth quarter in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and other
Intangible Assets, (SFAS No. 142).
The result of the analysis indicated that all of the
$41.4 million goodwill on our balance sheet was impaired.
This goodwill arose from the acquisitions of Pictos
Technologies, Inc., which was completed on June 9, 2003,
and Divio, Inc., which was completed on August 15, 2003.
Non-operating
Income (Loss), Net
Non-operating loss, net was $0.7 million in 2006 compared
to non-operating income, net of $1.3 million in 2005. In
2006, non-operating loss, net consisted primarily of investment
write downs of $3.5 million, partially offset by interest
income of $2.6 million. In 2005, non-operating income, net
consisted primarily of interest income of $2.2 million and
rental income of $0.3 million, which was partially offset
by investment write down of $1.3 million.
Provision
for (Benefit from) Income Taxes
Our effective tax benefit was $17.3 million, or 28.2% for
2006 compared to a tax provision of $1.8 million, or 1.8%
for 2005. The primary reason for the change in our effective tax
rate for 2006 was a benefit related to the expiration of the
statute of limitations on various uncertain tax positions.
Our effective tax benefit rate of 28.2% for 2006 and effective
tax provision rate of 1.8% for 2005 were lower than the combined
federal and state statutory rate of 40% primarily as a result of
foreign losses which could not be benefited, partially offset by
benefits related to U.S. tax losses and research and
development tax credits.
Liquidity
and Capital Resources
Three months ended March 31, 2008 compared to the three
months ended March 31, 2007:
Net cash used in operating activities was $0.8 million and
$4.3 million for the three months ended March 31, 2008
and 2007, respectively. The net cash used in operating
activities for the three months ended March 31, 2008
120
was primarily attributable to a net loss of $2.8 million,
and the increase in accounts receivable of $2.3 million,
and partially offset by the increases in accounts payable and
accrued expenses of $2.7 million, depreciation of
$0.8 million, income tax payable and deferred income taxes
of $0.5 million, and inventory $0.4 million. After
adjusting for the net gain of $8.5 million relating to the
sale of technology and tangible assets to SiS and the
$0.9 million impairment of property, plant and equipment,
the net cash used in operating activities for the three months
ended March 31, 2007 was primarily attributable to an
increase in other receivables of $3.5 million related to an
insurance receivable on the securities litigation settlement and
an increase in accounts receivable of $1.6 million, and
partially offset by net income of $4.6 million,
depreciation of $1.0 million and a decrease in net
inventory of $1.8 million.
Net cash used in investing activities for the three months ended
March 31, 2008 was $1.2 million and the net cash
provided by investing activities for the three months ended
March 31, 2007 was $13.8 million. The net cash used by
investing activities for the three months ended March 31,
2008 was primarily attributable to the purchase of short-term
investments of $2.2 million, offset by the proceeds from
sales of short-term investments of $1.0 million. The net
cash provided by investing activities for the three months ended
March 31, 2007 was primarily attributable to the proceeds
from sales of short-term investments of $5.5 million and
the proceeds from sale of technology and tangible assets of
$9.4 million, partially offset by the purchase of
short-term and long-term investments each of $0.5 million.
There were no significant financing activities in the three
months ended March 31, 2008 and 2007.
For the years ended December 31, 2007, 2006, and 2005:
Since inception, we have financed our cash requirements from
cash generated by operations, the sale of equity securities, and
short-term and long-term debt. At December 31, 2007, we had
cash, cash equivalents and short-term investments of
$49.9 million and working capital of $56.0 million.
Net cash used in operating activities was $4.5 million for
the year ended December 31, 2007, $48.2 million for
the year ended December 31, 2006, and $25.0 million
for the year ended December 31, 2005. After adjusting for
net gains and losses of $8.8 million relating to the sale
of technology and tangible assets to SiS, impairment and sale of
property, plant and equipment and write-down of equity
investments, the net cash used in operating activities for the
year ended December 31, 2007 was primarily attributable to
a decrease in accounts payable and accrued expenses of
$12.5 million due to lower accrued compensation of
$3.9 million resulting from lower headcount, lower accrued
adverse inventory commitments of $3.4 million, and lower
accounts payable trade and other of $3.0 million resulting
from the our strategic review of operations announced in
September 2006, partially offset by a decrease in accounts
receivable of $3.9 million, depreciation of
$3.6 million, and net income of $3.1 million. The net
cash used in operating activities for the year ended
December 31, 2006 was primarily attributable to a net loss
of $44.1 million, a decrease in accounts payable and
accrued expenses of $15.5 million due to a decrease in
production activities and a decrease in income tax payable and
deferred income taxes of $19.4 million due to a favorable
tax adjustments of $15.3 million related to the expiration
of certain statutes of limitations and certain tax refunds,
partially offset by a decrease in accounts receivables of
$5.8 million, a decrease in other receivables of
$4.6 million, a decrease in net inventories of
$4.2 million, and depreciation and amortization of
$6.8 million. The net cash used in operating activities for
the year ended December 31, 2005 was primarily attributable
to a net loss of $99.6 million, and a decrease in accounts
payable and accrued expenses of $14.7 million, partially
offset by an impairment charge for goodwill and intangible
assets of $42.7 million, and a decrease in net inventories
of $33.2 million, and depreciation and amortization of
$10.3 million.
Net cash provided by investing activities was $13.8 million
for the year ended December 31, 2007, $18.9 million
for the year ended December 31, 2006, and
$52.6 million for the year ended December 31, 2005.
The net cash provided by investing activities for the year ended
December 31, 2007 was primarily attributable to the
proceeds from sale of technology and tangible assets of
$11.4 million and the maturities and sales of short-term
investments of $8.3 million, partially offset by the
purchase of short-term investments of $4.8 million and
purchase of property, plant and equipment of $0.6 million.
During 2007 we made a $0.5 million long-term investment
that was subsequently determined to be impaired. The net cash
provided by investing activities for the year ended
December 31, 2006 was primarily attributable to the
proceeds from the maturities and sales of short-term investments
of $35.4 million, partially offset by the purchase of
short-term investments of $14.4 million and
121
purchase of property, plant and equipment of $1.9 million.
The net cash provided by investing activities for the year ended
December 31, 2005 was primarily attributable to the
proceeds from the maturities and sales of short-term investments
of $98.6 million, partially offset by the purchase of
short-term and long-term investments of $44.1 million and
purchase of property, plant and equipment of $4.7 million.
Net cash provided by financing activities was $30,000 for the
year ended December 31, 2007, and net cash used in
financing activities was $5.6 million for the year ended
December 31, 2006, and $0.5 million for the year ended
December 31, 2005. The net cash provided by the financing
activities for the year ended December 31, 2007 was
attributable to the proceeds from the issuance of common stock
under the employee stock purchase plan. The net cash used in
financing activities for the year ended December 31, 2006
was attributable to cash paid for repurchase of common stock of
$5.9 million, offset by the proceeds from the issuance of
common stock under the employee stock purchase plan and stock
option plans of $0.2 million. The net cash used in
financing activities for the year ended December 31, 2005
was attributable to cash paid for repurchase of common stock of
$1.2 million, offset by the proceeds from the issuance of
common stock under the employee stock purchase plan and stock
option plans of $0.7 million.
To date, we have not declared or paid cash dividends to our
shareholders and do not anticipate paying any dividend in the
foreseeable future due to a number of factors, including the
volatile nature of the semiconductor industry and the potential
requirement to finance working capital in the event of a
significant upturn in business. We reevaluate this practice from
time to time but are not currently contemplating the payment of
a cash dividend.
For the years ended December 31, 2006 and 2005, and the
three months ended March 31, 2008, we incurred significant
operating losses and negative cash flows. For the year ended
December 31, 2007, operating income was only achieved
through a gain on sale of assets and technology while operating
cash flow was still negative. We believe that we have the cash
resources to fund our operations for at least the next twelve
months. The semiconductor industry in which we operate is
characterized by rapid technological advances, short product
lives and significant price reductions. If we are unable to meet
these challenges, then we will not achieve profitable
operations. We may determine that we require additional capital
to achieve our business objectives. There can be no assurances
that such capital will be available or available on terms that
are acceptable to us, which could adversely affect our financial
position, results of operations or cash flows.
Our cash, cash equivalents and short-term investment portfolio
as of March 31, 2008 consists of money market funds, time
deposits, federal government agency obligations, and foreign and
public corporate debt securities. We follow an established
investment policy and set of guidelines to monitor, manage and
limit our exposure to interest rate and credit risk. The policy
sets forth credit quality standards and limits our exposure to
any one issuer. As a result of current adverse financial market
conditions, some financial instruments, such as structured
investment vehicles, sub-prime mortgage-backed securities and
collateralized debt obligations, may pose risks arising from
liquidity and credit concerns. As of March 31, 2008, we had
no direct holdings in these categories of investments and our
exposure to these financial instruments through our indirect
holdings in money market mutual funds was not material to total
cash, cash equivalents and short-term investments. As of
March 31, 2008, we had no recorded impairment charges
associated with our short-term investment portfolio. While we
cannot predict future market conditions or market liquidity, we
have taken steps, including regularly reviewing our investments
and associated risk profiles, which we believe will allow us to
effectively manage the risks of our investment portfolio.
Contractual
Obligations, Commitments and Contingencies
The following table sets forth the amounts of payments due under
specified contractual obligations, aggregated by category of
contractual obligations, as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
As of December 31, 2007, our commitments to purchase
inventory from the third-party contractors aggregated
approximately $4.6 million. Additionally, as of
December 31, 2007, commitments for service, license and
other operating supplies totaled $4.3 million.
Due to the uncertainty with respect to the timing of future cash
flows associated with our unrecognized tax benefits at
December 31, 2007, we are unable to make reasonably
reliable estimates of the period of cash settlement with
respective taxing authorities. Therefore, $35.7 million of
unrecognized tax benefits that may result in a cash payment have
been excluded from the contractual obligations table above. See
Note 7 Income Taxes to the consolidated
financial statements for a discussion on income taxes.
The total rent expense under all operating leases was
approximately $2.8 million, $4.3 million and
$4.6 million for fiscal years 2007, 2006 and 2005,
respectively.
We enter into various agreements in the ordinary course of
business. Pursuant to these agreements, we may agree to
indemnify our customers for losses suffered or incurred by them
as a result of any patent, copyright, or other intellectual
property infringement claims by any third party with respect to
our products. These indemnification obligations may have
perpetual terms. We estimate the fair value of our
indemnification obligations as insignificant, based upon our
history of litigation concerning product and patent infringement
claims. Accordingly, we have no liabilities recorded for
indemnification under these agreements as of December 31,
2007.
We have agreements whereby our officers and directors are
indemnified for certain events or occurrences while the officer
or director is, or was serving, at our request in such capacity.
The maximum potential amount of future payments we could be
required to make under these indemnification agreements is
unlimited. However, we have a directors and officers
insurance policy that may reduce our exposure and enable us to
recover a portion of any future amounts paid. As a result of our
insurance policy coverage, we believe the estimated fair value
of these indemnification agreements is minimal.
From time to time, we are subject to legal proceedings and
claims, including claims of alleged infringement of trademarks,
copyrights and other intellectual property rights and other
claims arising out of the ordinary course of business. We may
incur substantial expenses in litigating claims against third
parties and defending against existing and future third-party
claims that may arise. In the event of a determination adverse
to us, we may incur substantial monetary liability and be
required to change our business practices. Either of these
results could have a material adverse effect on our financial
position, results of operations or cash flows. See
Business and Properties of the Company
-
Legal
Proceedings
beginning on page 133.
Off-Balance
Sheet Arrangements
We are not a party to any agreements with, or commitments to,
any special purpose entities that would constitute material
off-balance sheet financing other than the operating lease
obligations listed above.
Quantitative
and Qualitative Disclosures about Market Risk
We are exposed to the impact of foreign currency fluctuations
and interest rate changes which may lead to changes in the
market values of our investments.
Foreign
Exchange Risks
We fund our operations with cash generated by operations, the
sale of marketable securities and short and long-term debt.
Since most of our revenues are international, as we operate
primarily in Asia, we are exposed to market risk from changes in
foreign exchange rates, which could affect our results of
operations and financial condition. In order to reduce the risk
from fluctuation in foreign exchange rates, our product sales
and all of our arrangements with our foundries and test and
assembly vendors are denominated in U.S. dollars. We have
operations in China, Taiwan, Hong Kong, Korea and Canada.
Expenses of our international operations are denominated in each
countrys local currency and therefore are subject to
foreign currency exchange risk; however, through March 31,
2008 we have not experienced any significant negative impact on
our operations as a result of fluctuations in foreign currency
exchange rates. We performed a sensitivity analysis assuming a
hypothetical 10% adverse movement over one quarter in foreign
exchange rates to the foreign subsidiaries and the underlying
exposures described above. As
123
of March 31, 2008, the analysis indicated that these
hypothetical market movements could impact our non-operating
income (loss), net, by approximately $0.6 million. We have
not entered into any currency hedging activities.
Interest
Rate Risks
We also invest in short-term investments. Consequently, we are
exposed to fluctuation in interest rates on these investments.
Increases or decreases in interest rates generally translate
into decreases and increases in the fair value of these
investments. For instance, one percentage point decrease in
interest rates would result in approximately a $0.5 million
decrease in our annual interest income. In addition, the credit
worthiness of the issuer, relative values of alternative
investments, the liquidity of the instrument, and other general
market conditions may affect the fair values of interest rate
sensitive investments. In order to reduce the risk from
fluctuation in rates, we invest in highly liquid corporate and
governmental notes and bonds with contractual maturities of less
than two years. All of the investments in debt securities have
been classified as available-for-sale, and on March 31,
2008, the fair market value of our investments approximated
their costs.
Investment
Risk
We are exposed to market risk as it relates to changes in the
market value of our investments in a public company. We invest
in equity instruments of public companies for business and
strategic purposes and we have classified these securities as
available-for-sale. These available-for-sale equity investments,
primarily in technology companies, are subject to significant
fluctuations in fair market value due to the volatility of the
stock market and the industries in which these companies
participate. Our objective in managing our exposure to stock
market fluctuations is to minimize the impact of stock market
declines to our earnings and cash flows. There are, however, a
number of factors beyond our control. Continued market
volatility, as well as mergers and acquisitions, have the
potential to have a material impact on our results of operations
in future periods.
We are also exposed to changes in the value of our investments
in non-public companies, including
start-up
companies. These long-term equity investments in technology
companies are subject to significant fluctuations in fair value
due to the volatility of the industries in which these companies
participate and other factors.
124
BUSINESS
AND PROPERTIES OF THE COMPANY
Overview
ESS Technology, Inc. was incorporated in California in 1984 and
became a public company in 1995. We have historically operated
in two primary business segments, Video and Digital Imaging,
both in the semiconductor industry serving the consumer
electronics and digital media marketplace.
In our Video business, we design, develop and market highly
integrated analog and digital processor chips and digital
amplifiers. Our digital processor chips drive digital video and
audio devices, including DVD players, Video CD (VCD)
players, consumer digital audio players and digital media
players. We continue to sell certain legacy products we have in
inventory including chips for use in recordable DVD players,
modems, other communication devices and PC audio products. On
September 18, 2006 we announced an ongoing strategic review
of our operations and business plan. In connection with this
strategic review, on November 3, 2006, we licensed to
Hangzhou Silan Microelectronics Co., Ltd. (Silan)
the development, manufacture and sale of our next generation
standard definition DVD chips, the Phoenix II and LMX II,
and also granted Silan a non-exclusive license for our standard
definition DVD technology. On April 23, 2008, we entered
into the ESS-Silan Audio and Video Technology License Agreement
(the License Agreement) with Silan to amend and
restate the ESS-Silan DVD Technology License Agreement, between
the Company and Silan, as amended, dated November 3, 2006.
The Company entered into the License Agreement in order to
license to Silan certain of ESSs audio and video
technology for the purpose of developing, designing,
manufacturing, distributing and selling products incorporating
such technology for which we will be owed royalties. Silan no
longer has a license to incorporate our technology in
standard-definition DVD products. On February 16, 2007, we
sold to Silicon Integrated Systems Corporation and its
affiliates (SiS) our tangible and intangible assets
relating to the development of high definition DVD chips based
on next generation blue laser technology. Also, in connection
with this restructuring strategy, during the first quarter of
2007 we substantially terminated the production and sale of our
camera phone image sensors, which were the only remaining
products of our Digital Imaging segment. We plan to license our
image sensor patents in exchange for royalties, but we will no
longer sell imaging sensor semiconductor chips. We continue to
design, develop and market highly integrated analog and digital
processor chips and digital amplifiers, including chips for
standard definition DVD players primarily for the Korean market,
and chips for digital audio players and digital media players
for all markets. We are now concentrating on our standard
definition DVD chip business and evaluating opportunities to
develop profitable operations.
Our strategy is to focus on the design and development of our
chip products while outsourcing all of our chip fabrication,
assembly, and test operations. All of our products are
manufactured, assembled and tested by independent third parties
primarily in Asia. We market our products worldwide through our
direct sales force, distributors and sales representatives.
Substantially all of our sales are to distributors, direct
customers and end-customers in China, Hong Kong, Taiwan, Japan,
Korea, Indonesia and Singapore. We employ sales and support
personnel located outside of the United States in China, Hong
Kong, Taiwan and Korea to support these international sales
efforts. We expect that international sales will continue to
represent a significant portion of our net revenues. We also
have a number of employees engaged in research and development
efforts outside of the United States. There are special risks
associated with conducting business outside of the United States.
Industry
Background
The conversion of analog to digital technology and the emergence
of Asia as a manufacturing hub for consumer electronic devices
created a growth opportunity for U.S. and foreign companies
in consumer entertainment products during the past decade.
However, in recent years that opportunity has matured, the
technology has become integrated with other complementary
technologies from other industries and competitors have
consolidated into large entities with significant financial and
human resources. The growing complexity of these new
technologies, the commoditization of ASIC semiconductor
products, the emergence of hundreds of design houses in Asia,
the increased regulatory requirements of public companies in the
United States and the emergence of highly educated but lower
cost labor centers in China and other foreign locations has
created a challenging business environment for ESS and for all
fabless semiconductor design houses in the United States.
Today technology advancements are enhancing consumer electronic
product offerings allowing consumers to choose from a virtually
endless variety of features, brands and price points. In
particular, the transition from analog to digital formats has
allowed audio and video data to be compressed with little or no
perceptible audio and image
125
degradation, improving storage and transmission efficiency and
enhancing the consumer experience. Digital formats provide users
with several benefits, including greatly expanded content
selection, accelerated transmission of video and audio content,
random access to data, superior editing capabilities
,
and
enhanced security features such as protection against
unauthorized copying. The technology that has been developed in
recent years to provide these enhancements has been staggering
as has been the amount of resources devoted by companies that
are in these industries.
The television, the telephone and the personal computer
(PC) have emerged as the three principal systems
that manage digital entertainment and information. Of those
systems, the television and the PC are the principal devices for
viewing and manipulating digital content. Digital set-top-boxes
(STBs), DVD players and game consoles connected to
televisions are emerging as the principal platforms for viewing
and listening to entertainment, while PCs remain the principle
platform for storing, and manipulating data and accessing the
internet. The cellular phone is emerging as the principal mobile
device for viewing and transmitting digital content. However,
because of size limitations for screens and keypads other mobile
devices such as PDAs, MPEG Audio Players (MP3s), and
portable DVD players also enjoy sizable end markets.
Increasing advances in semiconductor technology are allowing
these digital products to converge, resulting in cost savings
and added convenience for consumers. At the same time, advances
in communication allow better distribution of information and
entertainment content and provide opportunities for further
development of multimedia products.
This changing consumer market place and this merging of
technologies has caused a consolidation of industries and
companies that had in the past appeared to be unrelated. At the
same time the increasing commoditization of ASIC products has
made economies of scale in purchasing power for raw materials
and economies of scale in technical human resources critical to
survival. Of course, this environment means that suppliers and
vendors like ESS must aggressively compete for business
dominated by large purchasers with the market power to demand
price cuts. This has caused suppliers and vendors like ESS to
cut margins to unsustainable levels with the goals of increasing
market share and maintaining quarterly revenue targets. This
rapid rate of technology change puts even more pressure on
companies that are not first to market as prices erode quickly
with respect to older generation products. It is critical for
companies like ESS to identify and pursue those areas where it
can keep up with these rapid changes in technology.
Our
Current Businesses
Through our Video business segment, we offer video processor
chips that drive multi-featured video and audio products, and
incorporate video standards including MPEG1, MPEG2 and MPEG4.
Our chips use multiple processors and a programmable
architecture that enable us to offer a broad array of features
and functionality. Our decoder chips play DVD, VCD, MPEG4, DivX,
CD, MP3, WMA (Windows media audio) and other video formats and
support high quality audio formats, including full-featured
karaoke, Dolby Digital, DTS Surround, DVD audio and Sonys
Super Audio CD (SACD) audio. Our decoder chips also
allow consumers to view digital photo CDs with the music
slideshow feature on their televisions.
Through our Digital Imaging business segment, we historically
offered chips that contain image sensors used to manufacture
camera enabled cellular phones. Our CMOS image sensor technology
integrated several functions including image capture, image
processing, color processing and the conversion and output of a
fully processed image or video stream. We have discontinued the
sale of our image sensor products and therefore expect zero
revenues from our Digital Imaging business in 2008.
Our
Future Businesses
We plan to continue to offer standard definition DVD products
including MPEG1, MPEG2, and MPEG4 video standards; however, the
MPEG1 revenue has continued to decline to insignificant levels
and we do not expect significant revenues from our MPEG1
products in 2008. MPEG2 and MPEG4 products are planned to
continue to sell mainly to the non-China market, but we expect
DVD revenues to continue to decline. We have substantially
terminated the production and the sale of our image sensor
products and therefore expect zero revenues from our Digital
Imaging business in 2008. Although we plan to pursue licensing
of our Digital Imaging patents, we are not forecasting any
revenue from this area in 2008.
126
We are currently evaluating, designing and developing a new
product line of standard CMOS process digital semiconductor
products for the consumer electronics market that will perform
functions that have traditionally been addressed using analog
technology. An example of these products is a new
digital-to-analog-converter for Blu-ray players; however, these
products have not been proven, and we are not forecasting any
significant revenues from these products in 2008.
Our
Strategy
We significantly reorganized our operations and our business
strategy in the third and fourth quarter of 2006, and throughout
2007. We continue to evaluate our remaining businesses as well
as explore new opportunities to maximize shareholder value.
Digital technology in consumer electronics has matured and
consolidated with other technologies. In this environment, we
believe it will be increasingly difficult for ESS to compete
with competitors based in Asia that have significantly greater
technical and financial resources and have lower human resource
costs. Therefore, we will continue to evaluate our existing
businesses and explore new opportunities to maximize shareholder
value outside of our historical industries and technologies.
We currently plan to stay in certain niche markets or
sub-segments of our existing DVD markets that have higher ASPs
and thus higher margins. These niche markets are usually
characterized by customized or specialty software necessary to
address the consumers requirements such as digital media
players, digital audio players and automotive applications. Our
plan is to run this smaller DVD business at a profit and have
those sales contribute to the cost of addressing our new
businesses, however, if the revenue or margin prospects in these
niche markets change, our plan may change. With regard to those
new businesses, we are researching, defining and developing new
products for new markets where our digital knowledge can be
combined with our analog expertise to design digital
semiconductor solutions built on a standard CMOS process and
designed to address traditional analog functions. However, these
concepts are under evaluation and in the design process. It is
not certain that any product will be developed from these
efforts. To achieve our plan, we are pursuing the following
strategies in operating our business:
Leverage Expertise Across Market
Applications.
We believe additional markets and
applications will emerge as digital technologies and analog
technologies converge. We plan to share and leverage our
expertise in these two historically different areas of
technology to introduce new product offerings into existing
markets and to expand into other markets where traditional
analog is either too expensive, too big or where a digital
counterpart can achieve higher price/performance offering.
Offer a Low-Cost Solution.
Our engineers have
significant system design expertise at the device level. We
design our chips to either work with lower-cost components or to
decrease the number of components in our customers
products to lower their total bill-of-material cost. We work in
close collaboration with our customers in their own product
development processes, and with other vendors that are in our
customers bill-of-material supply chain, to reduce the
cost of our semiconductor products to lower our customers
total bill-of-material. We believe this approach enables us to
provide our customers with a lower-cost total solution and drive
total demand by reducing the cost to consumer.
Leverage Our Existing Relationships with OEMs and ODMs
Worldwide.
We believe we have a good reputation
and working relationship with many large consumer electronics
branded companies and that we can utilize that reputation to
introduce new products in existing markets or new products in
markets that are new to ESS. ESS has good channels to market and
an ability to access OEMs and ODMs at the decision making level
in those organizations.
Employ Our Software and Hardware Expertise to Develop New
Technologies.
The products and markets we serve
require significant expertise in software and hardware design,
many companies cannot do both with a very high level of quality
and in a very timely manner. That expertise and timeliness is
critical for a successful fabless semiconductor company in
todays global, highly competitive and fast paced
marketplace. We have a diversified base of technologies and a
strong track record for developing new technologies in-house. We
intend to leverage our software and hardware expertise to
continue to develop new technologies and add features to our
products and to enter new markets.
127
Leverage Our Relationships with Large Suppliers to Be One of
the Low-Cost Providers.
We believe consumer
electronics markets are so competitive and rapidly changing that
a manufacturer of fabless semiconductor products must focus on
being one of the low-cost providers of semiconductor chips in
the world. To do so, our products must have a relatively small
die size and achieve high yields throughout the manufacturing
process. We have extensive third party manufacturing expertise
and utilize long-standing and close relationships with some of
the largest third party fabrication companies and assemblers in
the world.
Pursue Acquisitions of Complementary and Advanced
Technologies.
We have in the past acquired and
will continue to consider acquiring complementary technologies
or product lines to enhance our own product offerings and to
accelerate our time to market.
Explore Opportunities To Maximize Shareholder
Value.
We have in the past and will continue to
consider opportunities outside complementary technologies and
product lines and even outside our historical businesses of the
fabless semiconductor industry.
Pursue Licenses of Complementary
Technologies.
We have in the past licensed and
will continue to consider licensing complementary technologies
or product lines to enhance our own product offerings and to
accelerate our time to market.
Leverage Our Proprietary Technology.
Our chips
utilize a combination of licensed and proprietary software.
Products
Historically, we have offered the products described below. As
we continue to evaluate our businesses in 2008 we could decide
to discontinue any
and/or
all
of these products, indeed several are not actively being sold at
this time but we continue efforts to reduce current on-hand
inventory.
Through our Video business, we offer DVD decoder chips and Video
CD chips. Through our Digital Imaging business, we historically
offered image sensor chips and image processor chips. In 2007,
we announced we were stopping sales of our image chips.
Additionally, we continue to offer certain legacy products such
as communication chips and PC audio chips, although we no longer
manufacture those chips.
DVD Decoder Chips.
Our DVD chips enable
consumers to play DVD, CD, VCD, DivX, MP3, JPEG, WMA, DVD audio,
full-featured karaoke and other audio and video formats. Our DVD
chips support high quality video formats such as Progressive
Scan, and high quality audio formats, including Dolby Digital,
DTS Surround, and DVD audio. These chips can also be used as the
primary processor in digital media players. We offer both MPEG2
and MPEG4 decoding products and various levels of integrated
products incorporating such capabilities as TV encoder, radio
frequency, and servo controller.
Video CD Chips.
We offer VCD chip products
with various feature combinations and price points. Our VCD
chips include an MPEG1 video and audio system decoder. They
deliver full-screen, full-motion video at 30 frames per second
with selectable CD-quality audio. These chips are used in
relatively low-cost VCD players that are sold primarily in
China, South East Asia, India and other emerging countries. VCD
chips are being replaced by cheaper priced DVD players in
certain foreign markets. We have experienced decline in this
business and expect this trend to continue. In 2005 we entered
into a license and collaboration arrangement with a third party
pursuant to which our VCD products are distributed in China and
India.
Image Sensor Chips.
Our SOC image sensor chips
performed the image processing, color processing and the
conversion and output of a fully processed image or video stream
in camera enabled cellular phones. In 2007, we announced we were
terminating production and sales of our image sensor chips.
Consumer Digital Audio Chips.
Our Audio chips
handle high quality audio formats such as Dolby Digital, Dolby
ProLogic, Dolby ProLogic II, Dolby Ex, Dolby Virtual Speaker,
DTS Surround, DTS ES, MP3, WMA, DVD audio and Sonys SACD
audio, enabling consumer electronics manufacturers to build high
quality, low cost 5.1 channel audio video receivers
(AVR) that compliment the existing installed base of
DVD players. Our
class-D
multi-channel digital audio amplifier chip further enables us to
deliver a total single chip solution for home theater system
applications.
128
Communication Chips.
We are not actively
manufacturing these chips but sell a modest amount out of
inventory each year. The volumes are declining and are
insignificant.
PC Audio Chips.
We are not actively
manufacturing these chips but sell a modest amount out of
inventory each year. The volumes are declining and are
insignificant.
Sales of these products accounted for the following percentages
of our net revenues in the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information on revenues and margins attributable to our business
segments is included in Note 13, Business Segment
Information and Concentration of Certain Risks, to the
consolidated financial statements included elsewhere in this
joint proxy statement/prospectus.
Technology
and Research and Development
In the digital semiconductor marketplace we design and develop
products utilizing our base of analog, digital and mixed-signal
design expertise and process technologies, as well as our
software and systems expertise. Our design environment is based
on workstations, dedicated product simulators, system simulation
with hardware and software modeling, and a high-level,
design-description language.
On research and development activities for both business
segments, we spent approximately $12.6 million during 2007,
$36.0 million during 2006 and $34.0 million during
2005.
In our Video business, our DVD technology includes DVD decoder
chips that incorporate a digital signal processor
(DSP) and a reduced instruction set computer
processor (RISC). The two processors work in
parallel on separate tasks. In 2001, we integrated a TV encoder
into our DVD decoder engine (labeled the Vibratto family of
products) to cut down the number of components required to build
a DVD player. In 2003, we enhanced the decoder engine to handle
MPEG4 technology. Our Vibratto II chip integrated the
front-end with the back-end into a single decoder chip and our
Phoenix chip added our own servo IP and our own RF encoder
technology.
In our Digital Imaging business, our chips were historically
manufactured using a proprietary CMOS process and utilizing a
unique chip architecture designed for low light sensitivity at
comparative lens sizes.
Customers
We have historically sold our chips to distributors and OEMs of
DVD, VCD, MP3, digital camcorders, consumer digital audio
players, digital media players, cellular phones, modem and PC
products. Our customers manufacture and sell these products both
as contract manufacturers for well-known brand labels and under
their own brands.
Samsung Electronics Company (Samsung), one of our
direct customers, accounted for approximately 31% and 13% of our
net revenues for 2007 and 2006, respectively. LG Electronics,
Inc. (LG), one of our direct customers, accounted
for approximately 16% and 15% of our net revenues for 2007 and
2006, respectively. Xing Qiu, an end customer of one of our
distributors, accounted for approximately 10% and 8% of our net
revenues for 2007 and 2006, respectively.
129
No other end-customers or direct customers accounted for more
than 10% of our net revenues during 2007 and 2006. Information
on net sales from external customers and long-lived assets
attributable to our geographic regions is included in
Note 13, Business Segment Information and
Concentration of Certain Risks, to the consolidated
financial statements included elsewhere in this joint proxy
statement/prospectus.
Sales and
Distribution
We market our products worldwide through our direct sales force,
distributors and sales representatives. We have sales and
support offices in the United States, China, Hong Kong, Taiwan,
and Korea.
We believe customer service and technical support are important
competitive factors in selling to major customers. Sales
representatives and distributors supplement our efforts by
providing additional customer service at the local level. We
believe close contact with our customers not only improves the
customers level of satisfaction, but also provides
important insight into future market direction.
International sales comprised almost 100% of our revenue in
2007, 2006 and 2005. International sales are based upon
destination of the shipment. Our international sales in 2007,
2006 and 2005 were derived primarily from Asian customers who
manufacture DVD products, VCD products, cameras, cell phones,
communications and PC audio products. Companies in Asia
manufacture a large percentage of the worldwide supply of these
products. We believe a significant portion of our chip products
are incorporated into consumer electronic devices that are
ultimately sold into the United States. We currently have direct
sales personnel and technical staff located in Hong Kong,
Taiwan, China, and Korea where significant portions of our sales
have historically been derived. Sales and technical staff in
these locations are being reviewed along with our efforts to
restructure our company, therefore the location and number of
our employees could change significantly. Our products are also
sold internationally through distributors and sales
representatives located in Hong Kong, Taiwan, Korea, Japan and
Indonesia. For fiscal year 2007, net sales to customers
(including distributors) in each region as a percentage of our
total net revenue were: Hong Kong 31%, Taiwan 29%, and Korea
12%. Due to our current restructuring efforts, our geographic
mix could change significantly in the future and is expected to
change significantly in 2008 as we focus more on business lines
that have greater sales to customers headquartered in Korea. All
of our international sales are denominated in U.S. dollars.
Our business is usually seasonal due to the Christmas holiday
season in America and Europe, and the Chinese New Year season in
China and Asia. Our sales representatives and distributors are
not subject to minimum purchase requirements and can discontinue
marketing any of our products at any time. In addition, certain
of our distributors have rights of return for unsold product and
rights to pricing adjustments to compensate for rapid,
unexpected price changes.
We historically relied on our largest distributor, FE Global
(China) Limited (FE Global), for a significant
portion of our revenues in the Video business. Sales through FE
Global were approximately 18%, 32%, and 37% of our net revenues
in 2007, 2006, and 2005, respectively. In addition to FE Global,
Weikeng Industrial Company Ltd (Weikeng), our other
distributor, accounted for approximately 11% of our net revenues
in 2007 and less than 10% in 2006 and 2005. On August 31,
2007, our distribution agreement with FE Global was terminated,
and we signed a new distribution agreement with CKD (Hong Kong)
High Tech Company Limited (CKD) who will perform
similar functions as those previously provided by FE Global.
As mentioned above, the geographic and product mix in our
revenues is expected to change significantly from what it has
been historically and we would expect CKDs portion of our
revenues to also change significantly from what it has been
historically but believe it is impossible to predict those
changes with any degree of certainty. CKD is not subject to any
minimum purchase requirements and can discontinue marketing any
of our products at any time. In addition, CKD has rights of
return for unsold product and rights to pricing allowances to
compensate for rapid, unexpected price changes, therefore we do
not recognize revenue until CKD sells through to our
end-customers.
Information on revenues and long-lived assets attributable to
our geographic regions is included in Note 13,
Business Segment Information and Concentration of Certain
Risks, to the consolidated financial statements in this
joint proxy statement/prospectus.
130
Manufacturing
To manufacture products, we contract with third parties for all
of our fabrication and assembly as well as the majority of our
test operations. This manufacturing strategy enables us to focus
on our design and development strengths, minimize fixed costs
and capital expenditures and gain access to advanced
manufacturing capabilities. Semiconductor manufacturing consists
of foundry activity where wafer fabrication takes place, as well
as chip assembly and testing activities. We use several
independent foundries that use advanced manufacturing
technologies to fabricate our chips. Substantially all of our
products are manufactured by a variety of foundries including:
Taiwan Semiconductor Manufacturing Company (TSMC),
which has manufactured products for us since 1989, as well as
United Microelectronics Corporation (UMC), which is
also located in Taiwan, Grace Semiconductor Manufacturing
Corporation (GSMC), which is located in China, and
other independent Asian foundries. Most of our products are
currently fabricated using both mixed-signal and CMOS logic
process technologies. Manufacturing requires raw materials and a
variety of components to be manufactured to our specifications.
We depend on a limited number of suppliers to obtain adequate
supplies of quality raw materials on a timely basis. We do not
generally have guaranteed supply arrangements with our
suppliers, and we depend on foundries such as TSMC, UMC, GSMC
and others for foundry capacity to produce products of
acceptable quantity, quality and with acceptable manufacturing
yields in a timely manner. As of December 31, 2007, we
believe we have sufficient foundry capacity to meet our
forecasted needs for the next 12 months.
After wafer fabrication by the foundry, all of our semiconductor
products are assembled and tested by third-party vendors,
primarily Advanced Semiconductor Engineering and Amkor
Technology. We have internally designed and developed our own
test software and purchased certain test equipment, which are
provided to our test vendors. See Item 1A,
Risk
Factors Risks Related to the Companys
Business Our products are manufactured by
independent third parties
beginning on page 23.
Competition
Our semiconductor markets are intensely competitive and are
characterized by rapid technological change, price reductions
and rapid product obsolescence. Competition typically occurs at
the design stage, where the customer evaluates alternative
design approaches that require integrated circuits. Because of
shortened product life cycles, there are frequent design win
competitions for next-generation systems. We expect competition
to remain intense from existing competitors and from companies
that may enter our existing or future markets. In general,
product prices in the semiconductor industry have decreased over
the life of a particular product. The markets for our products
are characterized by intense price competition. As the markets
for our products mature and competition increases, we anticipate
that prices for our products will continue to rapidly decline.
Our existing and potential competitors consist of medium and
large domestic and international companies, many of whom have
substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, greater
intellectual property rights, broader product lines and
longer-standing relationships with customers than we have. Our
competitors also include a number of smaller and emerging
companies.
Recently Asian competitors, especially from Taiwan and China,
have developed the expertise and ability to develop advanced
semiconductor products competing with ESS. These competitors
have significant cost advantages that have forced ESS to exit
certain product lines and may force ESS to exit other product
areas in the future.
In the Video business, our principal competitors in the DVD
market include MediaTek Inc. (MediaTek), Zoran,
Sony, Cheartek, Panasonic, STMicroelectronics, LSI Logic, and
Sunplus. In addition, we expect that the DVD platform will face
competition from other platforms including STBs, as well as
multi-function game boxes. Some of our competitors may supply
chips for multiple platforms, such as LSI Logic and
STMicroelectronics, each of which makes chips for both DVD
players and STBs. We also face strong competition from Sunplus
and Samsung in the VCD market.
Many of our current and potential competitors have longer
operating histories as well as greater name recognition than we
have. Any of these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer
requirements and to devote greater resources to the development,
promotion and sale of their products than we can. This is
especially true in the analog markets that we may enter in 2008.
Many
131
competitors in those markets are much bigger financially, have
many more employees, have long established relationships with
customers, have diversified product offerings and have broader
technical and design expertise.
In addition, a number of companies with significantly greater
resources than us could attempt to increase their presence in
the market by acquiring or forming strategic alliances with our
competitors resulting in increased competition to us. In the
past years, LSI Logic acquired C-Cube Microsystems; Cirrus Logic
acquired LuxSonor Semiconductors; Oak Technology acquired
TeraLogic; and Zoran acquired Oak Technology.
Proprietary
Technology
We rely on a combination of patents, trademarks, copyrights,
trade secret laws and confidentiality procedures to protect our
intellectual property rights. As of December 31, 2007, we
had 156 patents granted in the United States, and more than 31
applications on file with the United States Patent and Trademark
Office (USPTO). In addition, as of December 31,
2007 we had approximately 24 corresponding foreign patents
granted and 59 applications pending. We intend to seek further
U.S. and international patents on our technology whenever
possible.
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights or
positions, which have resulted in significant and often
protracted and expensive litigation. As of December 31,
2007, there are no intellectual property litigation matters
pending against us. See
Business and Properties of the
Company
Legal Proceedings
.
We currently license certain of the technology we use in our
products, and we expect to continue to do so in the future. We
have, in the past, granted limited licenses to certain of our
technology, some of which have expired. See Item 1A,
Risk Factors We may not be able to
adequately protect our intellectual property rights from
unauthorized use and we may be subject to claims of infringement
of third-party intellectual property right
beginning
on page 22.
Backlog
Our products are generally sold pursuant to standard purchase
orders, which are often issued only days in advance of shipment
and are frequently revised to reflect changes in the
customers requirements. Product deliveries are scheduled
when we receive purchase orders. Generally, these purchase
orders allow customers to reschedule delivery dates and cancel
purchase orders without significant penalties. For these
reasons, we believe that our backlog is not a reliable indicator
of future revenues. Delays in delivery schedules
and/or
a
reduction of backlog during any particular period could have a
material adverse effect on our business and results of
operations. As of December 31, 2007, our backlog amounted
to approximately $4.8 million.
Employees
As a result of our restructuring strategy, the total number of
our employees has dropped significantly. As of December 31,
2007, we had 143 full-time employees, including 50 in
research and development, 46 in marketing, sales and support, 28
in finance and administration and 19 in manufacturing. Our
future success will depend, in part, on our ability to continue
to attract, retain and motivate highly qualified technical and
management personnel, particularly highly-skilled semiconductor
design personnel and software engineers involved in new product
development, for whom competition can be intense, particularly
in the Silicon Valley. Our employees are not represented by any
collective bargaining unit, and we have never experienced a work
stoppage. We believe our relationship with our employees is good.
Properties
We own nearly 12 acres of land in Fremont, California, on
which we built our two-story, 93,000 square-foot corporate
headquarters, as well as a 77,000 square-foot office
building next to our corporate headquarters. In addition we own
an adjacent 11,000 square-foot dormitory building used to
house visitors and guest workers. We also have an approximately
5,000 square-foot warehouse next to our corporate
headquarters in Fremont, California. We also lease a small
amount of office space to support our operations outside the
United States.
132
In October 2007, we entered into an agreement with TC
Fund Property Acquisitions, Inc. (TC Fund) to
sell our real property assets located in Fremont, California,
for $26.3 million. The agreement was subject to certain
conditions to closing including a
30-day
due
diligence approval period. Prior to the expiration of the due
diligence period, TC Fund notified us that they were terminating
the agreement. The reason given for the termination was the
continued uncertainty in the real estate market.
We consider the above facilities suitable and adequate to meet
our current requirements. There are no liens on any of our owned
land and buildings. We are currently working with a real estate
company and actively considering the lease or sale of all or a
portion of our land and facilities in Fremont, California.
Legal
Proceedings
On September 12, 2002, following our downward revision of
revenue and earnings guidance for the third fiscal quarter of
2002, a series of putative federal class action lawsuits were
filed against us in the United States District Court, Northern
District of California. The complaints alleged that we and
certain of our present and former officers and directors made
misleading statements regarding our business and failed to
disclose certain allegedly material facts during an alleged
class period of January 23, 2002 through September 12,
2002, in violation of federal securities laws. These actions
were consolidated under the caption In re ESS Technology
Securities Litigation. The plaintiffs sought unspecified
damages on behalf of the putative class. Plaintiffs amended
their consolidated complaint on November 3, 2003, which we
then moved to dismiss on December 18, 2003. On
December 1, 2004, the Court granted in part and denied in
part our motion to dismiss, and struck from the complaint
allegations arising prior to February 27, 2002. On
December 22, 2004, based on the Courts order, we
moved to strike from the complaint all remaining claims and
allegations arising prior to September 10, 2002. On
February 22, 2005, the Court granted our motion in part and
struck all remaining claims and allegations arising prior to
August 1, 2002 from the complaint. In an order filed on
February 8, 2006, the Court certified a plaintiff class of
all persons and entities who purchased or otherwise acquired our
publicly traded securities during the period beginning
August 1, 2002, through and including September 12,
2002 (the Class Period), excluding officers and
directors of ESS, their families and families of the defendants,
and short-sellers of our securities during the
Class Period. On March 24, 2006, plaintiff filed a
motion for leave to amend their operative complaint, which the
Court denied on May 30, 2006. Trial was tentatively set for
January 2008. On November 12, 2006, the parties attended a
mediation at which they agreed to settle the litigation for
$3.5 million (to be paid by defendants insurance
carriers), subject to appropriate documentation by the parties
and approval by the Court. The Stipulation of Settlement and
Release was filed with the Court on April 30, 2007. On
May 8, 2007, the Court issued an order preliminarily
approving the settlement and providing for class notice. At a
fairness hearing on July 27, 2007, having received no
objections to the settlement and no requests for exclusion, the
Court entered a Final Judgment and Order of Dismissal With
Prejudice as to all defendants. The time for appeal from the
Final Judgment and Order of Dismissal With Prejudice has now
passed. While defendants have denied and continue to deny any
and all allegations of wrongdoing in connection with this
matter, we believe that given the uncertainties and cost
associated with litigation, the settlement is in the best
interests of ESS and its stockholders. We recorded a
$3.5 million loss for the settlement during the quarter
ended March 31, 2007. In addition, a receivable from our
insurance carriers was also recorded for the same amount, plus
recoverable legal fees. Accordingly, there is no impact to the
statement of operations because the amount of the settlement,
including legal expenses, and the insurance recovery offset each
other. The settlement was completed during the year ended
December 31, 2007.
On September 12, 2002, following the same downward revision
of revenue and earnings holders of our common stock, purporting
to represent us, filed a series of derivative lawsuits in
California state court, County of Alameda, against us as a
nominal defendant and against certain of our present and former
directors and officers as defendants. The lawsuits alleged
certain violations of the federal securities laws, including
breaches of fiduciary duty and insider trading. These actions
were consolidated as a Consolidated Derivative Action with the
caption ESS Cases. The derivative plaintiffs sought
compensatory and other damages in an unspecified amount,
disgorgement of profits, and other relief. On March 24,
2003, we filed a demurrer to the consolidated derivative
complaint and moved to stay discovery in the action pending
resolution of the initial pleadings in the related federal
action, described above. The Court denied the demurrer but
stayed discovery. That stay was then lifted in light of the
procedural progress of the federal action. The parties reached
an agreement in principle to settle the litigation in
133
exchange for certain minor modifications of our internal
policies and payment of plaintiffs attorneys fees not to
exceed $200,000 (to be paid by defendants insurance
carriers). The agreement in principle to settle the litigation
was then documented and finalized by the parties and submitted
to the Court for approval. On October 1, 2007, the
Stipulation and Agreement of Settlement became binding upon the
Courts entry of a final Judgment of Dismissal with
prejudice as to all defendants in the action, subject to appeal
as required by applicable state law. While defendants have
denied and continue to deny any and all allegations of
wrongdoing in connection with this matter, we believe that given
the uncertainties and cost associated with litigation, the
settlement is in the best interests of ESS and its stockholders.
We recorded a $200,000 loss for the proposed settlement in 2007,
as management has determined this amount probable of payment and
reasonably estimable. In addition, because recovery from the
insurance carriers was probable, a receivable was also recorded
for the same amount. Accordingly, there was no impact to the
statement of operations because the amount of the settlement and
the insurance recovery offset each other. The settlement
transactions have been completed.
On October 4, 2006, Ali Corporation (Ali) filed
a lawsuit in Alameda County Superior Court against ESS that
alleged claims for breach of contract, common counts, quantum
meruit, account stated and for an open book account. All of the
claims arose from a Joint Development Agreement between ESS and
Ali, originally entered into on December 14, 2001 and
subsequently amended on several occasions. Alis complaint
sought damages in the amount of $2.5 million. We answered
Alis complaint and on April 6, 2007 the parties
settled this matter in the course of a formal mediation. A
Settlement Agreement was executed whereby we have settled the
case by paying $1.7 million to Ali during the year ended
December 31, 2007.
From time to time, we are subject to various claims and legal
proceedings. If management believes that a loss arising from
these matters is probable and can reasonably be estimated, we
would record the amount of the loss, or the minimum estimated
liability when the loss is estimated using a range, and no point
within the range is more probable than another. As additional
information becomes available, any potential liability related
to these matters is assessed and the estimates are revised, if
necessary. Based upon consultation with the outside counsel
handling our defense in the legal proceedings listed above, and
an analysis of potential results, we have accrued sufficient
amounts for potential losses related to these proceedings. Based
on currently available information, management believes that the
ultimate outcome of these matters, individually and in the
aggregate, will not have a material adverse effect on ESS
financial position, cash flows or overall trends in results of
operations. However, litigation is subject to inherent
uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include monetary damages or an
injunction prohibiting us from selling one or more products. If
an unfavorable ruling were to occur, there exists the
possibility of a material adverse impact on the results of
operations of the period in which the ruling occurs, or future
periods, could result.
Environmental
Matters
Our operations are subject to various federal, state
and/or
local
laws regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment, such
as discharge into soil, water and air, and the generation,
handling, storage, transportation and disposal of waste and
hazardous substances. These laws generally have the effect of
increasing costs and potential liabilities associated with the
conduct of our operations, although historically they have not
had a material adverse effect on our financial position, results
of operations or cash flows.
Available
Information
Our website address is
http://www.esstech.com.
We make available free of charge, on or through our website, our
annual, quarterly and current reports, and any amendments to
those reports, as soon as reasonably practicable after
electronically filing such reports with the Securities and
Exchange Commission (the SEC). In addition, our Code
of Ethics as well as the respective charters for the Audit,
Compensation and Corporate Governance and Nominating Committees
of our Board of Directors are available on our website.
Information contained on our website is not part of this joint
proxy statement/prospectus.
134
Executive
Officers of the Registrant
The following table sets forth certain information regarding our
current executive officers:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Robert L. Blair
|
|
|
60
|
|
|
President, Chief Executive Officer and Director
|
John A. Marsh
|
|
|
49
|
|
|
Chief Financial Officer and Vice President
|
Robert L. Blair
has been our President and Chief
Executive Officer since September 1999. Mr. Blair was
elected as a director in 1999. Mr. Blair served as our
Executive Vice President of Operations and member of the Office
of the President from April 1997 to September 1999. From
December 1994 to March 1997, he was our Vice President of
Operations. From December 1991 to November 1994, he was Senior
Vice President of Operations (Software Packaging &
Printing Division) of Logistix Corporation, a software turnkey
company, and from 1989 to November 1991, he was Vice President
and co-owner of Rock Canyon Investments, a real estate
development-planning firm in California. From 1986 to 1989, he
held various positions at Xidex Corporation, a computer diskette
manufacturer, including President and General Manager at XEMAG,
a division of Xidex Corporation. From 1973 to 1986, he held
several positions including Vice President, High Reliability
Operations at Precision Monolithics, Inc.
John A. Marsh
has been our Chief Financial Officer since
August 2007. Mr. Marsh has more than 20 years of
experience in senior-level finance positions and joined us in
April 2001 as our International Controller. In September 2004,
Mr. Marsh became the Corporate Controller. From October
2006 to January 2007, Mr. Marsh was the North American
controller for VeriFone, Inc. Prior to joining ESS, he held
senior management positions in finance with SSE Telecom, Inc.
from November 1999 to April 2001 and Cylink Corporation from
January 1997 to January 1999; previously, he held finance and
accounting positions with National Semiconductor Corporation. He
received a Bachelor of Science degree in business administration
from San Jose State University and is a certified public
accountant.
135
DIRECTORS
AND OFFICERS FOLLOWING THE REINCORPORATION MERGER
The directors and officers of ESS immediately prior to the
reincorporation merger will be the directors and officers of ESS
Delaware following the reincorporation merger.
If Messrs. Mok and Stein are re-elected to our board of
directors, we have agreed to use our commercially reasonable
efforts to obtain, prior to the closing of the reincorporation
merger, resignations from each of Messrs. Mok and Stein as
members of our board of directors and of the boards of directors
of each of our subsidiaries on which they sit, including Echo,
effective immediately prior to the consummation of the
reincorporation merger and we expect that Messrs. Mok and
Stein will resign from the board of directors of ESS and the
boards of directors of each of its subsidiaries on which they
sit, including Echo, prior to the consummation of the
reincorporation merger. We will also use commercially reasonable
efforts to obtain, prior to the closing of the reincorporation
merger, resignations from each of Messrs. Lee and Marsh as
members of our board of directors and of the board of directors
of Echo, effective immediately prior to the consummation of the
reincorporation merger. If Messrs. Mok, Stein, Lee and
Marsh resign from our board of directors and the board of
directors of Echo, then, following the reincorporation merger,
Mr. Blair, or his duly elected or appointed replacement and
any other individuals duly elected or appointed to our board of
directors, will be the only directors of ESS Delaware following
the reincorporation merger.
136
DESCRIPTION
OF SECURITIES OF ESS DELAWARE
The following summary description of the capital stock of ESS
Delaware does not purport to be complete and is qualified in its
entirety by reference to ESS Delawares certificate of
incorporation and bylaws, copies of which are attached as
Annex D and E to this joint proxy statement/prospectus,
respectively. Further, except as noted below, the following
summary describes the capital stock of ESS Delaware assuming
that the reincorporation merger has already been effected.
The authorized capital stock of ESS Delaware will consist of
100,000,000 shares of common stock, $0.0001 par value
per share approximately 35.6 million, of which will be
issued and outstanding immediately following the reincorporation
merger, and 10,000,000 shares of preferred stock, par value
$0.0001 per share, none of which will be issued and outstanding
immediately following the reincorporation merger.
Common stock.
Holders of ESS Delaware common
stock are entitled to one vote per share on all matters on which
holders of ESS Delaware common stock are entitled to vote.
Because holders of ESS Delaware common stock do not have
cumulative voting rights, the holders of a majority of the
shares of ESS Delaware common stock represented at a meeting for
the election of directors can elect all of the directors. All
shares of ESS Delaware common stock that will be outstanding
upon completion of the reincorporation merger will be legally
issued, fully paid and nonassessable.
Preferred stock.
Pursuant to ESS
Delawares certificate of incorporation, the preferred
stock may be divided into such number of series as the board of
directors may determine from time to time. The board of
directors is authorized, from time to time, to determine or
alter the rights, preferences, privileges and restrictions
granted to, or imposed upon, any wholly unissued series of
preferred stock, and to fix the number of shares of any series
of preferred stock and the designation of any such series of
preferred stock. Additionally, the board of directors, within
the limits and restrictions stated in any resolution of the
board of directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below
the number of shares of such series then outstanding) the number
of shares of any series prior to or subsequent to the issuance
of that series.
Following the reincorporation merger, ESS Delaware will assume
the stock option and equity incentive plans of ESS in effect
immediately prior to the reincorporation merger, other than the
ESPP which will be treated as described under
The
Merger Agreement
Treatment of Stock
Options and Employee Stock Purchase Plan
beginning on
page 74 of this joint proxy statement/prospectus.
1995 Directors
Stock Option Plan
The 1995 Directors Stock Option Plan, which we refer to as
the 1995 plan, allows for granting of stock options to
non-employee members of the board of directors of ESS Delaware.
The 1995 plan authorizes the issuance of 1,000,000 shares
and has a termination date of 2015. The plan also provides for a
3-year
post-termination exercise period for termination of service for
any reason by a non-employee director.
1997
Equity Incentive Plan
The 1997 Equity Incentive Plan, which we refer to as the 1997
plan, authorized the issuance of 13,000,000 shares, and
provided for the grant of stock options and stock bonuses and
the issuance of restricted stock to ESS Delaware employees,
directors and others. The 1997 plan terminated in April 2007,
but the options granted under the 1997 plan will remain
outstanding until they expire in accordance with their terms.
Under the 1997 plan, options granted generally vest 25% at the
end of the first year, after the anniversary date of the date of
grant, and monthly thereafter over the remaining three years of
the vesting period, and have a term of 10 years.
2002
Non-executive Stock Option Plan
The 2002 Non-Executive Stock Option Plan, which we refer to as
the 2002 plan allows for granting of non-statutory stock options
to ESS Delawares non-executive employees and consultants.
2,000,000 shares of ESS Delaware common stock are reserved
for issuance thereunder. The vesting schedule of the 2002 plan
is generally similar to those of the 1997 plan outlined above.
137
BENEFICIAL
OWNERSHIP OF SECURITIES
The following table sets forth certain information, as of
March 31, 2008, known to ESS regarding the beneficial
ownership of ESS common stock that has been provided to
ESS with respect to the beneficial ownership of shares of
(1) each person known by ESS to be the beneficial owner of
more than 5% of ESS common stock, (2) each of
ESS directors, (3) each Named Executive Officer named
in the Summary Compensation Table below, and (4) all
directors and executive officers as a group. Except as otherwise
noted, the address of each person listed in the table is
c/o ESS
Technology, Inc., 48401 Fremont Blvd., Fremont, CA 94538.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.,
33
rd
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
|
|
|
(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 owners 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 the
Schedule 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
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|
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(11)
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|
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.
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(12)
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|
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.
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(13)
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|
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).
|
EQUITY
COMPENSATION PLAN INFORMATION
The following table summarizes information with respect to
options under our equity compensation plans at December 31,
2007:
Equity
Compensation Plan Information(1)
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Number of Securities
|
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|
|
|
|
|
|
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|
Remaining Available
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|
for Future Issuance
|
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|
|
|
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|
Under Equity
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Number of Securities
|
|
|
|
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|
Compensation
|
|
|
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to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Plans
|
|
|
|
Exercise of
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|
|
Exercise Price of
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|
|
(Excluding
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|
|
Outstanding
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|
|
Outstanding Options,
|
|
|
Securities
|
|
|
|
Options, Warrants
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|
|
Warrants and
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|
|
Reflected in
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|
Plan Category
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and Rights(a)
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Rights(b)
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Column(a)(b)
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Equity compensation plans approved by security holders
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2,726,398
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$
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5.95
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|
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831,243
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(2)
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Equity compensation plans not approved by security holders
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633,219
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$
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3.70
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1,352,451
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|
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|
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|
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Total
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3,359,617
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$
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5.52
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2,183,694
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(1)
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Includes only options outstanding under ESS stock option
plans, as no stock warrants or rights were outstanding as of
December 31, 2007.
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(2)
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Includes 132,493 shares of common stock reserved for future
issuance under the ESS Technology, Inc. 1995 Employee Stock
Purchase Plan.
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The equity compensation plans not approved by security holders
have generally the same features as those approved by security
holders. For further details regarding ESS equity
compensation plans, see Note 9, Shareholders
Equity, in the consolidated financial statements included
elsewhere in this joint proxy statement/prospectus.
EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
ESS compensation program is overseen and administered by
the Compensation Committee, which is comprised entirely of
independent directors as determined in accordance with various
NASDAQ Global Market, SEC and Internal Revenue Code rules. The
Compensation Committee ensures that the total compensation paid
to ESS executive officers is fair, reasonable and
competitive. None of the Named Executive Officers (as defined
below) serve on the Compensation Committee. The Compensation
Committee operates under a written charter
140
adopted by our board of directors. A copy of the charter is
available, free of charge, on our website at
http://www.esstech.com/IR/investor_relations.shtm
under the Corp Governance tab.
Philosophy
All of our compensation programs are designed to attract and
retain key employees, motivating them to achieve and rewarding
them for superior performance. Different programs are designed
to target short and longer-term performance with the goal of
increasing stockholder value over the long term. Executive
compensation programs impact all employees by setting general
levels of compensation and helping to create an environment of
setting goals, achieving goals and the direct linking of
achievement with reward. Because we believe the performance of
every employee is important to our success, the Compensation
Committee is mindful of the effect executive compensation and
incentive programs have on all of our employees.
The Compensation Committee and our board of directors both
believe that the compensation of our executives should reflect
their success as a management team and as individuals in
attaining key operating objectives, such as growth of sales,
growth of earnings, growth of market share, long-term strategic
objectives, and increased market price of our stock. The
Compensation Committee and our board of directors also believe
that the performance of the executives in managing our company,
considered in light of general economic and specific company,
industry and competitive conditions, should be the basis for
determining their overall compensation. The Compensation
Committee and our board of directors also believe that total
compensation package for each of the executive officers must
reflect the employment environment in which we compete for
skilled talent. The Compensation Committee and our board of
directors also seek to have the long-term performance of our
stock reflected in executive compensation through the stock
option and other equity incentive programs.
Objectives
The executive compensation programs and practices of ESS are
designed to, among other things:
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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;
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motivate executives to achieve our business goals through the
use of an incentive compensation plan that ties a portion of an
executives compensation to objectives of ESS and
individual performance;
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reward achievement of our short-term and long-term performance
goals; and
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align the interests of executives with the long-term interests
of stockholders through executive participation in equity-based
compensation plans.
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Elements
of Executive Compensation
Generally, compensation for our executives consists of:
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base salary;
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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
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in past years, stock-based incentive compensation programs,
including the shareholder-approved 1995 Equity Incentive Plan
and 1997 Equity Incentive Plan.
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Under the Compensation Committees supervision, we have
selected these elements because each is considered useful and
necessary to meet one or more of the principal objectives of our
compensation policy. We believe that these elements of
compensation, when combined, are effective, and will continue to
be effective, in achieving the objectives of our compensation
program. We strongly believe, however, in engaging and retaining
the best talent in critical functions, and this may entail
negotiations with individual executives who have significant
compensation packages in place with other employers or potential
employers. In order to enable us to hire and retain talented
executives, the Compensation Committee and our board of
directors may determine that it is in our best interests to
negotiate compensation arrangements that may deviate from our
standard practices in setting the compensation for certain of
ours executives when such deviation is required by competitive
or other market forces.
141
The Compensation Committee may also, from time-to-time, award
totally discretionary bonuses to our executives. Our executives
are also eligible to participate in the our 401(k) Plan, our
1995 Employee Stock Purchase Plan, as well as our 1997 Equity
Incentive Plan, and other benefits available generally to all
our employees.
We have a change of control arrangement with Robert Blair,
President and CEO which provides for Mr. Blair to receive
certain benefits if his employment with ESS is terminated. This
arrangement is discussed in detail below. The board of directors
has determined that such benefits are necessary in order to
retain Mr. Blair as a key executive. Mr. Marsh did not
enter into a change of control agreement when he became a vice
president and chief financial officer of ESS.
Determination
of Executive Compensation
In determining planned executive compensation, each component of
each executives compensation is considered relative to a
competitive market position based on executive compensation
survey information for similar sized high technology public
companies and other relevant information. Both qualitative
factors, such as experience, level of contribution, potential
impact on company performance and relative internal pay, and
quantitative factors relating to corporate and individual
experience and performance are considered when determining
individual compensation. The determination is not based on any
single experience or performance factor, nor does it
specifically assign relative weights to factors but, rather, a
mix of factors is considered and individual performance is
evaluated against that mix. In setting compensation levels for a
particular executive, the Compensation Committee takes into
consideration the proposed compensation package as a whole and
each element individually, as well as the executives past
and expected future contributions to our business.
SUMMARY
COMPENSATION TABLE FOR 2007
The following table shows for the year ended December 31,
2007 certain compensation information for: (i) the Chief
Executive Officer; (ii) the Chief Financial Officer; and
(iii) two former officers of ESS, (each a Named
Executive Officer and collectively, the Named
Executive Officers).
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Change in
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Pension
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Value and
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Non-Equity
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Non-Qualified
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Incentive
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Deferred
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Stock
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Option
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Plan
|
|
Compensation
|
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All Other
|
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|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Fred S.L. Chan,
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|
|
2007
|
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$
|
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
|
|
|
|
|
|
|
|
|
|
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$
|
40,311
|
(6)
|
|
$
|
440,900
|
|
Sr. V.P. & CFO(2)
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|
|
2006
|
|
|
$
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221,481
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|
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$
|
150,000
|
|
|
|
|
|
|
$
|
89,040
|
|
|
|
|
|
|
|
|
|
|
$
|
298
|
(4)
|
|
$
|
460,819
|
|
John Marsh,
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|
|
2007
|
(1)
|
|
$
|
164,141
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|
|
$
|
10,000
|
(7)
|
|
|
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|
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$
|
10,437
|
|
|
|
|
|
|
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$
|
297
|
(4)
|
|
$
|
184,876
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|
V.P. & CFO
|
|
|
2006
|
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|
$
|
121,760
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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$
|
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
|
|
|
(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 Form
10-K
and an
additional $75,000 for filing the annual report on
Form 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. Marshs
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.
|
Cash-Based
Compensation
The Compensation Committee typically reviews and approves on an
annual basis the target cash compensation for the Chief
Executive Officer (the CEO) and for each of our
other officers who are subject to Section 16 of the
Securities Exchange Act of 1934. The Compensation Committee
evaluates the base salary and target incentive bonus of
executives on an annual basis but does not have a standard
practice of providing increases in cash compensation to our
executives each year.
The Compensation Committee did not hold its usual annual meeting
regarding annual executive compensation in 2007 due to the board
of directors ongoing consideration of strategic
alternatives, and the related turn over in employees. The belief
was that, in the event that the board of directors approved a
strategic transaction with a third party, that party would
evaluate the base salaries and target bonus incentive
compensation, and approve the business objectives related to
target bonus incentive compensation of our executive officers.
Accordingly, there was no change to the structure of
compensation from 2006 for our CEO. Our chief financial officer
terminated employment in August 2007, and we hired our most
recent controller to fill the resulting vacancy. Our other named
executive officers from 2006 terminated employment with ESS.
Base
Salary
Base salary is set with the goal of attracting executives and
adequately compensating and rewarding them on a day-to-day basis
for the time spent, the services they perform and the skills and
experience they bring to ESS. Historically ESS has not increased
the base salary of our executives during difficult business
times.
Incentive
Bonus Compensation
The Incentive Bonus Plan (the Plan) places a
significant portion of an executives compensation at risk
because participants must achieve certain performance thresholds
to earn bonus incentive compensation under the Plan. In
addition, the Plan increases bonus incentive awards when
performance exceeds Plan objectives. Under the Plan,
participants are eligible to earn cash bonus incentive
compensation based upon the achievement of certain performance
goals and objectives relating to ESS and each individual
participant. The Compensation Committee sets certain annual
performance goals and objectives for the Plan. Following the end
of each year, the Compensation Committee determines the extent
to which the performance goals and objectives were obtained.
Based on this assessment, eligible participants in the Plan may
earn a bonus incentive award in an amount equal to a percentage
of such participants target bonus incentive compensation.
In 2007, because ESS was going through a period of restructuring
and internal reorganization, the Compensation Committee did not
set performance targets based on the financial results of ESS
for fiscal year 2007. Instead, employees were rewarded for
continuing the business of ESS with a reduced labor force
through the challenges of changing the strategic focuses of the
business.
143
Discretionary
Bonuses
In addition to compensation under our Incentive Bonus Plan, the
Compensation Committee may award special bonuses to executives
based on a number of factors including extraordinary
performance, market demands or other factors. In 2007, a year of
strategic reorganization that included the departure of a number
of employees, including the chief financial officer,
discretionary bonuses were given for staying with ESS and for
continuing its operations with a reduced number of employees.
Stock-Based
Compensation
The Compensation Committee believes that equity awards are an
essential component of executive compensation and closely aligns
the interests of executives with the long-term interests of
shareholders. Equity awards have been subject to vesting
provisions to encourage executives to remain employed with ESS
and to align their interests with the long-term interests of
stockholders. The Compensation Committee may grant immediately
vested equity awards to our executives in lieu of cash
compensation or for other reasons. As of April 2007, the 1997
Equity Incentive Plan terminated. The 1995 Equity Incentive Plan
terminated in 2005. As a result of the expiration of these
plans, no new grants or awards may be made to Named Executive
Officers. In addition to the two expired plans, ESS has its 2002
Non-Executive Stock Option Plan, or 2002 Plan. In August 2007,
while controller of ESS, Mr. Marsh received an option grant
under the 2002 Plan.
We do not currently have any equity or other security ownership
policy that mandates ownership of certain amounts of our common
stock by our executives. Under our insider trading policy,
directors, officers or employees are not allowed to margin our
securities, use our securities as collateral to purchase our
securities or the securities of any other issuer, short sell our
securities, either directly or indirectly, or trade in
derivative securities related to the our securities.
Either the board of directors or the Compensation Committee may
grant stock options to our executives. Our executives generally
receive a stock option which has been approved by the
Compensation Committee when they initially join ESS and may
receive additional equity grants as part of a refresh grant upon
promotion or for individual performance. The Compensation
Committee has implemented certain general policies relating to
grants of stock and other awards, which policies apply to our
executives. Specifically, the Compensation Committee has
determined that stock options shall be granted: (i) for
grants of 20,000 shares or more for any employee including
the Named Executive Officers, on the date the last member of the
board of directors or Compensation Committee member approves in
writing such grant; (ii) for grants below 20,000 and not
for a Named Executive Officer, on the date the CEO approves in
writing such grant; or (iii) on such other date established
by the board of directors or Compensation Committee. Options
grants or other equity awards to executive officers may be
approved at a properly constituted meeting of the board of
directors or the Compensation Committee or by the unanimous
written consent of the directors or Compensation Committee
members. Generally, to ensure the date of approval is certain
our unanimous written consents are considered executed when the
last required signature is received by the CFO by fax or hand
delivery. All required documentation, including the list of
recommended equity awards by recipient and the terms of the
award, are sent to the board of directors, Compensation
Committee or the CEO, as the case may be, prior to approval and
signature. The Compensation Committee believes that this
practice will ensure that the exercise price of the options or
other awards are based on the fair market value of our common
stock on the date of grant and that the approval process results
in grants made on a planned grant date. We have not and do not
plan in the future to coordinate the timing of the release of
material non-public information for the purpose of affecting the
value of executive compensation (including equity award grants).
The Compensation Committee determines the equity awards made to
the Chief Executive Officer in light of executive compensation
survey or review information for similarly sized companies,
publicly available information on other companies, and the
relative size of our other executive grants, taking into
consideration relative responsibility, performance and
anticipated future contribution to Company performance. The
Compensation Committee receives recommendations from the Chief
Executive Officer on the amount and terms of equity compensation
to be awarded to other executives based on individual position,
responsibilities, performance, compensation surveys, other
publicly available information and the officers
anticipated future performance,
144
responsibilities and potential impact on Company results. The
Compensation Committee takes these factors into account when
approving such awards.
The Compensation Committee also reviews prior equity awards to
each executive, including the number of shares that continue to
be subject to vesting under prior option grants, in determining
the size of option grants to each of the executives. Stock
options are typically granted with an exercise price per share
equal to the closing market price of our common stock on the
date of grant. With the exception of Mr. Marsh, our current
vice president and chief financial officer who was granted
150,000 stock options as controller during 2007, there have been
no new option grants since 2005 to our executives.
Compensation
for the Chief Executive Officer and Chairman of the Board of
Directors
The Compensation Committee determines the Chief Executive
Officers total compensation based on similar competitive
compensation data as that used for other comparable executive
officers at comparable companies, the Compensation
Committees assessment of his past performance and the
Compensation Committees expectations as to his future
contributions to ESS. Mr. Blairs base salary remained
at $328,000 in 2007.
The Compensation Committee also determines the Chairman of the
Board of Directors total compensation based on similar
competitive compensation data as that used for other comparable
executive officers at comparable companies, the committees
assessment of his past performance and the committees
expectations as to his future contributions to ESS.
Mr. Chans base salary remained at $328,000 in 2007
until his resignation as Chairman on July 18, 2007.
Mr. Chan did not receive any incentive bonus compensation
or any equity incentive compensation during 2007.
Tax
Considerations
Our board of directors has reviewed the impact of tax and
accounting treatment on the various components of our executive
compensation program and has determined that limitations on
deductibility of compensation may occur under
Section 162(m) of the Internal Revenue Code, which
generally limits the tax deductibility of compensation paid by a
public company to its chief executive officer and other highly
compensated executives to one million dollars per year in the
year the compensation becomes taxable to executives. There is an
exception to the limit on deductibility for performance-based
compensation that meets certain requirements.
Although deductibility of compensation is preferred, tax
deductibility is not a primary objective of our compensation
programs, due in part to the large net operating loss
carryforward already available to us for tax reporting purposes.
We believe that achieving the compensation objectives discussed
earlier is more important than the benefit of tax deductibility
and our executive compensation programs may, from time to time,
limit the tax deductibility of compensation.
145
Grants of
Plan-Based Awards for 2007
The following table provides information on stock options,
restricted stock and cash-based performance awards granted in
fiscal year 2007 to each of our named executive officers. There
can be no assurance that the Grant Date Fair Value of Stock and
Option Awards will ever be realized. The portions of the amounts
set forth under the Grant Date Fair Value of Stock and
Option Awards column that were recognized as compensation
expense during fiscal year 2007 are reported in the Stock
Awards and Option Awards columns of the
Summary Compensation Table. The unexercised portion of the
option awards identified in the table below are also reported in
the Outstanding Equity Awards at Fiscal Year End Table.
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All Other
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All Other
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Stock
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Option
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Awards:
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Awards:
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Exercise
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Number of
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Number of
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or Base
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Grant Date
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Estimated Future Payouts Under
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Shares of
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Securities
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Price of
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Fair Value
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Non-Equity Incentive Plan Awards(1)
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Stock or
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Underlying
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Option
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of Stock
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Grant
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Threshold
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Target
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Maximum
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Units
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Options
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Awards
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and Option
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Name
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Date/Plan
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(#)
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|
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(#)
|
|
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(#)
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|
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(#)
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(#)
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($/Share)
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Awards(2)
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|
01/16/2007
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John Marsh
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1997 Plan
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40,000
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$
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0.96
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$
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4,509
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08/10/2007
2002 Plan
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$
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40,000
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110,000
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$
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1.26
|
|
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$
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5,929
|
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(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.
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(2)
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|
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.
|
Option
Exercises and Stock Vested for 2007
None of the named executive officers exercised any options in
2007. During 2007, the exercise price of all options held by the
named executive officers, other than Mr. Marsh, exceeded
the fair market value of the ESS stock.
146
Outstanding
Equity Awards at Fiscal Year End for 2007
The following table sets forth certain information concerning
unexercised options held by each of the Named Executive Officers
as of December 31, 2007.
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Stock Awards
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Equity
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Equity
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Incentive
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Option Awards
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Incentive
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Plan
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Equity
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Plan
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Awards:
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Incentive
|
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Awards:
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Market or
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Plan
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Number of
|
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Payout
|
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|
|
|
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|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Unearned
|
|
|
Value of
|
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|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number
|
|
|
Value of
|
|
|
Shares,
|
|
|
Unearned
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
of Shares
|
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|
Shares or
|
|
|
Units or
|
|
|
Shares,
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
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or Units
|
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Units of
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Other
|
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|
Units or
|
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|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
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|
|
of Stock
|
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|
Stock
|
|
|
Rights
|
|
|
Other
|
|
|
|
Options
|
|
|
Options
|
|
|
Unearned
|
|
|
Exercise
|
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|
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.
|
Potential
Payments Upon Termination or Change in Control
Our board of directors has adopted forms of acceleration
agreement for our non-employee directors and named executive
officers. Under the acceleration agreement for non-employee
directors, in the event of death or a change in control (each,
an Acceleration Event), the vesting schedule for all
unvested options that are outstanding as of the date of the
Acceleration Event shall be immediately vested and exercisable
in full. Additionally, if any benefit under an acceleration
agreement would be subject to the excise tax under Code
Section 4999, the non-employee director shall receive the
greater of (as determined on an after-tax basis) the full amount
of the benefits or such lesser amount that would result in no
excise tax.
Under the acceleration agreement for named executive officers,
in the event of an executive officers death or involuntary
termination, including voluntary termination for a good reason,
within two months before a change in control, all unvested
options that are outstanding as of such change in control shall
be immediately vested upon the effective date of such change in
control and exercisable in full. Separately, in the event of a
change in control, the vesting schedule for 50% of unvested
options that are outstanding as of the date of the change in
control shall be immediately vested and exercisable in full,
with the remaining unvested options to accelerate upon an
involuntary termination within 12 months after a change in
control. Additionally, if any benefit under an acceleration
agreement would be subject to the excise tax under Code
Section 4999, the executive officer shall receive the
greater of (as determined on an after-tax basis) the full amount
of the benefits or such lesser amount that would result in no
excise tax.
147
If an Acceleration Event had occurred on December 31, 2007
and the price per share was the closing market price as of that
date ($1.33 per share), then no payments and benefits would be
provided to the non-employee directors and named executive
officers under either of the acceleration agreements described
here because the applicable exercise prices for the options held
by all non-employee directors and named executive officers
exceeded that price per share. Of our current executives, only
Mr. Blairs stock options accelerate by their terms
upon a change of control. Mr. Marsh did not enter into an
acceleration agreement when he became vice president and chief
financial officer. The value of such acceleration at
December 31, 2007 would be equal to the excess, if any, of
$1.33 over the applicable exercise price per share of
Mr. Marshs options, or $10,450.12.
The cash-out merger with Imperium will result in the following
payments to the named executive officers or the non-employee
directors other than under the acceleration agreements described
above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Blairs options exceed the
$1.64 cash-out merger consideration per share and these shares
are fully vested
|
Other
Potential Post-Employment Payments
Other than the payments under the change in control agreements
as set forth above, the named executive officers and
non-employee directors would not be entitled to any compensation
upon a termination of employment.
AUDIT
FEES
Fees Paid
to PricewaterhouseCoopers LLP
The following table lists the aggregate fees paid for
professional services rendered by PricewaterhouseCoopers LLP for
all Audit Fees, and Tax Fees, for the
last two fiscal years.
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Audit
Fees
The audit fees for the years ended December 31, 2007 and
2006, respectively, were for professional services rendered for
the audit of our annual financial statements for the fiscal
years 2007 and 2006, and for reviews of the financial statements
included in our quarterly reports on
Form 10-Q
for the first three quarters of the fiscal years 2007 and 2006.
Due to our market capitalization for fiscal year 2007, we
qualified as a non-accelerated filer. As a non-accelerated
filer, the independent registered public accounting firm did not
render an opinion of the internal
148
control over financial reporting and no related audit fees were
charged. However, for fiscal year 2006 the audit fees included
the audit of managements report on the effectiveness of
our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002.
Tax
Fees
The tax fees for the years ended December 31, 2007 and
2006, respectively, were for tax compliance/preparation and
other tax services. Tax compliance/preparation consists of fees
billed for assistance in the preparation of ESS
international, U.S. federal, state and local tax returns,
tax audits and appeals, and transfer pricing documentation.
Other tax services consist of tax advice related to mergers and
acquisitions and restructuring of foreign corporations.
All
Other Fees
All other fees for the years ended December 31, 2007 and
2006, respectively, were for subscription fees for the GAAP and
GAAS rule related updates.
The Audit Committee of the board of directors has considered
whether the provision by PricewaterhouseCoopers LLP of the
non-audit services listed above is compatible with maintaining
PricewaterhouseCoopers LLPs independence. The Audit
Committee has determined that the provision of the non-audit
services by PricewaterhouseCoopers LLP is compatible with
maintaining PricewaterhouseCoopers LLPs independence.
Policy on
Audit Committee Pre-Approval and Permissible Non-Audit Services
of Independent Registered Public Accounting Firm
The Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the
independent registered public accounting firm consistent with
applicable SEC rules. In general, the policy provides that
(1) the pre-approval request must be detailed as to the
particular services to be provided, (2) the Audit Committee
must be informed about each service, and (3) the
pre-approval may not result in a delegation of the Audit
Committees responsibilities to the management of ESS.
Pre-approval is generally provided for up to one year. The
independent registered public accounting firm is prohibited from
performing SEC prohibited non-audit services, including any
management functions. Under the policy, prior to the engagement
of the independent registered public accounting firm for the
next years audit, management and the independent
registered public accounting firm jointly submit a breakdown of
services expected to be rendered during that year for each of
the three categories of services described above, as well as the
anticipated fees for such services, to the Audit Committee for
approval. Prior to engagement, the Audit Committee pre-approves
these services and fees. The fees are budgeted and the Audit
Committee receives periodic reports from management and the
independent registered public accounting firm on actual fees
versus the budget by category of service. During the year,
circumstances may arise when it may become necessary to engage
the independent registered public accounting firm for additional
services not contemplated in the pre-approval. In those
instances, the Audit Committee requires specific pre-approval
before engaging the independent registered public accounting
firm. The Audit Committee may delegate pre-approval authority to
one or more of its members. The member or members to whom such
authority is delegated is required to report, for informational
purposes, any pre-approval decisions to the Audit Committee at
its next regularly scheduled meeting.
149
AUDIT
COMMITTEE REPORT
In 2000, the board of directors adopted a written charter for
the Audit Committee under which the Audit Committee performs its
functions and responsibilities. This charter has been amended
and restated from time to time in light of the Sarbanes-Oxley
Act of 2002 and new SEC and NASDAQ Market rules. The Audit
Committee reviews and reassesses the adequacy of this charter at
least once per year and makes recommendations to the board of
directors regarding changes or amendments the Audit Committee
deems appropriate.
Each of the Audit Committee members satisfies the definition of
independent director in accordance with applicable SEC and
NASDAQ Market rules. In addition, the board of directors has
determined that each Audit Committee member qualifies as an
audit committee financial expert as defined by SEC rules. The
Audit Committee met eight times during fiscal year 2007.
The Audit Committee has reviewed and discussed our audited
financial statements, together and separately, with the
independent registered public accounting firm and with
management, which has primary responsibility for the financial
statements. The Audit Committee has also reviewed the interim
financial information contained in each quarterly earnings
announcement with management and ESS independent
registered public accounting firm prior to the public release of
such earnings announcement.
The Audit Committee has discussed with ESS independent
registered public accounting firm the adequacy of our internal
control system, financial reporting procedures and other matters
that are required to be discussed by Statement on Auditing
Standards No. 61 (Communication With Audit Committees). Our
independent registered public accounting firm have provided to
the Audit Committee the written disclosures and the letter
required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and the Audit
Committee has discussed with the independent registered public
accounting firm the independent registered public accounting
firms independence.
The Audit Committee has reviewed the general scope of our annual
audit and fees charged by the independent registered public
accounting firm, has reviewed and approved the fees for and
monitored the performance of non-audit services by our
independent registered public accounting firm and has reviewed
the fairness of any proposed transactions between any officer,
director or other affiliate of ESS and ESS. The Audit Committee
concluded that PricewaterhouseCoopers LLPs provision of
non-audit services to ESS is compatible with
PricewaterhouseCoopers LLPs independence.
Based on its reviews of ESS 2007 audited financial
statements and the various discussions noted above, the Audit
Committee recommended to the board of directors that ESS
2007 audited financial statements be included in the our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2007 and appointed
PricewaterhouseCoopers LLP as our independent registered public
accounting firm for fiscal year 2008.
AUDIT COMMITTEE
Peter T. Mok, Chairman
Alfred J. Stein
David S. Lee
COMPENSATION
COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the
Compensation Discussion and Analysis required by
Item 402(b) of
Regulation S-K
and contained within this joint proxy statement/prospectus with
management and, based on such review and discussions with
management, the Compensation Committee recommended to the board
of directors that the Compensation Discussion and Analysis be
included in this joint proxy statement/prospectus and
incorporated into our Annual Report on
Form 10-K
for the year ended December 31, 2007.
COMPENSATION COMMITTEE
Peter T. Mok
Alfred J. Stein, Chairman
150
The compensation committee report is not soliciting
material, is not deemed filed with the SEC,
and is not to be incorporated by reference into any filing of
ESS under the Securities Act of 1933, as amended, or the
Exchange Act of 1934, as amended.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee consists of Mr. Alfred J. Stein
(Chairman) and Mr. Peter Mok. None of the persons who
served as members of our Compensation Committee during 2007 was,
is currently or has been, at any time since our formation, one
of our officers or employees. During 2007, no executive officer
served as a member of a board of directors or compensation
committee of any entity that has one or more executive officers
serving on our board of directors or our Compensation Committee.
None of the persons who served as members of our Compensation
Committee during 2007 currently has or has had any relationship
or transaction with a related person requiring disclosure
pursuant to Item 404 of
Regulation S-K.
151
PERFORMANCE
GRAPH
The following graph shows a comparison of the five-year
cumulative total return for ESS common stock, NASDAQ Stock
Market (US) Index and RDG Technology Composite Index (a
published industry index). The graph assumes the investment of
$100 in our common stock and in each of the indexes on
December 31, 2002, and reinvestment of all dividends. The
stock price performance on the following graph is not
necessarily indicative of future stock price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
ESS Technology, Inc., The NASDAQ Composite Index
And The RDG Technology Composite Index
* $100 invested on 12/31/02 in stock or index-including
reinvestment of dividends.
Fiscal year ending December 31.
The performance graph is not soliciting material, is
not deemed filed with the SEC, and is not to be
incorporated by reference into any filing of ESS under the
Securities Act of 1933, as amended, or the Exchange Act of 1934,
as amended.
152
TRANSACTIONS
WITH MANAGEMENT AND OTHERS
Review,
Approval or Ratification of Related Person
Transactions
Under SEC rules, a related person is a director, nominee for
director, executive officer, or more than five percent ESS
shareholder since the beginning of the last fiscal year and
their immediate family members. Such transactions may include
employment or consulting relationships with a related person or
contracts under which we receive goods or services from (or
provide goods and services to) a related person or a company for
which the related person is an employee or otherwise affiliated.
Our audit committee charter requires that the audit committee
apply our related person transaction policy and
procedures designed to identify related party transactions that
are material to our consolidated financial statements or
otherwise require disclosure under applicable laws and rules
adopted by the SEC. Our audit committee reviews and approves all
related party transactions other than compensation transactions.
Generally for a transaction to be approved, the audit committee
must be informed or have knowledge of (i) the related
persons relationship to ESS and interest in the
transaction; (ii) the material facts of the proposed
transaction, including a description of the nature and potential
aggregate value of the possible transaction; (iii) the
benefits, if any, to ESS of the proposed transaction;
(iv) if applicable, the availability of other sources of
comparable products or services; and (v) an assessment of
whether the proposed transaction or situation is on terms that
are comparable to the terms available to an unrelated third
party or to employees generally.
Transactions
with Related Persons
ESS has entered into indemnification agreements with our
directors and certain officers for the indemnification of and
advancement of expenses to these persons to the fullest extent
permitted by law. We also intend to enter into these agreements
with our future directors and certain future officers.
Pursuant to our articles of incorporation, bylaws and our
indemnification agreements with our officers and directors, we
are obligated to indemnify and advance expenses of our officers
and directors under certain circumstances to the fullest extent
permitted by California law. After we revised our revenues and
earnings guidance for the third quarter of 2002 on
September 12, 2002, several holders of our common stock,
purporting to represent the corporation, brought derivative
suits against us as a nominal defendant and certain of our
officers and directors. Class action lawsuits were also brought
against us. See
Business and Properties of the
Company
-
Legal Proceedings
. In connection with
these actions, during 2007, we paid an aggregate of $731,537 for
joint expenses, as to which there has been no allocation of
expenses among defendants.
Except as set forth above, in fiscal year 2007, we have not been
a party to any transaction exceeding $120,000 in value with any
of our directors, nominees for election as a director, executive
officers, holders of more than 5% of our common stock or any
member of the immediate family of any such persons, other than
normal compensation arrangements that are described under the
Executive Compensation section of this joint proxy
statement/prospectus.
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Exchange Act requires our directors and
officers, and persons who own more than 10% of our common stock
to file initial reports of ownership and reports of changes in
ownership with the SEC and the NASDAQ. Such persons are required
by SEC regulation to furnish us with copies of all
Section 16(a) forms that they file.
Based solely on its review of the copies of such forms furnished
to us and written representations from the executive officers
and directors, we believe that all Section 16(a) filing
requirements for the year ended December 31, 2007 were
satisfied on a timely basis.
153
DEADLINE
FOR RECEIPT OF SHAREHOLDER PROPOSALS
In the event that the mergers are not consummated, shareholders
may submit proposals to be included in our proxy materials on
matters appropriate for shareholder action at subsequent annual
meetings of our shareholders. For inclusion in our proxy
materials, a shareholder proposal must be received by ESS no
later than 120 days prior to the anniversary of the date of
the prior years proxy statement, in accordance with
Rule 14a-8
promulgated under the Exchange Act. If a shareholder wishes to
present a proposal at our annual meeting and the proposal is not
intended to be included in our proxy materials, the shareholder
must submit such proposals in writing to ESS not later than
45 days prior to the first anniversary of the mailing of
the prior years proxy statement, consistent with
Rule 14a-4
under the Exchange Act.
In order for ESS to receive notice by the shareholder a
reasonable time before it mails its proxy materials, any
shareholder who intends to present a proposal to be included in
the proxy materials for the annual meeting in 2009 must deliver
a written copy of the proposal to ESS principal executive
offices no later than the close of business on January 27,
2009. For submission of shareholder proposals for discretionary
voting (not intended to be included in our proxy materials), a
shareholder must give notice of such a proposal no later than
the close of business on April 12, 2009, referred to as the
discretionary vote deadline. If a shareholder gives notice of
such a proposal after the discretionary vote deadline our proxy
holders will be allowed to use their discretionary voting
authority to vote against the shareholder proposal when and if
the proposal is raised at our 2009 annual meeting of
shareholders.
OTHER
BUSINESS
The board of directors does not presently intend to bring any
other business before the annual meeting, and, so far as is
known to the board of directors, no matters are to be brought
before the annual meeting except as specified in this joint
proxy statement/prospectus. As to any business that may properly
come before the annual meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof
in accordance with the judgment of the persons voting such
proxies.
LEGAL
MATTERS
The validity of the shares of common stock offered hereby and
certain federal income tax consequences of the mergers will be
passed upon for ESS and Echo by Orrick, Herrington &
Sutcliffe LLP. Peter Cohn, a partner of Orrick,
Herrington & Sutcliffe LLP, is the Secretary of ESS.
EXPERTS
The financial statements as of December 31, 2007 and
December 31, 2006 and for each of the three years in the
period ended March 31, 2008 included in this joint proxy
statement/prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, an independent registered
public accounting firm, given on the authority of said firm as
experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
Echo has filed a registration statement on
Form S-4
under the Securities Act with the SEC with respect to the ESS
Delaware common stock to be issued to ESS shareholders in the
reincorporation merger. This joint proxy statement/prospectus
constitutes the prospectus of ESS Delaware filed as part of the
registration statement. This joint proxy statement/prospectus
does not contain all of the information set forth in the
registration statement because certain parts of the registration
statement are omitted in accordance with the rules and
regulations of the SEC. The registration statement and its
exhibits are available for inspection and copying as set forth
below.
154
In addition, ESS files annual, quarterly and current reports,
proxy and information statements and other information with the
SEC under the Exchange Act. Copies of these reports, proxy
statements and other information may be inspected and copied at
the Public Reference Room maintained by the SEC at:
100 F Street,
N.E.
Washington, D.C.
20549
Copies of these materials can also be obtained by mail at
prescribed rates from the Public Reference Room of the SEC,
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. The SEC
maintains a Website that contains reports, proxy statements and
other information regarding ESS. The address of the SEC web site
is
http://www.sec.gov.
You may also obtain these documents from ESS website,
http://www.esstech.com,
or by requesting them in writing or by telephone from ESS at the
following addresses:
ESS
Technology, Inc.
48401 Fremont Boulevard
Fremont, CA 94538
Attn: Investor Relations
Tel:
(510) 492-1088
ESS shareholders should contact Investor Relations at the
address or telephone number listed above with any questions
about the mergers.
This joint proxy statement/prospectus incorporates documents by
reference which are not presented in or delivered with this
joint proxy statement/prospectus. You should rely only on the
information contained in this joint proxy statement/prospectus
and in the documents that we have incorporated by reference into
this joint proxy statement/prospectus. No one has authorized
anyone to provide you with information that is different from or
in addition to the information contained in this joint proxy
statement/prospectus and incorporated by reference into this
joint proxy statement/prospectus.
In addition, all documents filed by ESS pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this joint proxy statement/prospectus and before the
date of the annual meeting are deemed to be incorporated by
reference into, and to be a part of, this joint proxy
statement/prospectus from the date of filing of those documents.
Any statement contained in this joint proxy statement/prospectus
or in a document incorporated or deemed to be incorporated by
reference into this joint proxy statement/prospectus will be
deemed to be modified or superseded for purposes of this joint
proxy statement/prospectus to the extent that a statement
contained in this joint proxy statement/prospectus or any other
subsequently filed document that is deemed to be incorporated by
reference into this joint proxy statement/prospectus modifies or
supersedes the statement. Any statement so modified or
superseded will not be deemed, except as so modified or
superseded, to constitute a part of this joint proxy
statement/prospectus.
ESS has supplied all information contained or incorporated by
reference in this joint proxy statement/prospectus about ESS,
and Imperium has supplied all information contained or
incorporated by reference in this joint proxy
statement/prospectus about Imperium.
The following documents, which were filed by ESS with the SEC,
are incorporated by reference into this joint proxy
statement/prospectus, except to the extent of information which
was furnished rather than filed by ESS, all such furnished
information specifically not being incorporated by reference
herein:
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ESS annual report on
Form 10-K
for the fiscal year ended December 31, 2007, filed with the
SEC on March 31, 2008;
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ESS current report on
Form 8-K
filed with the SEC on January 9, 2008;
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155
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ESS current report on
Form 8-K
filed with the SEC on February 22, 2008;
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ESS current report on
Form 8-K
filed with the SEC on March 31, 2008;
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ESS current report on
Form 8-K
filed with the SEC on April 8, 2008;
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ESS current report on
Form 8-K
filed with the SEC on April 16, 2008;
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ESS current report on
Form 8-K
filed with the SEC on April 28, 2008; and
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ESS quarterly report on Form 10-Q filed with the SEC on
May 15, 2008.
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Information
on ESS Web Site
Information on any ESS Internet web site is not part of this
document and you should not rely on that information in voting
for directors or in deciding whether to approve the
reincorporation merger or Merger, unless that information is
also in this joint proxy statement/prospectus or in a document
that is incorporated by reference in this joint proxy
statement/prospectus.
Information
on Imperiums Web Site
Information on any Imperium Internet web site is not part of
this document and you should not rely on that information in
voting for directors or in deciding whether to approve the
reincorporation merger or Merger, unless that information is
also in this joint proxy statement/prospectus or in a document
that is incorporated by reference in this joint proxy
statement/prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS, OR
THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES PURSUANT
TO THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH IN OR INCORPORATED INTO THIS
JOINT PROXY STATEMENT/PROSPECTUS BY REFERENCE OR IN THE AFFAIRS
OF ESS TECHNOLOGY, INC. SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
156
Statements
and Supplementary Data
The following documents are filed as part of this Report:
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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F-32
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F-33
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F-34
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F-34
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F-35
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F-36
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F-37
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F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of ESS Technology,
Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing on
page F-1
under (1) present fairly, in all material respects, the
financial position of ESS Technology, Inc. and its subsidiaries
at December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing on page
F-1
under (3) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for stock-based compensation in 2006.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 31, 2008
F-2
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December 31,
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2007
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2006
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(In thousands)
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ASSETS
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Cash and cash equivalents
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$
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43,110
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$
|
33,731
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Short-term investments
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|
6,837
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|
|
|
10,264
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Accounts receivable, net
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|
|
5,403
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|
|
|
9,189
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Other receivables
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|
|
482
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|
|
|
1,154
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Inventory
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|
|
7,210
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|
|
|
8,278
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Prepaid expenses and other assets
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|
|
823
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|
|
|
1,764
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Total current assets
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63,865
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64,380
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Property, plant and equipment, net
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12,609
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|
16,996
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Non-current deferred tax asset
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|
|
5,874
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Other assets
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9,025
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|
|
|
9,052
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Total assets
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$
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91,373
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$
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90,428
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LIABILITIES AND SHAREHOLDERS EQUITY
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Accounts payable and accrued expenses
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$
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7,928
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|
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$
|
20,404
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Income tax payable and deferred income taxes
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|
|
19
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|
|
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23,001
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Total current liabilities
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7,947
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|
43,405
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Non-current income tax liabilities
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35,661
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Total liabilities
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43,608
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43,405
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Commitments and contingencies (Note 15)
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Shareholders equity:
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Preferred stock, no par value, 10,000 shares authorized;
none issued and outstanding
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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
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176,459
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175,528
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Accumulated other comprehensive income
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845
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86
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Accumulated deficit
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(129,539
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)
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(128,591
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)
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Total shareholders equity
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47,765
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47,023
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Total liabilities and shareholders equity
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$
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91,373
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$
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90,428
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The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ESS
TECHNOLOGY, INC.
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Years Ended December 31,
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2007
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2006
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2005
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(In thousands, except per share data)
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Net revenues:
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Product
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$
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67,393
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$
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97,797
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$
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161,921
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License and royalty
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938
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2,668
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20,000
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Total net revenues
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68,331
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100,465
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181,921
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Cost of product revenues
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42,597
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97,640
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169,312
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Gross profit
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25,734
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2,825
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12,609
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Operating expenses:
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Research and development
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12,550
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36,044
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33,983
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Selling, general and administrative
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18,211
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27,566
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34,973
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Impairment of goodwill and intangible assets
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42,743
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Impairment of property, plant and equipment
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|
|
859
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|
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Gain on sale of technology and tangible assets
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|
(10,481
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)
|
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Operating income (loss)
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4,595
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|
|
(60,785
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)
|
|
|
(99,090
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)
|
Non-operating income (loss), net
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|
|
1,663
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|
|
|
(652
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)
|
|
|
1,316
|
|
|
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|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ESS
TECHNOLOGY, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ESS
TECHNOLOGY, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ESS
TECHNOLOGY, INC.
|
|
Note 1.
|
Nature of
Business
|
We were incorporated in California in 1984 and became a public
company in 1995. We have historically operated in two primary
business segments, Video and Digital Imaging, both in the
semiconductor industry and serving the consumer electronics and
digital media marketplace.
In our Video business, we design, develop and market highly
integrated analog and digital processor chips and digital
amplifiers. Our digital processor chips drive digital video and
audio devices, including DVD players, Video CD (VCD)
players, consumer digital audio players and digital media
players. We continue to sell certain legacy products we have in
inventory including chips for use in recordable DVD players,
modems, other communication devices and PC audio products. On
September 18, 2006 we announced an ongoing strategic review
of our operations and business plan. In connection with this
strategic review, on November 3, 2006, we licensed to
Hangzhou Silan Microelectronics Co., Ltd. (Silan)
the development, manufacture and sale of our next generation
standard definition DVD chips, the Phoenix II and LMX II,
and also granted Silan a non-exclusive license for our standard
definition DVD technology. Silan has recently notified us,
however, that it does not intend to proceed with the
development, manufacture and sale of any of the chips or
technology we licensed to Silan and we have sent Silan a notice
to cure this breach of our agreements. On February 16,
2007, we sold to Silicon Integrated Systems Corporation and its
affiliates (SiS) our tangible and intangible assets
relating to the development of high definition DVD chips based
on next generation blue laser technology. Also, in connection
with this restructuring strategy, during the first quarter of
2007 we substantially terminated the production and sale of our
camera phone image sensors, which were the only remaining
products of our Digital Imaging segment. We plan to license our
image sensor patents in exchange for royalties, but we will no
longer sell imaging sensor semiconductor chips. We continue to
design, develop and market highly integrated analog and digital
processor chips and digital amplifiers, including chips for
standard definition DVD players primarily for the Korean market,
and chips for digital audio players and digital media players
for all markets. We are now concentrating on our standard
definition DVD chip business and evaluating opportunities to
develop profitable operations.
Our strategy is to focus on the design and development of our
chip products while outsourcing all of our chip fabrication,
assembly, and test operations. All of our products are
manufactured, assembled and tested by independent third parties
primarily in Asia. We market our products worldwide through our
direct sales force, distributors and sales representatives.
Substantially all of our sales are to distributors, direct
customers and end-customers in China, Hong Kong, Taiwan, Japan,
Korea, Indonesia and Singapore. We employ sales and support
personnel located outside of the United States in China, Hong
Kong, Taiwan and Korea to support these international sales
efforts. We expect that international sales will continue to
represent a significant portion of our net revenues. We also
have a number of employees engaged in research and development
efforts outside of the United States. There are special risks
associated with conducting business outside of the United States.
On February 21, 2008, ESS Technology, Inc., a California
corporation (ESS California), Echo Technology
(Delaware), Inc., a Delaware corporation and a wholly owned
subsidiary of ESS California (Delaware Merger
Subsidiary), Semiconductor Holding Corporation, a Delaware
corporation and wholly owned subsidiary of Imperium Master Fund,
Ltd. (Parent), and Echo Mergerco, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent
(Merger Subsidiary) entered into an Agreement and
Plan of Merger (the Merger Agreement) pursuant to
which (i) ESS California will, subject to the satisfaction
or waiver of the conditions set forth in the Merger Agreement,
merge with and into Delaware Merger Subsidiary (the
Reincorporation Merger), the separate corporate
existence of ESS California shall cease and Delaware Merger
Subsidiary shall be the successor or surviving corporation of
the merger (ESS Delaware), and (ii) following
the Reincorporation Merger, Merger Subsidiary will, subject to
the satisfaction or waiver of the conditions set forth in the
Merger Agreement, including the consummation of the
Reincorporation Merger, merge with and into ESS Delaware (the
Merger), the separate corporate existence of Merger
Subsidiary shall cease and ESS Delaware shall be the successor
or surviving corporation of the merger and wholly owned
subsidiary of the Parent.
F-7
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon the consummation of the Reincorporation Merger, ESS
California will become a Delaware corporation, each share of ESS
California common stock will be converted into one share of ESS
Delaware common stock and each option to acquire ESS California
common stock granted pursuant to ESS Californias stock
plans and outstanding immediately prior to the consummation of
the Reincorporation Merger, whether vested or unvested,
exercisable or unexercisable, will be automatically converted
into the right to receive an option to acquire one share of ESS
Delaware common stock for each share of ESS California common
stock subject to such option, on the same terms and conditions
applicable to the option to purchase ESS California common stock
(each, an ESS Delaware Option).
Upon the consummation of the Merger, (i) ESS Delaware will
become a wholly owned subsidiary of Parent and (ii) each
share of ESS Delaware common stock will be converted into the
right to receive $1.64 in cash, unless the stockholder properly
exercises appraisal rights. In addition, each ESS Delaware
Option, whether vested or unvested, exercisable or
unexercisable, will be converted into the right to receive an
amount in cash equal to the product obtained by multiplying
(x) the aggregate number of shares of ESS Delaware common
stock subject to such ESS Delaware Option and (y) the
excess, if any, of the Merger Consideration less the exercise
price per share of ESS Delaware common stock subject to such ESS
Delaware Option, after which it shall be cancelled and
extinguished.
The parties to the Merger Agreement intend to consummate the
Merger as soon as practicable after the Reincorporation Merger
and ESS California will not consummate the Reincorporation
Merger unless the parties are in a position to consummate the
Merger. ESS California and Delaware Merger Subsidiary have made
customary representations and warranties in the Merger Agreement
and agreed to certain customary covenants, including covenants
regarding operation of the business of ESS California and its
subsidiaries, including Delaware Merger Subsidiary, prior to the
closing and covenants prohibiting ESS California from
soliciting, or providing information or entering into
discussions regarding, proposals relating to alternative
business combination transactions, except in limited
circumstances to permit the board of directors of ESS California
to comply with its fiduciary duties under applicable law.
The transactions contemplated by the Merger Agreement are
subject to ESS California shareholder approval, delivery of ESS
Californias audited financial statements for the year
ended December 31, 2007 and other customary closing
conditions. The Merger Agreement contains certain termination
rights for both ESS California and Parent and further provides
that, upon termination of the Merger Agreement under certain
circumstances, ESS California may be obligated to pay Parent a
termination fee of $1,981,000 plus reimbursement of
Parents and its affiliates reasonable expenses
incurred in connection with the transactions contemplated by the
Merger Agreement up to, but not in excess of, $500,000.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United Sates of America.
The consolidated financial statements include the accounts of
ESS Technology, Inc. and all of its subsidiaries. All
significant inter-company accounts and transactions have been
eliminated.
Certain reclassifications have been made to the consolidated
financial statements in order to conform with current year
presentation. These reclassifications had no impact on
previously reported results of operations, operating cash flows
or working capital.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts
F-8
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements
as well as the reported amounts of revenue and expenses during
the reporting period. Actual results could differ materially
from those estimates.
Foreign
Currency Translation
Our subsidiaries primarily use the U.S. dollar as their
functional currency. Accordingly, assets and liabilities of
these subsidiaries are translated using exchange rates in effect
at the end of the period, except for non-monetary assets that
are translated using historical exchange rates. Revenues and
costs are translated using average exchange rates for the
period, except for costs related to those balance sheet items
that are translated using historical exchange rates. The
resulting transaction gains and losses are recorded as
non-operating income (loss), net in the Consolidated Statement
of Operations as incurred and were $0.3 million,
$0.2 million and $(0.1) million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Cash,
Cash Equivalents, and Short-Term Investments
We consider all highly liquid investments with a maturity of
90 days or less at the time of purchase to be cash
equivalents and investments with maturity dates of greater than
90 days at the time of purchase to be short-term
investments.
Short-term investments are primarily comprised of debt
instruments and marketable securities. Short-term investments
are accounted for as available-for-sale and are reported at fair
value with unrealized gains and losses, net of related tax,
recorded as accumulated other comprehensive income in
shareholders equity until realized in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Gains and losses on securities sold
are based on the specific identification method and are included
in our Consolidated Statement of Operations as non-operating
income (loss), net.
Fair
Value of Financial Instruments
The reported amounts of certain of our financial instruments,
including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short maturities.
Inventory
Our inventory is comprised of raw materials,
work-in-process
and finished goods, all of which are manufactured by third-party
contractors. Inventory is valued at the lower of standard cost
(which approximates actual cost on a
first-in,
first-out basis) or market. We reduce the carrying value of
inventory for estimated slow-moving, excess, obsolete, damaged
or otherwise unmarketable products by an amount based on
forecasts of future demand and market conditions.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are generally computed using the straight-line
method over the shorter of the estimated useful lives of the
assets, or the lease term of the respective assets, if
applicable.
|
|
|
|
|
Building and building improvements
|
|
|
7-30 years
|
|
Machinery and equipment
|
|
|
3-5 years
|
|
Furniture and fixtures
|
|
|
3-5 years
|
|
Repairs and maintenance costs are expensed as incurred, and
improvements are capitalized.
F-9
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Equity
Investments
Equity investments, representing ownership of less than 20% of
the investee in which we do not have the ability to exert
significant influence, are accounted for using the cost method.
The Company reviews its investments on a regular basis and
considers factors including the operating results, available
evidence of the market value and economic outlook of the
relevant industry sector. When the Company concludes that an
other-than-temporary impairment has resulted, the difference
between the fair value and the carrying value is written off and
recorded as an impairment charge in the statement of operations.
Impairment
of Long-Lived Assets
We review long-lived assets and certain identifiable intangibles
assets to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. We evaluate any possible
impairment of long-lived assets and certain intangible assets
using estimates of undiscounted future cash flows. If an
impairment loss is to be recognized, it is measured as the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Management evaluates the fair value of
its long-lived assets and certain intangibles assets using
primarily the estimated discounted future cash flows method.
Management uses other alternative valuation techniques whenever
the estimated discounted future cash flows method is not
appropriate.
Revenue
Recognition
Revenue is primarily generated by product sales and is
recognized at the time of shipment when persuasive evidence of
an arrangement exists, the price is fixed or determinable and
collection of the resulting receivable is reasonably assured,
except for products sold to certain distributors with certain
rights of return for unsold products and rights to pricing
adjustments, in which case, revenue is deferred until such a
distributor resells the products to a third party. Such deferred
revenue related to distributor sales, net of deferred cost of
goods sold are recorded as deferred margin included in accrued
expenses on our balance sheets. License and royalty revenue is
recognized as the services provided have been completed, or
based on the units sold and reported to us by the third party
licensee provided collection of the resulting receivable is
reasonably assured.
We provide for rebates based on current contractual terms and
future returns based on historical experiences at the time
revenue is recognized as reductions to product revenue. Actual
amounts may be different from managements estimates. Such
differences, if any, are recorded in the period they become
known.
Research
and Development Costs
We expense research and development costs as incurred.
Income
Taxes
We account for income taxes under an asset and liability
approach that requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of timing differences between the carrying amounts and the tax
bases of assets and liabilities. U.S. deferred income taxes
are not provided on un-remitted earnings of our foreign
subsidiaries as such earnings are considered permanently
invested. Assumptions underlying recognition of deferred tax
assets and non-recognition of U.S. income tax on
un-remitted earnings can change if our business plan is not
achieved or if Congress adopts changes in the Internal Revenue
Code of 1986, as amended.
Effective January 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). This interpretation clarifies
the criteria for recognizing income tax benefits under FASB
Statement No. 109, Accounting for Income Taxes, and
requires additional disclosures about uncertain tax positions.
Under FIN 48 the financial statement recognition of the
benefit for a tax position is dependent upon the benefit being
more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the
F-10
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax benefit is then measured and recognized at the largest
amount that is greater than 50 percent likely of being
realized upon ultimate settlement.
Net
Income(Loss) per Share
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per
share is calculated using the weighted average number of
outstanding shares of common stock plus potential dilutive
shares. Potential dilutive shares consist of stock options using
the treasury stock method based on the average stock price for
the period. The calculation of diluted net income (loss) per
share excludes potential dilutive shares if the effect is
anti-dilutive.
Stock-Based
Compensation
Effective January 1, 2006, the Company began accounting for
share-based compensation under the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payments,
(SFAS No. 123(R)), which requires the
recognition of the fair value of share-based compensation. Under
the fair value recognition provisions for
SFAS No. 123(R), share-based compensation is estimated
at the grant date based on the fair value of the awards expected
to vest and recognized as expense ratably over the requisite
service period of the award. We have used the Black-Scholes
valuation model to estimate fair value of share-based awards,
which requires various assumptions including estimating stock
price volatility, forfeiture rates and expected life. We elected
to adopt the modified prospective application transition method
as provided by SFAS No. 123(R).
The Company has elected to use the with and without
approach as described in EITF Topic
No. D-32
in determining the order in which tax attributes are utilized.
As a result, the Company will only recognize a tax benefit from
stock-based awards in additional paid-in capital if an
incremental tax benefit is realized after all other tax
attributes currently available to the Company have been
utilized. In addition, the Company has elected to not account
for the indirect effects of stock-based awards on other tax
attributes, such as the research tax credit, through the income
statement.
Warranty
We provide standard warranty coverage for twelve months. We
account for the general warranty cost as a charge to cost of
product revenues when revenue is recognized. The estimated
warranty cost is based on historical product performance and
field expenses. In addition to the general warranty reserves, we
also provide specific warranty reserves for certain parts if
there are potential warranty issues. The following table shows
the details of the product warranty accrual.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risks
and Uncertainties
The semiconductor industry in which we operate is characterized
by rapid technological advances, changes in customer
requirements and evolving industry standards. Our failure to
anticipate or respond to such advances and changes could have a
material adverse effect on our business and operating results.
F-11
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentration
of Credit Risk
Financial instruments, which potentially subject us to
concentrations of credit risk, consist primarily of cash
equivalents, short-term investments, and accounts receivable. By
policy, we place our investments, other than
U.S. Government Treasury instruments, only with financial
institutions meeting our investment guidelines. The composition
and maturities of our cash equivalents and investments are
regularly monitored by management.
For a discussion of significant customers and distributors, see
Note 13, Business Segment Information and
Concentration of Certain Risks.
A substantial portion of our net revenues has been derived from
sales to a small number of customers. Sales to our top five
end-customers accounted for approximately 66% of our net
revenues in 2007 compared to 55% of our net revenues in 2006.
See Note 13, Business Segment Information and
Concentration of Certain Risks.
We believe that the concentration of credit risk on accounts
receivable is substantially mitigated by our evaluation process
and relatively short collection terms. We perform ongoing credit
evaluations of our customers financial condition and limit
the amount of credit extended as necessary but generally require
no collateral. We maintain an allowance for potential credit
losses. In estimating the allowance, we take into consideration
the overall quality and aging of the receivable portfolio and
specifically identified customer risks. Through
December 31, 2007 credit losses have been within our
expectations.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standard Board
(FASB) issued statement No. 157, Fair
Value Measurements (SFAS No. 157).
This standard defines fair value, establishes a framework for
measuring fair value in accounting principles generally accepted
in the United States of America, and expands disclosure about
fair value measurements. This pronouncement applies under other
accounting standards that require or permit fair value
measurements. Accordingly, this statement does not require any
new fair value measurement. In February 2008, the FASB issued
FASB Staff Position (FSP)
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1)
and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-1
amends SFAS No. 157 to remove certain leasing
transactions from its scope.
FSP 157-2
delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal 2009. The
measurement and disclosure requirements related to financial
assets and financial liabilities are effective for us beginning
in the first quarter of fiscal 2008. We are currently evaluating
the requirements of SFAS No. 157 and have not yet
determined the impact on our consolidated financial statements.
In February 2007, the FASB issued statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159).
SFAS No. 159 permits companies to choose to measure
certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be
reported in earnings. SFAS No. 159 is effective for us
beginning in the first quarter of fiscal year 2008, although
earlier adoption is permitted. We are currently evaluating the
impact that SFAS No. 159 may have on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141(R)). Under SFAS No. 141(R), an
entity is required to recognize the assets acquired, liabilities
assumed, contractual contingencies, and contingent consideration
at their fair value on the acquisition date. It further requires
that acquisition-related costs be recognized separately from the
acquisition and expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition
date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition,
acquired in-process research and development (IPR&D) is
capitalized as an intangible asset and amortized
F-12
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
over its estimated useful life. The adoption of
SFAS No. 141(R) will change our accounting treatment
for business combinations on a prospective basis beginning in
the first quarter of fiscal year 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 changes the
accounting and reporting for minority interests, which will be
recharacterized as non-controlling interests and classified as a
component of equity. SFAS No. 160 is effective for us
on a prospective basis for business combinations with an
acquisition date beginning in the first quarter of fiscal year
2009. As of December 29, 2007, we did not have any minority
interests. The adoption of SFAS No. 160 is not
expected to impact our consolidated financial statements.
|
|
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
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2007, 2006 and 2005, we
recognized approximately $6.2 million, $6.2 million
and $5.2 million, respectively, of net revenue on products
for which the inventory costs were fully reserved in a prior
year. Further, during the years ended December 31, 2007,
2006 and 2005, we provided new or increased inventory reserves
of approximately $1.3 million, $14.6 million and
$7.5 million, respectively, on other unsold products in
inventory. As of December 31, 2006, we had accrued
approximately $3.1 million as
non-cancelable,
adverse purchase order commitments. Of this amount,
$1.5 million was released to cost of product revenues in
2007 when it was determined that payment would not be required.
F-13
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Marketable
Securities
|
The amortized costs and estimated fair value of securities
available-for-sale as of December 31, 2007 and
December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of debt securities classified as
available-for-sale as of December 31, 2007, are as follows:
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Even though certain stated maturity dates of these investments
exceed one year beyond the balance sheet dates, we have
classified all marketable debt investments as short-term
investments. In accordance with Accounting Research
Bulletin No. 43, Chapter 3A, Working
Capital-Current Assets and Current Liabilities, we view
our available-for-sale portfolio as available for use in our
current operations. Actual maturities may differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties, and we may need to sell the investment to meet our
cash needs. Gross realized gains and gross realized losses for
the twelve months ended December 31, 2007, 2006 and 2005
were not material to our financial position or results of
operations.
Long-term marketable securities consists of our investment in
MosChip Semiconductor Technology Limited (MosChip).
In April 2002, we acquired 1,600,000 shares of MosChip
common stock for approximately $1,012,000 in cash. In December
2003, we acquired an additional 500,000 shares for
approximately $298,000. In July 2004, we acquired an additional
229,092 shares for approximately $176,000. Our total
investments represent approximately a 5% equity interest in
MosChip on a fully diluted basis. MosChip is a publicly traded
company based in Hyderabad, India, specializing in designing,
manufacturing and marketing very large integrated circuits
(ICs), with particular focus on consumer and data
communication ICs. Due to a decrease in the fair market value of
Moschip common stock that we considered to be other than
temporary, in the second quarter of 2006 we wrote down our
investment to $1,233,000 and recorded a corresponding charge of
$252,000 to non-operating income (loss), net. During the year
ended December 31, 2007, the Company recorded an unrealized
gain of $727,000.
|
|
Note 5.
|
Investments
in Equity Securities
|
In January 2003, we acquired 4,545,400 shares of
Convertible Non-Cumulative Preference Series B shares of
Best Elite International Limited (Best Elite) for
approximately $5,000,000 in cash. In January 2004, we acquired
an additional 4,545,455 shares for approximately $5,000,000
in cash, on the same terms and price as the initial investment.
Our investments represent approximately 1.3% equity interest in
Best Elite on a fully diluted basis. Best Elite is a privately
held company organized under the laws of the British Virgin
Islands as an investment vehicle primarily for the purposes of
operating a semiconductor foundry in China. During the year
ended December 31, 2006, we wrote down the investment to
$7,000,000, which represented our equity interest in Best
Elites book value. A similar write down of the investment
to $6,857,000 was recorded in 2007. We believe that book value
represents fair value.
|
|
Note 6.
|
Non-Operating
Income (Loss), Net
|
The following table lists the major components of Non-Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income (loss) before provision for (benefit from) income taxes
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation between the provisions for (benefit from) income
taxes computed at the federal statutory rate of 35% and the
provision for (benefit from) income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, state net operating loss
carryforwards for income tax purposes were approximately
$6.2 million. If not utilized, the state net operating loss
carryforwards will begin to expire in 2016. The Companys
federal and state research tax credit carryforwards for income
tax purposes are approximately $0.4 million and
$2.6 million, respectively. If not utilized, the federal
tax credit carryforwards will begin to expire in 2016, while the
state credits may be carried forward indefinitely. Utilization
of these state net operating loss and federal and state tax
credit carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986, as amended, and similar state
provisions.
We have evaluated our deferred tax assets and concluded that a
valuation allowance is required for that portion of the total
deferred tax assets that are not considered more likely than not
to be realized in future periods. To the extent that the
deferred tax assets with a valuation allowance become realizable
in future periods, we will have the ability, subject to
carryforward limitations, to benefit from these amounts. As of
December 31, 2007, management has concluded that it is more
likely than not that the Companys $5.8 million of net
deferred tax assets will be realized.
We have not provided for U.S. federal income and state
income taxes on
non-U.S. subsidiaries
undistributed earnings as of December 31, 2007, because
such earnings are intended to be reinvested in the operations
and potential acquisitions of our international subsidiaries
indefinitely. Upon distribution of those earnings in the form of
dividends of otherwise, we would be subject to applicable
U.S. federal and state income taxes; however, it is not
practicable to determine the amount of this liability.
Uncertain
Income Tax Positions
Effective January 1, 2007, the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). This interpretation clarifies
the criteria for recognizing income tax benefits under FASB
Statement No. 109, Accounting for Income Taxes, and
requires additional disclosures about uncertain tax positions.
Under FIN 48 the financial statement recognition of the
benefit for a tax position is dependent upon the benefit being
more likely than not to be sustainable upon audit by the
applicable taxing authority. If this threshold is met, the
F-18
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax benefit is then measured and recognized at the largest
amount that is greater than 50 percent likely of being
realized upon ultimate settlement. The cumulative effect of
adopting FIN No. 48 was an increase of
$4.1 million as a credit to tax liabilities and an increase
to the January 1, 2007 accumulated deficit balance. Upon
adoption, the tax liability at January 1, 2007 was
$33.6 million, which includes $24.1 million that was
reclassified from current to non-current liabilities because
payment of cash was not anticipated within one year of the
balance sheet.
A reconciliation of the beginning and ending amount of the
unrecognized income tax benefits during the tax year ended
December 31, 2007 is as follows:
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that would affect
our effective tax rate if recognized is $23.0 million as of
December 31, 2007 and $23.3 million as of
January 1, 2007. We do not believe that the total amounts
of unrecognized tax benefits will significantly increase or
decrease within 12 months of the reporting date. We
recognize interest and penalties related to uncertain tax
positions in income tax expense. As of January 1, 2007 and
December 31, 2007, we had approximately $4.1 million
and $6.2 million of accrued interest related to uncertain
tax positions, respectively.
Our only major tax jurisdictions are the United States,
California, and Hong Kong. The tax years 2003 through 2007
remain open and subject to examination by the appropriate
governmental agencies in the U.S., 2003 through 2007 in
California, and 2000 through 2007 in Hong Kong.
|
|
Note 8.
|
Impairment
of Property, Plant and Equipment
|
In connection with the strategic review of operations and
business plan announced in September 2006, we substantially
terminated the operations of our camera phone image sensor
business during the first quarter of 2007. As a result, we have
recorded a $0.9 million impairment charge for property,
plant and equipment related to our image sensor business.
|
|
Note 9.
|
Gain on
Sale of Technology and Tangible Assets
|
On February 16, 2007, we entered into asset purchase
agreements with SiS, pursuant to which we transferred employees,
sold certain tangible assets, and sold and licensed intellectual
property related to our HD-DVD and
Blu-ray
DVD
technologies for aggregate proceeds of approximately
$13.5 million. Of this amount, $9.5 million was
received during the first quarter of 2007, and $2.0 million
was received during the second quarter of 2007. The remaining
$2.0 million is to be paid on or about August 16, 2008
subject to adjustment upon settlement of any escrow claims by
SiS. The gain recognized during the year ended December 31,
2007 includes the proceeds received, net of the book value of
assets sold of $870,000 and certain transaction expenses related
to the sale to SiS amounting to $149,000. We have not recognized
any revenue related to HD-DVD or Blu-ray DVD products in any
period.
F-19
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 10.
|
Net
Income (Loss) Per Share
|
Statement of Financial Accounting Standards No. 128,
Earnings per Share
(SFAS No. 128) requires us to report both
basic net income (loss) per share, which is based on the
weighted-average number of common shares outstanding excluding
contingently assumable or returnable shares such as unvested
common stock or shares that contingently convert into common
stock upon certain events, and diluted net income (loss) per
share, which is based on the weighted average number of common
shares outstanding and dilutive potential common shares
outstanding.
The following tables set forth the computation of net income
(loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ending December 31, 2007, options representing
5,079,000 equivalent shares were excluded from the earnings per
share calculation as they were anti-dilutive. Because we
incurred net losses during the years ended December 31,
2006 and 2005, options for approximately 7,287,000 and
9,753,000 shares were excluded from the calculation of net
loss per share.
|
|
Note 11.
|
Shareholders
Equity
|
Common
Stock
Stock
Repurchase
From time-to-time our Board of Directors has authorized
management, at their discretion, to repurchase shares of our
common stock on the open market as conditions warrant.. During
the year ended December 31, 2006, we repurchased
4,185,000 shares of our common stock for an aggregate price
of $5.9 million at market prices ranging from $0.97 to
$3.52 per share. We did not repurchase any shares in 2007. Upon
repurchase, all shares are retired and no longer deemed
outstanding.
On February 16, 2007, our Board of Directors authorized us
to repurchase an additional 5 million shares of our common
stock, in addition to all shares that remain available for
repurchase under previously announced programs, on the same
terms and conditions as these prior repurchase programs. To
date, we have not repurchased any shares under the
February 16, 2007 repurchase program.
As of December 31, 2007, management was authorized to
repurchase an aggregate of 5,688,000 shares. There is no
stated expiration for this program.
1995
Equity Incentive Plan
In August 1995, we adopted the 1995 Equity Incentive Plan (the
1995 Plan), which provides for the grant of stock
options and stock bonuses and the issuance of restricted stock
to our employees, directors and others. Under the 1995 Plan,
options granted generally vest 25% at the end of the first year,
after the anniversary date of the date of grant, and ratably
thereafter over the remaining vesting period. A total of
3,000,000 shares of our common stock was reserved for
issuance under the 1995 Plan.
F-20
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This plan is no longer active and we will no longer issue
options under this plan. The 1995 Plan terminated in July 2005;
however, outstanding options issued under this plan will remain
exercisable until they expire.
1995
Employee Stock Purchase Plan
In August 1995, we adopted the 1995 Employee Stock Purchase Plan
(the Purchase Plan) and reserved a total of
225,000 shares of our common stock for issuance thereunder.
The Purchase Plan, as most recently amended on May 29,
2003, authorizes the aggregate issuance of 1,425,000 shares
under the Purchase Plan. The Purchase Plan permits eligible
employees to acquire shares of our common stock through payroll
deductions at a price equal to the lower of 85% of the fair
market value of our common stock at the beginning of the
offering period or on the purchase date. The Purchase Plan
provides a
24-month
rolling period beginning on each enrollment date and the
purchase price is automatically adjusted to reflect the lower
enrollment price. As of December 31, 2007,
1,293,000 shares have been issued under this plan.
1995 Directors
Stock Option Plan
In August 1995, we adopted the 1995 Directors Stock Option
Plan (the Directors Plan) and reserved a total of
300,000 shares of our common stock for issuance thereunder.
The Directors Plan, as amended in April 2001, authorizes the
issuance of 600,000 shares. The Directors Plan allows for
granting of stock options to non-employee members of the Board
of Directors of the Company. The plan was amended as of
July 24, 2004 to extend the termination date from 2005 to
2015 and increase the number of authorized shares by 400,000.
The plan was amended as of November 23, 2004 to provide a
3-year
post-termination exercise period for termination of service for
any reason by a non-employee director.
1997
Equity Incentive Plan
In May 1997, we adopted the 1997 Equity Incentive Plan (the
1997 Incentive Plan) and reserved a total of
3,000,000 shares of our common stock for issuance
thereunder. The 1997 Incentive Plan, as most recently amended in
May 2003, authorizes the issuance of 13,000,000 shares. The
terms of the 1997 Incentive Plan are similar to those of the
1995 Incentive Plan outlined above. This plan is no longer
active and we will no longer issue options under this plan. The
1997 Plan terminated in April 2007; however, outstanding options
issued under this plan will remain exercisable until they expire.
2002
Non-executive Stock Option Plan
In May 2002, we adopted the 2002 Non-Executive Stock Option Plan
(the 2002 Plan) and reserved a total of
2,000,000 shares of our common stock for issuance
thereunder. The 2002 Plan allows for granting of stock options
to our non-executive employees and consultants, and options
granted under the 2002 Plan are Non-statutory Stock Options. The
vesting schedule of the 2002 Plan is generally similar to those
of the 1995 Plan outlined above.
|
|
Note 12.
|
Stock-Based
Compensation
|
Effective January 1, 2006, we adopted the provisions of
SFAS No. 123(R), which requires the measurement and
recognition of compensation expense for all stock-based payment
awards made to employees and directors, including employee stock
options and employee stock purchases related to the Employee
Stock Purchase Plan, based on estimated fair values. We had
previously applied Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, (APB 25) and related
Interpretations and provided the required pro forma disclosures
of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS No. 123) which was superseded by
SFAS No. 123(R). The Company has also applied the
provisions of Staff Accounting Bulletin No. 107
(SAB 107) in the adoption of
SFAS No. 123(R).
F-21
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact
of the Adoption of SFAS No. 123(R)
We elected to adopt the modified prospective application
transition method as provided by SFAS No. 123(R). In
accordance with the modified prospective transition method,
consolidated financial statements for prior periods have not
been restated to reflect, and do not include, the impact of
SFAS No. 123(R). Stock-based compensation expense
recorded under SFAS No. 123(R) for the year ended
December 31, 2007 and 2006 was $0.9 million and
$3.6 million, respectively. Stock-based compensation
expense recorded during the year ended December 31, 2005
was not significant.
The effect of recording stock-based compensation for 2007 and
2006 were as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2007, we granted
approximately 226,000 stock options with an estimated total
grant-date fair value of $129,000. As of December 31, 2007,
total unrecognized stock-based compensation cost related to
stock options was $245,000 after estimated forfeitures, which
will be recorded as compensation expense over an estimated
weighted average period of approximately one year. During the
year ended December 31, 2006, we granted approximately
293,000 stock options with an estimated total grant-date fair
value of $381,000.
No stock based compensation costs were capitalized as inventory
at December 31, 2007 and 2006 because the amounts were not
material.
Valuation
Assumptions
SFAS No. 123(R) requires companies to estimate the
fair value of stock options on the date of grant using a
valuation model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the
requisite service periods in the consolidated statement of
operations. Prior to the adoption of SFAS No. 123(R),
we accounted for stock-based awards to employees and directors
using the intrinsic value method in accordance with APB 25 as
allowed under SFAS No. 123. Under the intrinsic value
method, no stock-based compensation expense had been recognized
in the consolidated statement of operations, other than as
related to acquisitions and investments, because the exercise
price of the our stock options granted to employees and
directors equaled the fair market value of the underlying stock
at the date of grant.
Stock-based compensation expense recognized in the consolidated
statement of operations for the year ended December 31,
2007 and 2006 included compensation expense for stock options
granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value estimated in accordance with
the pro forma provisions of SFAS No. 123 and
compensation expense for the stock options granted subsequent to
January 1, 2006 based on the
F-22
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). Stock-based
compensation expense recognized in the Consolidated Statements
of Operations for the year ended December 31, 2007 and 2006
has been reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In
the pro forma information required under SFAS No. 123
for the prior periods, the Company accounted for forfeitures as
they occurred.
We estimate the fair value of stock options using the
Black-Scholes valuation model, consistent with the provisions of
SFAS No. 123(R), SAB 107 and our prior period pro
forma disclosures of net earnings, including stock-based
compensation. The Black-Scholes valuation model was developed
for use in estimating the fair value of short-lived exchange
traded options that have no vesting restrictions and are fully
transferable. In addition, valuation models require the input of
subjective assumptions, including the options expected
life and the price volatility of the underlying stock. The
Black-Scholes valuation model for stock compensation expense
requires us to make several assumptions and judgments about the
variables to be assumed in the calculation including expected
life of the stock option, historical volatility of the
underlying security, an assumed risk-free interest rate and
estimated forfeitures over the expected life of the option. The
dividend yield of zero is based on the fact that we have never
paid cash dividends and have no present intention to pay cash
dividends. The expected life represents the weighted average
period of time that options granted are expected to be
outstanding giving consideration to vesting schedules and our
historical exercise patterns; expected volatilities are based on
historical volatilities of our common stock; the risk-free rate
is based on the U.S. Treasury yield curve in effect at the
time of grant for periods corresponding with the expected life
of the option; and we consider many factors when estimating
expected forfeitures, including types of awards, employee class,
and historical experience.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option valuation model and the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
We have several equity incentive plans that are intended to
attract and retain qualified management, technical and other
employees, and to align stockholder and employee interests as
detailed in Note 11. These equity incentive plans provide
that non-employee directors, officers, key employees,
consultants and all other employees may be granted options to
purchase shares of our stock, restricted stock units and other
types of equity awards. Through December 31, 2007, we have
only granted stock options under our various plans. These stock
options generally have a vesting period of four years, are
exercisable for a period not to exceed ten years from the date
of issuance and are granted at prices not less than the fair
market value of our common stock at the grant date.
F-23
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Combined
Activity
The following table summarizes the combined activity under the
equity incentive plans for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
At December 31, 2007, we had an aggregate of 2,051,000
options available to grant. The aggregate intrinsic value of
options vested and expected at December 31, 2007 to vest in
the future, based on our closing stock price of $1.33 as of
December 31, 2007, was approximately $43,000.
The weighted average grant date fair value of options, as
determined under SFAS No. 123(R), granted during the
year ended December 31, 2007 and 2006 were $0.57 and $1.30
per share, respectively. The total intrinsic value of options
exercised during the year ended December 31, 2006 was
$7,000. There were no stock option exercised during the year
ended December 31, 2007. The total cash received from
employees as a result of employee stock option exercises during
the year ended December 31, 2006 was $17,000. In connection
with these exercises, we realized no tax benefits.
We settle employee stock option exercises with newly issued
common shares.
F-24
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior
to the Adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), we provided
the disclosures required under SFAS No. 123. The pro
forma information for the year ended December 31, 2005 as
follows (in thousands, except per share data):
|
|
|
|
|
|
|
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
|
Business
Segments
We have historically operated in two reportable business
segments: the Video segment and the Digital Imaging segment. In
the Video segment, we primarily develop and market digital
processor chips which are the primary processors driving digital
video and audio devices, including DVD, VCD, consumer digital
audio players, and digital media players. The Video segment
markets encoding processors for digital video recorders and
recordable DVD players and continues to sell certain legacy
products we have in inventory including chips for use in modems,
other communication devices, and PC audio products. Our Digital
Imaging segment has historically developed and marketed imaging
sensor chips for cellular camera phone applications. The method
for determining what information to report is based on the way
that management organized the operating segments within the
Company for making operational decision and assessments of
financial performance. Our chief operating decision maker is
considered to be the Chief Executive Officer.
The following table summarizes revenue percentages by major
product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DVD revenue includes revenue from sales of DVD decoder chips,
integrated encoder and decoder chips and non-integrated encoder
and decoder chipsets. VCD revenue includes revenue from sales of
VCD chips. Royalty and License revenue consists of revenue from
license of DVD Technology to MediaTek, Silan and from license of
TV
F-25
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
audio technology to NEC. Digital Imaging revenue includes
revenue from sales of image sensor chips and image processor
chips.
We evaluate operating segment performance based on net revenues
and operating income (loss) of our segments. The accounting
policies of the operating segments are the same as those
described in the summary of accounting policies. Information
about reported segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the totals reported for the
operating segments to the applicable line items in the
consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Information
We sell and market to leading consumer OEMs worldwide.
International sales comprise substantially all of our revenues.
The following schedule of geographic location of our revenues
for 2007, 2006 and 2005 was based upon destination of the
shipment. Thus, our sales to our current and former
distributors, CKD and FE Global, were categorized as sales to
Hong Kong, even though CKD and FE Global eventually sell
products to other parts of China. The following table summarizes
net revenue and long-lived assets for the years ended
December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
Customers and Distributors
We sell to both direct customers and distributors. We use both a
direct sales force as well as sales representatives to help us
sell to our direct customers. FE Global (China) Limited
(FE Global) was our largest distributor. On
August 31, 2007, our distribution agreement with FE Global
was terminated. On August 31, 2007, we signed a new
distribution agreement with CKD (Hong Kong) High Tech Company
Limited (CKD) who will perform similar functions as
those previously provided by FE Global. We work directly with
many of our customers in Hong Kong and China on product design
and development. Whenever one of these customers buys our
products; however, the order is processed through our
distributor, which functions much like a trading company. Our
distributor manages the order processing, arranges shipment into
China and Hong Kong, manages the letters of credit, and provides
credit and collection expertise and services. The title and risk
of loss for the inventory are transferred to the distributor
upon shipment of inventory and the distributor is legally
responsible to pay our invoices regardless of when the
inventories are sold to end-customers. During the year ended
December 31, 2007, 2006, and
F-27
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005, FE Global accounted for approximately 18%, 32%, and 37% of
our net revenues, respectively. In addition to FE Global,
Weikeng Industrial Company, Ltd (Weikeng), our other
distributor, accounted for approximately 11% of our net revenues
in 2007 and less than 10% in 2006 and 2005. Revenues on sales to
FE Global, CKD and Weikeng are deferred until the
products are subsequently sold to end-customers.
The following table sets forth end-customers representing
greater than 10% of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
Customers representing greater than 10% of gross accounts
receivable were:
|
|
|
|
|
|
|
|
|
|
|
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.
|
In April 2001, our Board of Directors decided to spin off
Vialta, Inc. (Vialta), our majority-owned
subsidiary. The spin-off transaction, by which Vialta became a
public company, was completed in August 2001. On October 7,
2005, Vialta completed its going-private transaction. We do not
have any contractual obligations that are expected to have a
material impact upon our revenues, operating results or cash
flows under any of the spin-off agreements. We leased certain
office space to Vialta. In February 2006, Vialta moved out of
our building and we have terminated the lease agreements.
Our former Chairman of the Board of Directors, Fred S.L. Chan,
is the chairman of Vialta and acquired Vialta through a
going-private transaction in October 2005. In addition to the
lease we had with Vialta, from time-to-time, we also sold
semiconductor products and provided certain services to Vialta.
The following is a summary of major transactions between Vialta
and us for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Receivable from Vialta
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15.
|
Commitments
and Contingencies
|
The following table sets forth the amounts of payments due under
specified contractual obligations, aggregated by category of
contractual obligations, as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, our commitments to purchase
inventory from the third-party contractors aggregated
approximately $4.6 million. Additionally, as of
December 31, 2007, commitments for service, license and
other operating supplies totaled $4.3 million
The total rent expense under all operating leases was
approximately $2.8 million, $4.3 million and
$4.6 million for fiscal years 2007, 2006 and 2005,
respectively.
We enter into various agreements in the ordinary course of
business. Pursuant to these agreements, we may agree to
indemnify our customers for losses suffered or incurred by them
as a result of any patent, copyright, or other intellectual
property infringement claims by any third party with respect to
our products. These indemnification obligations may have
perpetual terms. We estimate the fair value of our
indemnification obligations as insignificant, based upon our
history of litigation concerning product and patent infringement
claims. Accordingly, we have no liabilities recorded for
indemnification under these agreements as of December 31,
2007.
We have agreements whereby our officers and directors are
indemnified for certain events or occurrences while the officer
or director is, or was serving, at our request in such capacity.
The maximum potential amount of future payments we could be
required to make under these indemnification agreements is
unlimited. However, we have a directors and officers
insurance policy that may reduce our exposure and enable us to
recover a portion of any future amounts paid. As a result of our
insurance policy coverage, we believe the estimated fair value
of these indemnification agreements is minimal.
Legal
Proceeding
On September 12, 2002, following our downward revision of
revenue and earnings guidance for the third fiscal quarter of
2002, a series of putative federal class action lawsuits were
filed against us in the United States District Court, Northern
District of California. The complaints alleged that we and
certain of our present and former officers and directors made
misleading statements regarding our business and failed to
disclose certain allegedly material facts during an alleged
class period of January 23, 2002 through September 12,
2002, in violation of federal securities laws. These actions
were consolidated under the caption In re ESS Technology
Securities Litigation. The plaintiffs sought unspecified
damages on behalf of the putative class. Plaintiffs amended
their consolidated complaint on November 3, 2003, which we
then moved to dismiss on December 18, 2003. On
December 1, 2004, the Court granted in part and denied in
part our motion to dismiss, and struck from the complaint
allegations arising prior to February 27, 2002. On
December 22, 2004, based on the Courts order, we
moved to strike from the complaint all remaining claims and
allegations arising prior to September 10, 2002. On
February 22, 2005, the
F-29
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Court granted our motion in part and struck all remaining claims
and allegations arising prior to August 1, 2002 from the
complaint. In an order filed on February 8, 2006, the Court
certified a plaintiff class of all persons and entities who
purchased or otherwise acquired the Companys publicly
traded securities during the period beginning August 1,
2002, through and including September 12, 2002 (the
Class Period), excluding officers and directors
of the Company, their families and families of the defendants,
and short-sellers of the Companys securities during the
Class Period. On March 24, 2006, plaintiff filed a
motion for leave to amend their operative complaint, which the
Court denied on May 30, 2006. Trial was tentatively set for
January 2008. On November 12, 2006, the parties attended a
mediation at which they agreed to settle the litigation for
$3.5 million (to be paid by defendants insurance
carriers), subject to appropriate documentation by the parties
and approval by the Court. The Stipulation of Settlement and
Release was filed with the Court on April 30, 2007. On
May 8, 2007, the Court issued an order preliminarily
approving the settlement and providing for class notice. At a
fairness hearing on July 27, 2007, having received no
objections to the settlement and no requests for exclusion, the
Court entered a Final Judgment and Order of Dismissal With
Prejudice as to all defendants. The time for appeal from the
Final Judgment and Order of Dismissal With Prejudice has now
passed. While defendants have denied and continue to deny any
and all allegations of wrongdoing in connection with this
matter, we believe that given the uncertainties and cost
associated with litigation, the settlement is in the best
interests of the Company and its stockholders. We recorded a
$3.5 million loss for the settlement during the quarter
ended March 31, 2007. In addition, a receivable from our
insurance carriers was also recorded for the same amount, plus
recoverable legal fees. Accordingly, there is no impact to the
statement of operations because the amount of the settlement,
including legal expenses, and the insurance recovery offset each
other. The settlement was completed during the year ended
December 31, 2007.
On September 12, 2002, following the same downward revision
of revenue and earnings holders of our common stock, purporting
to represent us, filed a series of derivative lawsuits in
California state court, County of Alameda, against us as a
nominal defendant and against certain of our present and former
directors and officers as defendants. The lawsuits alleged
certain violations of the federal securities laws, including
breaches of fiduciary duty and insider trading. These actions
were consolidated as a Consolidated Derivative Action with the
caption ESS Cases. The derivative plaintiffs sought
compensatory and other damages in an unspecified amount,
disgorgement of profits, and other relief. On March 24,
2003, we filed a demurrer to the consolidated derivative
complaint and moved to stay discovery in the action pending
resolution of the initial pleadings in the related federal
action, described above. The Court denied the demurrer but
stayed discovery. That stay was then lifted in light of the
procedural progress of the federal action. The parties reached
an agreement in principle to settle the litigation in exchange
for certain minor modifications of the Companys internal
policies and payment of plaintiffs attorneys fees not to
exceed $200,000 (to be paid by defendants insurance
carriers). The agreement in principle to settle the litigation
was then documented and finalized by the parties and submitted
to the Court for approval. On October 1, 2007, the
Stipulation and Agreement of Settlement became binding upon the
Courts entry of a final Judgment of Dismissal with
prejudice as to all defendants in the action, subject to appeal
as required by applicable state law. While defendants have
denied and continue to deny any and all allegations of
wrongdoing in connection with this matter, we believe that given
the uncertainties and cost associated with litigation, the
settlement is in the best interests of the Company and its
stockholders. We recorded a $200,000 loss for the proposed
settlement in the quarter ended June 30, 2007, as
management has determined this amount probable of payment and
reasonably estimable. In addition, because recovery from the
insurance carriers is probable, a receivable was also recorded
for the same amount. Accordingly, there is no impact to the
statement of operations because the amount of the settlement and
the insurance recovery offset each other.
On October 4, 2006, Ali Corporation (Ali) filed
a lawsuit in Alameda County Superior Court against the company
that alleged claims for breach of contract, common counts,
quantum meruit, account stated and for an open book account. All
of the claims arose from a Joint Development Agreement between
the company and Ali, originally entered into on
December 14, 2001 and subsequently amended on several
occasions. Alis complaint sought damages in the amount of
$2.5 million. The company answered Alis complaint and
on April 6, 2007 the
F-30
ESS
TECHNOLOGY, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
parties settled this matter in the course of a formal mediation.
A Settlement Agreement was executed whereby the Company has
settled the case by paying $1.7 million to Ali during the
year ended December 31, 2007.
From time to time, we are subject to various claims and legal
proceedings. If management believes that a loss arising from
these matters is probable and can reasonably be estimated, we
would record the amount of the loss, or the minimum estimated
liability when the loss is estimated using a range, and no point
within the range is more probable than another. As additional
information becomes available, any potential liability related
to these matters is assessed and the estimates are revised, if
necessary. Based upon consultation with the outside counsel
handling our defense in the legal proceedings listed above, and
an analysis of potential results, we have accrued sufficient
amounts for potential losses related to these proceedings. Based
on currently available information, management believes that the
ultimate outcome of these matters, individually and in the
aggregate, will not have a material adverse effect on the
Companys financial position, cash flows or overall trends
in results of operations. However, litigation is subject to
inherent uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include monetary damages or an
injunction prohibiting us from selling one or more products. If
an unfavorable ruling were to occur, there exists the
possibility of a material adverse impact on the results of
operations of the period in which the ruling occurs, or future
periods, could result.
|
|
Note 16.
|
Employee
Benefit Plan
|
We have a 401(K) Plan (the 401(K) Plan), which
covers substantially all employees. Each eligible employee may
elect to contribute to the 401(K) Plan, through payroll
deductions, up to 25% of their compensation, subject to current
statutory limitations. We made no contributions through
December 31, 2007.
F-31
Selected
Quarterly Financial Data (unaudited)
The following table presents unaudited quarterly financial
information for each of our last eight quarters. This
information has been derived from our unaudited financial
statements and has been prepared on the same basis as the
audited Consolidated Financial Statements included in the joint
proxy
statement/prospectus.
In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, have been
included to state fairly the quarterly results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
3.
|
Financial
Statement Schedule:
|
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
All other schedules are omitted as the required information is
inapplicable or the information is presented in the Consolidated
Financial Statements included in this joint proxy
statement/prospectus.
F-33
Unaudited
Financial Statements
ESS
TECHNOLOGY, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(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
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-34
ESS
TECHNOLOGY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(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
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-35
ESS
TECHNOLOGY, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-36
ESS
TECHNOLOGY, INC.
(Unaudited)
|
|
NOTE 1.
|
NATURE OF
BUSINESS
|
We were incorporated in California in 1984 and became a public
company in 1995. We have historically operated in two primary
business segments, Video and Digital Imaging, both in the
semiconductor industry and serving the consumer electronics and
digital media marketplace. During the first quarter of 2007 we
substantially terminated the production and sale of our camera
phone image sensors, which were the only remaining products of
our Digital Imaging segment. We plan to license our image sensor
patents in exchange for royalties, but we will no longer sell
imaging sensor semiconductor chips. We continue to design,
develop and market highly integrated analog and digital
processor chips and digital amplifiers, including chips for
standard definition DVD players primarily for the Korean market,
and chips for digital audio players and digital media players
for all markets. We are now concentrating on our standard
definition DVD chip business and evaluating opportunities to
develop profitable operations.
On February 21, 2008, we (ESS California), Echo
Technology (Delaware), Inc., a Delaware corporation and a wholly
owned subsidiary of ESS California (Delaware Merger
Subsidiary), Semiconductor Holding Corporation, a Delaware
corporation and wholly owned subsidiary of Imperium Master Fund,
Ltd. (Parent), and Echo Mergerco, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent
(Merger Subsidiary) entered into an Agreement and
Plan of Merger (the Merger Agreement) pursuant to
which (i) ESS California will, subject to the satisfaction
or waiver of the conditions set forth in the Merger Agreement,
merge with and into Delaware Merger Subsidiary (the
Reincorporation Merger), the separate corporate
existence of ESS California shall cease and Delaware Merger
Subsidiary shall be the successor or surviving corporation of
the merger (ESS Delaware), and (ii) following
the Reincorporation Merger, Merger Subsidiary will, subject to
the satisfaction or waiver of the conditions set forth in the
Merger Agreement, including the consummation of the
Reincorporation Merger, merge with and into ESS Delaware (the
Merger), the separate corporate existence of Merger
Subsidiary shall cease and ESS Delaware shall be the successor
or surviving corporation of the merger and wholly owned
subsidiary of the Parent. In connection with the merger, we have
incurred and expensed approximately $1.6 million of
professional and other transaction related fees during the three
months ended March 31, 2008.
Upon the consummation of the Reincorporation Merger, ESS
California will become a Delaware corporation, each share of ESS
California common stock will be converted into one share of ESS
Delaware common stock and each option to acquire ESS California
common stock granted pursuant to ESS Californias stock
plans and outstanding immediately prior to the consummation of
the Reincorporation Merger, whether vested or unvested,
exercisable or unexercisable, will be automatically converted
into the right to receive an option to acquire one share of ESS
Delaware common stock for each share of ESS California common
stock subject to such option, on the same terms and conditions
applicable to the option to purchase ESS California common stock
(each, an ESS Delaware Option).
Upon the consummation of the Merger, (i) ESS Delaware will
become a wholly owned subsidiary of Parent and (ii) each
share of ESS Delaware common stock will be converted into the
right to receive $1.64 in cash, unless the stockholder properly
exercises appraisal rights. In addition, each ESS Delaware
Option, whether vested or unvested, exercisable or
unexercisable, will be converted into the right to receive an
amount in cash equal to the product obtained by multiplying
(x) the aggregate number of shares of ESS Delaware common
stock subject to such ESS Delaware Option and (y) the
excess, if any, of the Merger Consideration less the exercise
price per share of ESS Delaware common stock subject to such ESS
Delaware Option, after which it shall be cancelled and
extinguished.
The parties to the Merger Agreement intend to consummate the
Merger as soon as practicable after the Reincorporation Merger
and ESS California will not consummate the Reincorporation
Merger unless the parties are in a position to consummate the
Merger. ESS California and Delaware Merger Subsidiary have made
customary representations and warranties in the Merger Agreement
and agreed to certain customary covenants, including covenants
regarding operation of the business of ESS California and its
subsidiaries, including Delaware Merger Subsidiary, prior to the
closing and covenants prohibiting ESS California from
soliciting, or providing information or entering into
discussions regarding, proposals relating to alternative
business combination transactions, except in
F-37
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
limited circumstances to permit the board of directors of ESS
California to comply with its fiduciary duties under applicable
law.
The transactions contemplated by the Merger Agreement are
subject to ESS California shareholder approval and other
customary closing conditions. The Merger Agreement contains
certain termination rights for both ESS California and Parent
and further provides that, upon termination of the Merger
Agreement under certain circumstances, ESS California may be
obligated to pay Parent a termination fee of $1,981,000 plus
reimbursement of Parents and its affiliates
reasonable expenses incurred in connection with the transactions
contemplated by the Merger Agreement up to, but not in excess
of, $500,000.
On April 23, 2008, we entered into the ESS-Silan Audio and
Video Technology License Agreement (the License
Agreement) with Hangzhou Silan Microelectronics, Co.,
Ltd., (Silan) to amend and restate the ESS-Silan DVD
Technology License Agreement, between the Company and Silan, as
amended, dated November 3, 2006. The Company entered into
the License Agreement in order to license to Silan certain of
ESSs audio and video technology for the purpose of
developing, designing, manufacturing, distributing and selling
products incorporating such technology for which we will be owed
royalties. Silan no longer has a license to incorporate our
technology in standard-definition DVD products.
|
|
NOTE 2.
|
BASIS OF
PRESENTATION
|
Our interim condensed consolidated financial statements included
herein have been prepared by us, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission
(the SEC). Certain information and footnote
disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting
principles in the United States (GAAP) have been
condensed or omitted pursuant to such rules and regulations. In
the opinion of management, the interim condensed consolidated
financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of
the results for the interim periods presented. These interim
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
and notes thereto, as well as the accompanying Managements
Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2007 included in
our Annual Report on
Form 10-K.
Interim financial results are not necessarily indicative of the
results that may be expected for a full year.
|
|
NOTE 3.
|
STOCK-BASED
COMPENSATION
|
Stock-based compensation for the three months ended
March 31, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
During the three months ended March 31, 2008, we granted
approximately 4,000 stock options with an estimated total
grant-date fair value of $2,000. During the three months ended
March 31, 2007, we granted approximately 84,000 stock
options with an estimated total grant-date fair value of
$46,000. As of March 31, 2008, unrecognized stock-based
compensation cost related to stock options was $218,000, which
will be recorded as compensation expense over an estimated
weighted average period of one year.
No stock-based compensation was capitalized as inventory at
March 31, 2008 and 2007 because the amounts were not
material.
Valuation
Assumptions
We estimate the fair value of stock options using the
Black-Scholes valuation model, consistent with the provisions of
SFAS No. 123(R) and, Staff Accounting
Bulletin No. 107 (SAB 107). The
Black-Scholes valuation model was developed for use in
estimating the fair value of short-lived exchange traded options
that have no vesting restrictions and are fully transferable. In
addition, valuation models require the input of subjective
assumptions, including the options expected life and the
price volatility of the underlying stock. The Black-Scholes
valuation model for stock compensation expense requires us to
make several assumptions and judgments about the variables to be
assumed in the calculation including expected life of the stock
option, historical volatility of the underlying security, an
assumed risk-free interest rate and estimated forfeitures over
the expected life of the option. The dividend yield of zero is
based on the fact that we have never paid cash dividends and
have no present intention to pay cash dividends. The expected
life represents the weighted average period of time that options
granted are expected to be outstanding giving consideration to
vesting schedules and our historical exercise patterns; expected
volatilities are based on historical volatilities of our common
stock; the risk-free rate is based on the U.S. Treasury
yield curve in effect at the time of grant for periods
corresponding with the expected life of the option; and we
consider many factors when estimating expected forfeitures,
including types of awards, employee class, and historical
experience.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option valuation model and the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
We have several equity incentive plans that are intended to
attract and retain qualified management, technical and other
employees, and to align stockholder and employee interests.
These equity incentive plans provide that non-employee
directors, officers, key employees, consultants and all other
employees may be granted options to purchase shares of our
stock, restricted stock units and other types of equity awards.
Through March 31, 2008, we have only granted stock options
under our various plans. These stock options generally have a
vesting period of four years, are exercisable for a period not
to exceed ten years from the date of issuance and are granted at
prices not less than the fair market value of our common stock
at the grant date.
F-39
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Combined
Activity
The following table summarizes the combined activity under the
equity incentive plans for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
At March 31, 2008, we had an aggregate of 2,080,000 options
available to grant. The aggregate intrinsic value of options
vested and expected at March 31, 2008 to vest in the
future, based on our closing stock price of $1.50 as of
March 31, 2008, was approximately $76,813.
The weighted average grant date fair values of options, as
determined under SFAS No. 123(R), granted during the
three months ended March 31, 2008 and 2007 were $0.52 and
$0.55 per share, respectively. The total intrinsic value of
options exercised during the three months ended March 31,
2008 and 2007 was insignificant and there were no tax benefits
realized.
We settle employee stock option exercises with newly issued
common shares.
|
|
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
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008 and 2007, we
recognized approximately $0.6 million and
$2.4 million, respectively, of net revenue on products for
which the inventory costs were written off in a prior period.
F-40
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Further, during the three months ended March 31, 2007, we
recorded inventory write-offs of approximately by
$2.5 million on other unsold products in inventory. As of
December 31, 2006, we had accrued approximately
$3.1 million as non-cancelable, adverse purchases order
commitments. Of this amount, $1.5 million was reversed as a
reduction of cost of revenues in the first quarter of 2007 when
it was determined that payment would not be required.
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
We include warranty in other accrued liabilities. We provide
standard warranty coverage for twelve months. We account for the
general warranty cost as a charge to cost of product revenues
when revenue is recognized. The
F-41
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
estimated warranty cost is based on historical product
performance and field expenses. In addition to the general
warranty accrual, we also provide specific warranty amounts for
certain parts if there are potential warranty issues. The
following table summarizes the activity in the product warranty
accrual for the three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of debt securities classified as
available-for-sale as of March 31, 2008, are as follows:
|
|
|
|
|
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
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties, and we may need to sell
the investment to meet our cash needs.
As of March 31, 2008, the fair value of our equity
investment in MosChip Semiconductor Technology Limited
(MosChip) of $1,042,000 was $191,000 less than our
cost. The decline in value is considered temporary and no
impairment loss was recognized in the statement of operations in
the three months ended March 31, 2008. In reaching this
conclusion, management considered the volatility of MosChip
common stock and that the fair value of our investment has
exceeded our cost subsequent to March 31, 2008.
|
|
NOTE 7.
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
The following table reconciles net income (loss) to total
comprehensive loss for the three months ended March 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
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
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
|
|
NOTE 8.
|
NON-OPERATING
INCOME, NET
|
The following table lists the major components of non-operating
income, net, for the three months ended March 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
We recorded income tax expense of $0.5 million and
$0.8 million for the three months ended March 31, 2008
and 2007, respectively. The tax expenses for three months ended
March 31, 2008 were higher than the pre-tax income at the
federal statutory rate of 35% primarily due to foreign taxes and
interest accrued on uncertain tax balances.
|
|
NOTE 10.
|
NET
INCOME (LOSS) PER SHARE
|
Because we incurred a net loss for the three months ended
March 31, 2008, options for approximately
3,003,900 shares were excluded from the calculation of net
loss per share. For the three months ended March 31, 2007,
options for approximately 6,958,000 shares were excluded
from the earnings per share calculation as they were
anti-dilutive.
|
|
NOTE 11.
|
BUSINESS
SEGMENT INFORMATION AND CONCENTRATION OF CERTAIN RISKS
|
Business
Segment
We have historically operated in two reportable business
segments: the Video segment and the Digital Imaging segment. In
the Video segment, we primarily develop and market digital
processor chips which are the primary processors driving digital
video and audio devices, including DVD, VCD, consumer digital
audio players, and digital media players. The Video segment
markets encoding processors for digital video recorders and
recordable DVD players and continues to sell certain legacy
products we have in inventory including chips for use in modems,
other communication devices, and PC audio products. Our Digital
Imaging segment has historically developed and marketed imaging
sensor chips for cellular camera phone applications. The method
for determining what information to report is based on the way
that management organized the operating segments within the
Company for making operational decision and assessments of
financial performance. Our chief operating decision maker is
considered to be the Chief Executive Officer.
F-44
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
The following table summarizes the percentages of revenues by
major product category for the three months ended March 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
DVD revenue includes revenue from sales of DVD decoder chips,
integrated encoder and decoder chips and non-integrated encoder
and decoder chipsets. VCD revenue includes revenue from sales of
VCD chips. License and royalty revenue primarily consists of
royalty payable to Silan for using licensed DVD technology and
from license of TV audio technology to NEC. Digital Imaging
revenue includes revenue from sales of image sensor chips and
image processor chips.
We evaluate operating segment performance based on net revenues
and operating income (loss) of our segments. The accounting
policies of the operating segments are the same as those
described in the summary of accounting policies in our Annual
Report on
Form 10-K.
Information about reported segments follows:
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Significant
Customers and Distributor
We sell to both direct customers and distributors. We use both a
direct sales force as well as sales representatives to help us
sell to our direct customers. FE Global (China) Limited
(FE Global) was our largest distributor. On
August 31, 2007, our distribution agreement with FE Global
was terminated. On August 31, 2007, we signed a new
distribution agreement with CKD (Hong Kong) High Tech Company
Limited (CKD) who will perform similar functions as
those previously provided by FE Global. In addition to CKD,
Weikeng Industrial
F-45
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
Company, Ltd (Weikeng) is also one of our largest
distributors. We work directly with many of our customers in
Hong Kong and China on product design and development. Whenever
one of these customers buys our products; however, the order is
processed through our distributor, which functions much like a
trading company. Our distributor manages the order processing,
arranges shipment into China and Hong Kong, manages the letters
of credit, and provides credit and collection expertise and
services. The title and risk of loss for the inventory are
transferred to the distributor upon shipment of inventory and
the distributor is legally responsible to pay our invoices
regardless of when the inventories are sold to end-customers.
The following table sets forth distributors representing greater
than 10% of net revenues:
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
Revenues on sales to FE Global, CKD and Weikeng are
deferred until the products are subsequently sold to
end-customers.
The following table sets forth direct and end-customers
representing greater than 10% of net revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Samsung Electronics Company
|
|
|
45
|
%
|
|
|
18
|
%
|
LG International Corporation
|
|
|
13
|
%
|
|
|
15
|
%
|
Xing Qiu
|
|
|
|
|
|
|
24
|
%
|
Customers representing greater than 10% of gross accounts
receivable were:
|
|
|
|
|
|
|
|
|
|
|
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
|
The following table sets forth the amounts of payments due under
specified contractual obligations, aggregated by category of
contractual obligations, as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, our commitments to purchase inventory
from the third-party contractors aggregated approximately
$7.0 million of which approximately $48,000 was
non-cancelable purchase order commitments that
F-46
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
we have recorded as accrued expenses. Additionally, as of
March 31, 2008, commitments for services, license and other
operating supplies totaled $5.1 million.
The total rent expense under all operating leases was
approximately $90,000 and $294,000 for the three months ended
March 31, 2008 and 2007, respectively.
We enter into various agreements in the ordinary course of
business. Pursuant to these agreements, we may agree to
indemnify our customers for losses suffered or incurred by them
as a result of any patent, copyright, or other intellectual
property infringement claims by any third party with respect to
our products. These indemnification obligations may have
perpetual terms. Our normal business practice is to limit the
maximum amount of
indemnification
to the license fees received. On occasion, the maximum amount of
indemnification we may be required to make may exceed our normal
business practices. We estimate the fair value of our
indemnification obligations as insignificant, based upon our
history of litigation concerning product and patent infringement
claims. Accordingly, we have no liabilities recorded for
indemnification under these agreements as of March 31, 2008.
We have agreements whereby our officers and directors are
indemnified for certain events or occurrences while the officer
or director is or was serving at our request in such capacity.
The maximum potential amount of future payments we could be
required to make under these indemnification agreements is
unlimited. We have, however, a directors and officers
insurance policy that may reduce our exposure and enable us to
recover a portion of any future amounts paid. As a result of
this insurance coverage, we believe the estimated fair value of
these indemnification agreements is minimal.
Legal
Proceedings
On September 12, 2002, following our downward revision of
revenue and earnings guidance for the third fiscal quarter of
2002, holders of our common stock, purporting to represent us,
filed a series of derivative lawsuits in California state court,
County of Alameda, against us as a nominal defendant and against
certain of our present and former directors and officers as
defendants. The lawsuits alleged certain violations of the
federal securities laws, including breaches of fiduciary duty
and insider trading. These actions were consolidated as a
Consolidated Derivative Action with the caption ESS
Cases. The derivative plaintiffs sought compensatory and
other damages in an unspecified amount, disgorgement of profits,
and other relief. On March 24, 2003, we filed a demurrer to
the consolidated derivative complaint and moved to stay
discovery in the action pending resolution of the initial
pleadings in a related federal action. The Court denied the
demurrer but stayed discovery. That stay was then lifted in
light of the procedural progress of the federal action. The
parties reached an agreement in principle to settle the
litigation in exchange for certain minor modifications of the
Companys internal policies and payment of plaintiffs
attorneys fees not to exceed $200,000 (to be paid by
defendants insurance carriers). The agreement in principle
to settle the litigation was then documented and finalized by
the parties and submitted to the Court for approval. On
October 1, 2007, the Stipulation and Agreement of
Settlement became binding upon the Courts entry of a final
Judgment of Dismissal with prejudice as to all defendants in the
action, subject to appeal as required by applicable state law.
The time for appeal of the final Judgement of Dismissal has now
passed. While defendants have denied and continue to deny any
and all allegations of wrongdoing in connection with this
matter, we believe that given the uncertainties and cost
associated with litigation, the settlement is in the best
interests of the Company and its stockholders. We recorded a
$200,000 loss for the proposed settlement in 2007, as management
determined this amount probable of payment and reasonably
estimable. In addition, because recovery from the insurance
carriers was probable, a receivable was also recorded for the
same amount. Accordingly, there was no impact to the statement
of operations because the amount of the settlement and the
insurance recovery offset each other. The settlement
transactions have been completed.
F-47
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
NOTE 13. RECENT
ACCOUNTING PRONOUNCEMENTS AND ADOPTION OF NEW
ACCOUNTING
PRONOUCEMENTS
Effective January 1, 2008, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements (SFAS 157).
In February 2008, the Financial Accounting Standard Board
(FASB) issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157, which
provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in
the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of
SFAS 157 with respect to its financial assets and
liabilities only. SFAS 157 defines fair value, establishes
a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value
measurements. Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under
SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes
a fair value hierarchy based on three levels of inputs, of which
the first two are considered observable and the last
unobservable, that may be used to measure fair value which are
the following:
|
|
|
|
|
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
|
The adoption of this statement did not have a material impact on
the Companys consolidated results of operations and
financial condition.
Effective January 1, 2008, the Company adopted
SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). SFAS 159 allows an entity the
irrevocable option to elect fair value for the initial and
subsequent measurement for specified financial assets and
liabilities on a
contract-by-contract
basis. The Company did not elect to adopt the fair value option
under this Statement.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R). Under
SFAS No. 141R, an entity is required to recognize the
assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the
acquisition date. It further requires that acquisition-related
costs be recognized separately from the acquisition and expensed
as incurred, restructuring costs generally be expensed in
periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and
acquired income tax uncertainties after the measurement period
impact income tax expense. In addition, acquired in-process
research and development (IPR&D) is capitalized as an
intangible asset and amortized over its estimated useful life.
The adoption of SFAS No. 141R will change our
accounting treatment for business combinations on a prospective
basis beginning in the first quarter of fiscal year 2009.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
changes the accounting and reporting for minority interests,
which will be recharacterized as non-controlling interests and
classified as a component of equity. SFAS No. 160 is
effective for us on a prospective basis for business
combinations with an acquisition date beginning in the first
quarter of fiscal year 2009. As of December 29, 2007, we
did not have any minority interests. The adoption of
SFAS No. 160 is not expected to impact our
consolidated financial statements.
F-48
ESS
TECHNOLOGY, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133 (SFAS No. 161). The
standard requires additional quantitative disclosures (provided
in tabular form) and qualitative disclosures for derivative
instruments. The required disclosures include how derivative
instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows;
relative volume of derivative activity; the objectives and
strategies for using derivative instruments; the accounting
treatment for those derivative instruments formally designated
as the hedging instrument in a hedge relationship; and the
existence and nature of credit-related contingent features for
derivatives. SFAS No. 161 does not change the
accounting treatment for derivative instruments.
SFAS No. 161 is effective for us in the first quarter
of fiscal year 2009.
|
|
NOTE 14.
|
FAIR
VALUE MEASUREMENTS
|
In accordance with SFAS 157, the following table represents
the Companys fair value hierarchy for its financial assets
(cash equivalents and marketable securities) measured at fair
value on a recurring basis as of March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15. GAIN ON SALE OF TECHNOLOGY AND
TANGIBLE ASSETS
On February 16, 2007, we entered into asset purchase
agreements with Silicon Integrated Systems Corporation and its
affiliates (SiS), pursuant to which we transferred
employees, sold certain tangible assets, and sold and licensed
intellectual property related to our HD-DVD and Blu-ray DVD
technologies for aggregate proceeds of approximately
$13.5 million. Of this amount, $9.5 million was
received during the first quarter of 2007, and $2.0 million
was received during the second quarter of 2007. The remaining
S2.0 million is to be paid on or about August 16, 2008
subject to adjustment upon settlement of any escrow claims by
SiS. The gain recognized during the year ended December 31,
2007 includes the proceeds received, net of the book value of
assets sold of $870,000 and certain transaction expenses related
to the sale to SiS amounting to $149,000. We have not recognized
any revenue related to
HD-DVD
or
Blu-ray DVD products in any period.
F-49
Annex A
EXECUTION
COPY
AGREEMENT
AND PLAN OF MERGER
by and
among
SEMICONDUCTOR
HOLDING CORPORATION
ECHO
MERGERCO, INC.
ESS
TECHNOLOGY, INC.
and
ECHO
TECHNOLOGY (DELAWARE), INC.
Dated as
of February 21, 2008
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
|
|
|
|
|
|
|
|
|
|
|
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
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24
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Section 8.1
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Notification of Certain Matters
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24
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Section 8.2
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Access to Information; Confidentiality
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24
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Section 8.3
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Consents and Approvals
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25
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Section 8.4
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Publicity
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26
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Section 8.5
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Directors and Officers Insurance and Indemnification
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27
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Section 8.6
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State Takeover Laws
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27
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Section 8.7
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Section 16
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28
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Section 8.8
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Obligations of Merger Sub; Contribution to Merger Sub
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28
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Section 8.9
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Assumption of Benefit Plans; Employee Benefits Matters
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28
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Section 8.10
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Termination of 401(k) Plan
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28
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Section 8.11
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Treatment of Employee Stock Purchase Plan
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28
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Section 8.12
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Approval of the Merger
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29
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Section 8.13
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Assumption of Registration Statements
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29
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Section 8.14
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Maintenance of NASDAQ Listing
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29
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Section 8.15
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Resignation of Directors
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29
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ARTICLE IX
CONDITIONS TO THE REINCORPORATION MERGER
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29
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Section 9.1
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Conditions to the Reincorporation Merger
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29
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Section 9.2
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Additional Conditions For the Benefit of Parent
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30
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Section 9.3
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Additional Conditions to Obligations of the Company and Delaware
Merger Sub
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30
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Section 9.4
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Frustration of Reincorporation Closing Conditions
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30
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ARTICLE X CONDITIONS
TO THE MERGER
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31
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Section 10.1
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Conditions to the Merger
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31
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Section 10.2
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Frustration of Closing Conditions
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31
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A-ii
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Page
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ARTICLE XI TERMINATION
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31
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Section 11.1
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Termination
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31
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Section 11.2
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Effect of Termination
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32
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Section 11.3
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Fees and Expenses
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32
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Section 11.4
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Company Termination Fee
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32
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ARTICLE XII MISCELLANEOUS
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33
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Section 12.1
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Amendment and Modification; Waiver
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33
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Section 12.2
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Non-survival of Representations and Warranties
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33
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Section 12.3
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Notices
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34
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Section 12.4
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Certain Definitions
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34
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Section 12.5
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Terms Defined Elsewhere
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38
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Section 12.6
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Interpretation
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40
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Section 12.7
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Counterparts
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40
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Section 12.8
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Entire Agreement; No Third-Party Beneficiaries
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40
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Section 12.9
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Severability
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40
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Section 12.10
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Governing Law; Jurisdiction
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40
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Section 12.11
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Assignment
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41
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Section 12.12
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Enforcement; Remedies
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41
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EXHIBITS AND SCHEDULES
|
Exhibit A
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Certificate of Incorporation of Delaware Merger Sub
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Exhibit B
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Bylaws of Delaware Merger Sub
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Exhibit C
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Amended and Restated Certificate of Incorporation of Surviving
Corporation
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Exhibit D
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Amended and Restated Bylaws of Surviving Corporation
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Exhibit E
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Form of Limited Guarantee
|
Company Disclosure Schedule
A-iii
AGREEMENT
AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this
Agreement
), dated February 21, 2008, is
entered into by and among Semiconductor Holding Corporation, a
Delaware corporation and wholly owned subsidiary of Imperium
Master Fund, Ltd. (
Parent
), Echo Mergerco,
Inc., a Delaware corporation and a wholly owned subsidiary of
Parent (
Merger Sub
), ESS Technology, Inc., a
California corporation (the
Company
) and Echo
Technology (Delaware), Inc., a Delaware corporation and a wholly
owned subsidiary of the Company (
Delaware Merger
Sub
).
WHEREAS, the respective Boards of Directors of Parent, Merger
Sub, the Company and Delaware Merger Sub deem it advisable and
in the best interests of their respective stockholders,
shareholders and corporations for Parent, Merger Sub, the
Company and Delaware Merger Sub to engage in a business
combination transaction;
WHEREAS, the Company and Delaware Merger Sub intend to effect a
merger of the Company with and into Delaware Merger Sub (the
Reincorporation Merger
) upon the terms and
subject to the conditions of this Agreement and in accordance
with the California Corporations Code (the
CCC
) and the Delaware General Corporation Law
(the
DGCL
). Upon consummation of the
Reincorporation Merger, the Company will cease to exist, and
Delaware Merger Sub will continue as the surviving corporation
in the Reincorporation Merger (such surviving corporation,
ESS Delaware
);
WHEREAS, as soon as practicable following the Reincorporation
Merger, Parent, Merger Sub, and ESS Delaware intend to effect a
merger of Merger Sub with and into ESS Delaware (the
Merger
) upon the terms and subject to the
conditions of this Agreement and in accordance with the DGCL.
Upon consummation of the Merger, Merger Sub will cease to exist,
and ESS Delaware will continue as a wholly owned subsidiary of
Parent; and
WHEREAS, the Merger and this Agreement have, on the terms and
subject to the conditions set forth herein, been approved by the
respective Boards of Directors of Parent, Merger Sub, the
Company and Delaware Merger Sub;
NOW, THEREFORE, intending to be legally bound, the parties to
this Agreement hereby agree as follows:
ARTICLE I
THE REINCORPORATION MERGER
Section 1.1
The
Reincorporation Merger
.
Upon the terms and
subject to the conditions set forth in this Agreement, at the
Effective Time of the Reincorporation Merger, the Company shall
be merged with and into Delaware Merger Sub, the separate
existence of the Company shall cease, and Delaware Merger Sub
will continue as ESS Delaware, the surviving corporation in the
Reincorporation Merger.
Section 1.2
Effect
of the Reincorporation Merger
.
The
Reincorporation Merger shall have the effects set forth in this
Agreement and in the applicable provisions of the CCC and the
DGCL (including as more fully set forth in and Section 1107
of the CCC and Section 259 of the DGCL), and following the
Reincorporation Merger, ESS Delaware, as the surviving
corporation, (i) shall possess all of the Companys
and Delaware Merger Subs assets, rights, powers and
property as constituted immediately prior to the Effective Time
of the Reincorporation Merger, (ii) shall continue to be
subject to all of the Companys and Delaware Merger
Subs debts, liabilities and obligations as constituted
immediately prior to the Effective Time of the Reincorporation
Merger and (iii) shall be subject to all actions previously
taken by the Board of Directors of the Company and Delaware
Merger Sub prior to the Effective Time of the Reincorporation
Merger.
Section 1.3
Reincorporation
Closing
.
The consummation of the
Reincorporation Merger (the
Reincorporation
Closing
) shall take place at the offices of
Latham & Watkins LLP, 140 Scott Drive, Menlo Park,
California at 8:00 a.m. local time on a date to be
specified by the parties, which shall be no later than the fifth
business day after the satisfaction or waiver of the last of the
conditions set forth in Article IX to be satisfied or
waived (other than those conditions that by their nature are to
be satisfied at the Reincorporation Closing), but subject to the
satisfaction or waiver of such conditions, or at such other
time, date and location as the parties hereto agree in writing.
The date on which the Reincorporation Closing actually takes
place is referred to in this Agreement as the
Reincorporation Closing Date
.
Section 1.4
Effective
Time of the Reincorporation
Merger
.
Contemporaneous with or as promptly
as practicable after the Reincorporation Closing, the parties
shall cause the Reincorporation Merger to be
A-1
consummated by filing with (i) the Secretary of State of
the State of Delaware a certificate of merger executed in
accordance with the relevant provisions of the DGCL, and shall
make all other filings or recordings required under the DGCL in
order to consummate the Reincorporation Merger and (ii) the
Secretary of State of the State of California an officers
certificate executed in accordance with the relevant provisions
of the CCC, and such filings or recordings as are required under
the CCC in order to consummate the Reincorporation Merger. The
Reincorporation Merger shall become effective at the time the
certificate of merger is filed with the Secretary of State of
the State of Delaware (the
Effective Time of the
Reincorporation Merger
).
Section 1.5
Certificate
of Incorporation and Bylaws of ESS
Delaware
.
Unless otherwise determined by
Parent and the Company prior to the Effective Time of the
Reincorporation Merger:
(a) the certificate of incorporation of Delaware Merger Sub
immediately prior to the Effective Time of the Reincorporation
Merger (and a copy of the certificate of incorporation of
Delaware Merger Sub as of the date of this Agreement is attached
hereto as
Exhibit A
) shall be the certificate of
incorporation of ESS Delaware, except that the name of ESS
Delaware as set forth in Article I thereof shall be amended
to ESS Technology, Inc.; and
(b) the bylaws of Delaware Merger Sub as of the Effective
Time of the Reincorporation Merger shall be the bylaws of ESS
Delaware (and a copy of the bylaws of Delaware Merger Sub as of
the date of this Agreement is attached hereto as
Exhibit B
).
Section 1.6
Directors
and Officers of ESS Delaware
.
Subject to
Section 8.15, the directors of the Company immediately
prior to the Effective Time of the Reincorporation Merger shall
be the directors of ESS Delaware, each to hold office in
accordance with the certificate of incorporation and bylaws of
ESS Delaware. The officers of the Company immediately prior to
the Effective Time of the Reincorporation Merger shall be the
officers of the ESS Delaware, each to hold office until the
earlier of his or her resignation or removal.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1
Conversion
of Capital Stock
.
At the Effective Time of
the Reincorporation Merger, by virtue of the Reincorporation
Merger and without any further action on the part of Parent,
Merger Sub, the Company, Delaware Merger Sub or any holder of
any capital stock of any of the Company, Delaware Merger Sub,
Parent or Merger Sub:
(a)
Company Common Stock
.
Each
Company Share shall be converted into and become one fully paid
and nonassessable share of ESS Delaware Common Stock.
(b)
Cancellation of Delaware Merger Sub Common
Stock
.
Each issued and outstanding share of
common stock of Delaware Merger Sub, par value $0.0001 per
share, shall be cancelled and shall cease to exist, and no
consideration shall be delivered in exchange therefor.
(c)
Transfer Books; Suspension of NASDAQ
Trading
.
Each of the Company and Delaware
Merger Sub shall, to the extent reasonably practicable and
subject to Sections 7.2, 8.13 and 8.14 hereof and
compliance with all applicable laws and rules and regulations of
NASDAQ, use their commercially reasonable efforts to cause
trading in shares of ESS Delaware Common Stock on NASDAQ
(subsequent to any listing thereof in accordance with
Section 8.14) to be suspended immediately following the
Effective Time of the Reincorporation Merger and to close the
stock transfer books of ESS Delaware immediately following the
Effective Time of the Reincorporation Merger so that thereafter
there shall be no further registration of transfers of ESS
Delaware Shares on the records of ESS Delaware.
Section 2.2
Treatment
of Company Options and Other Equity
Awards
.
At the Effective Time of the
Reincorporation Merger, each option to purchase Common Stock
granted pursuant to the Company Stock Plans (
Company
Options
), by virtue of the Reincorporation Merger and
without any further action on the part of any holder of any
outstanding Company Option, that is outstanding immediately
prior to the Effective Time of the Reincorporation Merger,
whether vested or unvested, or exercisable or unexercisable,
shall be deemed automatically converted into one option to
purchase, on the same terms and conditions as were applicable
under such Company Option at the Effective Time of the
Reincorporation Merger (including, without limitation, the
exercise
A-2
price per share and the vesting schedule for such Company
Option), such number of shares of ESS Delaware Common Stock as
is equal to the number of shares of Common Stock that were
subject thereto immediately prior to the Effective Time of the
Reincorporation Merger (each, an
ESS Delaware
Option
). A number of shares of ESS Delawares
Common Stock shall be reserved for issuance upon the exercise of
options, warrants or rights equal to the number of shares of
Common Stock so reserved immediately prior to the Effective Time
of the Reincorporation Merger.
Section
2.3
Treatment
of Employee Stock Purchase Plan
.
Each
outstanding purchase right (each, a
Purchase
Right
) under the Companys 1995 Employee Stock
Purchase Plan (the
ESPP
) shall be treated as
set forth in Section 8.11.
ARTICLE III
THE MERGER
Section
3.1
The
Merger
.
Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time of
the Merger, Merger Sub shall be merged with and into ESS
Delaware, the separate existence of Merger Sub shall cease, and
ESS Delaware will continue as the surviving corporation in the
Merger (the
Surviving Corporation
).
Section
3.2
Effect
of the Merger
.
The Merger shall have the
effects set forth in this Agreement and in the applicable
provisions of the DGCL.
Section
3.3
Closing
.
The
consummation of the Merger (the
Closing
)
shall take place as promptly as practicable following the
Reincorporation Closing, which shall be no later than the second
business day after the satisfaction or waiver of the last of the
conditions set forth in Article X to be satisfied or waived
(other than those conditions that by their nature are to be
satisfied at the Closing), but subject to the satisfaction or
waiver of such conditions, or at such other time, date and
location as Parent and ESS Delaware agree in writing. The date
on which the Closing actually takes place is referred to in this
Agreement as the
Closing Date
.
Section
3.4
Effective
Time of the Merger
.
Contemporaneously with or
as promptly as practicable after the Closing, the parties shall
cause the Merger to be consummated by filing with the Secretary
of State of the State of Delaware a certificate of merger
executed in accordance with the relevant provisions of the DGCL,
and shall make all other filings or recordings required under
the DGCL in order to consummate the Merger. The Merger shall
become effective at the time the certificate of merger is filed
with the Secretary of State of the State of Delaware (the
Effective Time of the Merger
).
Section
3.5
Certificate
of Incorporation and Bylaws
.
Unless otherwise
determined by Parent and ESS Delaware prior to the Effective
Time of the Merger:
(a) the certificate of incorporation of the Surviving
Corporation as of the Effective Time of the Merger shall be the
certificate of incorporation of ESS Delaware immediately prior
to the Effective Time of the Merger,
provided
that, at
the Effective Time of the Merger, the certificate of
incorporation of the Surviving Corporation shall be amended to
read in its entirety as set forth on
Exhibit C
hereto; and
(b) the bylaws of the Surviving Corporation as of the
Effective Time of the Merger shall be the bylaws of ESS Delaware
immediately prior to the Effective Time of the Merger,
provided
that, at the Effective Time of the Merger, the
bylaws of the Surviving Corporation shall be amended to read in
their entirety as set forth on
Exhibit D
hereto.
Section
3.6
Directors
and Officers
.
The directors of the ESS
Delaware immediately prior to the Effective Time of the Merger
shall submit their resignations to be effective as of the
Effective Time of the Merger. Immediately after the Effective
Time of the Merger, Parent shall take the necessary actions to
cause the directors of Merger Sub immediately prior to the
Effective Time of the Merger to be the directors of the
Surviving Corporation, each to hold office in accordance with
the certificate of incorporation and bylaws of the Surviving
Corporation. The officers of ESS Delaware immediately prior to
the Effective Time of the Merger shall be the officers of the
Surviving Corporation, each to hold office until the earlier of
his or her resignation or removal.
A-3
ARTICLE IV
CONVERSION OF SECURITIES
Section
4.1
Conversion
of ESS Delaware Capital Stock
.
At the
Effective Time of the Merger, by virtue of the Merger and
without any further action on the part of Parent, Merger Sub,
ESS Delaware or any holder of any capital stock of any of ESS
Delaware, Parent or Merger Sub:
(a)
Conversion of ESS Delaware Common
Stock
.
Each ESS Delaware Share, except for
Exception Shares, shall be converted into the right to receive
$1.64, payable to the holder thereof in cash, without interest
(the
Merger Consideration
). From and
after the Effective Time, all such ESS Delaware Shares shall no
longer be outstanding and shall automatically be cancelled and
shall cease to exist. Except with respect to Exception Shares,
each holder of a certificate representing any such ESS Delaware
Share shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration therefor
upon the surrender of such certificate in accordance with
Section 4.2, without interest thereon.
(b)
Merger Sub Common Stock
.
Each
issued and outstanding share of common stock of Merger Sub, par
value $0.0001 per share, shall be converted into and become one
fully paid and nonassessable share of common stock, par value
$0.0001 per share, of the Surviving Corporation.
(c)
Cancellation of Certain ESS Delaware
Shares
.
Each share of ESS Delaware Common
Stock owned by Parent, Merger Sub or any of their respective
wholly owned subsidiaries shall be cancelled and shall cease to
exist, and no consideration shall be delivered in exchange
therefor. Each share of ESS Delaware Common Stock held by ESS
Delaware or any Subsidiary of ESS Delaware (or held in the
treasury of ESS Delaware) shall be cancelled and shall cease to
exist, and no consideration shall be delivered in exchange
therefor. Each Dissenting Share shall be treated as provided in
Section 4.3.
(d)
Adjustment to Merger
Consideration
.
The Merger Consideration shall
be adjusted appropriately to reflect the effect of any stock
split, reverse stock split, stock dividend (including any
dividend or distribution of securities convertible into Common
Stock or ESS Delaware Common Stock), cash dividend,
reorganization, recapitalization, reclassification, combination,
exchange of shares or other like change with respect to Common
Stock or ESS Delaware Common Stock occurring on or after the
date hereof and prior to the Effective Time of the
Reincorporation Merger or the Effective Time of the Merger, as
applicable.
Section
4.2
Payment
and Exchange of Certificates
.
(a)
Paying Agent
.
Parent or Merger
Sub shall designate a bank or trust company to act as the
payment agent in connection with the Merger (the
Paying
Agent
). At the Effective Time of the Merger, Parent or
Merger Sub shall cause to be deposited with the Paying Agent the
aggregate Merger Consideration. Such funds shall be invested by
the Paying Agent as directed by Parent, in its sole discretion,
pending payment thereof by the Paying Agent to the holders of
the ESS Delaware Shares entitled thereto. Earnings from such
investments shall be the sole and exclusive property of Parent,
and no part of such earnings shall accrue to the benefit of
holders of ESS Delaware Shares.
(b)
Exchange Procedures
.
Promptly
after the Effective Time of the Merger, the Paying Agent shall
mail to each holder of record as of the Effective Time of the
Merger of a certificate or certificates which immediately prior
to the Effective Time represented outstanding ESS Delaware
Shares (each such certificate, a
Certificate
)
and whose ESS Delaware Shares were converted pursuant to
Section 4.1(a) into the right to receive the Merger
Consideration (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and
title to Certificates shall pass, only upon delivery of
Certificates to the Paying Agent and shall be in such form and
have such other provisions as Parent may reasonably specify) and
(ii) instructions for effecting the surrender of
Certificates in exchange for payment of the Merger
Consideration. Upon surrender of a Certificate for cancellation
in accordance with the instructions set forth in the letter of
transmittal to the Paying Agent or to such other agent or agents
as may be appointed by Parent, together with such letter of
transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor the Merger
Consideration for each ESS Delaware Share formerly represented
by such Certificate and the Certificate so surrendered shall
forthwith be cancelled. If payment of the Merger Consideration
is to be made to a Person other than the Person in whose name
the surrendered Certificate is registered, it shall be a
condition precedent of payment that (x) the Certificate so
surrendered shall be properly endorsed or shall be otherwise in
proper form for transfer and (y) the Person requesting such
payment shall have paid any transfer and other similar Taxes
required by reason of the payment of the Merger Consideration to
a
A-4
Person other than the registered holder of the Certificate
surrendered and shall have established to the satisfaction of
the Surviving Corporation that such Tax either has been paid or
is not required to be paid. As of the Effective Time of the
Merger, and until surrendered as contemplated by this
Section 4.2, each Certificate (except with respect to those
ESS Delaware Shares represented thereby that are Exception
Shares) shall be deemed at any time after the Effective Time of
the Merger to represent only the right to receive the Merger
Consideration in cash as contemplated by this Section 4.2,
without interest thereon.
(c)
Transfer Books; No Further Ownership Rights in
ESS Delaware Capital Stock
.
At the Effective
Time of the Merger, the stock transfer books of ESS Delaware
shall be closed and thereafter there shall be no further
registration of transfers of ESS Delaware Shares on the records
of ESS Delaware. From and after the Effective Time of the
Merger, the holders of Certificates outstanding immediately
prior to the Effective Time of the Merger shall cease to have
any rights with respect to such ESS Delaware Shares except as
otherwise provided for herein, including, without limitation,
Section 4.3 hereof, or by applicable law. If, after the
Effective Time of the Merger, Certificates are presented to the
Surviving Corporation for any reason, they shall be cancelled
and exchanged as provided in this Article IV.
(d)
Termination of Fund; No
Liability
.
At any time following six months
after the Effective Time of the Merger, the Surviving
Corporation shall be entitled to require the Paying Agent to
deliver to it any funds (including any interest received with
respect thereto) made available to the Paying Agent and not
disbursed (or for which disbursement is pending subject only to
the Paying Agents routine administrative procedures) to
holders of Certificates, and thereafter such holders shall be
entitled to look only to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) only as
general creditors thereof with respect to the Merger
Consideration payable upon due surrender of their Certificates,
without any interest thereon. Notwithstanding the foregoing,
none of Parent, the Surviving Corporation or the Paying Agent
shall be liable to any holder of a Certificate for Merger
Consideration delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(e)
Withholding Rights
.
Parent,
Merger Sub, the Surviving Corporation and the Paying Agent, as
the case may be, shall be entitled to deduct and withhold from
the Merger Consideration otherwise payable pursuant to this
Agreement to any holder of ESS Delaware Shares such amounts that
Parent, Merger Sub, the Surviving Corporation or the Paying
Agent is required to deduct and withhold with respect to the
making of such payment under the Internal Revenue Code of 1986,
as amended (the
Code
), the rules and
regulations promulgated thereunder or any provision of
applicable state, local or foreign law. To the extent that
amounts are so withheld by Parent, Merger Sub, the Surviving
Corporation or the Paying Agent, such amounts shall be treated
for all purposes of this Agreement as having been paid to the
Person in respect of which such deduction and withholding was
made by Parent, Merger Sub, the Surviving Corporation or the
Paying Agent.
(f)
Lost, Stolen or Destroyed
Certificates
.
In the event that any
Certificates shall have been lost, stolen or destroyed, the
Paying Agent shall issue in exchange for such lost, stolen or
destroyed Certificates, upon the making of an affidavit of that
fact by the holder thereof, the Merger Consideration payable in
respect thereof pursuant to Section 4.1 hereof;
provided
,
however
, that Parent may, in its
discretion and as a condition precedent to the payment of such
Merger Consideration, require the owners of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be
made against Parent, the Surviving Corporation or the Paying
Agent with respect to the Certificates alleged to have been
lost, stolen or destroyed.
Section
4.3
Dissenting
Shares
.
(a) Notwithstanding anything in this Agreement to the
contrary, if any stockholder of ESS Delaware Common Stock (each,
a
Dissenting Stockholder
) shall demand to be
paid the fair value of its shares of ESS Delaware
Common Stock (
Dissenting Share
), as provided
in Section 262(d)(2) of the DGCL, such Dissenting Shares
shall not be converted into or exchangeable for the right to
receive the Merger Consideration (except as provided in this
Section 4.3) and shall entitle such Dissenting Stockholder
only to be paid the fair value of such Dissenting
Shares, in accordance with Section 262 of the DGCL, unless
and until such Dissenting Stockholder (a) withdraws (in
accordance with Section 262(k) of the DGCL) or
(b) effectively loses the right to dissent and receive the
fair value of such Dissenting Shares under
Section 262 of the DGCL. ESS Delaware shall not, except
with the prior written consent of Parent, voluntarily make any
payment with respect to, or settle or offer to settle, any such
demand for
A-5
payment of fair value of Dissenting Shares prior to
the Effective Time of the Merger. ESS Delaware shall give Parent
prompt notice of any written demand by a Dissenting Stockholder
to be paid the fair value of its Dissenting Shares
received by ESS Delaware prior to the Effective Time of the
Merger, any attempted withdrawals of such demands and any other
instruments received by ESS Delaware relating to
stockholders rights of appraisal, and Parent shall have
the right to participate in all negotiations and proceedings
with respect to any such demand or instrument. If any Dissenting
Stockholder shall have effectively withdrawn (in accordance with
Section 262(k) of the DGCL) or otherwise lost its right to
dissent and receive the fair value of its Dissenting
Shares, then as of the later of the Effective Time of the Merger
or the occurrence of such event, the Dissenting Shares held by
such Dissenting Stockholder shall be cancelled and converted
into and represent solely the right to receive (upon the
surrender of the Certificate representing such share) the Merger
Consideration, without interest thereon, in accordance with
Section 4.1.
(b) Notwithstanding any other provision of this Agreement
to the contrary, any legal proceeding made or brought by any of
the current or former shareholders of the Company asserting that
ESS Delaware is required to purchase for cash at their fair
market value any Dissenting Shares (and that have not lost their
right to dissent) and that are owned by such shareholder may be
considered for purposes of determining whether a Company
Material Adverse Effect has occurred hereunder.
Section
4.4
Treatment
of ESS Delaware Options and Other Equity Awards
.
(a) At the Effective Time of the Merger, each ESS Delaware
Option, by virtue of the Merger and without any further action
on the part of any holder of any outstanding ESS Delaware
Option, that is outstanding immediately prior to the Effective
Time of the Merger, whether vested or unvested, exercisable or
unexercisable, shall be deemed automatically converted into the
right to receive an amount in cash equal to the product obtained
by multiplying (x) the aggregate number of shares of ESS
Delaware Common Stock subject to such ESS Delaware Option and
(y) the excess, if any, of the Merger Consideration less
the exercise price per share of ESS Delaware Common Stock
subject to such ESS Delaware Option (the
Option
Consideration
) after which it shall be cancelled and
extinguished.
(b) The Company and Delaware Merger Sub, and, after the
Reincorporation Merger, ESS Delaware, shall take all necessary
actions, including obtaining any required consents from holders
of outstanding Company Options and ESS Delaware Options,
respectively, necessary to effect the transactions described in
Sections 2.2 and 4.4(a) above pursuant to the terms of the
applicable Company Stock Plans and agreements evidencing the
Company Options and the ESS Delaware Options, as applicable. All
amounts payable pursuant to Section 4.4(a) shall be paid
without interest in accordance with this Agreement. Any payments
made pursuant to this Section 4.4 shall be net of all
applicable withholding Taxes that Parent, Merger Sub, the
Surviving Corporation and the Paying Agent, as the case may be,
shall be required to deduct and withhold from the relevant
Option Consideration or Merger Consideration under the Code, the
rules and regulations promulgated thereunder or any provision of
applicable state, local or foreign law. To the extent that
amounts are so withheld by Parent, Merger Sub, the Surviving
Corporation or the Paying Agent, such amounts shall be treated
for all purposes of this Agreement as having been paid to the
Person in respect of which such deduction and withholding was
made by Parent, Merger Sub, the Surviving Corporation or the
Paying Agent.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Companys disclosure schedule
delivered to Parent prior to the execution of this Agreement
(the
Company Disclosure Schedule
) or
(ii) any Company SEC Documents filed by the Company with
the United States Securities and Exchange Commission (the
SEC
) after January 1, 2007, the Company
represents and warrants to Parent and Merger Sub that the
statements contained in this Article V are correct and
complete as of the date of this Agreement. Each disclosure set
forth in the Company Disclosure Schedule is identified by
reference to, or has been grouped under a heading referring to,
a specific section of this Agreement and disclosure made
pursuant to any section thereof shall be deemed to be disclosed
on each of the other sections of the Company Disclosure Schedule
to the extent the applicability of the disclosure to such other
section is reasonably apparent on its face from the disclosure
made.
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Section
5.1
Organization
.
(a) The Company and each Subsidiary of the Company,
including Delaware Merger Sub (each, a
Company
Subsidiary
). is a corporation or other legal entity
duly organized, validly existing and in good standing (with
respect to jurisdictions which recognize such concept) under the
laws of the jurisdiction in which it is organized and has the
requisite corporate or other power, as the case may be, and
authority to conduct its business as now being conducted,
except, as to Company Subsidiaries, for those jurisdictions
where the failure to be so organized, existing or in good
standing would not, individually or in the aggregate, reasonably
be expected to be material to the Company and the Company
Subsidiaries taken as a whole. The Company and each of the
Company Subsidiaries is duly qualified or licensed to do
business and is in good standing (with respect to jurisdictions
which recognize such concept) in each jurisdiction in which the
nature of its business or the ownership, leasing or operation of
its properties makes such qualification or licensing necessary,
except for those jurisdictions where the failure to be so
qualified or licensed or to be in good standing would not,
individually or in the aggregate, reasonably be expected to be
material to the Company and the Company Subsidiaries taken as a
whole. The Company has made available to Parent complete and
correct copies of the articles of incorporation and bylaws of
the Company and the similar organizational documents of each
Company Subsidiary, and all amendments thereto, as currently in
effect. Neither the Company nor any Company Subsidiary is in
violation of its organizational or governing documents.
(b)
Subsidiaries
.
Each outstanding
share of capital stock or other Equity Interest of each Company
Subsidiary is owned, directly or indirectly, by the Company and
is duly authorized, validly issued, fully paid, nonassessable
and free of preemptive rights and is held by the Company or a
Company Subsidiary free and clear of all Liens, except for
Permitted Liens (as defined in Section 5.14). There are no
outstanding options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights or other agreements,
contracts or commitments that could require any Company
Subsidiary to issue, sell or otherwise cause to become
outstanding any of its capital stock. Other than the Company
Subsidiaries, the Company does not directly or indirectly
beneficially own any Equity Interests in any other Person except
for non-controlling investments made in the ordinary course of
business in entities which are not individually or in the
aggregate material to the Company and the Company Subsidiaries
as a whole.
Section
5.2
Capitalization
.
(a) The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock and
(ii) 10,000,000 shares of preferred stock, no par
value (the
Preferred Stock
). As of
February 21, 2008, (A) 35,547,323 shares of
Common Stock were issued and outstanding, (B) no shares of
Preferred Stock were issued and outstanding, and
(C) 12,619,152 shares of Common Stock were reserved
for issuance pursuant to the Company Stock Plans of which
12,507,953 of Common Stock were subject to outstanding Company
Options and 111,199 shares of Common Stock were reserved
for issuance pursuant to the ESPP. All of the outstanding shares
of the Companys capital stock are, and all Common Stock
which may be issued pursuant to the ESPP and the exercise of
outstanding Company Options will be, when issued in accordance
with the terms thereof, duly authorized, validly issued, fully
paid and non-assessable, free of preemptive rights. Except for
issuances of Common Stock pursuant to Company Options described
in the first sentence of Section 5.2(b) and issuances of
Common Stock pursuant to the ESPP, since its initial public
offering, the Company has not issued any Common Stock or
designated or issued any shares of Preferred Stock. There are no
bonds, debentures, notes or other indebtedness having general
voting rights (or convertible into securities having such
rights) (
Voting Debt
) of the Company or any
Company Subsidiary issued and outstanding. Other than the
Company Options described in the first sentence of
Section 5.2(b) and the rights outstanding under the ESPP,
there are no Equity Interests or outstanding contractual
obligations of the Company or any Company Subsidiary to
repurchase, redeem or otherwise acquire any Common Stock or any
capital stock of, or other Equity Interests in, the Company or
any Company Subsidiary or to provide funds to make any
investment (in the form of a loan, capital contribution or
otherwise) in the Company or any Company Subsidiary. No Company
Subsidiary owns any Common Stock.
(b) All of such Company Options have been granted to
employees, consultants and directors of the Company and the
Company Subsidiaries in the ordinary course of business pursuant
to the Company Stock Plans. Section 5.2(b) of the Company
Disclosure Schedule sets forth a listing of all outstanding
Company Options as of February 21, 2008 and (i) the
date of their grant and the portion of which that is vested as
of February 21, 2008 and if applicable, the exercise price
therefor, (ii) the date upon which each Company Option
would normally be
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expected to expire absent termination of employment or other
acceleration, and (iii) whether or not such Company Option
is intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code.
(c) Each Company Option that is designated as an
incentive stock option is intended to qualify as an
incentive stock option under the Code. Each grant of
a Company Option was duly authorized no later than the date on
which the grant of such Company Option was by its terms to be
effective (the
Grant Date
) by all necessary
corporate action, including, as applicable, approval by the
Board of Directors of the Company (or a duly constituted and
authorized committee thereof) and any required shareholder
approval by the necessary number of votes or written consents,
and: (i) each such grant was made in accordance with the
terms of the applicable Company Stock Plan, the Exchange Act and
all other applicable laws and the rules of NASDAQ; (ii) the
per share exercise price of each Company Option was equal to the
fair market value of a share of Common Stock on the applicable
Grant Date; and (iii) each such grant was properly
accounted for in accordance with GAAP (as defined in
Section 5.6(b)) in the financial statements (including the
related notes) of the Company and disclosed in the Company SEC
Documents (as defined in Section 5.6(a)) in accordance with
the Exchange Act and all other applicable laws.
(d) Section 5.2(d) of the Company Disclosure Schedule
sets forth the maximum number of shares of Common Stock that
could be purchased with accumulated payroll deductions under the
ESPP at the close of business on last day of current
offering/purchase period (assuming the fair market value of a
share of Common Stock on such date is equal to $1.64 per share
and payroll deductions continue at the rate in effect on the
date of this Agreement).
(e) Except as set forth in Section 5.2(a), there is
no: (i) outstanding subscription, option, call, warrant or
right (whether or not currently exercisable) to acquire any
shares of the capital stock or other securities of the Company
or any Subsidiary; (ii) outstanding security, instrument or
obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other
securities of the Company or any Subsidiary;
(iii) shareholder rights plan (or similar plan commonly
referred to as a poison pill) or contract under
which the Company or any Subsidiary is or may become obligated
to sell or otherwise issue any shares of its capital stock or
any other securities; or (iv) to the knowledge of the
Company, condition or circumstance that could reasonably be
expected to give rise to or provide a basis for the assertion of
a claim by any Person to the effect that such Person is entitled
to acquire or receive any shares of the capital stock or other
securities of the Company or any Subsidiary.
(f) There are no voting trusts or other agreements to which
the Company or any Company Subsidiary is a party with respect to
the voting of the Common Stock or any capital stock of, or other
equity interest of the Company or any of the Company
Subsidiaries. Neither the Company nor any Company Subsidiary has
granted any preemptive rights, anti-dilutive rights or rights of
first refusal or similar rights.
Section
5.3
Corporate
Authorization
.
(a) Each of the Company and Delaware Merger Sub has all
necessary corporate power and corporate authority to enter into
and to perform its obligations under this Agreement and the
execution, delivery and performance by each of the Company and
Delaware Merger Sub of this Agreement have been duly authorized
by all necessary action on the part of the Company, the Board of
Directors of the Company, Delaware Merger Sub and the Board of
Directors of Delaware Merger Sub. This Agreement constitutes the
legal, valid and binding obligation of each of the Company and
Delaware Merger Sub, enforceable against each of the Company and
Delaware Merger Sub in accordance with its terms, subject to
(i) the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock, which is the only vote
of the holders of any of the capital stock of the Company
necessary to approve the principal terms of the Reincorporation
Merger (the
Company Shareholder Approval
),
(ii) the affirmative vote or consent of the Company as the
sole stockholder of Delaware Merger Sub, which is the only vote
or consent of the holders of any of the capital stock of
Delaware Merger Sub necessary to adopt this Agreement with
respect to the Reincorporation Merger (and which shall occur
immediately following the execution of this Agreement and
evidence of which shall be provided to Parent on the date
hereof), (iii) following the Reincorporation Closing, the
affirmative vote or consent of the holders of a majority of the
outstanding shares of ESS Delaware Common Stock, which is the
only vote or consent of the holders of any of the capital stock
of ESS Delaware necessary to adopt this Agreement with respect
to the Merger (the
ESS Delaware Stockholder
Approval
), (iv) laws of general application
relating to bankruptcy, insolvency and the relief of debtors,
and (v) rules of law governing specific performance,
injunctive relief and other equitable remedies.
(b) The Board of Directors of the Company, and any
applicable special committee of the Board of Directors, by
resolutions duly adopted at meetings duly called and held, have
(A) determined that entry into this Agreement
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and consummation of the transactions contemplated by this
Agreement are fair to and in the best interests of the Company
and the shareholders of the Company, (B) approved and
declared advisable this Agreement and the transactions
contemplated by this Agreement, including the Reincorporation
Merger and the Merger, and (C) recommended in accordance
with applicable law that the shareholders of the Company vote in
favor of approval of the principal terms of both the
Reincorporation Merger and the Merger and the other transactions
contemplated by this Agreement (the
Company
Recommendation
).
(c) The Board of Directors of Delaware Merger Sub, by
resolutions duly adopted, has (A) determined that entry
into this Agreement and consummation of the transactions
contemplated by this Agreement are fair to and in the best
interests of Delaware Merger Sub and the stockholder of Delaware
Merger Sub and, following the Effective Time of the
Reincorporation Merger, the stockholders of ESS Delaware,
(B) approved and declared advisable this Agreement and the
transactions contemplated by this Agreement, including the
Reincorporation Merger and the Merger, (C) recommended in
accordance with applicable law that the Company as the sole
stockholder of Delaware Merger Sub adopt this Agreement with
respect to the Reincorporation Merger, and (D) subject to
the occurrence of the Reincorporation Closing, recommended in
accordance with applicable law that, following the Effective
Time of the Reincorporation Merger, the stockholders of ESS
Delaware adopt the Merger Agreement with respect to the Merger
(the
ESS Delaware Recommendation
).
Section
5.4
Governmental
Authorization
.
The execution, delivery and
performance by the Company and Delaware Merger Sub of this
Agreement and the consummation by the Company and Delaware
Merger Sub of the transactions contemplated by this Agreement
require no action by or in respect of, or filing with, any
Governmental Authority other than (i) filings with the
Secretary of State of the State of Delaware in connection with
the Reincorporation Merger and the Merger, filings with the
Secretary of State of the State of California in connection with
the Reincorporation Merger, and filings of appropriate documents
with the relevant authorities of other states in which the
Company is qualified to do business, (ii) compliance with
any applicable requirements of the HSR Act and of laws analogous
to the HSR Act existing in foreign jurisdictions,
(iii) compliance with any applicable requirements of the
Securities Act and the Exchange Act (including the filing of the
Registration Statement and the Proxy Statement), NASDAQ, and any
other applicable U.S. state or federal securities laws, and
(iv) any actions or filings the absence of which would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the
transactions contemplated by this Agreement.
Section
5.5
Non-contravention
.
The
execution, delivery and performance by the Company and Delaware
Merger Sub of this Agreement and the consummation of the
transactions contemplated by this Agreement do not and will not
(i) contravene, conflict with, or result in any violation
or breach of any provision of the articles or certificate of
incorporation, respectively, or bylaws of the Company or
Delaware Merger Sub, (ii) assuming compliance with the
matters referred to in Section 5.4, contravene, conflict
with or result in a violation or breach of any provision of any
applicable law, (iii) assuming compliance with the matters
referred to in Section 5.4, require any consent or other
action by any Person under, constitute a default, or an event
that, with or without notice or lapse of time or both, would
constitute a default under, or cause or permit the termination,
cancellation, acceleration or other change of any right or
obligation or the loss of any benefit to which the Company or
any of the Company Subsidiaries is entitled under any provision
of any agreement or other instrument binding upon the Company or
any of the Company Subsidiaries or any license, franchise,
permit, certificate, approval or other similar authorization
affecting, or relating in any way to, the assets or business of
the Company and the Company Subsidiaries (a
Company
Agreement
) or (iv) result in the creation or
imposition of any Lien, other than Permitted Liens, on any asset
of the Company or any of the Company Subsidiaries, with such
exceptions, in the case of each of clauses (ii) through
(iv), as would not, individually or in the aggregate, reasonably
be expected to have a Company Material Adverse Effect or have a
material adverse effect on the ability of the Company to
consummate the transactions contemplated by this Agreement.
Section
5.6
Company
SEC Documents and Financial Statements
.
(a) The Company has filed or furnished (as applicable) with
the SEC all forms, reports, schedules, statements and other
documents required by it to be filed or furnished (as
applicable) since and including January 1, 2005, under the
Exchange Act or the Securities Act (such documents, as have been
amended or superseded since the time of their filing,
collectively, the
Company SEC Documents
).
Each Company SEC Document (a) as of its date,
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complied as to form in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the
case may be, as in effect on the date so filed and (b) did
not, at the time it was filed (or, if subsequently amended or
supplemented, at the time of such amendment or supplement),
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. As of
the date of this Agreement, no Company Subsidiary is separately
subject to the reporting requirements of the Exchange Act.
(b) Each of the consolidated financial statements
(including, in each case, any notes thereto) of the Company
contained in the Company SEC Documents (collectively, the
Financial Statements
) was prepared in
accordance with United States generally accepted accounting
principles (
GAAP
), applied (except as may be
indicated in the notes thereto and, in the case of unaudited
quarterly financial statements, as permitted by
Form 10-Q
under the Exchange Act) on a consistent basis during the periods
indicated (except as may be indicated in the Company SEC
Documents), and each of the Financial Statements presents
fairly, in all material respects, the consolidated financial
position of the Company as of the respective dates thereof and
the consolidated statements of income, stockholders equity
and cash flows of the Company for the respective periods
indicated therein (subject, in the case of unaudited financial
statements, to normal period end adjustments).
Section
5.7
Internal
Controls; Sarbanes-Oxley Act
.
(a) The Company and the Company Subsidiaries have designed
and maintained a system of internal controls over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
of
the Exchange Act) sufficient to provide reasonable assurances
regarding the reliability of financial reporting. The Company
(i) has designed and maintains disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
of
the Exchange Act) to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and is accumulated and communicated to the
Companys management as appropriate to allow timely
decisions regarding required disclosure and (ii) has
disclosed to the Companys auditors and the audit committee
of the Board of Directors of the Company (and made summaries of
such disclosures available to Parent) (A) any significant
deficiencies and material weaknesses in the design or operation
of internal controls over financial reporting that are
reasonably likely to adversely affect the Companys ability
to record, process, summarize and report financial information
and (B) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
Companys internal controls over financial reporting.
(b) Since January 1, 2005, the Company has been in
compliance in all material respects with (i) all effective
provisions of the Sarbanes-Oxley Act and (ii) the
applicable listing and corporate governance rules and
regulations of NASDAQ.
(c) Since January 1, 2005, neither the Company nor any
of its Subsidiaries nor, to the knowledge of the Company, any
director, officer, auditor, accountant or representative of the
Company or any of its Subsidiaries has received or otherwise had
or obtained knowledge of any complaint, allegation, assertion or
claim, whether written or oral, that the Company or any of its
Subsidiaries has engaged in questionable accounting or auditing
practices. No current or former attorney representing the
Company or any of its Subsidiaries has reported evidence of a
violation of securities laws, breach of fiduciary duty or
similar violation by the Company or any of its current or former
officers, directors, employees or agents to the current Board of
Directors of the Company or any committee thereof or to any
current director or executive officer of the Company.
(d) To the knowledge of the Company, no employee of the
Company or any of the Company Subsidiaries has provided or is
providing information to any law enforcement agency regarding
the commission or possible commission of any crime or the
violation or possible violation of any applicable legal
requirements of the type described in Section 806 of the
Sarbanes-Oxley Act by the Company or any of its Subsidiaries.
Neither the Company nor any of the Company Subsidiaries nor, to
the knowledge of the Company, any director, officer, employee,
contractor, subcontractor or agent of the Company or any Company
Subsidiary has discharged, demoted, suspended, threatened,
harassed or in any other manner discriminated against an
employee of the Company or any of its Subsidiaries in the terms
and conditions of employment because of any lawful act of such
employee described in Section 806 of the Sarbanes-Oxley Act.
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Section
5.8
Absence
of Certain Changes
.
(a) Except as contemplated by this Agreement, since
September 30, 2007 (the
Balance Sheet
Date
), each of the Company and each Company Subsidiary
has conducted its respective business in the ordinary course of
business.
(b) From the Balance Sheet Date through the date of this
Agreement, there has not been any Company Material Adverse
Effect.
Section
5.9
No
Undisclosed Liabilities
.
Except (a) as
reflected or otherwise reserved against on the Financial
Statements (including the notes thereto), (b) for
liabilities and obligations incurred since the Balance Sheet
Date in the ordinary course of business and (c) for
liabilities and obligations incurred under this Agreement or in
connection with the transactions contemplated by this Agreement,
neither the Company nor any Company Subsidiary has incurred any
liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise required by GAAP to be
recognized or disclosed on a consolidated balance sheet of the
Company or any Company Subsidiary or in the notes thereto.
Section
5.10
Litigation
.
Except
as disclosed in the Company SEC Documents filed prior to the
date hereof, there is no material action, suit, investigation or
proceeding pending against, or, to the knowledge of the Company,
threatened against or affecting, the Company, any of the Company
Subsidiaries, any present or former officer, director or
employee of the Company or any of the Company Subsidiaries or
any Person for whom the Company or any Company Subsidiary may be
liable or any of their respective properties before any court or
arbitrator or before or by any Governmental Authority.
Section
5.11
Employee
Benefit Plans; ERISA
.
(a) Section 5.11(a) of the Company Disclosure Schedule
sets forth a correct and complete list of all material employee
benefit plans, programs, agreements or arrangements, including
pension, retirement, profit sharing, deferred compensation,
stock option, change in control, retention, equity or
equity-based compensation, stock purchase, employee stock
ownership, severance pay, vacation, bonus or other incentive
plans, all medical, vision, dental or other health plans, all
life insurance plans, and all other material employee benefit
plans or fringe benefit plans, including employee benefit
plans as that term is defined in Section 3(3) of
ERISA, maintained by the Company or any Company Subsidiary, or
to which the Company or any Company Subsidiary contributes or is
obligated to contribute thereunder, or with respect to which the
Company or any Company Subsidiary has or may have any material
liability (contingent or otherwise), in each case, for or to any
current or former employees, directors or officers of the
Company or any Company Subsidiary
and/or
their
dependents (collectively, the
Benefit Plans
).
(b) All Benefit Plans that are intended to be subject to
Code Section 401(a) and any trust agreement that is
intended to be tax exempt under Code Section 501(a) have
been determined by the Internal Revenue Service to be qualified
under Code Section 401(a) and exempt from taxation under
Code Section 501(a), and, to the knowledge of the Company,
nothing has occurred that would adversely affect the
qualification of any such plan. Each Benefit Plan and any
related trust subject to ERISA complies in all material respects
with and has been administered in substantial compliance with,
(A) the applicable provisions of ERISA, (B) all
applicable provisions of the Code, (C) all other applicable
laws, and (D) its terms and the terms of any collective
bargaining or collective labor agreements. Each Benefit Plan
which is maintained primarily for the benefit of any current or
former employees, directors or officers of the Company or any
Company Subsidiary not located primarily in the United States
and/or
their
dependents complies in all material respects with and has been
administered in substantial compliance with the laws of the
applicable foreign country. Neither the Company nor any Company
Subsidiary has received any written notice from any Governmental
Authority questioning or challenging such compliance described
above. There are no unresolved claims or disputes under the
terms of, or in connection with, the Benefit Plans other than
claims for benefits which are payable in the ordinary course.
There has not been any non-exempt prohibited
transaction (within the meaning of Section 406 of
ERISA or Section 4975 of the Code) with respect to any
Benefit Plan. No litigation has been commenced with respect to
any Benefit Plan and, to the knowledge of the Company, no such
litigation is threatened (other than routine claims for benefits
in the normal course). There are no governmental audits or
investigations pending or, to the knowledge of the Company,
threatened in connection with any Benefit Plan.
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(c) Neither the Company nor any ERISA Affiliate of the
Company (as defined below) (i) has an obligation to
contribute (as defined in ERISA Section 4212) to
a Benefit Plan that is a multiemployer plan (as
defined in ERISA Sections 4001(a)(3) and 3(37)(A));
(ii) sponsors, maintains or contributes to any plan,
program or arrangement that provides for post-retirement or
other post-employment welfare benefits (other than health care
continuation coverage as required by applicable law); or
(iii) sponsors a Benefit Plan that is a defined benefit
pension plan intended to be registered or approved by any
foreign Governmental Authority.
(d) Neither the Company nor any ERISA Affiliate has ever
maintained, established, sponsored, participated in, or
contributed to, any defined benefit plan (as defined in ERISA
Section 3(35)) subject to Part 3 of Subtitle B of
Title I of ERISA, Title IV of ERISA or
Section 412 of the Code.
(e) Neither the Company nor any Company Subsidiary has any
obligations for retiree health or life insurance benefits under
any Benefit Plan (other than for continuation coverage under
Section 4980B(f) of the Code or any similar state, local or
foreign law).
(f) Section 5.11(f) of the Company Disclosure Schedule
discloses: (i) each payment becoming due to any current or
former employee under any Benefit Plan because of this Agreement
(or the consummation of the transactions contemplated by this
Agreement); (ii) any increase in any benefit otherwise
payable under any Benefit Plan; or (iii) any acceleration
of the time of payment, vesting or funding of any such benefits
under any Benefit Plan in each case caused or triggered by the
execution and delivery of this Agreement or the consummation of
the Merger or the other transactions contemplated by this
Agreement. No payment or benefit which has been, will or may be
made by the Company or any Company Subsidiary with respect to
any current or former employee located in the United States in
connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated by this
Agreement would fail to be deductible under Section 162(m)
of the Code. Neither this Agreement (or the consummation of the
transactions contemplated by this Agreement) nor any other
agreement, plan, arrangement or other contract between the
Company or any Company Subsidiary and an employee or other
service provider that, considered individually or considered
collectively with any other such agreements, plans, arrangements
or other contracts, will give rise directly or indirectly to the
payment of any amount that would be characterized as an
excess parachute payment within the meaning of
Section 280G(b)(1) of the Code.
(g) Correct and complete copies have been delivered or made
available to Parent by the Company of all Benefit Plans
(including all amendments and attachments thereto); all
insurance contracts or other funding arrangements to the degree
applicable; the most recent annual information filings
(Form 5500) and annual financial reports for those
Benefit Plans (where required); the most recent determination
letter from the Internal Revenue Service (where required); all
material written agreements and contracts relating to each
Benefit Plan, including administrative service agreements and
group insurance contracts; and the most recent summary plan
descriptions for the Benefit Plans (where required) and in
respect of Benefit Plans, the most recent actuarial valuation
and any subsequent valuation or funding advice (where required,
including draft valuations).
(h) No payment pursuant to any Benefit Plans or other
arrangement between the Company or a Company Subsidiary and any
service provider (as such term is defined in
Section 409A of the Code and the United States Treasury
Regulations and IRS guidance thereunder), including, without
limitation, the grant, vesting or exercise of any Company
Option, would subject any Person to a Tax pursuant to
Section 409A of the Code (based upon a good faith
interpretation of Section 409A of the Code and the
applicable regulations, notices and other regulatory guidance
related thereto), whether pursuant to the consummation of the
Merger, any other transactions contemplated by this Agreement or
otherwise.
Section
5.12
Taxes
.
(a) The Company and each Company Subsidiary have timely
filed with the appropriate Tax authority all material Tax
Returns required to be filed by them through the date hereof.
All such Tax Returns are complete and accurate in all material
respects. None of the Company or any Company Subsidiary
currently is the beneficiary of any extension of time within
which to file any material Tax Return.
(b) The unpaid Taxes of the Company and each Company
Subsidiary did not, as of the dates of the Financial Statements,
exceed the reserve for Tax liability set forth on the face of
the balance sheets contained in such Financial Statements. Since
the date of the most recent Financial Statements, neither the
Company nor any of the Company
A-12
Subsidiaries have incurred any material liability for Taxes
outside the ordinary course of business or otherwise
inconsistent with past practice.
(c) No material deficiencies for Taxes of the Company and
the Company Subsidiaries have been claimed in writing or
proposed in writing or assessed by any Tax authority that have
not been resolved or settled. To the knowledge of the Company,
there are no pending audits of federal, state and local Tax
Returns of the Company and the Company Subsidiaries by the
relevant Tax authorities. Neither the Company nor the Company
Subsidiaries nor any predecessor has waived any statute of
limitations in respect of Taxes or agreed to any extension of
time with respect to a Tax assessment or deficiency.
(d) There are no Liens for Taxes upon the assets of the
Company and the Company Subsidiaries (other than Permitted
Liens).
(e) Neither the Company nor the Company Subsidiaries has
any liability for the Taxes of any other Person (other than the
Company and the Company Subsidiaries) under Treasury Regulation
§ 1.1502 6 (or any similar provision of
state, local, or foreign law), as a transferee, by contract, or
otherwise, except where such liability would not have (or
reasonably be expected to have) a material effect.
(f) There are no Tax sharing agreements or similar
arrangements (including Tax indemnity arrangements) with respect
to or involving the Company and the Company Subsidiaries (except
for the allocation of Taxes set forth in leases, contracts and
commercial agreements entered into in the ordinary course of
business and except where such agreement or arrangement would
not have (or reasonably be expected to have) a material effect).
(g) Neither the Company nor any of the Company Subsidiaries
has agreed, or is required, to make any adjustment under
Section 481(a) of the Code for any period after the Closing
Date by reason of a change in accounting method or otherwise.
Section
5.13
Contracts
.
(a) Except as filed as exhibits to the Company SEC
Documents filed prior to the date hereof (copies of which have
been made available to Parent), there is no Company Agreement
(a) any of the benefits to any party of which will be
materially increased, or the vesting of the material benefits to
any party of which will be materially accelerated, by the
occurrence of any of the transactions contemplated by this
Agreement or (b) which, as of the date hereof, (i) is
a material contract (as such term is defined in
Item 601(b)(10) of
Regulation S-K
of the SEC), (ii) involves aggregate expenditures in excess
of $500,000, (iii) was not entered into in the ordinary
course of business, (iv) that contains take or
pay provisions applicable to the Company or any Company
Subsidiary, (v) that contains any non-compete or
exclusivity provisions with respect to any line of business or
geographic area with respect to the Company or any Company
Subsidiary, or which restricts the conduct of any line of
business by the Company or any Company Subsidiary or any
geographic area in which the Company or any Company Subsidiary
conducts business, or (vi) which would prohibit or
materially delay the consummation of the transactions
contemplated by this Agreement. Each contract of the type
described above in Section 5.13, whether or not set forth
in Section 5.13 of the Company Disclosure Schedule, is
referred to herein as a
Company Material
Contract
. Each Company Material Contract is valid and
binding on the Company and each Company Subsidiary party thereto
and, to the knowledge of the Company, each other party thereto,
as applicable, and in full force and effect (except that
(x) such enforcement may be subject to applicable
bankruptcy, insolvency or other similar laws, now or hereafter
in effect, affecting creditors rights generally and
(y) the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any
proceeding therefor may be brought), and the Company and each
Company Subsidiary has performed in all material respects all
obligations required to be performed by it under each Company
Material Contract and, to the knowledge of the Company, each
other party to each Company Material Contract has performed in
all material respects all obligations required to be performed
by it under such Company Material Contract, except as would not,
individually or in the aggregate, be reasonably expected to be
material to the Company and the Company Subsidiaries, taken as a
whole. None of the Company or any Company Subsidiary knows of,
or has received notice of, any violation or default under (or
any condition which with the passage of time or the giving of
notice would cause such a violation of or default under) any
Company Material Contract except for violations or defaults that
would not, individually or in the aggregate, be reasonably
expected to, (1) prevent or materially delay consummation
of the Merger or any of the other transactions contemplated by
this Agreement, or (2) have a Company Material Adverse
Effect.
A-13
(b) The Company has delivered or made available to Parent
or provided to Parent for review, prior to the execution of this
Agreement, true and complete copies of all of the Company
Material Contracts required to be disclosed in Section 5.13
of the Company Disclosure Schedule, which are not filed as
exhibits to the Company SEC Documents and the Company Material
Contracts required to be disclosed in Section 5.13 of the
Company Disclosure Schedule filed as exhibits to the Company SEC
Documents are true and complete copies of such contracts.
Section
5.14
Properties
.
Except
as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, the Company
or a Company Subsidiary has good and marketable, indefeasible,
fee simple title to, or in the case of leased property and
assets, has valid leasehold interests in, all property and
assets (whether real, personal, tangible or intangible), except
for properties and assets sold since the Balance Sheet Date in
the ordinary course of business. None of such property or assets
is subject to any Lien, except:
(a) Liens disclosed in the Financial Statements;
(b) Liens consisting of zoning or planning restrictions,
easements, permits and other restrictions or limitations on the
use of real property or irregularities in title thereto, which
do not materially impair the value of such properties or the use
of such property by the Company or any of the Company
Subsidiaries in the operation of its respective business;
(c) workmens, repairmens, warehousemens
and carriers Liens arising in the ordinary course of
business of the Company and the Company Subsidiaries;
(d) Liens for Taxes, assessments or governmental charges or
levies not yet due or being contested in good faith (and for
which adequate accruals or reserves have been established on the
appropriate Financial Statements); or
(e) Liens and other imperfections of title (including
matters of record) and encumbrances that do not materially
interfere with the conduct of the business of the Company and
the Company Subsidiaries, taken as a whole (the foregoing Liens
(a)-(e),
Permitted Liens
).
Section
5.15
Intellectual
Property
.
(a) Section 5.15(a) of the Company Disclosure Schedule
contains a complete and accurate list, as of the date hereof, of
the following Owned Company IP: (i) all Company Registered
IP; and (ii) all unregistered Trademarks used in connection
with Company Products; in each case listing, as applicable,
(A) the name of the applicant or registrant and current
owner, (B) the jurisdiction where the application or
registration is located, (C) the Governmental Authority
with which the application or registration is filed,
(D) the application or registration number, and
(E) all proceedings or actions before any court or tribunal
(including the United States Patent and Trademark Office or any
equivalent authority anywhere else in the world) related to
Company Registered IP. The Company and each of the Company
Subsidiaries has in a timely manner made all filings, payments,
and recordations and taken all other actions reasonably required
to obtain and maintain ownership of all Intellectual Property
Rights in each material item of Company Registered IP.
(b) Section 5.15(b) of the Company Disclosure Schedule
contains a complete and accurate list of all Company Agreements
that are material to the Company, in effect as of the date
hereof, in each case specifying the date of and parties to the
agreement and whether such agreement is exclusive or
non-exclusive, (i) under which the Company or any of its
Subsidiaries uses or has the right to use any Licensed Company
IP, other than non-exclusive licenses and related services
agreements for generally commercially available software that is
not incorporated into any Company Products or (ii) under
which the Company or any of its Subsidiaries has licensed or
otherwise permitted others the right to use any Company IP or
Company Products (such agreements described in clauses (i)
and (ii) above, the
Company IP
Agreements
). Neither the Company nor any of its
Subsidiaries has granted any exclusive license under any Owned
Company IP. To the knowledge of the Company, there are no
pending material disputes regarding the scope of any Company IP
Agreements, performance under any Company IP Agreements, or with
respect to payments made or received under any Company IP
Agreements. To the knowledge of the Company (A) no parties
to the Company IP Agreements are in breach thereof, and
(B) all Company IP Agreements are binding and are in full
force and effect except for those Company IP Agreements that by
their terms have expired or been terminated since the date
hereof.
A-14
(c) To the knowledge of the Company, the Company and its
Subsidiaries own or otherwise have licensed all Intellectual
Property Rights needed to conduct the business of the Company
and its Subsidiaries as conducted prior to the Closing Date.
(d) The Company and its Subsidiaries own all right, title
and interest in the Owned Company IP, free and clear of all
Liens, other than Permitted Liens. Without limiting the
foregoing, each Person who is or was an employee or contractor
of Company or any of its Subsidiaries and who is or was involved
in the creation or development of any Owned Company IP has
executed a valid agreement containing an assignment of all
Intellectual Property Rights in such employees or
contractors contribution to the Owned Company IP.
(e) Neither the Company nor any of its Subsidiaries is or
has been a member of, or a contributor to, any domestic or
foreign industry standards body or similar organization which
membership or contribution may require the Company or any of its
Subsidiaries to grant or offer to any other Third Party any
compulsory license or right to any Owned Company IP. No
Governmental Authority has any ownership interest in any Owned
Company IP, and neither Company nor its Subsidiaries use or have
used any funding, facilities, or personnel of any Governmental
Authority in connection with the creation of the Owned Company
IP in a manner that could give rise to an ownership interest in
the Owned Company IP in favor of such Governmental Authority.
(f) The Company and each of its Subsidiaries has taken
reasonable and appropriate steps to protect and preserve the
confidentiality of the Trade Secrets of Company and its
Subsidiaries, and to the knowledge of the Company, there are no
unauthorized uses, disclosures or infringements of any such
Trade Secrets by any Person.
(g) To the knowledge of the Company, none of the Company or
any of its Subsidiaries or any of its or their current products
or services or other operation of the Companys or its
Subsidiaries business has infringed upon, misappropriated,
or otherwise violated, or is infringing upon, misappropriating,
or otherwise violating, in any respect the Intellectual Property
Rights of any Third Party. To the knowledge of the Company as of
the date hereof, no Person or any of such Persons products
or services or other operation of such Persons business is
infringing upon or otherwise violating any Owned Company IP in
any material respect.
(h) No action, claim or proceeding alleging infringement,
misappropriation, or other violation of any Intellectual
Property Right of another Person is pending or, to the knowledge
of the Company, has been threatened against Company or its
Subsidiaries. Neither the Company nor any of its Subsidiaries
has received any written notice or other communication relating
to any actual, alleged, or suspected infringement,
misappropriation, or violation of any Intellectual Property
Right of another Person by Company or any Subsidiary. The
Company and its Subsidiaries are not subject to any order,
judgment, writ, stipulation, award, injunction, decree,
arbitration award or finding of any Governmental Authority that
restricts or impairs the use of any Company IP.
(i) The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement
will not (with or without notice or the lapse of time, or both)
result in (i) the Company or its Subsidiaries granting to
any Third Party any rights or licenses to any Intellectual
Property or Intellectual Property Rights, (ii) any right,
including any right of termination, amendment, modification,
cancellation or acceleration under any Company IP Agreement,
(iii) the loss of or the imposition of any Lien on any
Owned Company IP, or (iv) the release, disclosure, or
delivery of any Owned Company IP by or to any escrow agent or
other Person.
(j) No software incorporated in any Company Product is
subject to any copyleft or other obligation or
condition (including any obligation or condition under any
open source license such as the GNU Public License,
Lesser GNU Public License, or Mozilla Public License) that could
require, or could condition the use or distribution of any
software contained in any Company Product on, the disclosure,
licensing, or distribution of any source code for any portion of
Owned Company IP in a Company Product.
(k) None of the source code used by Company or any of its
Subsidiaries and material to the conduct of the business of the
Company, including software contained any of the Company
Products, (collectively,
Company Source Code
)
has been disclosed by the Company or any of its Subsidiaries,
except to its employees or advisers or pursuant to
non-disclosure agreements, or, to the knowledge of the Company,
by any other Person except as authorized by the Company under a
non-disclosure agreement. Neither the Company nor any of its
Subsidiaries has provided or licensed, or has any duty or
obligation (whether present, contingent, or otherwise) to
provide or license, Company Source Code to any escrow agent or
other Third Party without a nondisclosure agreement. No event
has occurred, and no circumstance or condition exists, that
(with or without notice or lapse of time) will, or could
A-15
reasonably be expected to, result in the provision, license, or
disclosure of any Company Source Code to any Third Party without
a nondisclosure agreement.
Section
5.16
Labor
Matters
.
(a) Except as would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse
Effect: (i) there is no collective bargaining or other
labor union or foreign work council contract applicable to
Persons employed by the Company or any of the Company
Subsidiaries to which the Company or any of the Company
Subsidiaries is a party (each a
Company Collective
Bargaining Agreement
), (ii) no Company Collective
Bargaining Agreement is being negotiated by the Company or any
of the Company Subsidiaries, (iii) as of the date of this
Agreement, there is no strike or work stoppage against the
Company or any of the Company Subsidiaries pending or, to the
knowledge of the Company, threatened that may interfere with the
respective business activities of the Company or any Company
Subsidiary and (iv) as of the date of this Agreement, to
the knowledge of the Company, none of the Company or any Company
Subsidiary has committed any material unfair labor practice in
connection with the operation of the respective businesses of
the Company and the Company Subsidiaries.
(b) The Company and its Subsidiaries have complied in all
material respects with applicable laws, rules and regulations
with respect to employment, employment practices, and terms,
conditions and classification of employment (including
applicable laws, rules and regulations regarding wage and hour
requirements, immigration status, discrimination in employment,
employee health and safety, and the Workers Adjustment and
Retraining Notification Act).
Section
5.17
Compliance
with Laws; Permits
.
(a) As of the date hereof, the Company and each Company
Subsidiary have complied and are in compliance in all material
respects with all laws, rules and regulations, ordinances,
judgments, decrees, orders, writs and injunctions of all
federal, state, local and foreign governments and agencies
thereof, which materially affect the business, properties or
assets of the Company and each Company Subsidiary, and no
notice, charge or assertion has been received by the Company or
any Company Subsidiary or, to the knowledge of the Company,
threatened against the Company or any Company Subsidiary
alleging any material violation of any of the foregoing. All
licenses, authorizations, consents, permits and approvals
required under such laws, rules and regulations which materially
affect the business, properties or assets of the Company and
each of its Subsidiary are in full force and effect except where
the failure to be in full force and effect would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect.
(b) The Company and each Company Subsidiary is in all
material respects in possession of all authorizations, licenses,
permits, certificates, approvals and clearances of any
Governmental Authority necessary for the Company and each
Company Subsidiary to own, lease and operate its properties or
to carry on their respective businesses as it is being conducted
as of the date hereof (the
Company Permits
),
and all such Company Permits are valid, and in full force and
effect.
(c) None of the Company or any of the Company Subsidiaries,
nor to the knowledge of the Company, any of their respective
directors, officers, agents, employees or representatives (in
each case acting in their capacities as such), has violated or
is in violation of any provision of the Foreign Corrupt
Practices Act of 1977, as amended, or violated Section 8 of
the Export Administration Act of 1977, as amended.
(d) Without limiting the other provisions of this
Section 5.17, to the knowledge of the Company, none of
(A) the Company, or any of the Company Subsidiaries or
(B) any of the directors, officers, agents, employees or
representatives of the Company or any Company Subsidiary (in
each case acting in their capacities as such), has, in the past
five (5) years, taken any action or made any omission in
violation of, or that would reasonably be expected to cause the
Company or Company Subsidiary to be in violation of, any
applicable law governing imports into or exports from the United
States or any foreign country, transactions with designated
individuals and organizations, or relating to economic sanctions
or embargoes, money laundering, or compliance with unsanctioned
foreign boycotts, including without limitation: the Arms Export
Control Act, the Trading with the Enemy Act, the International
Emergency Economic Powers Act, the Export Administration Act,
the 1930 Tariff Act and other U.S. customs laws, the
Foreign Corrupt Practices Act, the Export Administration
Regulations, the International Traffic in Arms Regulations, the
Office of Foreign Assets Control Regulations, the
U.S. Customs Regulations, or any regulation,
A-16
ruling, rule, order, decision, writ, judgment, injunction, or
decree of any Governmental Authority issued pursuant thereto.
Section
5.18
Information
in the Proxy Statement and the Registration
Statement
.
The Proxy Statement (and any
amendment thereof or supplement thereto), at the date mailed to
the Companys shareholders, at the time of any meeting of
Company shareholders to be held in connection with the
Reincorporation Merger and at the Effective Time of the
Reincorporation Merger and the Effective Time of the Merger, and
the Registration Statement (and any amendment thereof or
supplement thereto), at the time it is declared effective by the
SEC, will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading,
except that no representation or warranty is made by the Company
with respect to statements made therein based on information
supplied by Parent or Merger Sub expressly for inclusion in the
Proxy Statement or the Registration Statement. At the time of
any meeting of Company shareholders to be held in connection
with the Reincorporation Merger, the Proxy Statement and the
Registration Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the
Securities Act and the rules and regulations thereunder.
Section
5.19
Insurance
.
The
Company maintains insurance coverage with insurers, or maintains
self-insurance practices, in such amounts and covering such
risks as are, to the knowledge of the Company, in accordance
with normal industry practice for companies engaged in
businesses similar to that of the Company and the Company
Subsidiaries (taking into account the cost and availability of
such insurance). Section 5.19 of the Company Disclosure
Schedule lists each insurance policy to which the Company and
each of its Subsidiaries is a party. All such policies are in
full force and effect, all premiums due and payable have been
paid, and no written notice of cancellation or termination has
been received with respect to any such policy. Neither the
Company nor any Company Subsidiary is in material breach or
default, and neither the Company nor any Company Subsidiary has
taken any action or failed to take any action which, with notice
or the lapse of time, would constitute such a breach or default,
or permit termination or material modification of any such
insurance policies. The consummation of the transactions
contemplated by this Agreement will not, in and of itself, cause
the revocation, cancellation or termination of any such
insurance policy.
Section 5.20
Environmental Laws and
Regulations
.
Except as would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect, (i) Hazardous Materials
have not been generated, used, treated or stored on, transported
to or from or Released or disposed of on, any Company Property,
(ii) the Company and each of the Company Subsidiaries are
in compliance with all applicable Environmental Laws and the
requirements of any permits issued under such Environmental Laws
with respect to any Company Property, (iii) there are no
past, pending or, to the knowledge of the Company, threatened
Environmental Claims against the Company or any of the Company
Subsidiaries or any Company Property and (iv) to the
knowledge of the Company, there are no facts or circumstances,
conditions or occurrences regarding the business, assets or
operations of the Company or any Company Property that could
reasonably be anticipated to form the basis of an Environmental
Claim against the Company or any of the Company Subsidiaries or
any Company Property.
Section
5.21
Opinions
of Financial Advisors
.
The Company has
received the opinions of Needham & Company, LLC and
Sutter Securities Incorporated (the
Company Financial
Advisors
), to the effect that, as of the date hereof,
the consideration to be received in the Merger by the holders of
the ESS Delaware Common Stock is fair to such stockholders from
a financial point of view, and such opinion has not been
modified or withdrawn.
Section
5.22
Brokers
.
No
broker, investment banker, financial advisor or other Person,
other than the Company Financial Advisors, is entitled to any
brokers, finders, financial advisors or other
similar fee or commission in connection with the Merger based
upon arrangements made by or on behalf of Company. True and
correct copies of all agreements between the Company and the
Company Financial Advisors concerning this Agreement and the
transactions contemplated by this Agreement, including, without
limitation, any fee arrangements, have been previously made
available to Parent, except to the extent such agreements have
been redacted with respect to pricing incentives thresholds.
Section
5.23
Affiliate
Transactions
.
To the knowledge of the
Company, no executive officer or director of the Company or any
Company Subsidiary or any Person who beneficially owns five
percent or more of the Common Stock is a party to any Company
Agreement with or binding upon the Company or any Company
Subsidiary or any of their respective properties or assets or
has any material interest in any property owned by the Company
or any of
A-17
the Company Subsidiaries or has engaged in any material
transaction with any of the foregoing within the twelve
(12) month period preceding the date of this Agreement, in
each case, that is of the type that would be required to be
disclosed under Item 404 of
Regulation S-K
under the Securities Act.
Section
5.24
Takeover
Statutes
.
The Board of Directors of the
Company has taken all actions necessary to ensure that any
restrictions on business combinations contained in the CCC will
not apply to the Reincorporation Merger and the other
transactions contemplated by this Agreement. No state takeover
statute or similar statute or regulation applies to the Company
with respect to the Reincorporation Merger, the Merger and the
other transactions contemplated by this Agreement.
Section
5.25
Capitalization
of Delaware Merger Sub; No Prior
Activities
.
The authorized capital stock of
Delaware Merger Sub consists of 100,000,000 shares of
common stock, par value $0.0001 per share and
10,000,000 shares or preferred stock, with a par value of
$0.0001 per share. 10,000 shares of common stock, par value
$0.0001, of Delaware Merger Sub are issued and outstanding, all
of which are, and immediately prior to the Effective Time of the
Reincorporation Merger will be, owned by the Company. Delaware
Merger Sub has not conducted any business prior to the date
hereof and has, and prior to the Effective Time of the
Reincorporation Merger will have, no assets, liabilities or
obligations of any nature other than those incident to its
formation or incurred pursuant to this Agreement or in
connection with the Reincorporation Merger, the Merger and the
other transactions contemplated by this Agreement.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent and Merger Sub represent and warrant to the Company that
the statements contained in this Article VI are correct and
complete as of the date of this Agreement.
Section
6.1
Organization
.
Each
of Parent and Merger Sub is a corporation or other legal entity
duly organized, validly existing and in good standing (with
respect to jurisdictions which recognize such concept) under the
laws of the jurisdiction in which it is organized and has the
requisite corporate or other power, as the case may be, and
authority to conduct its business as now being conducted,
except, for those jurisdictions where the failure to be so
organized, existing or in good standing, individually or in the
aggregate, would have a material adverse effect on the ability
of Parent or Merger Sub to obtain financing for or consummate
the Merger or other transactions contemplated by this Agreement
(a
Parent Material Adverse Effect
).
Section
6.2
Corporate
Authorization
.
Each of Parent and Merger Sub
has all necessary corporate power and corporate authority to
enter into and to perform its obligations under this Agreement;
and the execution, delivery and performance by each of Parent
and Merger Sub of this Agreement has been duly authorized by all
necessary action on the part of Parent and Merger Sub. This
Agreement constitutes the legal, valid and binding obligation of
Parent and Merger Sub, enforceable against each of Parent and
Merger Sub in accordance with its terms, subject to
(i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other
equitable remedies.
Section
6.3
Governmental
Authorization
.
The execution, delivery and
performance by Parent and Merger Sub of this Agreement and the
consummation by Parent and Merger Sub of the transactions
contemplated by this Agreement require no action by or in
respect of, or filing with, any Governmental Authority other
than (i) filings with the Secretary of State of the State
of Delaware in connection with the Merger and filings of
appropriate documents with the relevant authorities of other
states in which the Company is qualified to do business,
(ii) compliance with any applicable requirements of the HSR
Act and of laws analogous to the HSR Act existing in foreign
jurisdictions, (iii) compliance with any applicable
requirements of the Securities Act, the Exchange Act, NASDAQ,
and any other applicable U.S. state or federal securities
laws, and (iv) any actions or filings the absence of which
would not have a Parent Material Adverse Effect.
Section
6.4
Non-contravention
.
The
execution, delivery and performance by the Parent and Merger Sub
of this Agreement and the consummation of the transactions
contemplated by this Agreement do not and will not
(i) contravene, conflict with, or result in any violation
or breach of any provision of the articles of incorporation or
bylaws (or similar organization documents) of Parent or Merger
Sub, (ii) assuming compliance with the matters referred to
in Section 6.3, contravene, conflict with or result in a
violation or breach of any provision of any
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applicable law, (iii) assuming compliance with the matters
referred to in Section 6.3, require any consent or other
action by any Person under, constitute a default, or an event
that, with or without notice or lapse of time or both, would
constitute a default, under, or cause or permit the termination,
cancellation, acceleration or other change of any right or
obligation or the loss of any benefit to which Parent or Merger
Sub is entitled under any provision of any agreement or other
instrument binding upon Parent or Merger Sub or any license,
franchise, permit, certificate, approval or other similar
authorization affecting, or relating in any way to, the assets
or business of the Parent or Merger Sub or (iv) result in
the creation or imposition of any Lien, other than Permitted
Liens, on any asset of Parent or Merger Sub, with such
exceptions, in the case of each of clauses (ii) through
(iv), as would not have a Parent Material Adverse Effect.
Section
6.5
Sufficient
Funds
.
As of the Effective Time of the
Merger, Parent and Merger Sub will have all of the funds that
are necessary to consummate the transactions contemplated by
this Agreement and to perform their respective obligations under
this Agreement.
Section
6.6
Information
in the Proxy Statement and the Registration
Statement
.
None of the information supplied
by Parent or Merger Sub in writing expressly for inclusion or
incorporation by reference in the Proxy Statement (and any
amendment thereof or supplement thereto), at the date mailed to
the Companys shareholders, at the time of any meeting of
Companys shareholders to be held in connection with the
Reincorporation Merger or at the Effective Time of the
Reincorporation Merger or the Effective Time of the Merger, or
in the Registration Statement (and any amendment thereof or
supplement thereto), at the time it is declared effective by the
SEC, will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light
of the circumstances under which they are made, not misleading.
Section
6.7
Guarantee
.
Concurrently
with the execution of this Agreement, Parent has caused Imperium
Master Fund, Ltd. (the
Guarantor
) to deliver
to the Company an executed limited guarantee (the
Guarantee
), in the form attached hereto as
Exhibit E
. The Guarantee is valid and in full force
and effect and constitutes the valid and binding obligation of
the Guarantor, enforceable in accordance with its terms.
Section
6.8
Solvency
of the Surviving Corporation
.
Assuming the
accuracy of the Companys representations and warranties
set forth in Article V of this Agreement, the Company
Disclosure Schedule and the Company SEC Documents, as of the
Effective Time of the Merger, after giving effect to the
transactions contemplated by this Agreement and actions taken in
connection with the financing of these transactions, the
Surviving Corporation shall be Solvent. For purposes of this
Agreement, the Surviving Corporation will be deemed to be
Solvent so long, as of any date of determination:
(a) each of the Surviving Corporation and its Subsidiaries
will not have incurred, or be expected to incur, indebtedness
(including contingent and other liabilities) beyond its ability
to pay such indebtedness as it matures or becomes due,
(b) the then present fair salable value of the assets of
the Surviving Corporation and its Subsidiaries, taken as a
whole, exceeds, as of such date, the amount that will be
required to pay (x) all liabilities of the Surviving
Corporation and its Subsidiaries (including the amount necessary
to provide for contingent liabilities) and (y) all existing
indebtedness of the Surviving Corporation and its Subsidiaries
(including the amount necessary to provide for contingent
liabilities) as such indebtedness becomes absolute and matures
and (z) each of the Surviving Corporation and its
Subsidiaries will not have an unreasonably small amount of
capital to carry on their respective business, either
(i) as presently conducted or (ii) as intended by
Parent to be conducted. No transfer of property is being made
and no obligation is being incurred in connection with the
transactions contemplated by this Agreement with the intent to
hinder, delay or defraud any present or future creditors of the
Surviving Corporation and its Subsidiaries.
Section
6.9
Capitalization
of Merger Sub; No Prior Activities
.
The
authorized capital stock of Merger Sub consists of
1,000 shares of common stock, par value $0.0001 per share,
all of which are validly issued and outstanding. All of the
issued and outstanding capital stock of Merger Sub is, and at
the Effective Time of the Merger will be, owned by Parent.
Merger Sub has not conducted any business prior to the date
hereof and has, and prior to the Effective Time of the Merger
will have, no assets, liabilities or obligations of any nature
other than those incident to its formation or incurred pursuant
to this Agreement or in connection with the Merger and the other
transactions contemplated by this Agreement.
Section
6.10
Vote
Required
.
The Board of Directors of each of
Parent and Merger Sub has approved and declared advisable this
Agreement and the transactions contemplated hereby, including
the Merger, and the Board
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of Directors of Merger Sub has recommended in accordance with
applicable law that the stockholder of Merger Sub adopt this
Agreement. No vote of the holders of any class or series of
capital stock or other Equity Interests of Parent or Merger Sub
is necessary to approve or adopt this Agreement or the
transactions contemplated hereby, other than the vote of Parent
as the sole stockholder of Merger Sub, which shall occur
immediately following the execution of this Agreement and
evidence of which shall be provided to the Company on the date
hereof.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1
Interim
Operations of the Company
.
Except as set
forth in Section 7.1 of the Company Disclosure Schedule, as
required or permitted pursuant to this Agreement or as agreed in
writing by Parent (which agreement shall not be unreasonably
withheld or delayed), from the date hereof until the Effective
Time of the Merger, the Company (and, after the Effective Time
of the Reincorporation Merger, ESS Delaware) shall, and shall
cause the Company Subsidiaries to, (i) conduct their
businesses in the ordinary course, (ii) use commercially
reasonable efforts to preserve intact their present business
organizations, (iii) use commercially reasonable efforts to
maintain satisfactory relations with and keep available the
services of their current officers and other key employees,
(iv) maintain in effect all material foreign, federal,
state and local licenses, approvals and authorizations,
including all material licenses and permits that are required
for the Company or any Company Subsidiary to carry on its
business and (v) use commercially reasonable efforts to
preserve existing relationships with customers, lenders,
suppliers, distributors and others having business relationships
with the Company and the Company Subsidiaries. Without limiting
the generality of the foregoing, except as set forth in
Section 7.1 of the Company Disclosure Schedule, as required
or permitted pursuant to this Agreement or as agreed in writing
by Parent (which agreement shall not be unreasonably withheld or
delayed), from the date hereof until the Effective Time of the
Merger, the Company (and, for the avoidance of doubt, after the
Effective Time of the Reincorporation Merger, ESS Delaware)
shall not, nor shall it permit any Company Subsidiary to:
(a) amend the articles of incorporation or bylaws of the
Company or equivalent documents of any Company Subsidiary or
amend the terms of any outstanding security of the Company or
any Company Subsidiary;
(b) split, combine, subdivide or reclassify any shares of
capital stock of the Company or any Company Subsidiary, other
than any such transaction by a Company Subsidiary that remains a
wholly owned Company Subsidiary after consummation of such
transaction, in the ordinary course of business;
(c) declare, set aside or pay any dividend or other
distribution payable in cash, stock or property (or any
combination thereof) with respect to the Companys capital
stock or the capital stock of any Company Subsidiary that is not
wholly owned by the Company;
(d) redeem, purchase or otherwise acquire, or offer to
redeem, purchase or otherwise 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 agreements in
effect on the date hereof;
(e) issue, sell, pledge, deliver, transfer, dispose of or
encumber any shares of, or securities convertible into or
exchangeable for, or grant any options (including Company
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 the Company or any Company
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 (i) the issuance of Common Stock reserved for
issuance on the date hereof pursuant to the exercise of the
Company Options disclosed in Section 5.2(b) of the Company
Disclosure Schedule and outstanding on the date hereof in the
ordinary course of business of the Company Stock Plans,
(ii) the grant of Company Options in accordance with the
Company Stock Plans in an amount not to exceed
10,000 shares of Common Stock or (iii) the issuance of
Common Stock to participants in the ESPP consistent with the
terms thereof and as set forth in Section 8.11 hereof;
(f) acquire (whether pursuant to merger, stock or asset
purchase or otherwise) in one transaction or any series of
related transactions (i) except in the ordinary course of
business consistent with past practice, any
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assets having a fair market value in excess of $150,000 or
(ii) 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);
(g) transfer, lease, license, sell, mortgage, pledge,
dispose of, or encumber any of its material assets, other than
(i) sales in the ordinary course of business, and
(ii) dispositions of equipment and property no longer used
in the operation of the business;
(h) (i) incur or assume any long-term or short-term
indebtedness, except short-term indebtedness made in the
ordinary course of business, (ii) 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 Company Subsidiaries in
the ordinary course of business, or (iii) make any loans,
advances or capital contributions to, or investments in, any
other Person, other than loans, advance or capital contributions
to, or investments in, wholly owned Company Subsidiaries made in
the ordinary course of business;
(i) except as required by applicable law or by the terms of
any agreement, Benefit Plan or other plan existing on the date
hereof, make any change in, or accelerate the vesting of, the
compensation or benefits payable or to become payable to, or
grant any severance or termination pay to, any of its officers,
directors, employees, agents or consultants or 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, or make any loans to any of its officers,
directors, employees, affiliates or agents or consultants or
make any change in its existing borrowing or lending
arrangements for or on behalf of any of such Persons pursuant to
a Benefit Plan or otherwise;
(j) except as required by applicable law or by the terms of
any agreement, Benefit Plan or other plan existing on the date
hereof: (i) 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 the Company or any Company
Subsidiary of any amount relating to unused vacation days; or
(ii) 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, Company 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 any Company or any Company 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 foregoing;
(k) except as publicly announced prior to the date hereof,
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 the Company or any Company Subsidiary other than
routine employee terminations;
(l) 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 the Company and the Company Subsidiaries previously
made available to Parent;
(m) enter into any agreement or arrangement that limits or
otherwise restricts the Company, any Company Subsidiary or any
successor thereto from engaging or competing in any line of
business or in any location;
(n) amend or modify in a material respect or terminate any
Company Material Contract or otherwise waive, release or assign
any material rights, claims or benefits thereunder, or enter
into any contract that would be a Company Material Contract;
(o) 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 (i) disclosed or reserved against in the
Financial Statements included in the Company SEC Documents filed
prior to the date hereof in amounts no greater than the amount
reserved with respect to the relevant liability therein or
(ii) incurred in the ordinary course of business since the
date of such financial statements;
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(p) permit any material insurance policy naming it as a
beneficiary or a loss payee to be cancelled or terminated
without reasonable prior notice to Parent;
(q) change any of the accounting methods used by it
materially affecting its assets, liabilities or business, except
for such changes required by GAAP or
Regulation S-X
promulgated under the Exchange Act, as concurred in by its
independent registered public accountants;
(r) revalue in any material respect any of its material
assets, including writing down the value of inventory or writing
down notes or accounts receivable, other than in the ordinary
course of business;
(s) 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;
(t) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of the Company (other
than the Merger); and
(u) enter into any written agreement, contract, commitment
or arrangement to do any of the foregoing, or authorize in
writing any of the foregoing.
Section
7.2
Proxy
Statement and Registration Statement; Company Shareholders
Meeting
.
(a) Subject to the terms of this Agreement, as promptly as
reasonably practicable after the date hereof, the Company shall
prepare and file with the SEC a proxy statement and prospectus,
to be sent to the holders of shares of Common Stock in
connection with the Company Shareholders Meeting and in
connection with obtaining Consent Proxies with respect to the
ESS Delaware Stockholder Approval (together with any amendments
thereof or supplements thereto, the
Proxy
Statement
), and the Company and Delaware Merger Sub
shall prepare and file with the SEC a registration statement on
Form S-4
(which shall include such proxy statement and prospectus) with
respect to the shares of ESS Delaware Common Stock to be issued
in connection with the Reincorporation Merger (together with any
amendments thereof or supplements thereto, the
Registration Statement
);
provided
that
Parent, Merger Sub and their counsel shall be given reasonable
opportunity to review the Proxy Statement and the Registration
Statement before they are filed with the SEC and the Company and
Delaware Merger Sub shall give due consideration to all
reasonable additions, deletions or changes suggested thereto by
Parent, Merger Sub or their counsel.
(b) The Company and Delaware Merger Sub, after consultation
with Parent, will use commercially reasonable efforts to respond
promptly to any comments made by the SEC with respect to the
Proxy Statement and the Registration Statement. Parent and
Merger Sub shall furnish all information as the Company or
Delaware Merger Sub may reasonably request (or as may be
required to be included in the Proxy Statement and the
Registration Statement) in connection with such actions and the
preparation of the Proxy Statement and the Registration
Statement and shall, and shall cause their representatives to,
cooperate in the preparation thereof. Subject to the terms of
this Agreement, as promptly as reasonably practicable after the
clearance of the Registration Statement by the SEC, the Company
shall mail the Proxy Statement to the holders of shares of
Common Stock. Subject to and without limiting the rights of the
Board of Directors of the Company pursuant to Section 7.3,
the Proxy Statement shall include the Company Recommendation and
the ESS Delaware Recommendation. The Company will advise Parent,
as promptly as reasonably practicable, after it receives notice
thereof, of any request by the SEC for amendment of the Proxy
Statement or the Registration Statement or comments thereon and
responses thereto or requests by the SEC for additional
information, and shall give Parent, Merger Sub and their counsel
reasonable opportunity to review any responses to the SEC and
shall give due consideration to all reasonable additions,
deletions or changes suggested thereto by Parent, Merger Sub or
their counsel.
(c) If at any time prior to the Effective Time of the
Merger, any information, event or circumstance relating to any
party hereto, or their respective officers, directors,
affiliates or Representatives, should be discovered by any party
hereto which should be set forth in an amendment or a supplement
to the Proxy Statement or the Registration Statement so that
neither the Proxy Statement nor the Registration Statement
contains any untrue statement of material fact, or omit to state
any material fact required to be stated therein in order to make
the statements therein,
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in light of the circumstances under which they were made, not
misleading, the party discovering such information, event or
circumstance shall promptly inform the other parties hereto and,
to the extent required by applicable law, an appropriate
amendment or supplement describing such information, event or
circumstance shall be promptly prepared and filed by the Company
with the SEC and, if required, disseminated to the holders of
shares of Common Stock.
(d) The Company or ESS Delaware, as appropriate, shall take
all actions required under any applicable federal or state
securities or Blue Sky Laws in connection with the issuance of
shares of ESS Delaware Common Stock pursuant to the
Reincorporation Merger.
(e) Subject to Section 7.3, the Company shall call and
hold a meeting of the holders of Common Stock (the
Company Shareholders Meeting
) as
promptly as reasonably practicable following the date on which
the Registration Statement is cleared by the SEC (but taking
into account any advance notice or other requirements under
applicable law and the organizational documents of the Company)
for the purpose of obtaining the Company Shareholder Approval.
Section
7.3
No
Solicitation; Unsolicited Proposals
.
(a) The Company shall, and shall cause each Company
Subsidiary, and each of its Representatives (collectively, the
Company Representatives
) to, immediately
cease and cause to be terminated any discussions or negotiations
with any Third Parties (other than the Parent and Merger Sub)
and each of such Third Parties Representatives
(collectively, the
Third Party
Representatives
) that may be ongoing as of the date
hereof with respect to a Takeover Proposal. The Company shall
not, and shall cause each Company Subsidiary and shall instruct
the Company Representatives not to, (a) directly or
indirectly solicit, initiate, or knowingly encourage any
Takeover Proposal, (b) enter into any agreement or
agreement in principle with respect to a Takeover Proposal or
(c) engage in any negotiations or discussions regarding, or
furnish or disclose to any Third Party any information with
respect to, any Takeover Proposal;
provided
,
however
, that at any time prior to obtaining the Company
Shareholder Approval, in response to a bona fide Takeover
Proposal received by the Company after the date hereof that was
not solicited in violation of this Section 7.3(a) and that
the Board of Directors of the Company determines in good faith
(after consultation with its outside legal counsel and financial
advisors) constitutes, or could reasonably be expected to lead
to, a Superior Proposal, the Company may, subject to compliance
with Sections 7.3(b) and (c), (x) provide access to
its properties, Company Agreements, personnel, books and records
and furnish information, data or draft agreements with respect
to the Company and the Company Subsidiaries to the Person making
such Takeover Proposal (and its officers, directors, employees,
accountants, consultants, legal counsel, advisors, agents and
other representatives) if the Board of Directors of the Company
receives from such Person a confidentiality agreement containing
terms no less favorable to the Company, including the
standstill provisions, than the terms of the
confidentiality letter agreement, dated June 25, 2007
between Parent and the Company (the
Confidentiality
Agreement
); and (y) participate in discussions or
negotiations with the Person making such Takeover Proposal (and
its officers, directors, employees, accountants, consultants,
legal counsel, advisors, agents and other representatives)
regarding such Takeover Proposal.
(b) Notwithstanding any provision of this Section 7.3
or Section 7.2 to the contrary, the Board of Directors of
the Company may (a) withdraw (or not continue to make) or
modify, or publicly propose to withdraw (or not continue to
make) or modify the Company Recommendation, (b) approve,
recommend or adopt, or publicly propose to approve, recommend or
adopt, a Superior Proposal (any action described in the
foregoing clause (a) or this clause (b), a
Company
Adverse Recommendation Change
) or (c) enter into
an agreement regarding a Superior Proposal, if (x) in the
case of an action described in clause (a), clause (b) or
clause (c) above, the Board of Directors of the Company has
determined in good faith (after consultation with its outside
legal counsel) that the failure to take such action is
reasonably likely to be inconsistent with the fiduciary duties
of the members of the Board of Directors of the Company under
applicable law, (y) in the case of an action described in
clause (b) or clause (c) above, (A) the Company
has given Parent three (3) business days prior
written notice of its intention to take such action and
(B) the Board of Directors of the Company shall have
considered in good faith (after consultation with its outside
legal counsel and financial advisors) any changes or revisions
to this Agreement proposed in writing by Parent and shall not
have determined that the Superior Proposal would no longer
constitute a Superior Proposal if such changes were to be given
effect and (z) in the case of an action described in
clause (c) above, (A) the Company has complied in all
material respects with its obligations under this
Section 7.3 and (B) the Company shall have terminated
this
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Agreement in accordance with the provisions of
Section 11.1(c)(ii) hereof and, in the event that neither
Parent nor Merger Sub is in material default hereunder, the
Company pays Parent the Company Termination Fee in accordance
with Section 11.4(a).
(c) The Company shall advise Parent within two
(2) business days of any contact between the Company or its
Representatives and any Third Party regarding such Third
Partys intent to make a Takeover Proposal, or the
Companys receipt of any bona fide Takeover Proposal and
the material terms thereof. Following determination by the Board
of Directors of the Company that a Takeover Proposal constitutes
a Superior Proposal, the Company shall provide to Parent oral
and written notice within one (1) business day of such
determination advising it that the Board of Directors of the
Company has made such determination and specifying the material
terms of such Superior Proposal (which shall include the
identity of the Person making such proposal).
(d) Notwithstanding anything to the contrary contained
herein, nothing in this Section 7.3 shall prohibit or
restrict the Company or the Board of Directors of the Company
from (a) taking or disclosing to the shareholders of the
Company a position contemplated by
Rule 14d-9
or
Rule 14e-2
promulgated under the Exchange Act or (b) making any
disclosure to the shareholders of the Company if, in the good
faith judgment of the Board of Directors of the Company, such
disclosure would be reasonably necessary under applicable law
(including
Rule 14d-9
and
Rule 14e-2
promulgated under the Exchange Act);
provided
,
however
, that in no event shall this Section 7.3(d)
affect the obligations of the Company specified in
Section 7.3(b).
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section
8.1
Notification
of Certain Matters
.
The Company shall give
prompt written notice to Parent, and Parent shall give prompt
written notice to the Company, of (a) any notice or other
material communication received by such party from any
Governmental Authority in connection with this Agreement, the
Merger or the other transactions contemplated by this Agreement
or from any Person alleging that the consent of such Person is
or may be required in connection with this Agreement, the Merger
or the other transactions contemplated by this Agreement,
(b) any claims, actions, suits, proceedings or
investigations commenced or, to such partys knowledge,
threatened against, relating to or involving or otherwise
affecting such party or any of its Subsidiaries which relate to
this Agreement, the Merger or the other transactions
contemplated by this Agreement and (c) any fact, event or
circumstance known to such party that would cause or constitute,
or would reasonably be expected to cause or constitute, a breach
in any material respect of any such partys
representations, warranties, covenants or agreements contained
herein or would prevent, delay or impede, or would reasonably be
expected to prevent, delay or impede, the consummation of the
Merger or any other transaction contemplated by this Agreement;
provided
,
however
, that the delivery of any notice
pursuant to this Section 8.1 shall not limit or otherwise
affect any remedies available to the party receiving such notice
or prevent or cure any misrepresentations, breach of warranty or
breach of covenant or failure to satisfy the conditions to the
obligations of the parties under this Agreement. This
Section 8.1 shall not constitute a covenant or agreement
for purposes of Sections 9.2(b) or 9.3(b).
Section
8.2
Access
to Information; Confidentiality
.
(a) Subject to Section 8.2(b), the Company shall, and
shall instruct each Company Subsidiary and each of its and their
respective Company Representatives to: (a) provide to
Parent and Merger Sub and each of their respective Parent
Representatives reasonable access at reasonable times and upon
reasonable prior notice to the Company, to the officers,
employees, agents, properties, offices and other facilities of
the Company or Company Subsidiary and to the books and records
thereof and (b) furnish, or cause to be furnished, such
reasonably available information concerning the business,
properties, Company Agreements, assets, liabilities, personnel
and other aspects of the Company and the Company Subsidiaries as
Parent, Merger Sub or the Parent Representatives may reasonably
request. Notwithstanding the foregoing, neither the Company nor
any Company Subsidiary shall be required to provide access to or
disclose information where such access or disclosure would
(a) interfere in any significant manner with the operation
or business of the Company or any Company Subsidiary,
(b) jeopardize the attorney-client privilege of the Company
or any Company Subsidiary or (c) contravene any applicable
law, binding contract to which the Company or any Company
Subsidiary is party or any privacy policy applicable to the
Companys or any Company Subsidiarys customer
information.
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(b) With respect to any information disclosed or provided
by the Company, any Company Subsidiary or any Company
Representative to Parent, any of its affiliates or any Parent
Representative pursuant to, or in accordance with, this
Agreement, Parent and Merger Sub shall comply with, and shall
cause the Parent Representatives to comply with, the
Confidentiality Agreement. The Confidentiality Agreement shall
continue in full force and effect in accordance with its terms
until the earlier of (a) the Effective Time of the Merger
or (b) the expiration of the Confidentiality Agreement
according to its terms, and shall survive any termination of
this Agreement.
Section
8.3
Consents
and Approvals
.
(a) Each of the Company, Delaware Merger Sub, Parent and
Merger Sub shall use its commercially reasonable efforts to
(i) take, or cause to be taken, all appropriate action, and
do, or cause to be done, all things necessary, proper or
advisable under any applicable law or otherwise to consummate
and make effective the transactions contemplated by this
Agreement as promptly as practicable, (ii) obtain from any
Governmental Authority any consents, licenses, permits, waivers,
clearances approvals, authorizations or orders required to be
obtained or made by Parent, Merger Sub, the Company or Delaware
Merger Sub or any of their respective Subsidiaries, or avoid any
action or proceeding by any Governmental Authority (including,
without limitation, those in connection with the HSR Act), in
connection with the authorization, execution and delivery of
this Agreement and the consummation of the transactions
contemplated by this Agreement, (iii) make or cause to be
made the applications or filings required to be made by Parent,
Merger Sub, the Company or Delaware Merger Sub or any of their
respective Subsidiaries under or with respect to the HSR Act, if
applicable, or any other applicable laws in connection with the
authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement,
and pay any fees due in connection with such applications or
filings, as promptly as is reasonably practicable, and in any
event within ten (10) business days after the date hereof,
(iv) comply at the earliest practicable date with any
request under or with respect to the HSR Act, if applicable, and
any such other applicable laws for additional information,
documents or other materials received by Parent or the Company
or any of their respective Subsidiaries from the Federal Trade
Commission or the Department of Justice or any other
Governmental Authority in connection with such applications or
filings or the transactions contemplated by this Agreement and
(v) coordinate and cooperate with, and give due
consideration to all reasonable additions, deletions or changes
suggested by the other party in connection with, making
(A) any filing under or with respect to the HSR Act or any
such other applicable laws and (B) any filings, conferences
or other submissions related to resolving any investigation or
other inquiry by any such Governmental Authority. Each of the
Company and Parent shall, and shall cause their respective
affiliates to, furnish to the other party all information
necessary for any such application or other filing to be made in
connection with the transactions contemplated by this Agreement.
Each of the Company and Parent shall promptly inform the other
of any material communication with, and any proposed
understanding, undertaking or agreement with, any Governmental
Authority regarding any such application or filing. If a party
hereto intends to independently participate in any meeting with
any Governmental Authority in respect of any such filings,
investigation or other inquiry, then such party shall give the
other party reasonable prior notice of such meeting and invite
Representatives of the other party to participate in the meeting
with the Governmental Authority unless prohibited by such
Governmental Authority. The parties shall coordinate and
cooperate with one another in connection with any analyses,
appearances, presentations, memoranda, briefs, arguments,
opinions and proposals made or submitted by or on behalf of any
party in connection with all meetings, actions and proceedings
under or relating to any such application or filing.
(b) The Company and Parent shall give (or shall cause their
respective Subsidiaries to give) any notices to third parties,
and use, and cause their respective Subsidiaries to use,
commercially reasonable efforts to obtain any Third Party
consents (i) necessary, proper or advisable to consummate
the transactions contemplated by this Agreement,
(ii) required to be disclosed in the Company Disclosure
Schedule (including, without limitation, any Company Agreement
identified in Section 5.5 of the Company Disclosure
Schedule) or (iii) required to prevent a Company Material
Adverse Effect from occurring prior to or after the consummation
of the transactions contemplated by this Agreement;
provided
,
however
, that the Company and Parent
shall coordinate and cooperate in determining whether any
actions, notices, consents, approvals or waivers are required to
be given or obtained, or should be given or obtained, from
parties to any Company Material Contract in connection with
consummation of the transactions contemplated by this Agreement
and seeking any such actions, notices, consents, approvals or
waivers. In the event that either party shall fail to obtain any
Third Party consent described in the first sentence of this
Section 8.3(b), such party shall use its commercially
reasonable efforts, and shall take any such actions
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reasonably requested by the other party hereto, to mitigate any
adverse effect upon the Company and Parent, their respective
Subsidiaries, and their respective businesses resulting, or
which could reasonably be expected to result after the
consummation of the Merger, from the failure to obtain such
consent. Notwithstanding the foregoing, neither Parent nor
Merger Sub shall be required to, and neither the Company nor any
Company Subsidiary will without the written consent of Parent,
make any material payment to any Third Party or agree to any
limitation on the conduct of its business, in order to obtain
any such consent.
(c) Each of Parent and the Company shall promptly notify
the other in writing of any pending or, to the knowledge of
Parent or the Company (as the case may be), threatened action,
suit, arbitration or other proceeding or investigation by any
Governmental Authority or any other Person (i) challenging
or seeking damages in connection with the transactions
contemplated by this Agreement or (ii) seeking to restrain
or prohibit the consummation of the transactions contemplated by
this Agreement or otherwise limit in any material respect the
right of Merger Sub or any affiliate of Merger Sub to own or
operate all or any portion of the businesses or assets of the
Company or any Company Subsidiary. The Company shall give Parent
the opportunity to consult with the Company regarding the
defense or settlement of any such action or proceeding and shall
consider Parents views with respect to such action or
proceeding and shall not settle any such action or proceeding
without the prior written consent of Parent. Notwithstanding the
foregoing, the Company shall not be required to provide any
notice or information to Parent the provision of which the
Company, after consultation with counsel, in good faith
determines is reasonably likely to adversely affect the
Companys or any of its Representatives attorney
client or other privilege with respect to such information; it
being acknowledged that the parties shall use their commercially
reasonable efforts (which, for the avoidance of doubt, shall not
require obtaining the consent, approval or authorization of any
Third Party (other than such Representatives) or Governmental
Authority) to cause such notice or information to be provided in
a manner that does not so adversely affect the Companys or
any such Representatives attorney client or other
privilege.
(d) If any administrative or judicial action or proceeding
is instituted (or threatened to be instituted) by a Governmental
Authority challenging the transactions contemplated by this
Agreement as violative of any applicable law, each of the
Company and Parent shall, and shall cause their respective
Representatives to, cooperate and use their commercially
reasonable efforts to contest and resist, except insofar as the
Company and Parent may otherwise agree, any such action or
proceeding, including any action or proceeding that seeks a
temporary restraining order or preliminary injunction that would
prohibit, prevent or restrict consummation of the transactions
contemplated by this Agreement.
(e) Notwithstanding anything set forth in this Agreement,
nothing contained in this Agreement shall give Parent or Merger
Sub, directly or indirectly, the right to control or direct the
operations of the Company or ESS Delaware prior to the Effective
Time of the Merger. Prior to the Effective Time of the Merger,
the Company and ESS Delaware shall exercise, consistent with the
terms and conditions of this Agreement, control and supervision
over their respective business operations.
(f) Notwithstanding anything set forth in Section 8.3
and any other provision hereof, in connection with the receipt
of any necessary governmental approvals or clearances (including
under the HSR Act, if any), neither Parent nor the Company shall
be required to sell, hold separate or otherwise dispose of or
conduct their business in a specified manner, or agree to sell,
hold separate or otherwise dispose of or conduct their business
in a specified manner, or permit the sale, holding separate or
other disposition of, any assets of Parent, the Company or their
respective Subsidiaries or the conduct of their business in a
specified manner.
Section
8.4
Publicity
.
So
long as this Agreement is in effect, neither the Company nor
Parent, nor any of their respective controlled affiliates, shall
issue or cause the publication of any press release or other
announcement with respect to the Merger or this Agreement
without the prior consent of the other party, unless such party
determines, after consultation with outside counsel, that it is
required by applicable law or by any listing agreement with or
the listing rules of a national securities exchange or trading
market to issue or cause the publication of any press release or
other announcement with respect to the Merger or this Agreement,
in which event such party shall endeavor, on a basis reasonable
under the circumstances, to provide a meaningful opportunity to
the other parties to review and comment upon such press release
or other announcement and shall give due consideration to all
reasonable additions, deletions or changes suggested thereto;
provided
,
however
, that the party seeking to issue
or cause the publication of any press release or other
announcement with respect to the Merger or this Agreement shall
not be required to provide any such review or comment to the
other party in connection with any disclosure
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contemplated by Section 7.2 or Section 7.3, subject to
the compliance of such party with the terms and conditions
thereof.
Section
8.5
Directors
and Officers Insurance and Indemnification
.
(a) For a period of six (6) years after the Effective
Time of the Merger, Parent and the Surviving Corporation shall
honor and fulfill in all respects the obligations of the Company
and its Subsidiaries to the fullest extent permissible under
applicable provisions of the CCC (i) under the articles of
incorporation and bylaws of the Company (and the equivalent
organizational documents of all such Company Subsidiaries) in
effect on the date hereof and (ii) under any
indemnification or other similar agreements (the
Indemnification Agreements
) in effect on the
date hereof, as listed in Section 8.5 of the Company
Disclosure Schedule, between the Company or any of its
Subsidiaries and the current and former directors, officers and
other employees of the Company or any Company Subsidiary (the
Covered Persons
) arising out of or relating
to actions or omissions in their capacity as directors, officers
or employees occurring at or prior to the Effective Time of the
Merger, including in connection with the approval of this
Agreement and the transactions contemplated by this Agreement;
provided
,
however
, that in the event any claim or
claims are asserted or made within such six (6) year
period, all rights to indemnification in respect of any such
claim or claims shall continue until disposition of any and all
such claims.
(b) The Surviving Corporation shall advance expenses
(including reasonable legal fees and expenses) incurred in the
defense of any claim, action, suit, proceeding or investigation
with respect to any matters subject to indemnification pursuant
to Section 8.5(a) pursuant to the procedures set forth, and
to the extent provided in the articles of incorporation and
bylaws of the Company and the Company Subsidiaries or the
Indemnification Agreements as in effect on the date hereof;
provided
,
however
, that any Person to whom
expenses are advanced undertakes, to the extent required by the
articles of incorporation and bylaws of the Company or the CCC,
to repay such advanced expenses if it is ultimately determined
that such Person is not entitled to indemnification.
(c) For a period of six (6) years after the Effective
Time of the Merger, the articles of incorporation and bylaws of
the Surviving Corporation shall contain provisions no less
favorable with respect to indemnification, advancement of
expenses and exculpation of Covered Persons for periods prior to
and including the Effective Time than are currently set forth in
the articles of incorporation and bylaws of the Company. The
Indemnification Agreements with Covered Persons in existence on
the date of this Agreement that survive the Merger shall
continue in full force and effect in accordance with their terms.
(d) The Company shall obtain a prepaid policy or prepaid
policies at or prior to the Effective Time of the
Reincorporation Merger, which policy or policies shall provide
the Covered Persons with officers and directors
liability insurance (
D&O Insurance
)
coverage of equivalent amount and on no more favorable terms
than that provided by the Companys current D&O
Insurance for an aggregate period of at least six (6) years
with respect to claims arising from facts or events that
occurred on or before the Effective Time of the Merger,
including in connection with the approval of this Agreement and
the transactions contemplated by this Agreement. Parent and the
Surviving Corporation shall maintain any such policies in full
force and effect for the full policy period thereunder, and
continue to honor the Companys and the Surviving
Corporations obligations thereunder.
(e) In the event the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into
any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties
and assets to any Person, then and in each such case, proper
provision shall be made so that such continuing or surviving
corporation or entity or transferee of such assets, as the case
may be, shall assume all of the applicable obligations set forth
in this Section 8.5.
(f) The Covered Persons (and their successors and heirs)
are intended third party beneficiaries of this Section 8.5,
and this Section 8.5 shall not be amended in a manner that
is adverse to the Covered Persons (including their successors
and heirs) or terminated without the consent of the Covered
Persons (including their successors and heirs) affected thereby.
Section
8.6
State
Takeover Laws
.
If any control share
acquisition, fair price or other anti-takeover
laws or regulations enacted under state or federal laws becomes
or is deemed to become applicable to the Company, ESS Delaware,
the Reincorporation Merger, the Merger or any of the transaction
contemplated by this Agreement, then the Boards of Directors of
the Company, Delaware Merger Sub and ESS Delaware shall take all
action necessary to render such statute (or the applicable
provisions thereof) inapplicable to the foregoing.
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Section
8.7
Section 16
.
Prior
to the Effective Time of the Merger, the Company and ESS
Delaware shall, and shall be permitted to, take all such steps
as may reasonably be necessary to cause the transactions
contemplated by this Agreement, including any dispositions of
shares of ESS Delaware Common Stock (including any derivative
securities with respect to such shares of ESS Delaware Common
Stock) by each Person who is or will be subject to the reporting
requirements of Section 16(a) of the Exchange Act with
respect to the Company or ESS Delaware, to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
Section
8.8
Obligations
of Merger Sub; Contribution to Merger
Sub
.
Parent shall take all action necessary
to cause Merger Sub and the Surviving Corporation to perform
their respective obligations under this Agreement and to
consummate the transactions contemplated by this Agreements upon
the terms and subject to the conditions set forth herein. Parent
shall make available, or cause to be made available, to Merger
Sub funding in an amount of at least $10,000,000 prior to the
Effective Time of the Merger.
Section
8.9
Assumption
of Benefit Plans; Employee Benefits Matters
.
(a) Concurrently with the Effective Time of the
Reincorporation Merger, ESS Delaware shall assume and continue
the Company Stock Plans, the Benefit Plans and all other benefit
plans of the Company and the Company Subsidiaries, and the
Boards of Directors of the Company, Delaware Merger Sub and ESS
Delaware shall take such action as is reasonably necessary or
appropriate to cause such assumption to occur at the Effective
Time of the Reincorporation Merger.
(b) Except as provided in this Section 8.9(b), Parent
and the Surviving Corporation shall have no obligation to
continue after the Effective Time of the Merger any plan or
arrangement in effect immediately before the Effective Time of
the Merger (except as otherwise required by applicable law,
including without limitation ERISA and the Code) for current or
former employees, officers or directors of the Company, ESS
Delaware or any Subsidiary, and shall have the discretion to
continue or terminate any of such programs, or to merge any of
them into plans or arrangements in effect for other employees of
Parent or the Surviving Corporation;
provided
,
however
, that Parent and the Surviving Corporation shall,
for a period of at least one year following the Effective Time
of the Merger, provide substantially comparable plans or
arrangements in effect immediately before the Effective Time of
the Merger for current or former employees, officers or
directors of ESS Delaware or any Subsidiary in a manner
determined in the discretion of Parent. To the extent legally
permitted, employees of ESS Delaware or any Subsidiary shall
receive credit for purposes of eligibility to participate and
vesting under any employee pension benefit plan, program or
arrangement established or maintained by the Surviving
Corporation or any of its Subsidiaries and for the purpose of
eligibility and determining the amount of any benefit with
respect to any employee welfare benefit plan, program or
arrangement established or maintained by the Surviving
Corporation for service accrued or deemed accrued prior to the
Effective Time of the Merger with ESS Delaware or any
Subsidiary;
provided
,
however
, that such crediting
of service shall not operate to duplicate any benefit or the
funding of any such benefit. Parent shall also cause the
Surviving Corporation to perform the ESS Delawares
obligations under the change in control and other agreements
specifically set forth in Section 8.9 of the Company
Disclosure Schedule between ESS Delaware, as the successor to
the Company, and certain of its officers and employees unless
any such officer or employee agrees otherwise.
Section
8.10
Termination
of 401(k) Plan
.
Unless Parent directs the ESS
Delaware otherwise in writing no later than five
(5) business days prior to the Effective Time of the
Merger, the Board of Directors of ESS Delaware shall adopt
resolutions terminating, effective as of and contingent upon the
Effective Time of the Merger, any Benefit Plan assumed by ESS
Delaware which is intended to meet the requirements of
section 401(k) of the Code (each such Benefit Plan, a
401(k) Plan
). At the Closing, ESS Delaware
shall provide Parent with (i) executed resolutions of the
Board of Directors of ESS Delaware authorizing such termination
and (ii) an executed copy of any necessary amendment to
each such 401(k) Plan in a form reasonably satisfactory to
Parent that is intended to assure compliance with all applicable
requirements of the Code and the regulations thereunder.
Section
8.11
Treatment
of Employee Stock Purchase Plan
.
The Company
shall take all actions that may be reasonably necessary to:
(i) cause any outstanding offering period under the ESPP to
be terminated as of the last business day prior to the
Reincorporation Closing Date (the last business day prior to the
Reincorporation Closing Date being referred to as the
Designated Date
); (ii) make any pro-rata
adjustments that may be necessary to reflect the shortened
offering period, but otherwise treat such shortened offering
period as a fully effective and completed offering period for
all purposes under the ESPP; (iii) cause the exercise as of
the Designated Date of each
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outstanding Purchase Right under the ESPP; and (iv) provide
that no further offering period or purchase period shall
commence under the ESPP after the Designated Date;
provided
,
however
, that the actions described in
clauses (i) through (iv) of this
Section 8.11 shall be conditioned upon the consummation of
the Reincorporation Merger. On the Designated Date, the Company
shall apply the funds credited as of such date under the ESPP
within each participants payroll withholding account to
the purchase of whole shares of Common Stock in accordance with
the terms of the ESPP. The Company shall terminate the ESPP at
or prior to the Effective Time of the Reincorporation Merger in
compliance with the terms of the ESPP.
Section
8.12
Approval
of the Merger
.
Subject to the occurrence of
the Reincorporation Merger, on the Reincorporation Closing Date
immediately following the Effective Time of the Reincorporation
Merger, the Board of Directors of ESS Delaware shall make the
ESS Delaware Recommendation. Immediately thereafter, ESS
Delaware shall, and shall cause the authorized officers of the
Company named in proxies to act by written consent
and/or
powers of attorney from holders of Company Common Stock
(
Consent Proxies
) and received by the Company
prior to the Effective Time of the Reincorporation Merger to,
give a written consent with respect to the shares of ESS
Delaware Common Stock that are the subject of such Consent
Proxies (and that are held by the grantors of such Consent
Proxies at the time of delivery of such written consent) giving
the ESS Delaware Stockholder Approval in accordance with
applicable law, and shall immediately thereafter deliver such
written consent to an officer or agent of ESS Delaware having
custody of the book in which proceedings of meetings of
stockholders are recorded.
Section
8.13
Assumption
of Registration Statements
.
The Company,
Delaware Merger Sub and ESS Delaware shall take such steps as
may reasonably be necessary or appropriate, if any, to cause ESS
Delaware to, at the Effective Time of the Reincorporation
Merger, assume or otherwise become the successor issuer under
any and all registration statements of the Company filed with
the SEC that are in effect at the Effective Time of the
Reincorporation Merger.
Section
8.14
Maintenance
of NASDAQ Listing
.
The Company shall 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, subject to official
notice of issuance, prior to the Reincorporation Closing Date.
Section
8.15
Resignation
of Directors
.
The Company shall use
commercially reasonable efforts to obtain and deliver to Parent
at or prior to the Reincorporation Closing the resignation of
each of Alfred Stein and Peter Mok as a member of the Board of
Directors of the Company and of any of its Subsidiaries on which
he sits (including Delaware Merger Sub), and from any Committees
of such Boards of Directors on which he sits, effective
immediately prior to the Effective Time of the Reincorporation
Merger.
ARTICLE IX
CONDITIONS
TO THE REINCORPORATION MERGER
Section
9.1
Conditions
to the Reincorporation Merger
.
The occurrence
of the Reincorporation Closing shall be subject to the
satisfaction, or waiver by each of Parent, the Company and
Delaware Merger Sub, at or prior to the Effective Time of the
Reincorporation Merger of the following conditions:
(a) the Company Shareholder Approval shall have been
obtained in accordance with applicable law;
(b) all filing and waiting periods applicable (including
any extensions thereof) to the consummation of the Merger under
the HSR Act, if any, shall have expired or been terminated;
(c) no statute, rule or regulation shall have been enacted
or promulgated by any Governmental Authority which prohibits the
consummation of the Reincorporation Merger or the Merger, and
there shall be no order or injunction of a court of competent
jurisdiction in effect preventing the consummation of the
Reincorporation Merger or the Merger;
(d) all actions by or in respect of, or filings with, any
Governmental Authority, required to permit the consummation of
the Reincorporation Merger and the Merger shall have been taken,
made or obtained; and
(e) as of the Reincorporation Closing Date, the Company
shall have received Consent Proxies given to one or more of its
authorized officers from a sufficient number of holders of
Company Common Stock to allow
A-29
any such officer or officers, following the Reincorporation
Closing, to act on behalf of the holders of ESS Delaware Common
Stock immediately after such Reincorporation Merger and give the
ESS Delaware Stockholder Approval by written consent in
accordance with applicable law.
Section
9.2
Additional
Conditions For the Benefit of Parent
.
The
occurrence of the Reincorporation Closing shall also be subject
to the satisfaction, or waiver by Parent, at or prior to the
Effective Time of the Reincorporation Merger of the following
conditions:
(a) the representations and warranties of the Company
contained in this Agreement shall be true and correct as of the
date of this Agreement and the Reincorporation Closing Date as
if made at and as of the Agreement Date or the Reincorporation
Closing Date, 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 contained in
Sections 5.1(b), 5.2(a) 5.3 and 5.21 shall be true and
correct in all material respects;
(b) the Company shall have performed or complied in all
material respects with all material agreements and covenants
required by this Agreement to be performed or complied with by
the Company on or prior to the Reincorporation Closing Date;
(c) the Company shall have delivered to Parent a
certificate, dated as of the Reincorporation Closing Date,
signed by the Chief Executive Officer of the Company, to the
effect that each of the conditions set forth in
Section 9.2(a) and 9.2(b) is satisfied in all respects;
(d) since the date of this Agreement, there shall not have
occurred any event, change, occurrence or development that,
individually or in the aggregate, has a Company Material Adverse
Effect; and
(e) Parent and Merger Sub shall have received from the
Company audited consolidated financial statements of the Company
as of and for the year ended December 31, 2007, audited by
PricewaterhouseCoopers LLP and prepared in accordance with GAAP,
setting forth the assumptions and accounting policies related
thereto. PricewaterhouseCoopers LLP shall have issued a
customary audit opinion with respect to such financial
statements, and the Company shall have not have received any
notice from PricewaterhouseCoopers LLP that such opinion and
related financial statements may no longer be relied upon.
Section
9.3
Additional
Conditions to Obligations of the Company and Delaware Merger
Sub
.
In addition, the occurrence of the
Reincorporation Closing shall be subject to the satisfaction, or
waiver by both the Company and Delaware Merger Sub, at or prior
to the Effective Time of the Reincorporation Merger of each of
the following conditions:
(a) the representations and warranties of Parent and Merger
Sub contained in this Agreement shall be true and correct as of
the date of this Agreement and the Reincorporation Closing Date
as if made at and as of the date of this Agreement or the
Reincorporation Closing Date, 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
Parent Material Adverse Effect (it being understood that, for
the purposes of determining the effect of such failures, all
Parent Material Adverse Effect and materiality qualifiers
contained in such representations and warranties shall be
disregarded); and
(b) Parent and Merger Sub shall have performed or complied
in all material respects with all material agreements and
covenants required by this Agreement to be performed or complied
with by Parent or Merger Sub, as applicable, on or prior to the
Reincorporation Closing Date; and
(c) Parent and Merger Sub shall have delivered to the
Company a certificate, dated as of the Reincorporation Closing
Date, signed by any authorized officer of each of Parent and
Merger Sub, to the effect that each of the conditions set forth
in Section 9.3(a) and 9.3(b) is satisfied in all respects.
Section
9.4
Frustration
of Reincorporation Closing Conditions
.
None
of the Company, Delaware Merger Sub, Parent or Merger Sub may
rely on the failure of any condition set forth in
Article IX to be satisfied if such
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failure was caused by such partys failure to act in good
faith to comply with this Agreement or use its commercially
reasonable efforts to consummate and make effective the
transactions contemplated by this Agreement.
ARTICLE X
CONDITIONS
TO THE MERGER
Section
10.1
Conditions
to the Merger
.
The Closing shall be subject
to the satisfaction, or waiver by both Parent and ESS Delaware,
at or prior to the Effective Time of the Merger of the following
conditions:
(a) the Reincorporation Closing shall have occurred;
(b) the ESS Delaware Stockholder Approval shall have been
obtained in accordance with applicable law; and
(c) no statute, rule or regulation shall have been enacted
or promulgated by any Governmental Authority which prohibits the
consummation of the Merger, and there shall be no order or
injunction of a court of competent jurisdiction in effect
preventing the consummation of the Merger.
Section
10.2
Frustration
of Closing Conditions
.
None of ESS Delaware,
Parent or Merger Sub may rely on the failure of any condition
set forth in Article X to be satisfied if such failure was
caused by such partys failure to act in good faith to
comply with this Agreement or use its commercially reasonable
efforts to consummate and make effective the transactions
contemplated by this Agreement.
ARTICLE XI
TERMINATION
Section
11.1
Termination
.
This
Agreement may be terminated, and the Reincorporation Merger and
the Merger may be abandoned, at any time prior to the Effective
Time of the Reincorporation Merger, by action taken or
authorized by the Board of Directors of the terminating party,
whether before or after the Company Shareholder Approval:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company:
(i) if (i) the Company Shareholder Approval is not
obtained at the Company Shareholders Meeting or any
adjournment or postponement thereof at which approval of the
principal terms of the Reincorporation Merger and the other
transactions contemplated by this Agreement is voted upon or
(ii) the Company Shareholder Approval is obtained at the
Company Shareholders Meeting or any such adjournment or
postponement thereof, but the Company shall not receive Consent
Proxies given to one or more of its authorized officers from a
sufficient number of holders of Company Common Stock to allow
any such officer or officers, following the Reincorporation
Closing, to act on behalf of the holders of ESS Delaware Common
Stock immediately after such Reincorporation Merger and give the
ESS Delaware Stockholder Approval by written consent in
accordance with applicable law;
(ii) if the Reincorporation Merger shall not have been
consummated by the date that is six (6) months from the
date hereof (the
Outside Date
);
provided
,
however
, that the right to terminate
this Agreement under this Section 11.1(b)(ii) shall not be
available to any party if any action of such party (including,
in the case of Parent, Merger Sub and in the case of the
Company, Delaware Merger Sub) or the failure by any party
(including, in the case of Parent, Merger Sub and in the case of
the Company, Delaware Merger Sub) to perform any of its
obligations under this Agreement has been the cause of, or
resulted in, the failure of the Reincorporation Merger and the
other transactions contemplated by this Agreement to be
consummated on or before the Outside Date; or
(iii) if a Governmental Authority shall have issued an
order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or
otherwise prohibiting the Reincorporation Merger or the Merger,
which order, decree or ruling is final and nonappealable.
A-31
(c) by the Company:
(i) if (A) Parent or Merger Sub shall have breached
any of the covenants or agreements contained in this Agreement
to be complied with by Parent or Merger Sub such that the
closing condition set forth in Section 9.3(b) would not be
satisfied or (B) there exists a breach of any
representation or warranty of Parent or Merger Sub contained in
this Agreement such that the closing condition set forth in
Section 9.3(a) would not be satisfied, and, in the case of
clause (A) or clause (B), such breach is incapable of being
cured or, if capable of being cured, shall not have been cured
prior to the earlier of (x) the Outside Date and
(y) thirty (30) business days after Parent or Merger
Sub receives written notice of such breach from the Company;
provided
,
however
, that the Company shall not have
the right to terminate this Agreement pursuant to this
Section 11.1(c)(i) if the Company or Delaware Merger Sub is
then in material breach of any of its covenants or agreements
contained in this Agreement; or
(ii) if, prior to the obtaining of the Company Shareholder
Approval, (A) the Board of Directors of the Company has
received a Superior Proposal, (B) the Board of Directors of
the Company has determined in good faith (after consultation
with its outside legal counsel) that the failure to accept such
Superior Proposal is reasonably likely to be inconsistent with
the fiduciary duties of the members of the Board of Directors of
the Company to the shareholders of the Company under applicable
law, (C) the Company has complied in all material respects
with Section 7.3 and (D) the Company pays the Company
Termination Fee to Parent in accordance with
Section 11.4; or
(d) by Parent:
(i) if (A) the Company or Delaware Merger Sub shall
have breached any of the covenants or agreements contained in
this Agreement to be complied with by the Company or Delaware
Merger Sub such that the closing condition set forth in
Section 9.2(b) would not be satisfied or (B) there
exists a breach of any representation or warranty of the Company
contained in this Agreement such that the closing condition set
forth in Section 9.2(a) would not be satisfied, and, in the
case of clause (A) or clause (B), such breach is incapable
of being cured or, if capable of being cured, shall not have
been cured prior to the earlier of (x) the Outside Date and
(y) thirty (30) business days after the Company
receives written notice of such breach from Parent;
provided
,
however
, that Parent shall not have the
right to terminate this Agreement pursuant to this
Section 11.1(d)(i) if Parent or Merger Sub is then in
material breach of any of its covenants or agreements contained
in this Agreement; or
(ii) if, prior to the obtaining of the Company Shareholder
Approval, (A) a Company Adverse Recommendation Change shall
have occurred, (B) the Company has failed to include the
Company Recommendation or the ESS Delaware Recommendation in the
Proxy Statement or (C) the Board of Directors of the
Company approves, recommends or adopts, or publicly proposes to
approve, recommend or adopt, a Takeover Proposal or approves or
recommends that holders of Common Stock tender their shares of
Common Stock in any tender offer or exchange offer that is a
Takeover Proposal.
Section
11.2
Effect
of Termination
.
Except as otherwise set forth
in this Section 11.2, in the event of a termination of this
Agreement by either the Company or Parent as provided in
Section 11.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of
Parent, Merger Sub, the Company or Delaware Merger Sub
hereunder;
provided
,
however
, that the provisions
of this Section 11.2, Sections 8.2(b), 11.3, 11.4 and
Article XII shall remain in full force and effect and
survive any termination of this Agreement. In no event shall any
party be liable for punitive damages.
Section
11.3
Fees
and Expenses
.
Except as otherwise expressly
set forth in this Agreement, all fees and expenses incurred in
connection herewith and the transactions contemplated by this
Agreement shall be paid by the party incurring, or required to
incur, such expenses, whether or not the Reincorporation Merger
or the Merger is consummated.
Section
11.4
Company
Termination Fee
.
(a) If this Agreement is terminated by the Company pursuant
to Section 11.1(c)(ii), or by Parent pursuant to
Section 11.1(d) but only in a case where the Company has
breached its obligations and covenants in Section 7.3 by
affirmatively soliciting a Takeover Proposal, then the Company
shall pay to Parent (or as directed by Parent), by wire transfer
of same day funds, $1,981,000
plus
reimbursement of
Parents and its affiliates reasonable expenses
incurred in connection with the transactions contemplated by
this Agreement up to, but not in excess of, $500,000
(collectively,
A-32
the
Company Termination Fee
), as promptly as
practicable (and, in any event, within two (2) business
days following such termination). If this Agreement is
terminated by either the Company or Parent pursuant to
Section 11.1(b)(i) or by Parent pursuant to
Section 11.1(d)(ii), then, in the event that, (a) at
any time after the date of this Agreement and prior to the
occurrence of the action or event that gave rise to
Parents right to terminate pursuant to
Section 11.1(b)(i) or Section 11.1(d)(ii), as
applicable, any Third Party shall have publicly made, proposed,
communicated or disclosed an intention to make a bona fide
Takeover Proposal, which bona fide Takeover Proposal was not
retracted or rescinded prior to the occurrence of the action or
event that gave rise to Parents right to terminate
pursuant to Section 11.1(b)(i) or Section 11.1(d)(ii),
as applicable, and (b) within nine (9) months of the
termination of this Agreement, the Company enters into a
definitive agreement with any Third Party with respect to a
Takeover Proposal or any Takeover Proposal is consummated by
such Third Party, then the Company shall pay, or cause to be
paid, to Parent, by wire transfer of same day funds, the Company
Termination Fee, such payment to be made upon the consummation
of such Takeover Proposal. For purposes of this
Section 11.4(a), each reference in the definition of
Takeover Proposal to 20 percent (20%) will be
deemed to be references to 50 percent (50%).
(b) If paid, the Company Termination Fee shall be the sole
and exclusive remedy of Parent, Merger Sub and their affiliates
against the Company, any Company Subsidiary and any Company
Representative for any loss or damage suffered as a result of
the breach of any representation, warranty or covenant contained
in this Agreement by the Company, any Company Subsidiary or any
Company Representative and the failure of the Reincorporation
Merger or the Merger to be consummated and, upon payment of the
Company Termination Fee in accordance with Section 11.4(a),
none of the Company, any Company Subsidiary or any Company
Representative shall have further liability or obligation to
Parent, Merger Sub or any other Person relating to or arising
out of this Agreement or the transactions contemplated by this
Agreement. For the avoidance of doubt, in no event shall the
Company be obligated to pay, or cause to be paid, the Company
Termination Fee on more than one occasion.
(c) The Company acknowledges that the agreements contained
in this Section 11.4 are an integral part of the
transactions contemplated by this Agreement and that, without
these agreements, Parent and Merger Sub would not enter into
this Agreement. If the Company fails to pay the Company
Termination Fee when due, and, in order to obtain such payment
Parent commences a suit which results in a judgment against the
Company for all or any portion of the Company Termination Fee,
the Company shall pay to Parent its reasonable out-of-pocket
costs and expenses (including reasonable attorneys fees)
in connection with such suit.
ARTICLE XII
MISCELLANEOUS
Section
12.1
Amendment
and Modification; Waiver
.
(a) Subject to applicable law and except as otherwise
provided in this Agreement, this Agreement may be amended,
modified and supplemented in any and all respects, whether
before or after any vote of shareholders of the Company
contemplated hereby, by written agreement of the parties hereto;
provided
,
however
, that after the approval of the
principal terms of the Reincorporation Merger and the Merger
(and the other transactions contemplated by this Agreement) by
the shareholders of the Company and the stockholders of ESS
Delaware, respectively, no amendment shall be made which by law
requires further approval by such shareholders or stockholders,
respectively, without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
(b) At any time prior to the Effective Time of the Merger,
any party or parties hereto may, to the extent legally allowed
and except as otherwise set forth herein, (i) extend the
time for the performance of any of the obligations or other acts
of the other party or parties hereto, as applicable,
(ii) waive any inaccuracies in the representations and
warranties made to such party or parties hereto contained herein
or in any document delivered pursuant hereto and
(iii) waive compliance with any of the agreements or
conditions for the benefit of such party or parties hereto
contained herein. Any agreement on the part of a party or
parties hereto to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf
of such party or parties, as applicable. Any delay in exercising
any right under this Agreement shall not constitute a waiver of
such right.
Section
12.2
Non-survival
of Representations and Warranties
.
None of
the representations and warranties in this Agreement or in any
schedule, instrument or other document delivered pursuant to
this Agreement shall
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survive the Effective Time of the Merger. This Section 12.2
shall not limit any covenant or agreement of the parties which
by its terms contemplates performance after the Effective Time
of the Merger.
Section
12.3
Notices
.
Any
notices or other communications required or permitted under, or
otherwise made in connection with this Agreement, shall be in
writing and shall be deemed to have been duly given
(a) when delivered in person, (b) upon confirmation of
receipt when transmitted by facsimile transmission or by
electronic mail (but, in the case of electronic mail, only if
followed by transmittal by national overnight courier or hand
for delivery on the next business day), (c) upon receipt
after dispatch by registered or certified mail, postage prepaid
or (d) on the next business day if transmitted by national
overnight courier (with confirmation of delivery), in each case,
addressed as follows:
|
|
|
|
(a)
|
if to Parent or Merger Sub, to:
|
|
|
|
|
|
Imperium Partners Group, LLC
153 East
53
rd
Street,
29
th
Floor
New York, New York 10022
Attention: John Michaelson
Maurice Hryshko
Facsimile:
(212) 433-1361
|
with a copy to:
Pillsbury Winthrop Shaw Pittman LLP
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:
|
ESS Technology, Inc.
48401 Fremont Boulevard
Fremont, California 94538
Attention: Robert L. Blair
Facsimile:
(510) 492-1098
with copies to:
|
|
|
|
|
Latham & Watkins LLP
140 Scott Drive
Menlo Park, California 94025
Attention: Christopher L. Kaufman
Jamie K. Leigh
Joshua M. Dubofsky
Facsimile:
(650) 463-2600
|
and
|
|
|
|
|
Orrick, Herrington & Sutcliffe LLP
1020 Marsh Road
Menlo Park, California 94025
Attention: Peter Cohn
Lowell Ness
Facsimile:
(650) 463-7401
|
Section 12.4
Certain
Definitions
.
For the purposes of this
Agreement, the term:
business day
means any day, other than
Saturday, Sunday or a legal holiday under the laws of the States
of New York or California.
Common Stock
means the common stock of
the Company, no par value.
Company IP
means Owned Company IP and
Licensed Company IP.
A-34
Company Material Adverse Effect
shall
mean any event, change, occurrence or development that has a
material adverse effect on the business, results of operations
or financial condition of the Company and the Company
Subsidiaries taken as a whole;
provided
, that in no event
shall any of the following events, changes, or occurrences alone
or in combination (or the effects or consequences thereof)
constitute a Company Material Adverse Effect or be
considered in determining whether a Company Material
Adverse Effect has occurred or is likely or expected to
occur: (i) conditions (or changes therein) in any industry
or industries in which the Company operates to the extent that
such conditions do not have a materially disproportionate effect
on the Company and the Company Subsidiaries, taken as a whole,
relative to other companies of comparable size to the Company
operating in such industry or industries, (ii) general
economic conditions (or changes therein) in the United States,
in any country in which the Company or any of the Company
Subsidiaries conducts business or in the global economy as a
whole, (iii) any generally applicable change in law, rule
or regulation or GAAP or interpretation of any of the foregoing
to the extent that such conditions do not have a materially
disproportionate effect on the Company and its Subsidiaries,
taken as a whole, relative to other companies of comparable size
to the Company operating in such industry or industries,
(iv) conditions arising out of acts of terrorism, war,
weather conditions or other force majeure events, (v) the
public announcement or pendency of this Agreement or any of the
transactions contemplated by this Agreement, including the
impact thereof on the relationships of the Company or the
Company Subsidiaries with customers, suppliers, distributors,
consultants, employees or independent contractors or other Third
Parties with whom the Company or any Company Subsidiary has any
relationship, (vi) changes in the Companys stock
price or the trading volume of the Companys stock, in and
of itself (it being understood that the facts or occurrences
giving rise or contributing to such changes that are not
otherwise excluded from the definition of a Company
Material Adverse Effect may be taken into account), and
(vii) any failure by the Company to meet any published
analyst estimates or expectations, in and of itself, or any
failure by the Company to meet its internal projections or
forecasts, in and of itself (it being understood that the facts
or occurrences giving rise or contributing to such failure that
are not otherwise excluded from the definition of a
Company Material Adverse Effect may be taken into
account) and (viii) any legal proceedings made or brought
by any of the current or former shareholders of the Company (on
their own behalf or on behalf of the Company) arising out of or
related to this Agreement or any of the transactions
contemplated by this Agreement.
Company Products
means products
distributed and services performed by the Company or its
Subsidiaries.
Company Property
means any real
property and improvements, now or heretofore, owned, used,
leased or operated by the Company or any of the Company
Subsidiaries or their respective predecessors.
Company Registered IP
means all
Intellectual Property owned by the Company or any Company
Subsidiary that is registered, filed, or issued under the
authority of any Governmental Authority, including all Patents,
registered Copyrights, registered Trademarks, domain names and
URLs, and all applications for any of the foregoing.
Company Shares
means the shares of
Common Stock issued and outstanding as of the Effective Time of
the Reincorporation Merger.
Company Stock Plans
mean collectively
the Companys 1995 Equity Incentive Plan,
1995 Directors Stock Option Plan, 1997 Equity Incentive
Plan, 2002 Non-executive Stock Option Plan, and Platform
Technologies, Inc. 1995 Stock Option Plan.
Environmental Claims
means any and all
administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, Liens, notices of noncompliance or
violation, investigations or proceedings under any Environmental
Law or any permit issued under any such Environmental Law,
including, without limitation, (A) any and all
Environmental Claims by Governmental Authorities for
enforcement, cleanup, removal, response, remedial or other
actions or damages pursuant to any applicable Environmental Law
and (B) any and all Environmental Claims by any Third Party
seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous
Materials or arising from alleged injury to the environment or
as a result of exposure to Hazardous Materials.
Environmental Law
means any federal,
state, foreign or local statute, law, rule, regulation,
ordinance, code or rule of common law and any judicial or
administrative interpretation thereof binding on the Company
A-35
or its operations or property as of the date hereof and Closing
Date, including any judicial or administrative order, consent
decree or judgment, relating to the environment, Hazardous
Materials, worker safety or exposure of any Person to Hazardous
Materials including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. sec. 9601 et seq.; the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. sec.
6901 et seq.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. sec. 1251 et seq.; the Toxic Substances
Control Act, 15 U.S.C. sec. 2601 et seq.; the Clean Air
Act, 42 U.S.C. sec. 7401 et seq.; Oil Pollution Act of
1990, 33 U.S.C. sec. 2701 et seq.; the Safe Drinking Water
Act, 42 U.S.C. sec. 300f et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. sec. 1801 et seq.; the
Occupational Safety and Health Act of 1970, 29 U.S.C. sec.
651 et seq., and all similar or analogous foreign, state,
regional or local statutes, secondary and subordinate
legislation, and directives, and the rules and regulations
promulgated thereunder.
Equity Interests
means, with respect
to any Person, options, warrants, calls, pre-emptive rights,
subscriptions or other rights, agreements, arrangements or
commitments of any kind, including any shareholder rights plan,
relating to the issued or unissued capital stock of the Person
or any of its Subsidiaries, as applicable, obligating the Person
or any of its Subsidiaries to issue, transfer or sell or cause
to be issued, transferred or sold any shares of capital stock or
Voting Debt of, or other equity interest in, the Person or any
of its Subsidiaries, as applicable, or securities convertible
into or exchangeable for such shares or equity interests, or
obligating the Person or any of its Subsidiaries to grant,
extend or enter into any such option, warrant, call,
subscription or other right, agreement, arrangement or
commitment.
ERISA Affiliate
means any trade or
business, whether or not incorporated, that together with the
Company would be deemed a single employer for purposes of
Section 4001 of ERISA or Sections 414(b), (c), (m),
(n) or (o) of the Code.
ESS Delaware Common Stock
means the
common stock of ESS Delaware, par value $0.0001 per share.
ESS Delaware Shares
means the shares
of ESS Delaware Common Stock issued and outstanding as of the
Effective Time of the Merger, including the Exception Shares.
Exception Shares
means all shares of
Common Stock to be cancelled in accordance with
Section 4.1(c) and all Dissenting Shares.
Exchange Act
means the United States
Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
Governmental Authority
means any:
(i) nation, state, commonwealth, province, territory,
county, municipality, district or other jurisdiction of any
nature; (ii) federal, state, local, municipal, foreign or
other government; or (iii) governmental or
quasi-governmental authority of any nature (including any
governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Person
and any court or other tribunal).
HSR Act
means the United States
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Hazardous Materials
means
(A) any petroleum or petroleum products, radioactive
materials, asbestos in any form that is or could become friable,
transformers or other equipment that contain dielectric fluid
containing levels of polychlorinated biphenyls, and radon gas;
and (B) any chemicals, materials or substances defined as
or included in the definition of hazardous
substances, hazardous wastes, hazardous
materials, extremely hazardous wastes,
extremely hazardous substances, restricted
hazardous wastes, toxic substances,
toxic pollutants, or words of similar import, under
any applicable Environmental Law.
Intellectual Property
shall mean any
or all of the following: (i) inventions (whether patentable
or not), invention disclosures, industrial designs,
improvements, trade secrets, proprietary information,
technology, technical data and customer lists, and all
documentation relating to any of the foregoing;
(ii) business, technical and know-how information,
non-public information, and confidential information, including
databases and data collections; (iii) works of authorship
(including computer programs, source code, object code, whether
embodied in software, firmware or otherwise), architecture,
documentation, files, records, schematics, verilog files,
netlists, emulation and simulation reports, test vectors and
hardware development tools;
A-36
(iv) URLs and domain names; and (v) any similar or
equivalent property of any of the foregoing (as applicable).
Intellectual Property Rights
shall
mean any or all of the following and all worldwide common law
and statutory rights in, arising out of, or associated
therewith: (i) patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals,
continuations and
continuations-in-part
thereof (
Patents
); (ii) copyrights,
copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world
including moral and economic rights of authors and inventors,
however denominated (
Copyrights
);
(iii) industrial designs and any registrations and
applications therefor; (iv) trade names, logos, common law
trademarks and service marks, trademark and service mark
registrations and applications therefor
(
Trademarks
); (v) trade secrets
(including, those trade secrets defined in the Uniform Trade
Secrets Act and under corresponding foreign statutory and common
law) (
Trade Secrets
); and (vi) any
similar or equivalent rights to any of the foregoing (as
applicable).
knowledge
will be deemed to be the
actual knowledge of any executive officer or director of Parent,
Merger Sub or the Company, as the case may be.
Licensed Company IP
means all
Intellectual Property and Intellectual Property Rights that are
licensed to the Company or any of its Subsidiaries by third
parties and material to the conduct of the business of the
Company.
Lien
means any lien, pledge,
hypothecation, mortgage, security interest, encumbrance, claim,
infringement, interference, option, right of first refusal,
preemptive right, community property interest or restriction of
any nature (including any restriction on the voting of any
security, any restriction on the transfer of any security or
other asset, any restriction on the possession, exercise or
transfer of any other attribute of ownership of any asset).
NASDAQ
means the NASDAQ Global Market.
Owned Company IP
means shall mean all
Intellectual Property and Intellectual Property Rights that are
owned by the Company or any of its Subsidiaries and material to
the conduct of the business of the Company.
Person
means a natural person,
partnership, corporation, limited liability company, business
trust, joint stock company, trust, unincorporated association,
joint venture, Governmental Authority or other entity or
organization.
Release
means disposing, discharging,
injecting, spilling, leaking, leaching, dumping, emitting,
escaping, emptying or seeping into or upon any land or water or
air, or otherwise entering into the environment.
Representative
means, with respect to
any Person, any of such Persons directors, officers,
employees, accountants, consultants, legal counsel, advisors,
agents and other representatives.
Sarbanes-Oxley Act
means the United
States Sarbanes-Oxley Act of 2002, as amended, and the rules and
regulations promulgated thereby.
Securities Act
means the United States
Securities Act of 1933, as amended, and the rules and
regulations promulgated thereby.
Subsidiary
means, with respect to any
Person, any corporation, limited liability company, partnership
or other legal entity of which such Person (either alone or
through or together with any other Subsidiary), owns, directly
or indirectly, a majority of the stock or other Equity
Interests, the holders of which are generally entitled to vote
for the election of the board of directors or other governing
body of such corporation or other legal entity.
Superior Proposal
shall mean a bona
fide Takeover Proposal (for this purpose, substituting
50 percent (50%) for each reference to
20 percent (20%) in the definition of Takeover
Proposal) which the Board of Directors of the Company determines
in good faith (after consultation with its outside legal counsel
and financial advisors) (a) is reasonably likely to be
consummated and (b) if consummated, would result in a
transaction more favorable to the holders of Common Stock than
the transactions contemplated by this Agreement, in each case
with respect to clauses (a) and (b), taking into account
such factors as the Board of Directors of the Company deems
appropriate, including the Third Party making such Takeover
Proposal and
A-37
the legal, financial, regulatory, fiduciary and other aspects of
this Agreement and such Takeover Proposal, including any
conditions relating to financing, regulatory approvals or other
events or circumstances (and, for the avoidance of doubt, a
Superior Proposal may be a transaction where the consideration
per share to be received by the holders of Common Stock is
comprised of cash
and/or
other
property or securities).
Takeover Proposal
shall mean any
inquiry, proposal or offer from any Third Party relating to, in
a single transaction or series of related transactions,
(a) a merger, reorganization, consolidation, share
exchange, business combination, recapitalization, liquidation,
dissolution or similar transaction involving a direct or
indirect acquisition of the Company (or any Company Subsidiary
whose business constitutes 20 percent (20%) or more of the
net revenues, net income or assets (based on fair market value)
of the Company and the Company Subsidiaries, taken as a whole)
or (b) the acquisition (including by way of tender or
exchange offer) in any manner, directly or indirectly, of over
20 percent (20%) of (i) the Common Stock or
(ii) the consolidated total assets (based on fair market
value) of the Company and the Company Subsidiaries, in each case
other than the Reincorporation Merger or the Merger.
Tax
or
Taxes
means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental,
customs duties, capital stock, franchise, profits, withholding,
social security, unemployment, disability, real property,
personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of
any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
Tax Claim
means any audit,
investigation, litigation or other proceeding conducted by or
with any Governmental Authority with respect to Taxes.
Tax Return
means any return,
declaration, report, claim for refund, or information return or
statement relating to Taxes.
Third Party
shall mean any Person or
group (within the meaning of Section 13(d)(3)
of the Exchange Act) other than the Company, the Company
Subsidiaries, the Parent and its affiliates.
Section 12.5
Terms
Defined Elsewhere
.
The following terms are
defined elsewhere in this Agreement, as indicated below:
|
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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
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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
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4.3(a)
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Dissenting Stockholder
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4.3(a)
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Effective Time of the Merger
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3.4
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Effective Time of the Reincorporation Merger
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|
1.4
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ESPP
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2.3
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ESS Delaware
|
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Recitals
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ESS Delaware Options
|
|
2.2
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ESS Delaware Recommendation
|
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5.3(c)
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ESS Delaware Stockholder Approval
|
|
5.3
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Financial Statements
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5.6(b)
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GAAP
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5.6(b)
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Grant Date
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5.2(c)
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Guarantee
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6.7)
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Guarantor
|
|
6.7
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Indemnification Agreements
|
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8.5(a)
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Merger
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|
Recitals
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Merger Consideration
|
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4.1(a)
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Merger Sub
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Introduction
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Option Consideration
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4.4(a)
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Outside Date
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11.1(b)(ii)
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Parent
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Introduction
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Parent Material Adverse Effect
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6.1
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Paying Agent
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6.2(a)
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Permitted Liens
|
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5.14(e)
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Preferred Stock
|
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5.2(a)
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Proxy Statement
|
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7.2(a)
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Purchase Right
|
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2.3
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Registration Statement
|
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7.2(a)
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Reincorporation Closing
|
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1.3
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Reincorporation Closing Date
|
|
1.3
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Reincorporation Merger
|
|
Recitals
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A-39
|
|
|
Term
|
|
Section
|
|
SEC
|
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Article V
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Solvent
|
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6.7
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Surviving Corporation
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3.1
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Third Party Representative
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7.3(a)
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Voting Debt
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5.2(a)
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Section
12.6
Interpretation
.
When
a reference is made in this Agreement to Sections, such
reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words include,
includes or including are used in this
Agreement they shall be deemed to be followed by the words
without limitation. As used in this Agreement, the
term affiliates shall have the meaning set forth in
Rule 12b-2
of the Exchange Act. All references to this Agreement shall be
deemed to include references to the agreement of
merger contained herein (as such term is used in the CCC).
The table of contents and headings set forth in this Agreement
are for convenience of reference purposes only and shall not
affect or be deemed to affect in any way the meaning or
interpretation of this Agreement or any term or provision
hereof. When reference is made herein to a Person, such
reference shall be deemed to include all direct and indirect
Subsidiaries of such Person unless otherwise indicated or the
context otherwise requires. Unless otherwise indicated, all
references herein to the Subsidiaries of a Person shall be
deemed to include all direct and indirect Subsidiaries of such
Person unless otherwise indicated or the context otherwise
requires.
Section
12.7
Counterparts
.
This
Agreement may be executed manually or by facsimile by the
parties hereto, in any number of counterparts, each of which
shall be considered one and the same agreement and shall become
effective when a counterpart hereof shall have been signed by
each of the parties and delivered to the other parties.
Section
12.8
Entire
Agreement; No Third-Party Beneficiaries
.
This
Agreement (including the Company Disclosure Schedule) and the
Confidentiality Agreement:
(a) constitute the entire agreement among the parties with
respect to the subject matter hereof and thereof and supersede
all other prior agreements (except that the Confidentiality
Agreement shall be amended so that until the termination of this
Agreement in accordance with Section 11.1 hereof, Parent
and Merger Sub shall be permitted to take the action
contemplated by this Agreement, including the making of any
proposals as contemplated by Section 7.3) and
understandings, both written and oral, among the parties or any
of them with respect to the subject matter hereof and
thereof, and
(b) except as provided in Section 8.5, are not
intended to confer upon any Person other than the parties hereto
any rights or remedies hereunder.
Section
12.9
Severability
.
If
any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by rule of law or public
policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as
the economic or legal substance of the Reincorporation Merger
and the Merger is not affected in any manner adverse to any
party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so
as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the
Reincorporation Merger and the Merger are fulfilled to the
extent possible.
Section
12.10
Governing
Law; Jurisdiction
.
(a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without
giving effect to conflicts of laws principles that would result
in the application of the law of any other state, except to the
extent that mandatory principles of law require the application
of the laws of the State of California.
(b) Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the
exclusive jurisdiction of the Chancery Court of the State of
Delaware, or, if no such state court has proper jurisdiction,
any Federal court of the United States of America sitting in the
State of Delaware, and any appellate court from any thereof, in
any action or proceeding arising out of or relating to this
Agreement or the agreements delivered in connection herewith or
the transactions contemplated hereby or thereby or for
recognition or enforcement of any judgment relating thereto, and
each of the parties hereby irrevocably and unconditionally
(i) agrees not to commence
A-40
any such action or proceeding except in such courts,
(ii) agrees that any claim in respect of any such action or
proceeding may be heard and determined in such Delaware State
court or, if no such state court has proper jurisdiction, in
such Federal court, (iii) waives, to the fullest extent it
may legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any such action
or proceeding in any such Delaware State court or Federal court,
and (iv) waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such
action or proceeding in any such Delaware State court or Federal
court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in
any other manner provided by law. Each party to this Agreement
irrevocably consents to service of process in the manner
provided for notices in Section 12.3. Nothing in this
Agreement will affect the right of any party to this Agreement
to serve process in any other manner permitted by law. Each
party hereto agrees not to commence any legal proceedings
relating to or arising out of this Agreement or the transactions
contemplated by this Agreement in any jurisdiction or courts
other than as provided herein.
Section
12.11
Assignment
.
(a) This Agreement shall not be assigned by any of the
parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties, except
that Merger Sub may assign, in its sole discretion and without
the consent of any other party, any or all of its rights,
interests and obligations hereunder to (i) Parent,
(ii) to Parent and one or more direct or indirect wholly
owned Subsidiaries of Parent or (iii) to one or more direct
or indirect wholly owned Subsidiaries of Parent. Subject to the
preceding sentence, but without relieving any party hereto of
any obligation hereunder, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and
their respective successors and assigns. Notwithstanding
anything to the contrary contained herein, Parent, Merger Sub
and their affiliates shall have the right to collaterally assign
in whole or in part this Agreement and any ancillary agreements
or documents related to the transactions contemplated by this
Agreement and any of their respective rights thereunder as
security to one or more lenders or purchasers of debt securities
who, in each case, are being granted a collateral interest in
this Agreement or any ancillary agreements or documents related
to the transactions contemplated by this Agreement.
(b) Notwithstanding the foregoing, at the Effective Time of
the Reincorporation Merger, ESS Delaware shall, by operation of
law, succeed to all of the rights and obligations of each of the
Company and Delaware Merger Sub hereunder, without any further
action by any party to this Agreement and for all purposes
hereunder shall be a party hereto.
Section
12.12
Enforcement;
Remedies
.
The parties hereto agree that
irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance
with their specific terms. It is accordingly agreed that the
parties hereto shall be entitled seek an injunction or
injunctions to prevent breaches of this Agreement and to
specifically enforce the terms hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of
any one remedy will not preclude the exercise of any other
remedy.
[Signature
Page Follows]
A-41
IN WITNESS WHEREOF, Parent, Merger Sub, the Company and Delaware
Merger Sub have caused this Agreement to be signed by their
respective officers thereunto duly authorized as of the date
first written above.
SEMICONDUCTOR HOLDING CORPORATION
|
|
|
|
By
|
/s/ John
C. Michaelson
|
Name: John C. Michaelson
ECHO MERGERCO, INC.
|
|
|
|
By
|
/s/ John
C. Michaelson
|
Name: John C. Michaelson
ESS TECHNOLOGY, INC.
Name: Robert L. Blair
|
|
|
|
Title:
|
President and Chief Executive Officer
|
ECHO TECHNOLOGY (DELAWARE), INC.
Name: Robert L. Blair
|
|
|
|
Title:
|
President and Chief Executive Officer
|
A-42
Annex B
Section 262
of the Delaware General Corporation Law
§
262. Appraisal rights.
(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this Section with respect to
such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this Section and who has
neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholders shares of
stock under the circumstances described in subsections (b)
and (c) of this section. As used in this section, the word
stockholder means a holder of record of stock in a
stock corporation and also a member of record of a nonstock
corporation; the words stock and share
mean and include what is ordinarily meant by those words and
also membership or membership interest of a member of a nonstock
corporation; and the words depository receipt mean a
receipt or other instrument issued by a depository representing
an interest in one or more shares, or fractions thereof, solely
of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to
§ 251 (other than a merger effected pursuant to
§ 251(g) of this title), § 252,
§ 254, § 257, § 258,
§ 263 or § 264 of this title:
(1) Provided, however, that no appraisal rights under this
Section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national
securities exchange or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of
Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this Section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to
§§ 251, 252, 254, 257, 258, 263 and 264 of this
title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under § 253 of
this title is not owned by the parent corporation immediately
prior to the merger, appraisal rights shall be available for the
shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this Section shall be
available for the shares of any class or series of its stock as
a result of an amendment to its certificate of incorporation,
any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is
practicable.
B-1
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this Section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or
(c) hereof that appraisal rights are available for any or
all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholders
shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for
appraisal of such stockholders shares. Such demand will be
sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such stockholders
shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as
herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not
voted in favor of or consented to the merger or consolidation of
the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to
§ 228 or § 253 of this title, then either a
constituent corporation before the effective date of the merger
or consolidation or the surviving or resulting corporation
within 10 days thereafter shall notify each of the holders
of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the
merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation
the appraisal of such holders shares. Such demand will be
sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holders shares. If
such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of
the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder
who is entitled to appraisal rights and who has demanded
appraisal of such holders shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix,
in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the
merger or consolidation, the surviving or resulting corporation
or any stockholder who has complied with subsections (a)
and (d) of this Section hereof and who is otherwise
entitled to appraisal rights, may commence an appraisal
proceeding by filing a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within
60 days after the effective date of the merger or
consolidation, any stockholder who has not commenced an
appraisal proceeding or joined that proceeding as a named party
shall have the right to withdraw such stockholders demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) of
this Section hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
B-2
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholders
written request for such a statement is received by the
surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal
under subsection (d) of this Section hereof, whichever is
later. Notwithstanding subsection (a) of this section, a
person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such
person may, in such persons own name, file a petition or
request from the corporation the statement described in this
subsection.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after
such service file in the office of the Register in Chancery in
which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the
time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1
or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the
City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this Section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After the Court determines the stockholders entitled to
an appraisal, the appraisal proceeding shall be conducted in
accordance with the rules of the Court of Chancery, including
any rules specifically governing appraisal proceedings. Through
such proceeding the Court shall determine the fair value of the
shares exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with interest, if any, to be paid upon the amount
determined to be the fair value. In determining such fair value,
the Court shall take into account all relevant factors. Unless
the Court in its discretion determines otherwise for good cause
shown, interest from the effective date of the merger through
the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve
discount rate (including any surcharge) as established from time
to time during the period between the effective date of the
merger and the date of payment of the judgment. Upon application
by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court
may, in its discretion, proceed to trial upon the appraisal
prior to the final determination of the stockholders entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this Section and who has submitted such
stockholders certificates of stock to the Register in
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder
is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Courts decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or
resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys fees
and the fees and expenses of experts, to be charged pro rata
against the value of all the shares entitled to an appraisal.
B-3
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights
as provided in subsection (d) of this Section shall be
entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholders demand for an
appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of
this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval
may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right
of any stockholder who has not commenced an appraisal proceeding
or joined that proceeding as a named party to withdraw such
stockholders demand for appraisal and to accept the terms
offered upon the merger or consolidation within 60 days
after the effective date of the merger or consolidation, as set
forth in subsection (e) of this section.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
B-4
Annex C-1
Needham & Company, LLC
445 Park Avenue, New York,
NY 10022-4406 (212-371-8300)
February 19, 2008
Strategic Transaction Committee of the Board of Directors
ESS Technology, Inc.
48401 Fremont Boulevard
Fremont, CA 94538
Strategic Transaction Committee of the Board of Directors
Echo Technology (Delaware), Inc.
48401 Fremont Boulevard
Fremont, CA 94538
Gentlemen:
We understand that Semiconductor Holding Corporation
(Parent), Echo Mergerco, Inc., a wholly-owned
subsidiary of Parent (Merger Sub), ESS Technology,
Inc. (the Company) and Echo Technology (Delaware),
Inc., a wholly-owned subsidiary of the Company (Delaware
Merger Sub) propose to enter into an Agreement and Plan of
Merger (the Merger Agreement) whereby, upon the
terms and subject to the conditions set forth in the Merger
Agreement, (i) the Company will be merged with and into
Delaware Merger Sub (the Reincorporation Merger),
with Delaware Merger Sub continuing as the surviving corporation
(unless the context otherwise requires, both the predecessor and
such surviving corporation are herein referred to as, ESS
Delaware), and (ii) Merger Sub will be merged with
and into ESS Delaware, and ESS Delaware will become a
wholly-owned subsidiary of Parent (the Merger). The
terms and conditions of the Merger will be set forth more fully
in the Merger Agreement.
Pursuant to the proposed Merger Agreement, we understand that,
at the Effective Time of the Reincorporation Merger (as defined
in the Merger Agreement), each issued and outstanding share of
common stock of the Company, no par value (Common
Stock), shall be converted into and become one fully paid
and nonassessable share of common stock, par value $0.01 per
share, of ESS Delaware (ESS Delaware Common Stock).
In addition, pursuant to the proposed Merger Agreement, we
understand that, following the Reincorporation Merger, at the
Effective Time of the Merger (as defined in the Merger
Agreement), each issued and outstanding share of ESS Delaware
Common Stock, other than shares of ESS Delaware Common Stock
owned by Parent, Merger Sub or any of their wholly owned
subsidiaries or held by ESS Delaware or any Subsidiary (as
defined in the Merger Agreement) of ESS Delaware (or held in the
treasury of ESS Delaware), and any Dissenting Shares (as defined
in the Merger Agreement), will be converted into the right to
receive $1.64 per share in cash (the Merger
Consideration).
You have asked us to advise you as to the fairness, from a
financial point of view, to the holders of ESS Delaware Common
Stock following the Reincorporation Merger of the Merger
Consideration to be received by such holders pursuant to the
Merger Agreement.
Boston Office:
One Post Office Square,
Suite 1900, Boston, MA 02109 (617) 457-0900
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
For purposes of this opinion we have, among other things:
(i) reviewed a draft of the Merger Agreement dated
February 18, 2008; (ii) reviewed certain publicly
available information concerning the Company and certain other
relevant financial and operating data of the Company furnished
to us by the Company; (iii) reviewed the historical stock
prices and trading volumes of Common Stock of the Company;
(iv) held discussions with members of management of the
Company concerning the current operations of and future business
prospects for the Company; (v) reviewed certain financial
forecasts with respect to the Company prepared by the management
of the Company and held discussions with members of such
management concerning those forecasts; (vi) compared
certain publicly available financial data of companies whose
securities are traded in the public markets and that we deemed
relevant to similar data for the Company; (vii) reviewed
the financial terms of certain other business combinations that
we deemed generally relevant; and (viii) performed and
considered such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In connection with our review and in arriving at our opinion, we
have assumed and relied on the accuracy and completeness of all
of the financial, accounting, legal, tax and other information
discussed with or reviewed by us for purposes of this opinion
and have neither attempted to verify independently nor assumed
responsibility for verifying any of such information. In
addition, we have assumed, with your consent, that the Merger
will be consummated upon the terms and subject to the conditions
set forth in the draft Merger Agreement dated February 18,
2008, without waiver, modification or amendment of any material
term, condition or agreement thereof. With respect to the
financial forecasts for the Company provided to us by the
management of the Company, we have assumed, with your consent
and based upon discussions with such management, that such
forecasts have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of such
management, at the time of preparation, of the future operating
and financial performance of the Company. We express no opinion
with respect to any of such forecasts or the assumptions on
which they were based.
We have not assumed any responsibility for or made or obtained
any independent evaluation, appraisal or physical inspection of
the assets or liabilities of the Company or Parent nor have we
evaluated the solvency or fair value of the Company under any
state or federal laws relating to bankruptcy, insolvency or
similar matters. Further, our opinion is based on economic,
monetary and market conditions as they exist and can be
evaluated as of the date hereof and we assume no responsibility
to update or revise our opinion based upon circumstances and
events occurring after the date hereof. Our opinion as expressed
herein is limited to the fairness, from a financial point of
view, to the holders of ESS Delaware Common Stock following the
Reincorporation Merger of the Merger Consideration to be
received by such holders pursuant to the Merger Agreement and we
express no opinion as to the fairness of the Merger to, or any
consideration received in connection therewith by, the holders
of any other class of securities, creditors or other
constituencies of ESS Delaware, or as to the Companys
underlying business decision to engage in the Merger or the
relative merits of the Merger as compared to other business
strategies that might be available to the Company. In addition,
we express no opinion with respect to the amount or nature or
any other aspect of any compensation payable to or to be
received by any officers, directors or employees of any party to
the Merger, or any class of such persons, relative to the Merger
Consideration to be received by the holders of ESS Delaware
Common Stock pursuant to the Merger Agreement or with respect to
the fairness of any such compensation. Our opinion does not
constitute a recommendation to any shareholder of the Company as
to how such shareholder should vote with respect to the proposed
Reincorporation Merger or the proposed Merger.
Needham & Company, LLC, as part of its investment
banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions
of securities, private placements and other purposes. We have
been engaged by the Strategic Transaction Committee of the Board
of Directors of the Company as financial advisor in connection
with the Reincorporation Merger and the Merger and to render
this opinion and will receive a fee for our services, a portion
of which is payable upon rendering this opinion and a
substantial portion of which is contingent on the consummation
of the Merger. In addition, the Company has agreed to indemnify
us for certain liabilities arising out of our role as financial
advisor and out of the rendering of this opinion and to
reimburse us for our out-of-pocket expenses. We have in the past
provided investment banking and financial advisory services to
the Company and have received customary fees for those services.
We may in the future provide investment banking and financial
advisory services to the Company, Parent or Imperium unrelated
to the proposed Merger, for which services we would expect to
receive compensation. In the ordinary course of our business, we
may actively trade the equity
C-1-2
securities of the Company for our own account or for the
accounts of customers or affiliates and, accordingly, may at any
time hold a long or short position in such securities.
This letter and the opinion expressed herein are provided at the
request and for the information of the Strategic Transaction
Committee of the Board of Directors of the Company and the
Strategic Transaction Committee of the Board of Directors of
Delaware Merger Sub, may be provided to the entire Board of
Directors of the Company and the entire Board of Directors of
Delaware Merger Sub, and may not be quoted or referred to or
used for any purpose without our prior written consent, except
that this letter may be disclosed in connection with any
registration statement and any proxy statement/prospectus
contained therein, in each case used in connection with the
Merger, provided that this letter is quoted in full in such
registration statement or proxy statement/prospectus and any
description of or reference to Needham & Company, LLC
or summary of this opinion in such statement will be in a form
reasonably acceptable to Needham & Company, LLC. This
opinion has been approved by a fairness committee of
Needham & Company, LLC.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the Merger Consideration to be received
by the holders of ESS Delaware Common Stock following the
Reincorporation Merger pursuant to the Merger Agreement is fair
to such holders from a financial point of view.
Very truly yours,
NEEDHAM & COMPANY, LLC
C-1-3
Annex C-2
May 21,
2008
[Sutter Securities Incorporated Letterhead]
Strategic
Transaction Committee of the Board of Directors
ESS Technology, Inc.
48401 Fremont Boulevard,
Fremont, California 94538
Strategic Transaction Committee of the Board of Directors
Echo Technology (Delaware), Inc.
48401 Fremont Boulevard,
Fremont, California 94538
Attention:
Alfred Stein, Chairman
Dear Sirs:
We understand that ESS Technology, Inc. (ESS) is
considering a transaction pursuant to which (i) ESS will be
merged into Echo Technology (Delaware), Inc. (Echo)
and (ii) shareholders of Echo would be entitled to receive
$1.64 per share in cash pursuant to a subsequent merger
(collectively, the Transaction).
ESS, Echo (now a wholly-owned subsidiary of ESS), Semiconductor
Holding Corporation (Acquiror), and Echo Mergerco,
Inc. (Merger Sub, a wholly-owned subsidiary of
Acquiror) propose to enter into an Agreement and Plan of Merger
(the Merger Agreement) whereby, upon the terms and
conditions therein, (i) ESS (a California corporation) will
be merged into Echo (a Delaware corporation) on a
share-for-share basis, which will survive the merger and change
its name to ESS Technology Inc. (ESS Delaware, a
Delaware corporation) at the time of the merger, and
(ii) Merger Sub will then be merged into ESS Delaware.
Shareholders of ESS Delaware (formerly shareholders of ESS) will
be entitled to receive $1.64 per share in cash and ESS Delaware
will become a wholly-owned subsidiary of Acquiror.
You have provided us with the Merger Agreement dated
February 21, 2008 (the Merger Agreement) and
with the proxy statement in substantially the form to be sent to
the shareholders of ESS (the Proxy Statement).
You have asked us to render our opinion as to whether the
Transaction, taken as a whole, is fair, from a financial point
of view, to the public stockholders of ESS and Echo.
In the course of our analyses for rendering this opinion, we
have:
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1.
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reviewed the Proxy Statement and the Merger Agreement;
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2.
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reviewed ESSs Annual Reports to Shareholders and Annual
Reports on
Form 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;
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3.
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reviewed certain operating and financial information, including
projections, provided to us by management relating to ESSs
business and prospects;
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4.
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met with certain members of ESSs senior management to
discuss its operations, historical financial statements and
future prospects;
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5.
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discussed information concerning ESS with outside advisors to
ESS;
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6.
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reviewed the historical market prices and trading volume of the
common shares of ESS; and
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7.
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conducted such other studies, analyses, inquiries and
investigations as we deemed appropriate.
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In the course of our review, we have relied upon and assumed the
accuracy and completeness of the financial and other information
provided to us by ESS and we have not independently verified any
of the information provided to us by ESS. With respect to
ESSs projected financial results, we have assumed that
they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the management of
ESS. We have not assumed any responsibility for the information
or projections provided to us and we have further relied upon
the assurances of the management of ESS that it is unaware of
any facts that would make the
C-2-1
information or projections provided to us incomplete or
misleading. In arriving at our opinion, we have not performed or
obtained any independent appraisal of the assets of ESS. This
opinion has been approved by our Fairness Committee. Our opinion
is necessarily based on economic, market and other conditions,
and the information made available to us, as of the date hereof.
We express no opinion as to the fairness of the amount of
compensation received by any officers, directors or employees of
ESS relative to the consideration to be received by the public
stockholders.
Based on the foregoing, it is our opinion that the Transaction,
taken as a whole, is fair, from a financial point of view, to
the public stockholders of ESS and Echo.
We have not acted as financial advisor to ESS in connection with
the Transaction and have not previously been engaged by ESS. In
addition, we have not had and do not contemplate entering into
any material relationship with any party to the Transaction,
although we may in the future provide services to parties to the
Transaction that are unrelated to the Transaction and may
receive compensation therefore. No portion of our fee is
contingent on completion of the Transaction.
Very truly yours,
SUTTER SECURITIES INCORPORATED
Senior Managing Director
C-2-2
Annex D
CERTIFICATE
OF INCORPORATION
OF
ECHO
TECHNOLOGY (DELAWARE), INC.
ARTICLE I
The name of the corporation is Echo Technology (Delaware), Inc.
(the
Corporation
).
ARTICLE II
The address of the Corporations registered office in the
State of Delaware is 2711 Centerville Road, Suite 400, in
the City of Wilmington, County of New Castle, zip code 19808.
The name of its registered agent at such address is Corporation
Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock to
be designated, respectively, Common Stock and
Preferred Stock. The number of shares of Common
Stock that the Corporation is authorized to issue is
100,000,000 shares, with a par value of $0.0001 per share.
The number of shares of Preferred Stock that the Corporation is
authorized to issue is 10,000,000 shares, with a par value
of $0.0001 per share.
The Preferred Stock may be divided into such number of series as
the board of directors may determine from time to time. The
board of directors of the corporation is authorized, from time
to time, to determine or alter the rights, preferences,
privileges and restrictions granted to, or imposed upon, any
wholly unissued series of Preferred Stock, and to fix the number
of shares of any series of Preferred Stock and the designation
of any such series of Preferred Stock. The board of directors,
within the limits and restrictions stated in any resolution or
resolutions of the board of directors originally fixing the
number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series prior to or
subsequent to the issuance of shares of that series.
ARTICLE V
In furtherance of and not in limitation of the powers conferred
by the laws of the State of Delaware, the Board of Directors of
the Corporation is expressly authorized to make, amend or repeal
Bylaws of the Corporation.
ARTICLE VI
The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. Elections of
directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or as may hereafter be
amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
D-1
(B) The Corporation shall indemnify to the fullest extent
permitted by law any person made or threatened to be made a
party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he,
his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or
served at any other enterprise as a director or officer at the
request of the Corporation or any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this
Article VII, nor the adoption of any provision of the
Corporations Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect
of this Article VII in respect of any matter occurring, or
any action or proceeding accruing or arising or that, but for
this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE VIII
The Corporation shall not have cumulative voting. This provision
shall become effective only when this corporation becomes listed
on a national securities exchange.
ARTICLE IX
The name and mailing address of the incorporator are as follows:
Lowell
Ness
Orrick, Herrington & Sutcliffe LLP
1040 Marsh Road
Menlo Park, CA 94025
Lowell Ness, Incorporator
Executed on February 19, 2008
D-2
Annex E
BYLAWS
OF
ECHO TECHNOLOGY (DELAWARE), INC.
TABLE OF
CONTENTS
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Page
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ARTICLE I CORPORATE OFFICES
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E-1
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1.1
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Registered Office
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E-1
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1.2
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Other Offices
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E-1
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ARTICLE II MEETINGS OF STOCKHOLDERS
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E-1
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2.1
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Place Of Meetings
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E-1
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2.2
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Annual Meeting
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E-1
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2.3
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Special Meeting
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E-1
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2.4
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Notice Of Stockholders Meetings
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E-2
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2.5
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Manner Of Giving Notice; Affidavit Of Notice
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E-2
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2.6
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Quorum
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E-2
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2.7
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Adjourned Meeting; Notice
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E-2
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2.8
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Organization; Conduct of Business
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E-2
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2.9
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Voting
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E-2
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2.10
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Waiver Of Notice
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E-3
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2.11
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Stockholder Action By Written Consent Without A Meeting
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E-3
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2.12
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Record Date For Stockholder Notice; Voting; Giving Consents
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E-3
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2.13
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Proxies
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E-4
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ARTICLE III DIRECTORS
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E-4
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3.1
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Powers
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E-4
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3.2
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Number Of Directors
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E-4
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3.3
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Election, Qualification And Term Of Office Of Directors
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E-4
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3.4
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Resignation And Vacancies
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E-5
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3.5
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Removal Of Directors
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E-5
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3.6
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Fees And Compensation Of Directors
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E-6
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3.7
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Chairman Of The Board Of Directors
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E-6
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3.8
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Powers and Duties
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E-6
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ARTICLE IV MEETINGS OF DIRECTORS
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E-7
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4.1
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Place Of Meetings; Meetings By Telephone
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E-7
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4.2
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Regular Meetings
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E-8
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4.3
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Special Meetings; Notice
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E-8
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4.4
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Quorum
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E-8
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4.5
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Waiver Of Notice
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E-8
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4.6
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Board Action By Written Consent Without A Meeting
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E-9
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ARTICLE V COMMITTEES
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E-9
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5.1
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Committees Of Directors
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E-9
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5.2
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Committee Minutes
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E-9
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5.3
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Meetings And Action Of Committees
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E-9
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ARTICLE VI OFFICERS
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E-10
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6.1
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Officers
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E-10
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6.2
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Appointment Of Officers
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E-10
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6.3
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Subordinate Officers
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E-10
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6.4
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Term of Office and Compensation
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E-10
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6.5
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Removal And Resignation Of Officers
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E-10
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E-i
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Page
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6.6
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Vacancies In Offices
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E-10
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6.7
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Chief Executive Officer
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E-10
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6.8
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Chairman of the Board
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E-11
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6.9
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President
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E-11
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5.8
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President Pro Tem
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E-11
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6.11
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Vice Presidents
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E-11
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6.12
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Secretary
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E-11
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6.13
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Chief Financial Officer
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E-12
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6.14
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Instruments in Writing
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E-12
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6.15
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Authority And Duties Of Officers
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E-13
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ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS
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E-13
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7.1
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Indemnification Of Directors And Officers
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E-13
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7.2
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Indemnification Of Others
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E-13
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7.3
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Payment Of Expenses In Advance
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E-13
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7.4
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Indemnity Not Exclusive
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E-13
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7.5
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Insurance
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E-14
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7.6
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Conflicts
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E-14
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7.7
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Effect of Amendment
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E-14
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ARTICLE VIII RECORDS AND REPORTS
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E-14
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8.1
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Maintenance And Inspection Of Records
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E-14
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8.2
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Inspection By Directors
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E-15
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ARTICLE IX GENERAL MATTERS
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E-15
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9.1
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Checks
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E-15
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9.2
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Execution Of Corporate Contracts And Instruments
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E-15
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9.3
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Business Combinations with Interested Stockholders
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E-15
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9.4
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Stock Held By the Corporation
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E-15
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9.5
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Stock Certificates; Partly Paid Shares
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E-15
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9.6
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Special Designation On Certificates
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E-16
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9.7
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Lost Certificates
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E-16
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9.8
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Construction; Definitions
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E-16
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9.9
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Dividends
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E-16
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9.10
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Fiscal Year
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E-16
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9.11
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Seal
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E-16
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9.12
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Transfer Of Stock
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E-16
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9.13
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Stock Transfer Agreements
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E-17
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9.14
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Registered Stockholders
|
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E-17
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9.15
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Facsimile Signature
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E-17
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ARTICLE X AMENDMENTS
|
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E-17
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10.1
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By Stockholders
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E-17
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10.2
|
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By the Board of Directors
|
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E-17
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10.3
|
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Certification and Inspection of Bylaws
|
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E-17
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E-ii
BYLAWS
OF
ECHO
TECHNOLOGY (DELAWARE), INC.
ARTICLE I
CORPORATE
OFFICES
1.1
Registered Office
.
The registered office of the corporation (the
Corporation
) shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of
the registered agent of the Corporation at such location is
Corporation Service Company.
1.2
Other Offices
.
The Board of Directors may at any time establish other offices
at any place or places where the Corporation is qualified to do
business.
ARTICLE II
MEETINGS
OF STOCKHOLDERS
2.1
Place Of Meetings
.
Meetings (whether regular, special or adjourned) of the
stockholders of the Corporation shall be held at the principal
executive office for the transaction of business of the
Corporation, or at any place within or outside the State of
Delaware which may be designated by written consent of all the
stockholders entitled to vote thereat, or which may be
designated by resolution of the Board of Directors. Any meeting
shall be valid wherever held if held by the written consent of
all the stockholders entitled to vote thereat, given either
before or after the meeting and filed with the Secretary of the
Corporation.
2.2
Annual Meeting
.
The annual meetings of the stockholders shall be held at the
place provided pursuant to Section 2.1 hereof and at such
time in a particular year as may be designated by written
consent of all the stockholders entitled to vote thereat or
which may be designated by resolution of the Board of Directors
of the Corporation. Said annual meetings shall be held for the
purpose of the election of directors, for the making of reports
of the affairs of the Corporation and for the transaction of
such other business as may properly come before the meeting
2.3
Special Meeting
.
A special meeting of the stockholders may be called at any time
by the Board of Directors, the Chairman of the Board, the
President or by one or more stockholders holding shares in the
aggregate entitled to cast not less than ten percent of the
votes at that meeting.
If a special meeting is called by any person or persons other
than the Board of Directors, the President or the Chairman of
the Board, the request shall be in writing, specifying the time
of such meeting and the general nature of the business proposed
to be transacted, and shall be delivered personally or sent by
registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board, the President, any
Vice President, or the Secretary of the Corporation. No business
may be transacted at such special meeting otherwise than
specified in such notice. The officer receiving the request
shall cause notice to be promptly given to the stockholders
entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a
meeting will be held at the time requested by the person or
persons calling the meeting, not less than thirty-five
(35) nor more than sixty (60) days after the receipt
of the request. If the notice is not given within twenty
(20) days after the receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be
construed as limiting, fixing, or affecting the time when a
meeting of stockholders called by action of the Board of
Directors may be held.
E-1
2.4
Notice Of Stockholders
Meetings
.
All notices of meetings with stockholders shall be in writing
and shall be sent or otherwise given in accordance with
Section 2.5 of these Bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice
shall specify the place (if any), date and hour of the meeting,
and in the case of a special meeting, the purpose or purposes
for which the meeting is called.
2.5
Manner Of Giving Notice; Affidavit Of
Notice
.
Written notice of any meeting of stockholders, if mailed, is
given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his address as it appears on the
records of the Corporation. Without limiting the manner by which
notice otherwise may be given effectively to stockholders, any
notice to stockholders may be given by electronic mail or other
electronic transmission, in the manner provided in
Section 232 of the Delaware General Corporation Law. An
affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the Corporation that the notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
2.6
Quorum
.
The holders of a majority of the shares of stock issued and
outstanding and entitled to vote thereat, present in person or
represented by proxy or other authorization, shall constitute a
quorum at all meetings of the stockholders for the transaction
of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not
present or represented at any meeting of the stockholders, then
either (a) the chairman of the meeting or (b) holders
of a majority of the shares of stock entitled to vote who are
present, in person or by proxy or other authorization, shall
have power to adjourn the meeting to another place (if any),
date or time.
2.7
Adjourned Meeting; Notice
.
When a meeting is adjourned to another place (if any), date or
time, unless these Bylaws otherwise require, notice need not be
given of the adjourned meeting if the time and place (if any),
thereof and the means of remote communications, if any, by which
stockholders and holders of proxies or other authorizations may
be deemed to be present and vote at such adjourned meeting, are
announced at the meeting at which the adjournment is taken. At
the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned
meeting, notice of the place (if any), date and time of the
adjourned meeting and the means of remote communications, if
any, by which stockholders and holders of proxies or other
authorizations may be deemed to be present in person and vote at
such adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
2.8
Organization; Conduct of Business
.
(a) Such person as the Board of Directors may have
designated or, in the absence of such a person, the President of
the Corporation or, in his or her absence, such person as may be
chosen by the holders of a majority of the shares entitled to
vote who are present, in person or by proxy or other
authorization, shall call to order any meeting of the
stockholders and act as Chairman of the meeting. In the absence
of the Secretary of the Corporation, the Secretary of the
meeting shall be such person as the Chairman of the meeting
appoints.
(b) The Chairman of any meeting of stockholders shall
determine the order of business and the procedure at the
meeting, including the manner of voting and the conduct of
business. The date and time of opening and closing of the polls
for each matter upon which the stockholders will vote at the
meeting shall be announced at the meeting.
2.9
Voting
.
The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of
Section 2.12 of these Bylaws, subject to the provisions of
Sections 217 and 218 of the General Corporation Law of
Delaware (relating to voting rights of fiduciaries, pledgors and
joint owners of stock and to voting trusts and other voting
agreements).
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Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote
for each share of capital stock held by such stockholder. All
elections shall be determined by a plurality of the votes cast,
and except as otherwise required by law, all other matters shall
be determined by a majority of the votes cast affirmatively or
negatively.
2.10
Waiver Of Notice
.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of
incorporation or these Bylaws, a written waiver thereof, signed
by the person entitled to notice, or waiver by electronic mail
or other electronic transmission by such person, whether before
or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends
a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, any regular or special
meeting of the stockholders need be specified in any written
waiver of notice, or any waiver of notice by electronic
transmission, unless so required by the certificate of
incorporation or these Bylaws.
2.11
Stockholder Action By Written Consent
Without A Meeting
.
Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting
of stockholders of the Corporation, or any action that may be
taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice, and without a
vote if a consent in writing, setting forth the action so taken,
is (i) 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
(ii) delivered to the Corporation in accordance with
Section 228(a) of the Delaware General Corporation Law.
Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall
be effective to take the corporate action referred to therein
unless, within 60 days of the date the earliest dated
consent is delivered to the Corporation, a written consent or
consents signed by a sufficient number of holders to take action
are delivered to the Corporation in the manner prescribed in
this Section. A telegram, cablegram, electronic mail or other
electronic transmission consenting to an action to be taken and
transmitted by a stockholder or holder of a proxy or other
authorization, or by a person or persons authorized to act for a
stockholder or holder of a proxy or other authorization, shall
be deemed to be written, signed and dated for purposes of this
Section to the extent permitted by law. Any such consent shall
be delivered in accordance with Section 228(d)(1) of the
Delaware General Corporation Law.
Any copy, facsimile or other reliable reproduction of a consent
in writing may be substituted or used in lieu of the original
writing for any and all purposes for which the original writing
could be used, provided that such copy, facsimile or other
reproduction shall be a complete reproduction of the entire
original writing.
Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing (including
by electronic mail or other electronic transmission as permitted
by law). If the action which is consented to is such as would
have required the filing of a certificate under any section of
the General Corporation Law of Delaware if such action had been
voted on by stockholders at a meeting thereof, then the
certificate filed under such section shall state, in lieu of any
statement required by such section concerning any vote of
stockholders, that written notice and written consent have been
given as provided in Section 228 of the General Corporation
Law of Delaware.
2.12
Record Date For Stockholder Notice;
Voting; Giving Consents
.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for
the purpose of any other lawful action, the Board of Directors
may fix, in advance, a record date, which shall not be more than
60 nor less than 10 days before the date of such meeting,
nor more than 60 days prior to any other action.
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If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at
the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of
business on the day next preceding the day on which the meeting
is held.
(b) The record date for determining stockholders entitled
to consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary,
shall be the day on which the first written consent (including
consent by electronic mail or other electronic transmission as
permitted by law) is delivered to the Corporation.
(c) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on
which the Board of Directors adopts the resolution relating
thereto.
A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting, if such adjournment is for thirty
(30) days or less; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
2.13
Proxies
.
Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act
for such stockholder by an instrument in writing or by an
electronic transmission permitted by law filed with the
Secretary of the Corporation, but no such proxy or other
authorization shall be voted or acted upon after three years
from its date, unless the proxy or other authorization provides
for a longer period. A proxy or other authorization shall be
deemed signed if the stockholders name is placed on the
proxy or other authorization (whether by manual signature,
typewriting, facsimile, electronic or telegraphic transmission
or otherwise) by the stockholder or the stockholders
attorney-in-fact. The revocability of a proxy or other
authorization that states on its face that it is irrevocable
shall be governed by the provisions of Section 212(e) of
the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1
Powers
.
Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the certificate of incorporation
or these Bylaws relating to action required to be approved by
the stockholders or by the outstanding shares, the business and
affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board
of Directors.
3.2
Number Of Directors
.
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be three (3),
provided that at the effective time of a merger of Echo
Mergerco, Inc. with and into the Corporation, the number of
authorized directors shall be five (5).Thereafter, the
authorized number of directors may be varied from time to time
by resolution of the Board of Directors, provided that the
minimum authorized number shall be not less than five
(5) and the maximum authorized number shall not be more
than nine (9). Until changed by an amendment of this Section by
the stockholders, the authorized number of directors of the
Corporation may be varied by the Board of Directors, as opposed
to being fixed, within the range of the minimum and the maximum
authorized numbers of directors provided above. Any amendment to
these Bylaws reducing such minimum number of authorized
directors to a number less than five (5) cannot be adopted
if the votes cast against its adoption at a meeting, or the
shares not consenting in the case of action by written consent,
are equal to more than
16
2
/
3
%
of the outstanding shares entitled to vote.
3.3
Election, Qualification And Term Of Office
Of Directors
.
Except as provided in Section 3.4 of these Bylaws, and
unless otherwise provided in the certificate of incorporation,
the directors shall be elected annually by the stockholders at
the annual meeting of the stockholders.
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The term of office of the directors shall begin immediately
after their election and shall continue until the next annual
meeting of the stockholders and until their respective
successors are elected. A reduction of the authorized number of
directors shall not shorten the term of any incumbent director
or remove any incumbent director prior to the expiration of such
directors term of office. Directors need not be
stockholders unless so required by the certificate of
incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed.
Unless otherwise specified in the certificate of incorporation,
elections of directors need not be by written ballot.
3.4
Resignation And Vacancies
.
A vacancy or vacancies on the Board of Directors shall exist:
(a) in the case of the death of any director; or
(b) in the case of the resignation or removal of any
director; or
(c) if the authorized number of directors is
increased; or
(d) if the stockholders fail, at any annual meeting of
stockholders at which any director is elected, to elect the full
authorized number of directors at that meeting.
The Board of Directors may declare vacant the office of a
director if he or she is declared of unsound mind by an order of
court or convicted of a felony or if, within 60 days after
notice of his or her election, he or she does not accept the
office. Any vacancy, except for a vacancy created by removal of
a director as provided in Section 3.5 hereof, may be filled
by a person selected by a majority of the remaining directors
then in office, whether or not less than a quorum, or by a sole
remaining director. Vacancies occurring in the Board of
Directors by reason of removal of directors shall be filled only
by approval of stockholders. The stockholders may elect a
director at any time to fill any vacancy not filled by the
directors. Any such election by the written consent of
stockholders, other than to fill a vacancy created by removal,
requires the consent of stockholders holding a majority of the
outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to
the Chairman of the Board, if any, the President, the Secretary
or the Board of Directors, unless the notice specifies a later
time for the effectiveness of such resignation. After the notice
is given and if the resignation is effective at a future time, a
successor may be elected or appointed to take office when the
resignation becomes effective.
If at any time, by reason of death or resignation or other
cause, the Corporation should have no directors in office, then
any officer or any stockholder or an executor, administrator,
trustee or guardian of a stockholder, or other fiduciary
entrusted with like responsibility for the person or estate of a
stockholder, may call a special meeting of stockholders in
accordance with the provisions of the certificate of
incorporation or these Bylaws, or may apply to the Court of
Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than
a majority of the whole board (as constituted immediately prior
to any such increase), then the Court of Chancery may, upon
application of any stockholder or stockholders holding at least
10% of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the
directors then in office as aforesaid, which election shall be
governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5
Removal Of Directors
.
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, the entire Board of Directors
or any individual director may be removed from office without
cause by an affirmative vote of stockholders holding a majority
of the outstanding shares entitled to vote; provided, however,
that if the stockholders of the Corporation are entitled to
cumulative voting, if less than the entire Board of Directors is
to be removed, no director may be removed without cause if the
votes cast against his removal would be sufficient to
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elect him if then cumulatively voted at an election of the
entire Board of Directors. If the entire Board of Directors is
not removed, however, then no individual director shall be
removed if the votes cast against removal of that director, plus
the votes not consenting in writing to such removal, would be
sufficient to elect that director if voted cumulatively in an
election at which the following were true:
(a) the same total number of votes were cast, or, if such
action is taken by written consent, all shares entitled to vote
were voted; and
(b) the entire number of directors authorized at the time
of the directors most recent election were then being
elected.
If any or all directors are so removed, new directors may be
elected at the same meeting or at a subsequent meeting. If at
any time a class or series of shares is entitled to elect one or
more directors under authority granted by the certificate of
incorporation, the provisions of this Section 3.5 shall
apply to the vote of that class or series and not to the vote of
the outstanding shares as a whole.
3.6
Fees And Compensation Of Directors
.
Unless otherwise restricted by the certificate of incorporation
or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. No such compensation shall
preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor.
3.7
Chairman Of The Board Of Directors
.
The Corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors.
3.8
Powers and Duties
.
Without limiting the generality or extent of the general
corporate powers to be exercised by the Board of Directors
pursuant to Section 3.1 of these Bylaws, it is hereby
provided that the Board of Directors shall have full power with
respect to the following matters:
(a) To purchase, lease and acquire any and all kinds of
property, real, personal or mixed, and at its discretion to pay
therefor in money, in property
and/or
in
stocks, bonds, debentures or other securities of the Corporation.
(b) To enter into any and all contracts and agreements
which in its judgment may be beneficial to the interests and
purposes of the Corporation.
(c) To fix and determine and to vary from time to time the
amount or amounts to be set aside or retained as reserve funds
or as working capital of the Corporation or for maintenance,
repairs, replacements or enlargements of its properties.
(d) To declare and pay dividends in cash, shares
and/or
property out of any funds of the Corporation at the time legally
available for the declaration and payment of dividends on its
shares.
(e) To adopt such rules and regulations for the conduct of
its meetings and the management of the affairs of the
Corporation as it may deem proper.
(f) To prescribe the manner in which and the person or
persons by whom any or all of the checks, drafts, notes, bills
of exchange, contracts and other corporate instruments shall be
executed.
(g) To accept resignations of directors; to declare vacant
the office of a director as provided in Section 3.4 hereof;
and, in case of vacancy in the office of directors, to fill the
same to the extent provided in Section 3.4 hereof.
(h) To create offices in addition to those for which
provision is made by law or these Bylaws; to elect and remove at
pleasure all officers of the Corporation, fix their terms of
office, prescribe their titles, powers and duties, limit their
authority and fix their salaries in any way it may deem
advisable that is not contrary to law or these Bylaws.
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(i) To designate one or more persons to perform the duties
and exercise the powers of any officer of the Corporation during
the temporary absence or disability of such officer.
(j) To appoint or employ and to remove at pleasure such
agents and employees as it may see fit, to prescribe their
titles, powers and duties, limit their authority and fix their
salaries in any way it may deem advisable that is not contrary
to law or these Bylaws.
(k) To fix a time in the future, which shall not be more
than 60 days nor less than 10 days prior to the date
of the meeting nor more than 60 days prior to any other
action for which it is fixed, as a record date for the
determination of the stockholders entitled to notice of and to
vote at any meeting, or entitled to receive any payment of any
dividend or other distribution, or allotment of any rights, or
entitled to exercise any rights in respect of any other lawful
action; and in such case only stockholders of record on the date
so fixed shall be entitled to notice of and to vote at the
meeting or to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the
Corporation after any record date fixed as aforesaid. The Board
of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of such period.
(l) To fix and locate from time to time the principal
office for the transaction of the business of the Corporation
and one or more branch or other subordinate offices of the
Corporation within or without the State of Delaware; to
designate any place within or without the State of Delaware for
the holding of any meeting or meetings of the stockholders or
the Board of Directors, as provided in Sections 2.1 and 4.1
hereof; to adopt, make and use a corporate seal, and to
prescribe the forms of certificates for shares and to alter the
form of such seal and of such certificates from time to time as
in its judgment it may deem best, provided such seal and such
certificates shall at all times comply with the provisions of
law now or hereafter in effect.
(m) To authorize the issuance of shares of stock of the
Corporation in accordance with the laws of the State of Delaware
and the certificate of incorporation.
(n) Subject to the limitation provided in Section 10.2
hereof, to adopt, amend or repeal from time to time and at any
time these Bylaws and any and all amendments thereof.
(o) To borrow money, make guarantees of indebtedness or
other obligations of third parties and incur indebtedness on
behalf of the Corporation, including the power and authority to
borrow money from any of the stockholders, directors or officers
of the Corporation; and to cause to be executed and delivered
therefor in the corporate name promissory notes, bonds,
debentures, deeds of trust, mortgages, pledges (or other
transfers of property as security or collateral for a debt), or
other evidences of debt and securities therefor; and the note or
other obligation given for any indebtedness of the Corporation,
signed officially by any officer or officers thereunto duly
authorized by the Board of Directors, shall be binding on the
Corporation.
(p) To approve a loan of money or property to any officer
or director of the Corporation or any parent or subsidiary
company, guarantee the obligation of any such officer or
director, or approve an employee benefit plan authorizing such a
loan or guaranty to any such officer or director; provided that,
on the date of approval of such loan or guaranty, the
Corporation has outstanding shares held of record by 100 or more
persons. Such approval shall require a determination by the
Board of Directors that the loan or guaranty may reasonably be
expected to benefit the Corporation and must be by vote
sufficient without counting the vote of any interested director.
Generally to do and perform every act and thing whatsoever that
may pertain to the office of a director or to a board of
directors
ARTICLE IV
MEETINGS
OF DIRECTORS
4.1
Place Of Meetings; Meetings By
Telephone
.
Meetings (whether regular, special or adjourned) of the Board of
Directors of the Corporation shall be held at the principal
executive office of the Corporation or at any other place within
or outside the State of Delaware which
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may be designated from time to time by resolution of the Board
of Directors or which is designated in the notice of the meeting
Unless otherwise restricted by the certificate of incorporation
or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate
in a meeting of the Board of Directors, or any committee, by
means of conference telephone or other communications equipment
by means of which all persons participating in the meeting can
hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
4.2
Regular Meetings
.
Regular meetings of the Board of Directors shall be held at such
times as may be designated from time to time by resolution of
the Board of Directors. Notice of the time and place of all
regular meetings shall be given in the same manner as for
special meetings, except that no such notice need be given if
the time and place of such meetings are fixed by the Board of
Directors.
4.3
Special Meetings; Notice
.
Special meetings of the Board of Directors may be called at any
time by the Chairman of the Board, if any, or the President, or
any Vice President, or the Secretary or by any two or more
directors.
Special meetings of the Board of Directors shall be held upon no
less than 4 days notice by mail or
48 hours notice delivered personally or by telephone
or telegraph to each director. Notice need not be given to any
director who signs a waiver of notice or a consent to holding
the meeting or an approval of the minutes thereof, whether
before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents and
approvals shall be filed with the corporate records or made a
part of the minutes of the meeting. Any oral notice given
personally or by telephone may be communicated either to the
director or to a person at the home or office of the director
who the person giving the notice has reason to believe will
promptly communicate it to the director. A notice or waiver of
notice need not specify the purpose of any meeting of the Board
of Directors. If the address of a director is not shown on the
records of the Corporation and is not readily ascertainable,
notice shall be addressed to him or her at the city or place in
which meetings of the directors are regularly held. If a meeting
is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the
time of the adjourned meeting to all directors not present at
the time of adjournment.
4.4
Quorum
.
A majority of the authorized number of directors constitutes a
quorum of the Board of Directors for the transaction of
business. Every act or decision done or made by a majority of
the directors present at a meeting duly held at which a quorum
is present is the act of the Board of Directors subject to
provisions of law relating to interested directors and
indemnification of agents of the Corporation. A majority of the
directors present, whether or not a quorum is present, may
adjourn any meeting to another time and place. A meeting at
which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any
action taken is approved by at least a majority of the required
quorum for such meeting.
4.5
Waiver Of Notice
.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of
incorporation or these Bylaws, a written waiver thereof, signed
by the person entitled to notice, or waiver by electronic mail
or other electronic transmission by such person, whether before
or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends
a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, any regular or special
meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice
unless so required by the certificate of incorporation or these
Bylaws.
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The transactions of any meeting of the Board of Directors,
however called and noticed or wherever held, shall be as valid
as though had at a meeting duly held after regular call and
notice if a quorum is present, and if, either before or after
the meeting, each of the directors not present signs a written
waiver of notice, a consent to holding such meeting or an
approval of the minutes thereof. All such waivers, consents and
approvals shall be filed with the corporate records or made a
part of the minutes of the meeting.
4.6
Board Action By Written Consent Without A
Meeting
.
Unless otherwise restricted by the certificate of incorporation
or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the
board or committee, as the case may be, consent thereto in
writing or by electronic transmission, and the writing or
writings or electronic transmission or transmissions are filed
with the minutes of proceedings of the board or committee. Such
filing shall be in paper form if the minutes are maintained in
paper form and shall be in electronic form if the minutes are
maintained in electronic form.
Any copy, facsimile or other reliable reproduction of a consent
in writing may be substituted or used in lieu of the original
writing for any and all purposes for which the original writing
could be used, provided that such copy, facsimile or other
reproduction shall be a complete reproduction of the entire
original writing.
ARTICLE V
COMMITTEES
5.1
Committees Of Directors
.
The Board of Directors may designate one or more committees,
each committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the
absence or disqualification of a member of a committee, the
member or members present at any meeting and not disqualified
from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent
or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, or in
these Bylaws, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or
authority in reference to the following matters:
(i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the
General Corporate Law of Delaware to be submitted to
stockholders for approval or (ii) adopting, amending or
repealing any Bylaw of the Corporation.
5.2
Committee Minutes
.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
5.3
Meetings And Action Of Committees
.
Meetings and actions of committees shall be governed by, and
held and taken in accordance with, the provisions of
Section 4.1 (place of meetings and meetings by telephone),
Section 4.2 (regular meetings), Section 4.3 (special
meetings and notice), Section 4.4 (quorum),
Section 4.5 (waiver of notice), and Section 4.6
(action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute
the committee and its members for the Board of Directors and its
members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the Board
of Directors or by resolution of the committee, that special
meetings of committees may also be called by resolution of the
Board of Directors and that notice of special meetings of
committees shall also be given to all alternate members, who
shall have the right to attend all meetings of the committee.
The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
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ARTICLE VI
OFFICERS
6.1
Officers
.
The officers of the Corporation shall consist of a President
and/or
a
Chief Executive Officer, a Secretary, a Chief Financial Officer
and such other officers, including, but not limited to, a
Chairman of the Board of Directors, one or more Vice Presidents,
a Treasurer, and Assistant Vice Presidents, Assistant
Secretaries and Assistant Treasurers, as the Board of Directors
shall deem expedient, who shall be chosen in such manner and
hold their offices for such terms as the Board of Directors may
prescribe. Any number of offices may be held by the same person.
Any Vice President, Assistant Treasurer or Assistant Secretary,
respectively, may exercise any of the powers of the President,
the Chief Financial Officer or the Secretary, respectively, as
directed by the Board of Directors, and shall perform such other
duties as are imposed upon him or her by these Bylaws or the
Board of Directors.
6.2
Appointment Of Officers
.
The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Sections 6.3
or 6.5 of these Bylaws, shall be appointed by the Board of
Directors, subject to the rights, if any, of an officer under
any contract of employment.
6.3
Subordinate Officers
.
The Board of Directors may appoint, or empower the Chief
Executive Officer or the President to appoint, such other
officers and agents as the business of the Corporation may
require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time
determine.
6.4
Term of Office and Compensation.
The term of office and salary of each of said officers and the
manner and time of the payment of such salaries shall be fixed
and determined by the Board of Directors and may be altered by
said Board of Directors from time to time at its pleasure,
subject to the rights, if any, of any officer under any contract
of employment.
6.5
Removal And Resignation Of Officers
.
Subject to the rights, if any, of an officer under any contract
of employment, any officer may be removed, either with or
without cause, by an affirmative vote of the majority of the
Board of Directors at any regular or special meeting of the
board or, except in the case of an officer chosen by the Board
of Directors, by any officer upon whom the power of removal is
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to
the Corporation. Any resignation shall take effect at the date
of the receipt of that notice or at any later time specified in
that notice; and, unless otherwise specified in that notice, the
acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights,
if any, of the Corporation under any contract to which the
officer is a party.
6.6
Vacancies In Offices
.
Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors.
6.7
Chief Executive Officer
.
Subject to the control of the Board of Directors and such
supervisory powers, if any, as may be given by the Board of
Directors, the powers and duties of the Chief Executive Officer
of the Corporation are:
(a) To act as the general manager and, subject to the
control of the Board of Directors, to have general supervision,
direction and control of the business and affairs of the
Corporation.
(b) To preside at all meetings of the stockholders and, in
the absence of the Chairman of the Board of Directors or if
there be no Chairman, at all meetings of the Board of Directors.
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(c) To call meetings of the stockholders and meetings of
the Board of Directors to be held at such times and, subject to
the limitations prescribed by law or by these Bylaws, at such
places as he or she shall deem proper.
(d) To affix the signature of the Corporation to all deeds,
conveyances, mortgages, leases, obligations, bonds, certificates
and other papers and instruments in writing which have been
authorized by the Board of Directors or which, in the judgment
of the Chief Executive Officer, should be executed on behalf of
the Corporation; to sign certificates for shares of stock of the
Corporation; and, subject to the direction of the Board of
Directors, to have general charge of the property of the
Corporation and to supervise and control all officers, agents
and employees of the Corporation.
The President shall be the Chief Executive Officer of the
Corporation unless the Board of Directors shall designate the
Chairman of the Board or another officer to be the Chief
Executive Officer. If there is no President, then the Chairman
of the Board shall be the Chief Executive Officer.
6.8
Chairman of the Board
.
The Chairman of the Board of Directors, if there be one, shall
have the power to preside at all meetings of the Board of
Directors and shall have such other powers and shall be subject
to such other duties as the Board of Directors may from time to
time prescribe.
6.9
President
.
Subject to the supervisory powers of the Chief Executive
Officer, if not the President, and to such supervisory powers as
may be given by the Board of Directors to the Chairman of the
Board, if one is elected, or to any other officer, the President
shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall
have such other powers and duties as may be prescribed by the
Board of Directors or these Bylaws.
6.10
President Pro Tem
.
If neither the Chairman of the Board of Directors, the
President, nor any Vice President is present at any meeting of
the Board of Directors, a President pro tem may be chosen by the
directors present at the meeting to preside and act at such
meeting. If neither the President nor any Vice President is
present at any meeting of the stockholders, a President pro tem
may be chosen by the stockholders present at the meeting to
preside at such meeting.
6.11
Vice Presidents
.
The titles, powers and duties of the Vice President or Vice
Presidents, if any, shall be as prescribed by the Board of
Directors. In case of the resignation, disability or death of
the President, the Vice President, or one of the Vice
Presidents, shall exercise all powers and duties of the
President. If there is more than one Vice President, the order
in which the Vice Presidents shall succeed to the powers and
duties of the President shall be as fixed by the Board of
Directors.
6.12
Secretary
.
The powers and duties of the Secretary are:
(a) To keep a book of minutes at the principal executive
office of the corporation, or such other place as the Board of
Directors may order, of all meetings of its directors and
stockholders with the time and place of holding of such meeting,
whether regular or special, and, if special, how authorized, the
notice thereof given, the names of those present at
directors meetings, the number of shares present or
represented at stockholders meetings and the proceedings
thereof.
(b) To keep the seal of the Corporation and to affix the
same to all instruments which may require it.
(c) To keep or cause to be kept at the principal executive
office of the Corporation, or at the office of the transfer
agent or agents, a record of the stockholders of the
Corporation, giving the names and addresses of all
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stockholders and the number and class of shares held by each,
the number and date of certificates issued for shares and the
number and date of cancellation of every certificate surrendered
for cancellation.
(d) To keep a supply of certificates for shares of the
Corporation, to rill in all certificates issued, and to make a
proper record of each such issuance; provided that, so long as
the Corporation shall have one or more duly appointed and acting
transfer agents of the shares, or any class or series of shares,
of the Corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents.
(e) To transfer upon the share books of the Corporation any
and all shares of the Corporation; provided that, so long as the
Corporation shall have one or more duly appointed and acting
transfer agents of the shares, or any class or series of shares,
of the Corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents,
and the method of transfer of each certificate shall be subject
to the reasonable regulations of the transfer agent to whom the
certificate is presented for transfer and, if the Corporation
then has one or more duly appointed and acting registrars,
subject to the reasonable regulations of the registrar to which
a new certificate is presented for registration; and, provided
further, that no certificate for shares of stock shall be issued
or delivered or, if issued or delivered, shall have any validity
whatsoever until and unless it has been signed or authenticated
in the manner provided in Section 9.4 hereof.
(f) To make service and publication of all notices that may
be necessary or proper in connection with meetings of the Board
of Directors of the stockholders of the Corporation. In case of
the absence, disability, refusal or neglect of the Secretary to
make service or publication of any notices, then such notices
may be served
and/or
published by the President or a Vice President, or by any person
thereunto authorized by either of them, or by the Board of
Directors, or by the holders of a majority of the outstanding
shares of the Corporation.
Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
6.13
Chief Financial Officer
.
The powers and duties of the Chief Financial Officer are:
(a) To supervise and control the keeping and maintaining of
adequate and correct accounts of the Corporations
properties and business transactions, including accounts of its
assets, liabilities, receipts, disbursements, gains, losses,
capital, surplus and shares. The books of account shall at all
reasonable times be open to inspection by any director.
(b) To have the custody of all funds, securities, evidences
of indebtedness and other valuable documents of the Corporation
and, at his or her discretion, to cause any or all thereof to be
deposited for the account of the Corporation with such
depository as may be designated from time to time by the Board
of Directors.
(c) To receive or cause to be received, and to give or
cause to be given, receipts and acquaintances for monies paid in
for the account of the Corporation.
(d) To disburse, or cause to be disbursed, all funds of the
Corporation as may be directed by the President or the Board of
Directors, taking proper vouchers for such disbursements.
(e) To render to the President or to the Board of
Directors, whenever either may require, accounts of all
transactions as Chief Financial Officer and of the financial
condition of the Corporation.
Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
6.14
Instruments in Writing
.
All checks, drafts, demands for money, notes and written
contracts of the Corporation shall be signed by such officer or
officers, agent or agents, as the Board of Directors may from
time to time designate. No officer, agent, or employee of the
Corporation shall have the power to bind the Corporation by
contract or otherwise unless authorized to do so by these Bylaws
or by the Board of Directors.
E-12
6.15
Authority And Duties Of Officers
.
In addition to the foregoing authority and duties, all officers
of the Corporation shall respectively have such authority and
perform such duties in the management of the business of the
Corporation as may be designated from time to time by the Board
of Directors or the stockholders.
ARTICLE VII
INDEMNIFICATION
OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
7.1
Indemnification Of Directors And
Officers
.
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify
each person who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or
investigative (a
Proceeding
) by reason of the
fact that such person is or was a director or officer of the
Corporation, or is or was serving at the request of the
Corporation as a director or officer of another foreign or
domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director or officer of a foreign or
domestic corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such
predecessor corporation, against all expenses, including,
without limitation, attorneys fees and any expenses of
establishing a right to indemnification, judgments, fines,
settlements and other amounts actually and reasonably incurred
in connection with such Proceeding, and such indemnification
shall continue as to a person who has ceased to be such a
director or officer, and shall inure to the benefit of the
heirs, executors and administrators of such person; provided,
however, that the Corporation shall indemnify any such person
seeking indemnity in connection with a Proceeding (or part
thereof) initiated by such person only if such Proceeding (or
part thereof) was authorized by the Board of Directors of the
Corporation.
7.2
Indemnification Of Others
.
The corporation shall have the power, to the maximum extent and
in the manner permitted by the General Corporation Law of
Delaware, to indemnify each of its employees and agents (other
than directors and officers) against expenses (including
attorneys fees), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any
Proceeding, arising by reason of the fact that such person is or
was an agent of the Corporation. For purposes of this
Section 7.2, an employee or agent
of the Corporation (other than a director or officer) includes
any person (a) who is or was an employee or agent of the
Corporation, (b) who is or was serving at the request of
the Corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or
(c) who was an employee or agent of a corporation which was
a predecessor corporation of the Corporation or of another
enterprise at the request of such predecessor corporation.
7.3
Payment Of Expenses In Advance
.
The corporation shall pay all expenses incurred by such a
director or officer in defending any Proceeding as they are
incurred in advance of its final disposition; provided, however,
that the payment of such expenses incurred by a director or
officer in advance of the final disposition of a Proceeding
shall be made only upon receipt by the Corporation of an
agreement by or on behalf of such director or officer to repay
such amount if it shall be determined ultimately that such
person is not entitled to be indemnified under this
Article VII or otherwise; and provided further that the
Corporation shall not be required to advance any expenses to a
person against whom the Corporation brings an action, alleging
that such person committed an act or omission not in good faith
or that involved intentional misconduct or a knowing violation
of law, or that was contrary to the best interest of the
Corporation, or derived an improper personal benefit from a
transaction.
7.4
Indemnity Not Exclusive
.
The rights conferred on any person in this Article VII
shall not be deemed exclusive of any other rights that such
person may have or hereafter acquire under any statute, by law,
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
Additionally, nothing in this Article VII shall limit the
ability of the Corporation, in its
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discretion, to indemnify or advance expenses to persons whom the
Corporation is not obligated to indemnify or advance expenses to
pursuant to this Article VII.
7.5
Indemnification
Contracts.
The Board of Directors is authorized to cause the Corporation to
enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request
of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, providing for indemnification rights equivalent to
or, if the Board of Directors so determines, greater than (to
the extent permitted by the certificate of incorporation and the
General Corporation Law of Delaware) those provided for in this
Article VII.
7.6
Insurance
.
The corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and
incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against such liability
under the provisions of the General Corporation Law of Delaware.
7.7
Conflicts
.
No indemnification or advance shall be made under this
Article VII, except where such indemnification or advance
is mandated by law or the order, judgment or decree of any court
of competent jurisdiction, in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the
stockholders or an agreement in effect at the time of the
accrual of the alleged cause of the action asserted in the
proceeding in which the expenses were incurred or other amounts
were paid, which prohibits or otherwise limits
indemnification; or
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
7.8
Effect of Amendment
.
Any amendment, repeal or modification of any provision of this
Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person
pursuant to this Article VII and existing at the time of
such amendment, repeal or modification.
ARTICLE VIII
RECORDS
AND REPORTS
8.1
Maintenance And Inspection Of
Records
.
The corporation shall, either at its principal executive offices
or at such place or places as designated by the Board of
Directors, keep a record of its stockholders listing their names
and addresses and the number and class of shares held by each
stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose
thereof, have the right during the usual hours for business to
inspect for any proper purpose the Corporations stock
ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper
purpose shall mean a purpose reasonably related to such
persons interest as a stockholder. In every instance where
an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a
power of attorney or such other writing that authorizes the
attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at
its registered office in Delaware or at its principal place of
business.
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A complete list of stockholders entitled to vote at any meeting
of stockholders, arranged in alphabetical order for each class
of stock and showing the address of each such stockholder and
the number of shares registered in each such stockholders
name, shall be open to the examination of any such stockholder
for a period of at least ten (10) days prior to the meeting
in the manner provided by law. The stock list shall also be open
to the examination of any stockholder during the whole time of
the meeting as provided by law. This list shall presumptively
determine the identity of the stockholders entitled to vote at
the meeting and the number of shares held by each of them.
8.2
Inspection By Directors
.
Any director shall have the right to examine the
Corporations stock ledger, a list of its stockholders, and
its other books and records for a purpose reasonably related to
his or her position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine
whether a director is entitled to the inspection sought. The
Court may summarily order the Corporation to permit the director
to inspect any and all books and records, the stock ledger, and
the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other
and further relief as the Court may deem just and proper.
ARTICLE IX
GENERAL
MATTERS
9.1
Checks
.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all
checks, drafts, other orders for payment of money, notes or
other evidences of indebtedness that are issued in the name of
or payable to the Corporation, and only the persons so
authorized shall sign or endorse those instruments.
9.2
Execution Of Corporate Contracts And
Instruments
.
The Board of Directors, except as otherwise provided in these
Bylaws, may authorize any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in
the name of and on behalf of the Corporation; such authority may
be general or confined to specific instances. Unless so
authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall
have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it
liable for any purpose or for any amount.
9.3
Business Combinations with Interested
Stockholders
The Corporation shall not be governed by Section 203 (or
its successor) of the General Corporation Law of the State of
Delaware.
9.4
Stock Held By the Corporation
.
Shares in other companies standing in the name of the
Corporation may be voted or represented and all rights incident
thereto may be exercised on behalf of the Corporation by any
officer of the Corporation authorized to do so by resolution of
the Board of Directors.
9.5
Stock Certificates; Partly Paid
Shares
.
The shares of a corporation shall be represented by
certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some
or all of any or all classes or series of its stock shall be
uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is
surrendered to the Corporation. Any or all of the signatures on
the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with
the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
E-15
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the
consideration to be paid therefor. Upon the face or back of each
stock certificate issued to represent any such partly paid
shares, upon the books and records of the Corporation in the
case of uncertificated partly paid shares, the total amount of
the consideration to be paid therefor and the amount paid
thereon shall be stated. Upon the declaration of any dividend on
fully paid shares, the Corporation shall declare a dividend upon
partly paid shares of the same class, but only upon the basis of
the percentage of the consideration actually paid thereon.
9.6
Special Designation On Certificates
.
If the Corporation is authorized to issue more than one class of
stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or
restrictions of such preferences
and/or
rights shall be set forth in full or summarized on the face or
back of the certificate that the Corporation shall issue to
represent such class or series of stock; provided, however,
that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing
requirements there may be set forth on the face or back of the
certificate that the Corporation shall issue to represent such
class or series of stock a statement that the Corporation will
furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or
restrictions of such preferences
and/or
rights.
9.7
Lost Certificates
.
Except as provided in this Section 9.6, no new certificates
for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the Corporation
and cancelled at the same time. The corporation may issue a new
certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may require the
owner of the lost, stolen or destroyed certificate, or the
owners legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new
certificate or uncertificated shares.
9.8
Construction; Definitions
.
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General
Corporation Law shall govern the construction of these Bylaws.
Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the
singular, and the term person includes both a
corporation and a natural person.
9.9
Dividends
.
The directors of the Corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or
(b) the certificate of incorporation, may declare and pay
dividends upon the shares of its capital stock. Dividends may be
paid in cash, in property, or in shares of the
Corporations capital stock.
The directors of the Corporation may set apart out of any of the
funds of the Corporation available for dividends a reserve or
reserves for any proper purpose and may abolish any such
reserve. Such purposes shall include but not be limited to
equalizing dividends, repairing or maintaining any property of
the Corporation, and meeting contingencies.
9.10
Fiscal Year
.
The fiscal year of the Corporation shall be fixed by resolution
of the Board of Directors and may be changed by the Board of
Directors.
9.11
Seal
.
The corporation may adopt a corporate seal, which may be altered
at pleasure, and may use the same by causing it or a facsimile
thereof, to be impressed or affixed or in any other manner
reproduced.
9.12
Transfer Of Stock
.
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty
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of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate, and record the
transaction in its books.
9.13
Stock Transfer Agreements
.
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more
classes of stock of the Corporation to restrict the transfer of
shares of stock of the Corporation of any one or more classes
owned by such stockholders in any manner not prohibited by the
General Corporation Law of Delaware.
9.14
Registered Stockholders
.
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares
to receive dividends and to vote as such owner, shall be
entitled to hold liable for calls and assessments the person
registered on its books as the owner of shares, and shall not be
bound to recognize any equitable or other claim to or interest
in such share or shares on the part of another person, whether
or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
9.15
Facsimile Signature
.
In addition to the provisions for use of facsimile signatures
elsewhere specifically authorized in these Bylaws, facsimile
signatures of any officer or officers of the Corporation may be
used whenever and as authorized by the Board of Directors or a
committee thereof.
ARTICLE X
AMENDMENTS
10.1
By Stockholders
.
Bylaws may be adopted, amended or repealed by the vote or
written consent of holders of a majority of the outstanding
shares entitled to vote. Bylaws specifying or changing a fixed
number of directors or the maximum or minimum number or changing
from a fixed to a variable board or vice versa may be adopted
only by the stockholders.
10.2
By the Board of Directors
.
Subject to the right of stockholders to adopt, amend or repeal
Bylaws, and other than a Bylaw or amendment thereof specifying
or changing a fixed number of directors or the maximum or
minimum number or changing from a fixed to a variable board or
vice versa, these Bylaws may be adopted, amended or repealed by
the Board of Directors. A Bylaw adopted by the stockholders may
restrict or eliminate the power of the Board of Directors to
adopt, amend or repeal Bylaws.
10.3
Certification and Inspection of
Bylaws
.
The corporation shall keep at its principal executive office the
original or a copy of these Bylaws as amended or otherwise
altered to date, which shall be open to inspection by the
stockholders at all reasonable times during office hours.
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CERTIFICATE
OF ADOPTION OF BYLAWS
OF
ECHO
TECHNOLOGY (DELAWARE), INC.
ADOPTION
BY INCORPORATOR
The undersigned person appointed in the certificate of
incorporation to act as the Incorporator of Echo Technology
(Delaware), Inc., a Delaware corporation, hereby adopts the
foregoing bylaws as the Bylaws of the corporation.
Lowell Ness, Incorporator
Executed on February 19, 2008.
CERTIFICATE
BY SECRETARY OF ADOPTION BY INCORPORATOR
The undersigned hereby certifies that the undersigned is the
duly elected, qualified, and acting Secretary of Echo Technology
(Delaware), Inc., a Delaware corporation, and that the foregoing
Bylaws were adopted as the Bylaws of the corporation on
February 19, 2008, by the person appointed in the
certificate of incorporation to act as the Incorporator of the
corporation.
Robert L. Blair, Secretary
Executed on February 19, 2008.
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