SC 14D9 1 d244288dsc14d9.htm SC 14D9 SC 14D9
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14D-9

(Rule 14d-101)

Solicitation/Recommendation Statement

Under Section 14(d)(4) of the Securities Exchange Act of 1934

 

 

SKULLCANDY, INC.

(Name of Subject Company)

 

 

SKULLCANDY, INC.

(Name of Person Filing Statement)

 

 

Common Stock, par value $0.0001 per share

(Title of Class of Securities)

83083J104

(CUSIP Number of Class of Securities)

Patrick Grosso

Vice President, Strategic Initiatives and Corporate Affairs,

Chief Legal Officer and Secretary

Skullcandy, Inc.

1441 West Ute Boulevard, Suite 250

Park City, Utah 84098

(435) 940-1545

(Name, address and telephone number of person authorized to receive notices and communications

on behalf of the persons filing statement)

With copies to:

Cary K. Hyden

David M. Wheeler

Latham & Watkins LLP

650 Town Center Drive, 20th Floor

Costa Mesa, California 92626

(714) 540-1235

 

 

 

¨   Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item 1.

  Subject Company Information      1   

Item 2.

  Identity and Background of Filing Person      1   

Item 3.

  Past Contacts, Transactions, Negotiations and Agreements      4   

Item 4.

  The Solicitation or Recommendation      13   

Item 5.

  Persons/Assets Retained, Employed, Compensated or Used      52   

Item 6.

  Interest in Securities of the Subject Company      53   

Item 7.

  Purposes of the Transaction and Plans or Proposals      53   

Item 8.

  Additional Information      53   

Item 9.

  Exhibits      64   

Annex I

  Opinion of Peter J. Solomon Securities Company, LLC   

Annex II

  Section 262 of the Delaware General Corporation Law   

 

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Item 1. Subject Company Information.

Name and Address.

The name of the subject company is Skullcandy, Inc., a Delaware corporation (the “Company”). The address of the Company’s principal executive office is 1441 West Ute Boulevard, Suite 250, Park City, Utah 84098. The telephone number of the Company’s principal executive office is (435) 940-1545.

Securities.

The title of the class of equity securities to which this Solicitation/Recommendation Statement on Schedule 14D-9 (together with any exhibits attached hereto, this “Schedule 14D-9”) relates is the Company’s common stock, par value $0.0001 per share (the “Common Stock”). As of August 25, 2016, there were 28,800,219 shares of Common Stock outstanding.

 

Item 2. Identity and Background of Filing Person.

Name and Address.

The name, address and telephone number of the Company, which is the person filing this Schedule 14D-9 and the subject company, are set forth in Item 1 above under the heading “Name and Address.”

Tender Offer.

This Schedule 14D-9 relates to the tender offer by MRSL Merger Co., a Delaware corporation (“Purchaser”) and a direct wholly owned subsidiary of MRSK Hold Co., a Delaware corporation (“Parent”), which is a direct wholly owned subsidiary of Mill Road Capital II, L.P., a Delaware limited liability company (“Mill Road”), to purchase any and all of the issued and outstanding shares of Common Stock (the “Company Shares”), other than any Company Shares that are owned immediately prior to the commencement of the Offer (as defined below) by Mill Road or by Parent, Purchaser, the Company or any of their respective wholly owned affiliates, at a purchase price of $6.35 per Company Share (the “Offer Price”), net to the seller thereof in cash, and less any required withholding taxes, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 1, 2016 (as amended or supplemented from time to time, the “Offer to Purchase”), and in the related Letter of Transmittal (which, together with the Offer to Purchase, as each may be amended or supplemented from time to time, constitute the “Offer”). Mill Road, Parent and Purchaser are affiliates of Mill Road Capital Management LLC, a Delaware limited liability company (“MRC”). The Offer is described in a Tender Offer Statement on Schedule TO (as amended or supplemented from time to time, the “Schedule TO”) filed by Mill Road, Parent and Purchaser with the Securities and Exchange Commission (the “SEC”) on September 1, 2016. The Offer to Purchase and a form of the Letter of Transmittal are filed as Exhibits (a)(1) and (a)(2), respectively, hereto and are incorporated herein by reference.

The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of August 23, 2016, by and among Parent, Purchaser and the Company (as it may be amended or supplemented from time to time, the “Merger Agreement”). The Merger Agreement provides that, among other things, subject to the satisfaction or waiver of certain conditions, following completion of the Offer, and in accordance with the General Corporation Law of the State of Delaware, as amended (the “DGCL”), Purchaser will be merged into and with the Company (the “Merger”). Following the consummation of the Merger, the Company will continue as the surviving corporation (the “Surviving Corporation”) as a wholly owned subsidiary of Parent. The Merger will be effected under Section 251(h) of the DGCL, which provides that following consummation of a successful tender offer for a public corporation, and subject to certain statutory provisions, if the acquiror holds at least the amount of shares of each class of stock of the acquired corporation that would otherwise be required to adopt the agreement of merger, and the stockholders that did not tender their shares in the tender offer receive the same consideration for their stock in the merger as was payable in the tender offer, the acquiror can effect a merger without the vote or

 

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written consent of the stockholders of the acquired corporation. Accordingly, if Purchaser consummates the Offer, the Merger Agreement contemplates that the parties will effect the closing of the Merger without a vote of the stockholders of the Company in accordance with Section 251(h) of the DGCL.

The obligation of Purchaser to purchase the Company Shares validly tendered pursuant to the Offer and not validly withdrawn prior to the expiration of the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) that there shall have been validly tendered and not validly withdrawn a number of Company Shares that, when added to the Company Shares then owned by Purchaser, Parent and their respective affiliates, represents at least a majority of all then outstanding Company Shares, (ii) the expiration or termination of the applicable waiting period (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (iii) the absence of any law or order by any government, court or other governmental entity that would make illegal or otherwise prohibit the consummation of the Offer, the acquisition of the Company Shares by Parent or Purchaser or the Merger, (iv) the accuracy of the representations and warranties contained in the Merger Agreement, subject to certain customary exceptions, (v) the Company’s material compliance with covenants contained in the Merger Agreement, (vi) there not having been a material adverse effect with respect to the Company that is continuing as of immediately prior to the termination of the Offer and (vii) certain other customary conditions. The Merger Agreement is not subject to a financing condition.

At the effective time of the Merger (the “Effective Time”), by virtue of the Merger and without any action on the part of the holders of any Company Shares, each outstanding Company Share (excluding any Company Shares (i) owned immediately prior to the Effective Time by Parent, Purchaser or the Company or any wholly owned subsidiary of Parent, Purchaser or the Company or (ii) held by stockholders who have properly and validly perfected their appraisal rights under Delaware law) will be canceled and extinguished and automatically converted into the right to receive an amount in cash equal to the Offer Price, without interest and less any required withholding taxes. In addition, at the Effective Time, each option to purchase Company Shares that remains outstanding immediately prior to the Effective Time (each, a “Company Option”) will be accelerated in full and each Company Option will be canceled and converted into the right to receive an amount in cash, if any, without interest and less any required withholding taxes, equal to the product obtained by multiplying (i) the excess, if any, of (A) the Offer Price minus (B) the exercise price per share of such Company Option and (ii) the number of Company Shares underlying such Company Option. At the Effective Time, each Company restricted stock unit or performance stock unit that remains outstanding immediately prior to the Effective Time (each, a “Company RSU Award”) will be accelerated in full (which, in the case of a Company RSU Award that vests in whole or in part on the basis of achievement of performance goals, shall be determined as if performance were at 100% of targeted performance) and each Company RSU Award will be canceled and converted into the right to receive an amount in cash, if any, without interest and less any required withholding taxes, equal to the product obtained by multiplying (i) the Offer Price and (ii) the number of Company Shares underlying such Company RSU Award immediately prior to the Effective Time.

The Company, until the earlier of consummation of the Offer or the date on which the Merger Agreement is terminated has agreed that the Company and its subsidiaries may not, and will cause its and their respective representatives not to, directly or indirectly, except as otherwise described in the following sentence, (i) initiate, solicit or knowingly facilitate or encourage, including by way of furnishing non-public information, any inquiries or the making of any proposals or inquiry that constitutes, or is reasonably likely to lead to, an acquisition proposal, (ii) other than informing persons of the applicable provisions described in the Merger Agreement, enter into, engage in, continue or otherwise participate in any discussions or negotiations regarding, or provide any non-public information or data relating to, any acquisition proposal, (iii) agree to, approve, endorse, recommend or consummate any acquisition proposal or enter into any letter of intent, contract or other agreement or commitment contemplating or otherwise relating to any acquisition proposal, (iv) grant any waiver, amendment or release under any standstill or similar agreement, the Rights Agreements (as defined in the Merger Agreement) or applicable state anti-takeover laws, or (v) otherwise knowingly facilitate any effort or attempt by any person to make an acquisition proposal. Notwithstanding this limitation, prior to the consummation of the

 

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Offer, the Company may under certain circumstances provide information to third parties that submit a written, unsolicited alternative acquisition proposal that the board of directors of the Company (the “Company Board”) has determined, in good faith, constitutes or is reasonably likely to lead to a Superior Proposal (as defined in the Merger Agreement), and the Company may request clarification on the terms and conditions with respect to any unsolicited alternative acquisition proposal. The Company Board may also terminate the Merger Agreement in order to accept a Superior Proposal and may change its recommendation in the event the Company Board determines, in good faith, after consultation with outside legal counsel and financial advisors, that failure to take such action would be inconsistent with the directors’ fiduciary duties under applicable law, subject to certain restrictions.

The Merger Agreement is summarized in the Offer to Purchase in Section 11 under the heading “Purpose of the Offer and Plans for Skullcandy; Merger Agreement and Other Agreements.” The summary of the Merger Agreement set forth in the Offer to Purchase and any summary of provisions of the Merger Agreement set forth herein do not purport to be complete and each is qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit (e)(1) hereto and is incorporated herein by reference. The expiration date of the Offer is midnight, New York Time, at the end of the day on Thursday, September 29, 2016, subject to extension in certain circumstances set forth in the Merger Agreement and described in the Offer to Purchase.

Mill Road has formed Parent and Purchaser for the purpose of effecting the Offer and the Merger. The Offer to Purchase states that Parent’s and Purchaser’s principal executive offices are located at 382 Greenwich Ave., Suite One, Greenwich, Connecticut 06830, and their telephone numbers are (203) 987-3500.

The Company has made information relating to the Offer available online at http://investors.skullcandy.com. The Company has also filed this Schedule 14D-9 and Mill Road, Parent and Purchaser have filed the Schedule TO with the SEC, and these documents are available free of charge at the website maintained by the SEC at www.sec.gov.

 

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Item 3. Past Contacts, Transactions, Negotiations and Agreements.

Except as described in this Schedule 14D-9 or in the excerpts from the Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 6, 2016 (the “2016 Proxy Statement”), which excerpts are filed as Exhibit (e)(23) to this Schedule 14D-9 and incorporated herein by reference, to the knowledge of the Company as of the date of this Schedule 14D-9, there are no material agreements, arrangements or understandings, nor any actual or potential conflict of interest between the Company or its affiliates, on the one hand, and (i) the Company, its executive officers, directors or affiliates or (ii) Mill Road, Parent, Purchaser or their respective executive officers, directors or affiliates, on the other hand. The excerpts filed as Exhibit (e)(23) to this Schedule 14D-9 are incorporated herein by reference, and include information from the following sections of the 2016 Proxy Statement: “Proposal 1: Election of Directors,” “Governance of Skullcandy,” “Security Ownership of Directors and Executive Officers and Certain Beneficial Owners,” “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation Tables,” “Compensation of Directors” and “Certain Relationships and Related Transactions.” Any information contained in the excerpts from the 2016 Proxy Statement incorporated herein by reference shall be deemed modified or superseded for purposes of this Schedule 14D-9 to the extent that any information contained in this Schedule 14D-9 modifies or supersedes such information.

Arrangements with Purchaser, Parent, Mill Road or their Affiliates

The following is a discussion of all known material agreements, understandings and actual or potential conflicts of interest between the Company and Purchaser, Parent, Mill Road or their affiliates relating to the Offer.

Merger Agreement

The summary of the Merger Agreement and the description of the conditions to the Offer contained in the Offer to Purchase are incorporated herein by reference. Such summary and description and any summary of provisions of the Merger Agreement set forth herein are qualified in their entirety by reference to the Merger Agreement.

The Merger Agreement has been included to provide investors and stockholders with information regarding the terms of the agreement. It is not intended to provide any other factual information about Parent, Purchaser, Mill Road, MRC, the Company, or their respective affiliates. The representations, warranties and covenants contained in the Merger Agreement were made only as of specified dates for the purposes of such agreement, were solely for the benefit of the parties to such agreement and may be subject to qualifications and limitations agreed upon by such parties. In particular, in reviewing the representations, warranties and covenants contained in the Merger Agreement and discussed in the foregoing description, it is important to bear in mind that such representations, warranties and covenants were negotiated with the principal purpose of allocating risk between the parties, rather than establishing matters as facts. Such representations, warranties and covenants may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC, and in some cases were qualified by disclosures set forth in a confidential disclosure letter that was provided by the Company to Parent and Purchaser but is not filed with the SEC as part of the Merger Agreement. Investors and stockholders should not rely on such representations, warranties and covenants as characterizations of the actual state of facts or circumstances described therein without consideration of the entirety of the factual disclosures about the Company, Parent, Purchaser, Mill Road and MRC made in this Schedule 14D-9, the Schedule TO or reports filed with the SEC. Information concerning the subject matter of such representations, warranties and covenants, which do not purport to be accurate as of the date of this Schedule 14D-9, may have changed since the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the parties’ public disclosures.

Sponsor Guarantee

On August 23, 2016, concurrently and in connection with the execution of the Merger Agreement, Mill Road delivered a guarantee for the benefit of Skullcandy, guaranteeing certain payment obligations of Parent and

 

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Purchaser under the Merger Agreement (the “Sponsor Guarantee”). The summary of the Sponsor Guarantee contained in the Offer to Purchase in Section 11 under the heading “Purpose of the Offer and Plans for Skullcandy; Merger Agreement and Other Agreements—Guarantee” is incorporated herein by reference.

Pursuant to the Sponsor Guarantee, as an inducement to the Company to enter into the Merger Agreement, Mill Road agreed to absolutely, unconditionally and irrevocably guarantee (i) the payment obligations of Parent to pay the Equity Commitment (as defined in the Sponsor Guarantee) in accordance with the terms of the Merger Agreement, or (ii) the full and timely payment by Parent and Purchaser of any and all damages incurred by the Company or its stockholders as a result of a breach by Parent or Purchaser of any of their obligations under the Merger Agreement.

Nondisclosure Agreement

On June 29, 2016, the Company and MRC entered into a Confidentiality Letter Agreement (the “Nondisclosure Agreement”), pursuant to which, among other things, MRC agreed, subject to certain exceptions, to keep confidential certain non-public information about the Company in connection with the consideration of a potential business relationship and/or transaction between the parties and to use it only for specified purposes. On July 24, 2016, following the determination that the acquisition proposal submitted to the Company by MRC on July 24, 2016 was reasonably likely to lead to a Superior Proposal (as defined under the terms of the Agreement and Plan of Merger, dated June 23, 2016, by and among the Company, Incipio, LLC (“Incipio”) and Powder Merger Sub, Inc. (the “Original Incipio Merger Agreement”)), the Company and MRC entered into a First Amendment to the Nondisclosure Agreement, which amended provisions in the Nondisclosure Agreement regarding the timing of the return to the Company or destruction of any confidential information provided pursuant to the Nondisclosure Agreement. The summary of the Nondisclosure Agreement contained in the Offer to Purchase in Section 11 under the heading “Purpose of the Offer and Plans for Skullcandy; Merger Agreement and Other Agreements—Nondisclosure Agreement” is incorporated herein by reference.

On June 30, 2016, the Company and MRC entered into the Clean Team Agreement (the “Clean Team Agreement”), under which the Company granted certain permitted representatives of MRC access to proprietary, secret and highly confidential information on financial, management and operational issues related to the Company’s business. Under the terms of the Clean Team Agreement, MRC agreed to use the information only in connection with evaluating, proposing and furthering a potential transaction between MRC and the Company. The summary of the Clean Team Agreement contained in the Offer to Purchase in Section 11 under the heading “Purpose of the Offer and Plans for Skullcandy; Merger Agreement and Other Agreements—Nondisclosure Agreements” is incorporated herein by reference.

Arrangements with Current Executive Officers and Directors of the Company.

The Company’s executive officers and directors may be deemed to have certain interests in the Offer and the Merger and related transactions that may be different from or in addition to those of the Company’s stockholders generally. The Company Board was aware of those interests and considered them, among other matters, in reaching its decision to approve the Merger Agreement and related transactions.

Consideration for Company Shares Tendered Pursuant to the Offer

If the directors and executive officers of the Company who own Company Shares tender their Company Shares for purchase pursuant to the Offer, they will receive the same Offer Price on the same terms and conditions as the other stockholders of the Company. As of August 25, 2016, the directors and executive officers of the Company and their affiliates beneficially owned an aggregate of 1,051,127 Company Shares, which for purposes of this subsection excludes any Company Shares issuable upon exercise or settlement of Company Options and Company RSU Awards (each, as defined below) held by such individuals. If the directors and

 

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executive officers and their affiliates were to tender all of such Company Shares pursuant to the Offer and those Company Shares were accepted for purchase and purchased by Purchaser, the directors and executive officers and their affiliates would receive an aggregate of $6,674,656 in cash, without interest, less any required withholding taxes. For a description of the treatment of Company Options and Company RSU Awards held by the directors and executive officers of the Company, see below under the heading “—Merger Agreement—Effect of the Merger on Stock Awards.”

The following table sets forth, as of August 25, 2016, the cash consideration that each executive officer and director and his or her affiliates would be entitled to receive in respect of outstanding Company Shares beneficially owned by him, her or it (excluding Company Shares underlying unvested Company Options and Company RSU Awards), assuming such individual or his, her or its affiliate were to tender all of his, her or its outstanding Company Shares pursuant to the Offer and those Company Shares were accepted for purchase and purchased by Purchaser.

 

Name

   Number
of Shares
     Consideration
Payable in
Respect of
Shares
 

Executive Officers

     

S. Hoby Darling

     75,251       $ 477,844   

Jason Hodell

     22,717       $ 144,253   

Sam Paschel, Jr.

     49,657       $ 315,322   

David Raffone

     —           —     

Patrick Grosso

     17,682       $ 112,281   

Non-Employee Directors

     

Rick Alden(1)

     658,597       $ 4,182,091   

Jay Brown(2)

     21,684       $ 137,693   

Doug Collier

     31,622       $ 200,800   

Jeff Kearl(3)

     57,160       $ 362,966   

Scott Olivet

     34,957       $ 221,977   

Heidi O’Neill

     21,559       $ 136,900   

Greg Warnock

     60,241       $ 382,530   

 

(1) Excludes shares of Common Stock held by Ptarmagin, LLC (“Ptarmagin”). Ptarmagin’s two members are trusts of which Rick Alden and his children are beneficiaries, but the voting and dispositive power over Ptarmagin’s shares of Common Stock is held by a third-party manager. Based on the information contained in the Schedule 13D/A filed by Ptarmagin and Mr. Alden with the SEC on August 24, 2016, Ptarmagin beneficially owns 3,227,386 shares of Common Stock.
(2) Mr. Brown ceased to be a director of the Company effective as of May 18, 2016.
(3) Represents (i) 43,510 shares of Common Stock held directly by Mr. Kearl and (ii) 13,650 shares of Common Stock held by Monarch Partners. Mr. Kearl is the manager of Monarch Partners and holds voting and dispositive power of the shares held by Monarch Partners. Mr. Kearl may be deemed to indirectly beneficially own the shares held by Monarch Partners. The address of Monarch Partners is 38 Via Divertirse, San Clemente, California 92673.

Merger Agreement

Effect of the Merger on Stock Awards

Stock Options

Pursuant to the Merger Agreement, effective as of immediately prior to the Effective Time, each Company Option will be accelerated in full and each Company Option will be canceled and converted into the right to receive an amount in cash, if any, without interest and less any required withholding taxes, equal to the product

 

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obtained by multiplying (i) the excess, if any, of (A) the Offer Price minus (B) the exercise price per share of such Company Option, and (ii) the number of Company Shares underlying such Company Option.

The table below sets forth information regarding the Company Options held by each of the Company’s executive officers and directors as of August 25, 2016.

 

     Number
of Vested
Company
Options
     Value of
Vested
Company
Options
     Number
of
Unvested
Company
Options
     Value of
Unvested
Company
Options
     Total
Value of
Vested
and
Unvested
Company
Options
 

Executive Officers

              

S. Hoby Darling

     517,687       $ 543,396         368,632       $ 440,435       $ 983,831   

Jason Hodell

     79,895         —           317,116       $ 317,321       $ 311,161   

Sam Paschel, Jr.

     94,022       $ 44,943         195,683       $ 248,353       $ 293,296   

David Raffone

     26,059         —           93,005       $ 116,685       $ 116,685   

Patrick Grosso

     33,369       $ 13,482         93,294       $ 121,179       $ 134,661   

Non-Employee Directors

              

Rick Alden

     28,000         —           —           —           —     

Jay Brown(1)

     —           —           —           —           —     

Doug Collier

     28,000         —           —           —           —     

Jeff Kearl

     57,378       $ 175,680         —           —         $ 175,680   

Scott Olivet

     28,000         —           —           —           —     

Heidi O’Neill

     —           —           —           —           —     

Greg Warnock

     28,000         —           —           —           —     

 

(1) Mr. Brown ceased to be a director of the Company effective as of May 18, 2016.

Restricted Stock Units

Pursuant to the Merger Agreement, effective as of immediately prior to the Effective Time, each Company RSU Award will be accelerated in full (which, in the case of a Company RSU Award that vests in whole or in part on the basis of achievement of performance goals, shall be determined as if performance were at 100% of targeted performance) and each Company RSU Award will be canceled and converted into the right to receive an amount in cash, if any, without interest and less any required withholding taxes, equal to the product obtained by multiplying (i) the Offer Price, and (ii) the number of Company Shares underlying such Company RSU Award immediately prior to the Effective Time.

 

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The table below sets forth information regarding the Company RSU Awards held by each of the Company’s executive officers and directors as of August 25, 2016 (and, with respect to Company RSU Awards that vest in whole or in part on the basis of achievement of performance goals, the number of Company RSUs that would vest at 100% of targeted performance is reflected).

 

Name

   Number of
Company
RSUs Held
     Value of
Company
RSUs
 

Executive Officers

     

S. Hoby Darling

     98,953       $ 628,352   

Jason Hodell

     151,518       $ 962,139   

Sam Paschel, Jr.

     36,694       $ 233,007   

David Raffone

     57,644       $ 366,039   

Patrick Grosso

     14,649       $ 93,021   

Non-Employee Directors

     

Rick Alden

     22,727       $ 144,316   

Jay Brown(1)

     —           —     

Doug Collier

     22,727       $ 144,316   

Jeff Kearl

     22,727       $ 144,316   

Scott Olivet

     29,829       $ 189,414   

Heidi O’Neill

     29,119       $ 184,906   

Greg Warnock

     30,113       $ 191,218   

 

(1) Mr. Brown ceased to be a director of the Company effective as of May 18, 2016.

Continuing Employees

The Merger Agreement provides that for a period of 12 months following the Effective Time, each employee of the Company and any of its subsidiaries who, as of the Closing, continues to be employed with the Company or any of its subsidiaries (each, a “Continuing Employee”), will receive (i) a base salary or wage rate, as applicable, and annual bonus opportunity, in each case, that is not less favorable than the base salary or wage rate (as applicable) and annual bonus opportunity that were provided to such Continuing Employee immediately prior to the Effective Time and (ii) other compensation and benefits (including severance, benefits and the cash value of any equity-based compensation) but excluding any equity-based compensation (other than the cash value of any equity-based compensation) and benefits provided pursuant to any defined benefit pension plans, that are, taken as a whole, at least as favorable in the aggregate as the other compensation and benefits provided to such Continuing Employee immediately prior to the Effective Time. The Merger Agreement further provides that from and after the Closing, Parent will provide, or will cause the Surviving Corporation or any of their subsidiaries to provide, each Continuing Employee with full credit for all service with the Company and its subsidiaries prior to the Effective Time for all purposes, including eligibility to participate, vesting and entitlement to benefits where length of service is relevant, under any employee benefit plans, arrangements, collective agreements and employment-related entitlements (including under any applicable pension, 401(k), savings, medical, dental, life insurance, vacation, long-service leave or other leave entitlements, post-retirement health and life insurance, termination indemnity, severance or separation pay plans) provided, sponsored, maintained or contributed to by Parent or any of its subsidiaries to the same extent recognized by the Company or any of its subsidiaries under the Plans (as defined in the Merger Agreement). Service need not be credited to the extent that (i) it would result in duplication of coverage or benefits, (ii) it was not recognized under the corresponding Plan (as defined in the Merger Agreement) or (iii) to the extent it is prohibited by applicable law.

The Merger Agreement further provides that Parent will ensure or will cause the Surviving Corporation and its subsidiaries to ensure that (i) each Continuing Employee is immediately eligible to participate, without any waiting time, in any and all employee benefit plans sponsored by Parent, the Surviving Corporation and its subsidiaries in which the Continuing Employees participate to the extent coverage under any such plan replaces

 

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coverage under a comparable Plan (as defined in the Merger Agreement) in which such Continuing Employee participates immediately before the Effective Time, (ii) for purposes of each plan providing medical, dental, pharmaceutical, vision and/or disability benefits to any Continuing Employee, (A) cause all waiting periods, pre-existing condition exclusions, evidence of insurability requirements and actively-at-work or similar requirements of such plan to be waived for such Continuing Employee and his or her covered dependents, and (B) provide full credit for any eligible expenses incurred by such Continuing Employee and his or her covered dependents during any unfinished portion of the plan year ending on the date such employee’s participation in the corresponding new plan begins for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements applicable to such Continuing Employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such new plan, and (iii) credit the accounts of such Continuing Employees under any new plan that is a flexible spending plan with any unused balance in the account of such Continuing Employee under the applicable plan; provided, however, that such service need not be credited to the extent that it would result in duplication of coverage or benefits or to the extent it is prohibited by applicable law.

Other Compensatory Arrangements with Executive Officers and Directors

On June 23, 2016, the Company entered into amended and restated employment agreements (the “Amended and Restated Employment Agreements”) with each of the Company’s executive officers. The Amended and Restated Employment Agreements supersede the named executive officers’ previous employment agreements.

S. Hoby Darling

Mr. Darling’s Amended and Restated Employment Agreement provides that Mr. Darling will serve as the Company’s CEO and that the Company will nominate him to serve as a director. Mr. Darling’s annual base salary is set at a minimum of $450,000 and he is eligible to participate in the Company’s annual bonus program, with a target bonus opportunity of 100% of his base salary and a maximum bonus opportunity of 150% of his base salary. Mr. Darling is eligible to participate in the Company’s 401(k) plan, health plans and other benefits on the same terms as all other Company employees.

Other Currently Serving Executive Officers

The Amended and Restated Employment Agreements provide minimum base salaries of $309,200 (in the case of Messrs. Hodell and Paschel) and $242,300 (in the case of Messrs. Raffone and Grosso), a target bonus opportunity of 50% of base salary and a maximum bonus opportunity of 100% of base salary. Each of Messrs. Hodell, Paschel, Raffone and Grosso is eligible to receive a discretionary annual equity award with an aggregate target Black-Scholes value equal to $400,000 (for Mr. Hodell), $300,000 (for Mr. Paschel) or $150,000 (for Messrs. Raffone and Grosso). These executive officers are also eligible to participate in the Company’s 401(k) plan, health plans and other benefits on the same terms as all other Company employees.

Potential Payments Upon Termination, Including in Connection with a Change in Control

The Amended and Restated Employment Agreements provide that in the event of (i) a termination of employment by the Company without cause (as defined in the Amended and Restated Employment Agreements), (ii) a termination by the executive for good reason (as defined in the Amended and Restated Employment Agreements) or (iii) death or disability, the executive will be entitled to:

 

    a cash lump sum payment equal to executive’s then-current annual base salary (for Mr. Darling) or six months of annual base salary (for Messrs. Hodell, Paschel, Raffone and Grosso), which payment will be made on the 60th day following the date of termination;

 

    a cash lump sum payment equal to the executive’s annual target bonus for the year in which the termination occurs, which payment will be made on the 60th day following the date of termination;

 

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    payment of health insurance premiums for COBRA coverage for a period of up to 18 months; and

 

    accelerated vesting of all outstanding equity awards, except for Mr. Grosso’s August 6, 2013 equity award grant.

If the Company terminates the executive’s employment without cause or the executive terminates his employment for good reason, in either case, on or within 18 months following a change in control, executive will be entitled to:

 

    a cash lump sum payment equal to the sum of the executive’s then-current annual base salary for the year in which the termination occurs, multiplied by 2.5 (for Mr. Darling), 2.0 (for Messrs. Hodell and Grosso) or 1.5 (for Messrs. Raffone and Paschel), which payment will be made on the 60th day following the date of termination;

 

    a cash lump sum payment equal to the executive’s annual target bonus for the year in which the termination occurs, multiplied by 2.5 (for Mr. Darling), 2.0 (for Messrs. Hodell and Grosso) or 1.5 (for Messrs. Raffone and Paschel), which payment will be made on the 60th day following the date of termination;

 

    a pro-rata portion of the executive’s annual bonus based on the executive’s service during the year of termination, which payment will be made on the date on which annual bonuses are paid to the Company’s senior executives generally for the applicable year;

 

    payment of health insurance premiums for continued healthcare coverage for a period of up to 30 months (for Mr. Darling), 24 months (for Messrs. Hodell and Grosso) or 18 months (for Messrs. Raffone and Paschel);

 

    accelerated vesting of all outstanding equity awards; and

 

    reimbursement of up to $25,000 for outplacement services.

The Amended and Restated Employment Agreements do not provide for any type of tax “gross up” or similar reimbursement obligation by the Company in respect of “golden parachute” or any other taxes to which any of the executive officers may become subject. The Amended and Restated Employment Agreements contain confidentiality provisions and require the timely execution and non-revocation of a release of claims against the Company in exchange for severance benefits.

Definitions

The following terms have the following meanings under the Amended and Restated Employment Agreements:

“Good reason” means the occurrence of any one or more of the following events without the executive’s prior written consent, unless the Company fully corrects the circumstances constituting good reason:

 

    a material diminution in the executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities, excluding for this purpose any isolated, insubstantial or inadvertent actions not taken in bad faith and which are remedied by the Company promptly after receipt of notice thereof given by the executive;

 

    the Company’s material reduction of the executive’s base salary, as the same may be increased from time to time;

 

    a material change in the geographic location of the Company’s principal office which shall, in any event, include only a relocation of the principal office by more than 50 miles from its existing location; or

 

    the Company’s material breach of the Amended and Restated Employment Agreements.

 

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In addition, Mr. Grosso’s agreement provides that “good reason” includes if Mr. Darling ceases to serve as the Company’s CEO, which was negotiated at the time of his hiring and to induce him to relocate given the Company’s turnaround circumstances. The Amended and Restated Employment Agreements for Messrs. Darling, Hodell and Grosso also clarify that the executive ceasing to serve in his current position in a public company following the occurrence of a “change in control” will be deemed to constitute “good reason.”

“Cause” generally means the occurrence of any one or more of the following events unless cured:

 

    willful and continued failure by the executive to substantially perform his reasonably assigned duties with the Company;

 

    engaging in illegal conduct which is materially and demonstrably injurious to the Company;

 

    engaging in fraudulent conduct, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction;

 

    conviction of a felony, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction;

 

    gross negligence in the performance of the executive’s duties or responsibilities; or

 

    significant violation of the Company’s material, written policies and procedures.

The foregoing descriptions of the Amended and Restated Employment Agreements do not purport to be complete and are qualified in their entirety by reference to such agreements, including any forms or amendments thereto, filed as Exhibits (e)(17) through (e)(21) to this Schedule 14D-9 and are incorporated herein by reference.

Please also see the description of certain severance payments and benefits below in Item 8 under the heading “Additional Information—Named Executive Officer Golden Parachute Compensation.”

Director and Officer Indemnification and Insurance

Section 102(b)(7) of the DGCL allows a corporation, by a provision of its certificate of incorporation, to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of the DGCL, or engaged in a transaction from which the director derived an improper personal benefit. The Company has included in its Amended and Restated Certificate of Incorporation (the “Charter”) a provision to limit or eliminate the personal liability of its directors to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended.

Section 145 of the DGCL provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities with other entities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in (i) any criminal proceeding, if such person had no reasonable cause to believe his or her conduct was unlawful or (ii) any action or suit by or in the right of the Company, only for expenses incurred and, unless otherwise provided by an appropriate court, only as to claims, issues or matters as to which such person is not ultimately adjudged to be liable to the Company. The Company has included in the Charter and its bylaws (the “Bylaws”) provisions that require the Company to provide the foregoing indemnification to current and former directors and officers to the fullest extent permitted by the DGCL, as it presently exists or may in the future be amended, and to the extent authorized by the Charter and the Bylaws. The Company has also included in the Bylaws a provision that permits the Company, at the discretion of the Company Board, to provide the foregoing indemnification to non-officer employees to the fullest extent permitted by the DGCL, as it presently exists or may in the future be amended. In addition, pursuant to the Charter and the Bylaws, the Company is

 

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required to advance expenses incurred by any director or officer in connection with any such proceeding upon receipt of a written request and an undertaking by such director or officer to repay the amount so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Company for such expenses.

Pursuant to authorization by the Company Board, the Company has entered into indemnification agreements (the “Indemnification Agreements”) with each of its directors and certain of its officers that provide greater protection than that which is provided by the Charter and the Bylaws. The Indemnification Agreements provide, among other things, that the Company will indemnify the director or officer (the “Indemnitee”) to the fullest extent permitted by law (subject to certain exceptions and exclusions) if the Indemnitee is or was a party to or is threatened to be made a party to any proceeding by reason of the fact that Indemnitee is or was a director, officer, or employee of the Company or a subsidiary of the Company or other person authorized by the Company to act for the Company, including persons serving in such capacity as a director, officer, employee, fiduciary or other official of another corporation, partnership, joint venture, trust or other enterprise at the request of, for the convenience of, or to represent the interest of the Company or a subsidiary of the Company, in each case whether or not such proceeding is an action by or in the right of the Company, against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnitee if the Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation.

In addition, and subject to certain limitations, the Indemnification Agreements provide for the advancement of expenses incurred by an Indemnitee in connection with any proceeding, and reimbursement to the Company of the amounts advanced to the extent that it is ultimately determined that the Indemnitee is not entitled to be indemnified by the Company. The Indemnification Agreements do not exclude any other rights to indemnification or advancement of expenses to which the Indemnitee may be entitled pursuant to the Charter or Bylaws.

The foregoing summary of the Indemnification Agreements is qualified in its entirety by reference to the Indemnification Agreements, the form of which is filed as Exhibit (e)(6) hereto and is incorporated herein by reference.

The Merger Agreement provides for certain exculpation, indemnification, expense advancement and insurance rights in favor of the Company’s current and former directors or officers (the “indemnified persons”). Specifically, all rights to exculpation, indemnification, advance and reimbursement of expenses provided to the indemnified persons, under the Company’s Charter, Bylaws or indemnification agreements, with respect to acts or omissions arising directly or indirectly from such indemnified person’s capacity as a director, officer, employee or agent of the Company or any of its subsidiaries or other affiliates (regardless of whether such action or omission, or alleged action or omission, occurred prior to or at the Effective Time), or any of the transactions contemplated by the Merger Agreement, will continue in full force and effect for six years following the Effective Time. In addition, during the period commencing at the Effective Time and ending on the sixth anniversary of the Effective Time, the Surviving Corporation and its subsidiaries as of the Effective Time shall (and Parent shall cause the Surviving Corporation and its subsidiaries as of the Effective Time to) cause the certificates of incorporation and bylaws (and other similar organizational documents) of the Surviving Corporation and its subsidiaries, as of the initial acceptance by Purchaser of Company Shares pursuant to the Offer, to contain provisions with respect to indemnification, exculpation and the advancement of expenses that are no less favorable than the indemnification, exculpation and advancement of expenses provisions contained in the certificates of incorporation and bylaws (or other similar organizational documents) of the Company and its subsidiaries as of the date hereof, and during such six-year period, such provisions shall not be repealed, amended or otherwise modified in any manner except as required by applicable law or as otherwise provided in the Merger Agreement.

For a period commencing at the Effective Time and ending on the sixth anniversary of the Effective Time, the Surviving Corporation will (and Parent will cause the Surviving Corporation to) maintain directors’ and

 

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officers’ liability insurance with respect to acts or omissions occurring at or prior to the Effective Time covering each person covered by the Company’s existing directors’ and officers’ liability insurance, on terms with respect to coverage and amounts that are no less favorable than those of the policy currently maintained by the Company. However, Parent and the Surviving Corporation are not required after the Effective Time to pay annual premiums in excess of 300% of the last annual premium for the Company’s existing policies, but in such case will purchase as much coverage as may be purchased for such amount.

The Company is permitted to purchase, prior to the Effective Time, a six-year prepaid “tail” policy on its current directors’ and officers’ liability insurance. If such a “tail” policy is obtained, the Surviving Corporation will maintain the “tail” policy in full force and effect and continue to honor its obligations thereunder, and will have no further obligations with respect to directors’ and officers’ liability insurance for so long as such “tail” policy is maintained in full force and effect.

If, following the Effective Time, Parent or the Surviving Corporation merges into or consolidates with another entity and is not the surviving corporation or sells substantially all its assets, provision will be made so that the successors or assigns of Parent or the Surviving Corporation assume the insurance and indemnification obligations described above.

 

Item 4. The Solicitation or Recommendation.

Recommendation of the Company Board.

At a meeting of the Company Board held on August 23, 2016, the Company Board (i) determined that the Offer and the Merger are in the best interests of the Company and its stockholders, (ii) approved and declared advisable the Merger Agreement and approved the Offer, the Merger, the other transactions contemplated by the Merger Agreement and all other actions or matters necessary or appropriate to give effect to the foregoing and (iii) resolved to recommend that the Company’s stockholders accept the Offer and tender all of their Company Shares pursuant to the Offer.

Accordingly, and for the other reasons described in more detail below, the Company Board hereby recommends that the Company’s stockholders accept the Offer and tender all of their Company Shares pursuant to the Offer.

A copy of the letter to the Company’s stockholders communicating the Company Board’s recommendation is filed as Exhibit (a)(9) to this Schedule 14D-9 and is incorporated herein by reference. A copy of the joint press release issued by MRC and the Company on August 24, 2016, announcing the Merger Agreement, the Offer and the Merger, is filed as Exhibit (a)(7) to this Schedule 14D-9 and is incorporated herein by reference.

Background and Reasons for the Company Board’s Recommendation.

Background of the Offer

The Company Board and management have continually evaluated the Company’s business and financial plans and prospects. As part of this evaluation, the Company Board has periodically considered various strategic alternatives in an effort to enhance value to the Company’s stockholders. To that end, over the last few years, the Company Board has worked with the Company’s financial advisor, Peter J. Solomon Securities Company, LLC (“PJSC”), to assess potential strategic alternatives available to the Company, including at times exploring a potential sale of the Company, to enhance value to the Company’s stockholders, including having discussions and exchanging information with several third parties from time to time.

On February 10, 2016, as part of the Company Board’s evaluation of its performance and its ongoing process to consider potential strategic alternatives, the Company Board met in person and by telephone with

 

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PJSC, management, and its legal advisor, Latham & Watkins LLP (“Latham”). Prior to engaging in discussions regarding the Company’s potential exploration of strategic alternatives, the Company Board provided the members of the Company Board the opportunity to recuse themselves if they were potentially interested in participating as a bidder in any strategic alternatives being explored by the Company. Rick Alden, a Company Board member and founder of the Company, expressed his interest in potentially participating as a bidder in a strategic transaction involving the Company. Mr. Alden then recused himself from the meeting, and acknowledged that he would no longer receive any materials or be involved in the discussions of the Company Board related to the evaluation and consideration of potential strategic alternatives. No other Company Board members expressed any interest in potentially participating as a bidder in the Company’s exploration of potential strategic alternatives at that time.

After Mr. Alden’s recusal, representatives of PJSC presented, at the request of the Company Board, results of PJSC’s preliminary financial analysis of the Company’s historical and potential future operating performance and plans, as prepared by management, and various potential strategic alternatives available to the Company. The presentation included a preliminary financial analysis of forecasts for continuing operations as an independent company, as prepared by management, including uncertainties around the Company’s outlook and the retail markets in general. The presentation also included a preliminary financial analysis of other potential strategic alternatives, including opportunities to further reduce costs, restructure the business, or sell some or all of the Company. Following PJSC’s presentation, the Company Board began a detailed discussion of potential strategic alternatives with management and representatives of PJSC and Latham. As part of that discussion, the Company Board, management and its representatives discussed the merits of exploring potential strategic alternatives, possible procedures and whether the Company should conduct a broad or more targeted outreach to third parties in connection with the exploration of a potential strategic transaction. As part of its discussion, the Company Board discussed the advantages of conducting a broad outreach process, including, among others, the potential to assist the Company Board to obtain a potentially higher value transaction and negotiate more favorable terms if the Company chose to engage in a strategic transaction. The Company Board also considered the material disadvantages of conducting a broad outreach process to explore a strategic transaction as compared to a more targeted outreach process, including, among others, increased risk of leaks that could harm the competitive position of the Company, potential to turn away potential bidders, additional work force disruption that could negatively impact sales and progress on other key operating performance metrics and delay the ultimate timing of, and thereby increase the execution risks of, a potential strategic transaction. The Company Board also concluded that, based on the advice of PJSC and the Company Board’s prior experiences with third parties approaching the Company related to exploring potential strategic alternatives, they could compile a targeted list of select parties likely to have both the interest and ability to move on a timely basis to evaluate and potentially enter into a strategic transaction with the Company for a price that should result in a better outcome for the Company’s stockholders than remaining an independent company, while minimizing the disadvantages of exploring a potential strategic transaction by going to a broad group of potential bidders and maintaining the option to broaden the list of potential bidders later in the process. At the conclusion of the discussion, the Company Board determined that a more targeted outreach involving multiple strategically selected potential bidders would be in the best interests of the Company and its stockholders in connection with the Company’s exploration of a potential strategic transaction. The Company Board discussed with management and representatives of PJSC a list of potential parties to be contacted as part of the initial outreach. After further discussions, the Company Board authorized and directed PJSC and management to contact four potential strategic parties and three private equity firms, which included Mr. Alden, Party A, Party B, Party C, Party D, Party F and Party G (the “Initial Bidders”), to gauge interest in exploring a potential strategic transaction with the Company after the Company announced its earnings for the fourth quarter and fiscal year of 2015. The Company Board also assessed other potential strategic parties and private equity firms that management and PJSC could consider contacting if the Company Board decided to expand its outreach beyond the Initial Bidders.

Commencing later that day, at the request and direction of the Company Board, representatives of PJSC and management contacted each of the Initial Bidders to gauge interest in a potential strategic transaction with the Company. Representatives of PJSC and management indicated to each Initial Bidder that the Company would

 

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generally be available for in-person meetings and discussions starting in early March 2016, after its year-end earnings announcement. On February 10, 2016, the closing price of the Company’s Common Stock was $3.20 per share.

On February 10, 2016, S. Hoby Darling, the Company’s Chief Executive Officer, contacted Mr. Alden by telephone to discuss Mr. Alden’s potential interest in exploring a potential strategic transaction with the Company. Mr. Alden confirmed his interest in doing so.

Also on February 10, 2016, Mr. Darling contacted Party A, a private equity firm, by telephone to discuss its potential interest in exploring a potential strategic transaction with the Company. Party A also expressed interest in exploring further a potential strategic transaction involving the Company.

On February 11, 2016, Mr. Darling contacted Party B, a strategic party, to discuss its potential interest in exploring a potential strategic transaction involving the Company, and Party B expressed interest in meeting with management to further discuss such a potential strategic transaction involving the Company. On that same day, following initial contact from Mr. Darling, Party C, a strategic party, and Party D, a private equity firm, each also expressed interest in further exploring a potential strategic transaction involving the Company.

In February, management also received an unsolicited expression of interest from representatives of Party E, a private equity firm, regarding a potential strategic transaction involving the Company. At the direction of the Company Board, representatives of PJSC informed Party E that the Company had already begun exploring a potential strategic transaction with other parties, and invited Party E to participate in further discussions with the Company regarding Party E’s interest. Representatives of Party E confirmed that they would be interested in further exploring a potential strategic transaction involving the Company.

On February 16, 2016, Andy Fathollahi, the Chief Executive Officer of Incipio, LLC (“Incipio”), informally met with Mr. Darling in Park City, Utah after an introduction by a mutual business acquaintance and engaged in informal discussions about their respective businesses, but did not discuss the Company’s exploration of potential strategic alternatives.

On February 19, 2016, at the direction of the Company Board, representatives of PJSC contacted Party F, a private equity firm, which also expressed interest in participating in the Company’s process for exploring potential strategic transaction involving the Company.

On March 2, 2016, the Company announced its earnings for the fourth quarter and fiscal year of 2015. On that same day, the closing price of the Company’s Common Stock was $3.58 per share.

On March 3, 2016, representatives of PJSC sent a form of nondisclosure and standstill agreement to each of the potentially interested parties (other than Party A, which had previously entered into a nondisclosure and standstill agreement with the Company in connection with previous discussions with the Company). The standstill provisions in the form agreement prohibited the parties from making unsolicited offers to purchase the Company, in order to allow the Company and its advisors to control its exploration of the potential strategic transaction and potentially maximize the initial offers made by the interested parties (which standstills would terminate if the Company engaged in certain strategic transactions). Beginning on March 3, 2016, each of Parties B through F began negotiating the form of nondisclosure and standstill agreement with the Company. In early March 2016, the Company also began preparing and populating a virtual data room, in preparation to share additional confidential information about the Company with the potential bidders that signed a nondisclosure agreement.

On March 14, 2016, Party D entered into a nondisclosure agreement with the Company, which contained standstill provisions substantially identical to those of the other potentially interested parties.

Beginning mid-March 2016, representatives of PJSC began distributing copies of a confidential presentation about the Company to each of the interested parties once such party signed a nondisclosure agreement. From that

 

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same period and through May 9, 2016, the Company’s management and its advisors held in-person meetings and follow-up conversations by telephone with the interested parties to facilitate their due diligence efforts and address any questions the parties may have regarding the Company. PJSC and the Company also began providing to the interested parties that signed nondisclosure agreements certain non-public information requested by them to help them better evaluate the Company in connection with a potential strategic transaction.

On March 16, 2016, Mr. Darling and Doug Collier, Chairman of the Company Board, received from Incipio an unsolicited, written nonbinding indication of interest to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a price per share of $5.50. Incipio indicated that it could not finance its offer without external capital, but that its existing capital providers indicated their support of the transaction, and Incipio would not require a financing contingency. Incipio requested exclusivity through June 30, 2016. Mr. Darling informed Mr. Fathollahi that the Company was in the early stages of exploring a potential strategic transaction, and invited Incipio to participate in further discussions related thereto. Mr. Fathollahi confirmed that Incipio would be interested in participating in exploring such a potential strategic transaction, and representatives of PJSC sent to Incipio a draft of the form of nondisclosure and standstill agreement.

On March 16, 2016, the closing price of the Company’s Common Stock was $3.96 per share.

On March 17, 2016, March 30, 2016 and March 31, 2016, each of Party C, Party E and Party F entered into a nondisclosure agreement with the Company, respectively, each of which contained standstill provisions substantially identical to those of the other interested parties.

On March 31, 2016, the Company also approached Party G, a strategic party, to determine whether Party G would be interested in exploring a strategic transaction with the Company. Party G responded that same day that it would review the potential opportunity internally, and would respond to the Company once it was able to evaluate.

That same day, Party B informed Mr. Darling that Party B was primarily interested in the Company’s Astro Gaming product lines, and suggested that it might be interested in acquiring that part of the Company’s business exclusively, or partnering with other parties to bid on the entire Company.

On April 4, 2016, Mr. Alden indicated to representatives of PJSC that he did not intend to enter into a nondisclosure agreement or standstill agreement at this time. PJSC communicated to Mr. Alden and his advisors that his refusal to enter into a nondisclosure agreement would prevent the Company from sharing with him or his advisors non-public information about the Company, which would be provided to the other potential bidders that signed nondisclosure agreements, which may disadvantage Mr. Alden relative to other potential bidders, notwithstanding his historical access to Company information as a member of the Company Board.

In early April 2016, at the direction of the Company, representatives of PJSC sent a bid procedures letter to each of the potential bidders that had expressed interest in exploring further a potential strategic transaction involving the Company. The letter requested the submission of nonbinding indications of interest by May 10, 2016. The Company also authorized Latham to begin preparing a draft of a merger agreement to provide to each of the potential bidders.

Also in early April 2016, representatives of MRC contacted ICR, LLC, the Company’s investor relations firm (“ICR”), to request a meeting with the Company’s management, without specifying the purpose of that meeting. A representative of ICR informed MRC that the Company was then in a “quiet period,” and its management was unable to meet with MRC at that time.

On April 6, 2016 and April 18, 2016, respectively, Incipio and Party B entered into a nondisclosure agreement with the Company, each of which contained standstill provisions substantially identical to those of the other parties then party to a nondisclosure agreement with the Company.

 

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On April 8, 2016, Jeff Kearl, a member of the Company Board, inquired about potentially participating in a potential bid with Mr. Alden in connection with the Company’s potential strategic transaction. Based on his inquiry, Mr. Kearl informed the Company Board that he would recuse himself from future Company Board meetings in connection with the Company’s exploration of a strategic transaction.

Between April 8, 2016 and April 19, 2016, Mr. Collier, management and representatives of Latham and PJSC held numerous discussions regarding Mr. Kearl’s potential participation in the Company’s exploration of a potential strategic transaction.

On April 19, 2016, the Company Board, other than Mr. Alden and Mr. Kearl, who continued to recuse themselves, met with management and representatives of PJSC and Latham to discuss Mr. Kearl’s potential involvement as a potential bidder in the Company’s exploration of a potential strategic transaction, including the procedures the Company Board should take to ensure independence, impartiality in the process, and increased competitiveness in potential price and process. The Company Board determined that Mr. Kearl could consider participating in a potential bid with Mr. Alden in connection with the Company’s exploration of a potential strategic transaction, subject to certain conditions communicated to Mr. Kearl to help ensure a fair and transparent process for all potential bidders, including recusal from all related Company Board communications and signing a nondisclosure agreement before sharing any further nonpublic information.

On April 21, 2016, Party E informed representatives of PJSC that it would only be interested in acquiring the Company’s low-price product lines, and would not be interested in submitting an indication of interest in connection with the potential strategic transaction involving the Company as a whole. Similarly, on April 22, 2016, Party G communicated to the Company that it was not interested in submitting an indication of interest in connection with the potential strategic transaction involving the Company.

On April 25, 2016, Greg Warnock, a member of the Company Board, informed the Company that he had been approached by Mr. Alden to participate in a potential bid with Mr. Alden in connection with the Company’s potential strategic transaction. Mr. Warnock was uncertain as to whether he would be interested in participating, but he informed the Company Board that he would recuse himself from future Company Board meetings in connection with the Company’s exploration of a strategic transaction.

On April 30, 2016, the virtual data room was made available to all potential bidders that remained involved in the exploration of a potential strategic transaction involving the Company and had signed a nondisclosure agreement to provide them confidential information about the Company and allow them to conduct further due diligence.

Later that day, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC, Latham and Richards, Layton & Finger, P.A., Delaware legal advisor to the Company (“Richards Layton”), to discuss the potential participation of Mr. Kearl and Mr. Warnock with Mr. Alden. The Company Board discussed with its representatives the strategic transaction process to date, including the potential participation of Messrs. Alden, Kearl and Warnock as potential bidders. In response to these discussions and on the advice of legal counsel, the Company Board established a special committee consisting of three independent members of the Company Board designated as the Strategic Transactions Committee (the “Strategic Transactions Committee”) to review any proposals received by the Company, manage the potential strategic process for the Company Board, and report to the independent members of the Company Board on the results of its deliberations. The Strategic Transactions Committee consisted of Mr. Collier, as Chairman, Heidi O’Neill and Scott Olivet, who were selected on the basis of their independence from the potential strategic process, finance and investment backgrounds and their relative availability to assume additional and potentially time-consuming responsibilities on behalf of the Company Board. The Company Board then discussed with Richards Layton and Latham the fiduciary duties of the members of the Company Board and the Strategic Transactions Committee, and the potential concerns related to the participation of another Company Board member in the potential strategic process, including the information about the process received by the Company Board members to date, the

 

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ability to maintain the impartiality of the Strategic Transactions Committee and the potential strategic process, and the ability to isolate participating Company Board members from future information related to the process. After extensive deliberations, the Company Board determined that Mr. Kearl and Mr. Warnock could participate in the potential strategic process, subject to certain conditions to help ensure a fair and transparent process for all potential bidders, including recusal from all related Company Board communications and signing a nondisclosure agreement before any further nonpublic information regarding the Company would be shared.

In May and June 2016, representatives of MRC contacted a representative of ICR to request a meeting with the Company’s management, without further specifying the purpose of that meeting, but the parties were unable to coordinate a time in which management and the representatives of MRC were available, and, following June 7, 2016, the Company placed a hold on general investor meetings following the amendment to the Schedule 13D filed with the SEC by Ptarmagin, LLC and Rick Alden, as described below.

On May 8, 2016, representatives of Latham contacted Mr. Alden’s advisors to remind them that Mr. Alden and any of his affiliates would need to execute a nondisclosure agreement before the Company could provide them with access to the virtual data room or any other confidential information about the Company.

On May 9, 2016, representatives of Party A and Party F indicated to representatives of PJSC that they would not be submitting indications of interest in connection with the potential strategic transaction.

Also on May 9, 2016, representatives of Mr. Alden indicated that they would be unable to submit an indication of interest by the May 10 deadline based on their progress to date, but hoped to be able to provide the Company with an indication of interest by the following week.

From mid-March 2016 through May 9, 2016, the Company’s management and its advisors continued to hold in-person meetings with the various potential bidders, address diligence-related questions regarding the Company from the potential bidders and provide supplemental diligence materials requested by the potential bidders.

On May 9 and 10, 2016, PJSC received written nonbinding indications of interest from the following parties, in each case, with the following terms:

 

    Party D submitted a nonbinding indication of interest to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a price per share of $4.35. Party D indicated it did not expect to have a debt financing contingency, but did not provide further details on its plans to finance the proposed acquisition.

 

    Party C submitted a nonbinding indication of interest to purchase all of the Company’s outstanding shares of Common Stock, in all stock, at a price equivalent per share of $4.45. Party C confirmed that it would require public stockholder approval for the proposed acquisition.

 

    Party B submitted a nonbinding indication of interest to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a range of prices per share between $4.5571 and $5.3166, subject to further due diligence by Party B. Party B requested exclusivity through June 22, 2016, and suggested it would require 30 business days to complete its due diligence.

 

    Incipio submitted a nonbinding indication of interest to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a price per share of $5.50, which was substantively the same as the prior indication of interest submitted by Incipio on March 16, 2016. Incipio indicated that it could not finance its offer without external capital, but that its existing capital providers indicated their support of the transaction, and Incipio would not require a financing contingency. Incipio requested exclusivity through June 30, 2016.

On May 10, 2016, the closing price of the Company’s Common Stock was $3.75 per share.

 

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On May 12, 2016, the Strategic Transactions Committee and management met by telephone with representatives of PJSC and Latham to discuss the terms and conditions of the indications of interest received on May 10, 2016, and the status of discussions with other parties that had not submitted an indication of interest, including Mr. Alden. The Strategic Transactions Committee, management and its advisors discussed each of the indications of interests as well as the Company’s future prospects as a stand-alone entity and other strategic alternatives available to the Company. In particular, the Strategic Transactions Committee discussed the merits of a potential all-cash sale relative to an all-stock sale, as proposed by Party C. The Strategic Transactions Committee noted that an all-cash sale of the Company would provide certainty of the value to the Company stockholders, and also avoid the potential delays and uncertainty related to requiring a vote from Party C’s stockholders. Based on these discussions, the Strategic Transactions Committee tentatively determined that an all-cash sale of the Company at a compelling price was preferable to an acquisition by Party C in an all-stock transaction.

In addition, the Strategic Transactions Committee discussed the relative prices set forth in each of the indications of interests, noting the potential for additional uncertainty of price related to those giving a price range rather than a fixed dollar amount. The Strategic Transactions Committee also noted that none of the current bidders expressly indicated that they would require a financing contingency, but discussed with its advisors the potential risks to deal certainty and delays inherent with any bidder that required debt or equity financing, even without an expressed contingency. The Strategic Transactions Committee also discussed the requests for exclusivity from certain of the bidders, and determined that none of the current proposals presented favorable enough terms for enhancing the value to the stockholders to justify granting exclusivity to any one party at this time.

The Strategic Transactions Committee also reviewed with its advisors the initial draft of the merger agreement prepared by representatives of Latham and senior management. Representatives of Latham discussed with the Strategic Transactions Committee the key features of the draft, including the representations and warranties, covenants, conditions to closing, termination rights, go-shop provisions and anti-trust obligations. The Strategic Transactions Committee focused on certain key terms, including the go-shop provisions, the termination fee, the anti-trust provisions and the conditions to closing, focusing on the effect of these terms on the certainty of closing a potential transaction and the effect on any potential competing proposal that could be received after signing a definitive merger agreement. The Strategic Transactions Committee instructed management and Latham to share the proposed draft with the bidders and begin negotiating with those bidders that were still exploring a potential strategic sale transaction involving the Company. Representatives of Latham again reviewed with the Strategic Transactions Committee key principles related to its fiduciary duties with respect to the potential sale of the Company. Representatives of PJSC and Latham reviewed with the Strategic Transactions Committee the proposed process moving forward, including an overview of what the next round of the bidding process would include, the status of the various parties’ due diligence efforts, and projected timelines for potentially identifying and signing a deal based on the current bidders.

At the conclusion of the May 12 meeting, the Strategic Transactions Committee directed its advisors to continue to explore a potential strategic transaction involving the Company with each of Party B, Party D and Incipio and attempt to negotiate for a higher price from each of them, while also continuing to discuss and negotiate with Mr. Alden. The Strategic Transactions Committee also directed management and its advisors to inform Party C that, at its proposed price and consideration mix, the Company would not be interested in its proposal. The Strategic Transactions Committee and its advisors discussed potential timing for soliciting the next round of proposals, including the projected timelines that the bidders estimated were needed to complete due diligence and the uneven progress made by each party. The Strategic Transactions Committee instructed management and PJSC to urge all bidders to work towards finalizing a proposed transaction as soon as possible, but did not yet establish a date by which the next round of bids would be due.

On May 12, 2016, management and representatives of PJSC informed Party B, Party C, Party D, Incipio and Mr. Alden of the Strategic Transactions Committee’s instructions, and requested that each bidder come back to the Company with their best offers, as well as comments to the proposed merger agreement, as soon as possible.

 

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Management and representatives of PJSC also encouraged each bidder to engage in further diligence in the Company’s virtual data room and to schedule further informational and diligence sessions with senior management of the Company to the extent needed to finalize their proposals.

On May 12, 2016, representatives of Party C informed representatives of PJSC that it would not be interested in increasing the purchase price in its indication of interest or submitting an all-cash offer at this time, and thus would not continue to pursue a strategic transaction with the Company.

From May 12, 2016 through June 23, 2016, the Company’s management and advisors continued to respond to due diligence requests, meet in person or by telephone with the various bidders, update the virtual data room based on requests from the bidders and address questions arising from each bidder’s internal procedures.

On May 13, 2016, the Company provided the draft of the merger agreement to the prospective bidders by posting it to the virtual data room.

On May 16, 2016, representatives of Party B confirmed with representatives of PJSC that it would be willing to move forward in the process without exclusivity. Party B also informed PJSC that it would begin reaching out to private equity sponsors to seek a potential partner to help Party B sell off the Company’s businesses, other than Astro Gaming, following its potential acquisition of the Company.

On May 17, 2016, Party D’s advisors indicated to representatives of PJSC that Party D would be unable to increase the price of its bid and would no longer be interested in exploring the potential acquisition of the Company.

On May 18, 2016, representatives of Latham received an initial mark-up of the draft of the merger agreement from Incipio’s legal counsel, Rutan & Tucker, LLP (“Rutan”). Representatives of Latham reviewed this draft with Company management and PJSC, and prepared an issues list highlighting principal outstanding issues, including the removal of the go-shop provisions, certain fiduciary outs for the Company Board and certain carve-outs to the definition of “Company Material Adverse Effect,” the expansion of certain conditions to the tender offer and the merger and interim operating restrictions, the removal of the availability of expectation damages and a termination fee equal to 4.2% of the total transaction equity value. Management instructed Latham to negotiate for terms more closely aligned with the draft presented to the Strategic Transactions Committee, with an emphasis on such terms that would increase the Company’s ability to enter into potential superior proposals and exercise the Company Board’s fiduciary duties.

From May 20, 2016 through June 1, 2016, Party B requested various consents from the Company to approach private equity sponsors, and the Company negotiated joinders to Party B’s nondisclosure agreement in connection with those sponsors and, once executed, granted such sponsors access to the virtual data room.

On May 22, 2016, in order to facilitate the sharing of some of the Company’s potentially competitively sensitive information requested by bidders, the Company agreed to establish clean team procedures by which certain individuals within the bidders’ organization and their advisors would be granted access to certain restricted folders in the virtual data room. Representatives of Latham drafted a form clean team agreement, and representatives of PJSC sent the form to the bidders who had already signed a nondisclosure agreement for review and comment.

On May 24, 2016, Incipio executed the clean team agreement in the form provided.

On May 24, 2016, a member of the Company’s senior management responsible for the Astro Gaming products and a representative of PJSC met in person with representatives of Party B to discuss various due diligence matters.

 

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On June 1, 2016, representatives of Latham sent a revised draft of the merger agreement to Rutan on behalf of Incipio, which incorporated the comments from the Company’s management.

As of early June 2016, Mr. Alden had not submitted an indication of interest to the Company. However, on June 3, 2016, representatives of Mr. Alden indicated that Mr. Alden intended to submit a nonbinding indication of interest by June 6, 2016, that the indication of interest contemplated participation by Ptarmagin, and that Mr. Alden was also considering partnerships with two to four individual private equity partners in connection with his proposal. Ptarmagin’s two members are trusts of which Mr. Alden and his children are beneficiaries, but the voting and dispositive power over Ptarmagin’s shares of Common Stock is held by a third-party manager. Mr. Alden’s representatives requested separate meetings with management for each of the potential equity partners. Representatives of PJSC indicated that, given management’s business schedule and the speed at which the process was moving, it would be difficult to facilitate individual meetings, but that management would be happy to accommodate a meeting with Mr. Alden and all potential partners that would like to participate. Mr. Alden’s representatives informed PJSC that they would discuss the foregoing with Mr. Alden and schedule a management meeting as soon as possible.

Mr. Alden’s representatives also informed representatives of Latham that Mr. Alden, together with Ptarmagin and several other affiliated parties, intended to publicly file an amendment to Ptarmagin’s Schedule 13D, stating that Mr. Alden determined to explore potential transactions in which he may cause one of his affiliates to make an offer to purchase some or all of the shares of the Company’s Common Stock or otherwise pursue a “going private” transaction, and he proposed that Ptarmagin participate in any such offer. Representatives of Latham and PJSC discussed with management and the Strategic Transactions Committee the immediate and future impact such a filing would likely have on the Company’s stock price and process, given the fact that those statements would be publicly filed.

On June 5, 2016, the Company’s management team and representatives of PJSC met in person with Incipio’s management and representatives in Park City, Utah to discuss various due diligence matters.

On June 6, 2016, representatives of Latham received a revised draft of the merger agreement from Rutan on behalf of Incipio. Representatives of Latham reviewed this draft with Company management and PJSC, and prepared an issues list highlighting principal outstanding issues, which showed limited movement with respect to the removal of the go-shop provisions, certain fiduciary outs for the Company Board and certain carve-outs to the definition of “Company Material Adverse Effect,” the expansion of certain conditions to the tender offer and the merger and interim operating restrictions, and a termination fee equal to 3.9% of the transaction equity value. Management discussed the draft with representatives of Latham, and instructed Latham to continue to negotiate for terms more closely aligned with the draft presented to Strategic Transactions Committee. Between June 6, 2016 and June 15, 2016, representatives of Latham continued to negotiate the draft of the merger agreement and related documents with Incipio and representatives of Rutan on behalf of Incipio.

On June 7, 2016, after market hours, Mr. Alden, Ptarmagin, and certain affiliated entities filed an amendment to Ptarmagin’s Schedule 13D, indicating Mr. Alden’s intention to explore a potential sale transaction involving the Company. Following this filing, the Company became aware of speculation by certain media outlets that the Company was a potential takeover target and may be in discussions with Mr. Alden to effectuate a “go-private” transaction, and the Company received informal inquiries from third parties based on that market speculation.

Shortly thereafter, representatives of PJSC received a written nonbinding indication of interest from an entity formed and owned by Mr. Alden, SKDY, LLC (“SKDY”), which was not publicly filed. The indication of interest stated that Mr. Alden, through SKDY, would be willing to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a range of prices per share between $4.50 and $5.50, subject to further due diligence by SKDY, its affiliates and potential partners. Mr. Alden suggested that SKDY would require approximately 30 days from the date on which Mr. Alden and SKDY were to sign a nondisclosure agreement to

 

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complete its due diligence and to finalize a definitive agreement. Representatives of Mr. Alden also indicated that SKDY anticipated using a combination of debt and equity financing (including the shares held by Mr. Alden and Ptarmagin) to consummate the potential strategic transaction, but did not identify which partner or partners Mr. Alden intended to have participate therein.

That night, Mr. Darling received a communication from Mr. Fathollahi, expressing concern after learning that Mr. Alden was involved in the strategic process. Mr. Fathollahi expressed his concerns that Mr. Alden’s relationship with the Company might impact Incipio’s treatment in the strategic process and the timing of the process, and Incipio was reluctant to expend significant resources if Incipio would ultimately only serve as a market check for Mr. Alden. Mr. Darling assured Mr. Fathollahi that, while he was not on the Strategic Transactions Committee, the Company’s strategic process had been impartial to the best of his knowledge, and that he believed the Strategic Transactions Committee would recommend to the Company Board to enter into an agreement if it was in the best interests of the Company’s stockholders, regardless of the identity of the bidder. Mr. Fathollahi indicated that Incipio did not want to delay the process, and intended to continue to move forward as quickly as possible.

On June 8, 2016, the closing price of the Common Stock was $4.56 per share, compared to a closing price on the previous trading day of $3.93 per share, an increase of approximately 16%.

On June 8, 2016, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the status of negotiations with the current bidders. Representatives of Latham reviewed with the Strategic Transactions Committee its fiduciary duties, and representatives of PJSC reviewed the current proposals, including the most recent proposal from Mr. Alden, and the status of each bidder with respect to their respective due diligence processes and progress towards negotiating a definitive merger agreement. Representatives of PJSC noted that Incipio was meaningfully ahead of Party B and Mr. Alden in terms of due diligence and was the only party to have begun negotiating a definitive merger agreement. Management and representatives of PJSC and Latham further noted that Mr. Alden’s proposal had still not identified a partner, and only the highest end of its price range was competitive with Incipio’s current bid. In addition, representatives of Latham confirmed that Mr. Alden and SKDY still had not signed or begun negotiating a nondisclosure and standstill agreement, and Mr. Alden’s proposal suggested that they would need an additional 30 days from the date that the nondisclosure and standstill agreement was executed to potentially complete any strategic sale transaction. Management also informed the Strategic Transactions Committee of Mr. Darling’s discussion with Mr. Fathollahi from the previous day, including the potential risk of Incipio withdrawing its interest if the process were to be significantly delayed.

The Strategic Transactions Committee discussed with management and representatives of PJSC and Latham the benefits and risks involved in delaying the process to allow Party B and Mr. Alden to catch up to Incipio, including, among others, the potential for increased competition on price and other terms, the increased risk of further leaks that could harm the competitive position of the Company, the potential for Incipio or others to withdraw their interest, and the additional work force disruption which could negatively impact sales and progress on other key operating performance metrics. The Strategic Transactions Committee noted that both Party B and Mr. Alden had already been aware of this process for nearly four months, received numerous communications from PJSC informing them that they were falling behind and had no less time than Incipio to move their bid process forward, and there would be no guarantees that the additional time would result in a proposal better than that of Incipio. The Strategic Transactions Committee further noted that the proposals from both Party B and Mr. Alden were based on price ranges, and only the highest ends of both ranges were competitive with Incipio’s proposed purchase price, and there would be no assurances that either bidder would ultimately offer at the top end of their respective ranges. The Strategic Transactions Committee similarly noted that neither Party B nor Mr. Alden had yet provided comments to the draft merger agreement, and thus it was unclear whether or not the terms of such an offer would be in the best interests of the Company and its stockholders.

At the conclusion of the June 8 meeting of the Strategic Transactions Committee, the Strategic Transactions Committee directed its advisors to proceed to the next round of bidding with each of Party B, Incipio and

 

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Mr. Alden and attempt to negotiate for a higher price from each of them, and, with respect to Incipio, for more favorable terms in the merger agreement. The Strategic Transactions Committee also directed its advisors to encourage Party B and Mr. Alden to provide comments to the draft merger agreement, so that the Strategic Transactions Committee can better evaluate the terms of their respective proposals.

Later on June 8, 2016, representatives of Mr. Alden provided to representatives of Latham an initial mark-up of the nondisclosure agreement, in which, among other things, Mr. Alden rejected the inclusion of a standstill provision and suggested he was unwilling to sign the nondisclosure agreement in his individual capacity. From June 8, 2016 through June 13, 2016, representatives of Latham and representatives of Mr. Alden negotiated Mr. Alden’s nondisclosure agreement.

Also on June 8, 2016, Party B executed the clean team agreement substantively in the form provided.

On June 9, 2016, representatives of PJSC attended a teleconference meeting with one of Party B’s sponsors to address certain due diligence matters.

On June 13, 2016, Mr. Alden and SKDY executed a nondisclosure agreement, which named both of them as parties to the nondisclosure agreement and included a standstill provision substantially identical to those in the nondisclosure agreements signed by other parties. On June 14, 2016, Mr. Alden and his advisors were granted access to the virtual data room, and from June 14, 2016 through June 20, 2016, representatives of PJSC provided responses to Mr. Alden and his advisors with respect to follow-up due diligence requests.

On June 14, 2016, Mr. Alden and Ptarmagin filed an amendment to their Schedule 13D to file a copy of the nondisclosure agreement.

Also on June 14, 2016, a representative of MRC contacted a representative of PJSC via telephone to identify MRC as a stockholder of the Company, request an introduction to the investment banker representing the Company, and indicate MRC’s interest in becoming involved in any strategic process relating to the Company that may be occurring.

Also on June 14, 2016, members of management, including Mr. Darling, met with members of Incipio’s management team and their financial advisors to discuss remaining due diligence and operational questions. On June 14, 2016, the closing price of the Company’s Common Stock was $4.58 per share.

On June 15, 2016, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to review the status of negotiations and discussions with the current bidders. Representatives of Latham reviewed with the Strategic Transactions Committee its fiduciary duties, and representatives of Latham and PJSC reviewed the current status of each bidder with respect to their due diligence processes and progress towards negotiating a definitive merger agreement. Mr. Darling and PJSC reported to the Strategic Transactions Committee on the meeting with Incipio on the previous day, confirming that it was very productive. Representatives of PJSC also informed the Strategic Transactions Committee of the recent contact from MRC, including the fact that PJSC neither confirmed nor denied to MRC the existence of any strategic alternatives being explored by the Company, they were unable to confirm MRC’s status as a stockholder, and that, based on the current speed and progress of the strategic process to date, MRC would likely be too far behind to effectively participate in the strategic process at this time. Representatives of Latham also provided an update on the latest draft of the definitive merger agreement from Incipio, and informed the Strategic Transactions Committee that the only key open items related to the go-shop provision, the termination fee, and the unwillingness to make available to the Company or its stockholders expectation damages. Representatives of Latham also informed the Strategic Transactions Committee that they had not received copies of the debt commitment papers from Incipio, but they expected to receive them within the next week. Representatives of PJSC and Latham confirmed that Mr. Alden and SKDY had executed a nondisclosure agreement, but neither Mr. Alden nor Party B had indicated when or if the Company should expect an initial mark-up of the draft merger agreement.

 

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The Strategic Transactions Committee and its advisors discussed potential timing for soliciting the next round of bids, and the Strategic Transactions Committee directed PJSC to instruct the bidders that their best and final bids will be due on June 21, 2016.

Following the meeting, representatives of Latham sent a revised draft of the merger agreement to Incipio.

On June 16, 2016, Mr. Alden called representatives of PJSC to discuss the strategic process to date. PJSC reiterated that the Company had run, and would continue to run, an impartial process, and that the Company would only enter into a definitive agreement if it is in the best interests of the Company’s stockholders.

On June 16, 2016, representatives of Party B called representatives of PJSC to indicate that they have received bids from sponsors in connection with their proposal, but none of them were strong enough to allow Party B to bid on the Company’s entire business.

Also on June 16, 2016, a representative of MRC contacted a representative of PJSC to indicate MRC’s interest in becoming involved in any strategic process relating to the Company that may be occurring.

On June 17, 2016, at the request of Party B and after discussions with the Strategic Transactions Committee, management and representatives of Latham, representatives of PJSC facilitated an introduction between Mr. Alden and Party B to allow discussions regarding a potential partnership between the parties and to elicit a potentially stronger bid.

On June 20, 2016, representatives of Incipio provided to the Company drafts of their substantially final debt commitment papers from Monroe Capital, LLC and Wells Fargo Bank, N.A.

On June 21, 2016, Mr. Alden delivered a letter to representatives of PJSC stating that he was not prepared to submit a bid at this time. He indicated that he was frustrated with the speed at which the process had moved forward, although he acknowledged that the Company and its advisors instructed him to move as quickly as possible. He indicated that he remained interested in pursuing a potential transaction with the Company. The letter did not contain any further indication of a price that Mr. Alden might be willing to offer.

Later that day, Party B delivered a nonbinding indication of interest to representatives of PJSC to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a range of prices per share between $4.80 and $5.20, subject to further due diligence by Party B. The top range of this indication of interest was approximately $0.11 less than Party B’s previous indication of interest. Party B indicated that it would require 20 additional business days to complete its due diligence. The indication of interest stated that Party B would pay with cash on hand, and would not require outside financing. Party B did not provide a mark-up of the draft merger agreement.

That same evening, Incipio delivered a nonbinding indication of interest to representatives of PJSC to purchase all of the Company’s outstanding shares of Common Stock, in all cash, at a price per share of $5.55. Incipio confirmed its due diligence was complete and provided executed copies of its debt commitment letters. Incipio also provided a revised draft of the proposed merger agreement, which proposed a termination fee of 3.2%, removed the go-shop provisions, and excluded the Company and its stockholders from being able to recover expectation damages. Incipio indicated that it was prepared to sign the merger agreement that same day, and stated that the offer would expire at 5:00 p.m. Eastern Time on June 23, 2016. On June 21, 2016, the closing price of the Company’s Common Stock was $4.52 per share.

Later that same evening, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to review the current proposals and status of the latest round of bids received by the Company. Representatives of Latham again reviewed with the Strategic Transactions Committee its fiduciary duties. Representatives of PJSC communicated to the Strategic Transactions Committee that Mr. Alden

 

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was not able to submit a bid at this time, and summarized the contents of his letter. Representatives of PJSC also summarized Party B’s indication of interest, including the reduction in the high-end of its price range, and Party B’s request for an additional 20 business days to complete diligence. Lastly, representatives of PJSC and Latham provided an update on the latest bid and draft of the merger agreement from Incipio. Latham informed the Strategic Transactions Committee that certain key items remained open, including those related to the go-shop provisions, the termination fee and the unwillingness to make available to the Company or its stockholders expectation damages in the event of a breach.

The Strategic Transactions Committee, management and its advisors discussed these events, including Mr. Alden’s inability to prepare an offer, the reduction in the purchase price range for Party B, Incipio’s incremental increase in price, and unwillingness of Incipio to provide certain deal terms, such as the go-shop provisions, lower termination fee, or expectation damages, as well as the potential risk of losing the interest of Incipio if the process was extended. Management, representatives of PJSC and the Strategic Transactions Committee reviewed the debt commitment papers and financial information provided by Incipio and determined that there was some room to continue to seek a higher price. The Strategic Transactions Committee instructed management and PJSC to negotiate with Incipio for better deal terms and a higher price, and to negotiate with Party B for a higher price.

On the morning of June 22, 2016, representatives of PJSC informed Incipio that the Company would be unwilling to enter into a potential strategic transaction with Incipio without additional deal terms, including the go-shop provision, and without a higher price.

That same morning, representatives of PJSC separately informed Party B that it would need to present a significantly higher purchase price per share to cause the Company to extend the process to accommodate the additional time Party B needed. Representatives of Party B suggested that Party B might be able to increase its proposed purchase price to as high as $5.35 per share, but would be unable to increase it further without significantly more time to identify a potential partner and complete its due diligence.

In the afternoon on June 22, 2016, representatives of Incipio informed PJSC that Incipio would be willing to provide a 30-day go-shop provision in exchange for a single termination fee of 3.5%, no expectation damages, and no change in the proposed purchase price. Later that afternoon, Incipio provided a revised draft of the definitive merger agreement, reflecting those terms.

On the evening of June 22, 2016, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to review Party B’s response and the terms of Incipio’s latest proposal. Representatives of Latham and PJSC summarized the terms of the revised merger agreement with Incipio. The Strategic Transactions Committee discussed with management and its advisors the best approach to extract further stockholder value from the negotiations, including the relative value of a higher purchase price, go-shop provisions, the availability of expectation damages, and the size of the termination fee. After deliberations and advice from management and its advisors, the Strategic Transactions Committee instructed management and representatives of PJSC to attempt to negotiate for a higher price and add to the draft merger agreement the availability of expectation damages.

On the morning of June 23, 2016, representatives of PJSC informed Incipio that the Company would be unwilling to enter into a proposed transaction with Incipio without a higher price and the availability of expectation damages, in addition to the terms previously presented. After some further negotiations, Incipio informed PJSC that it would accept the inclusion of expectation damages and increased its purchase price to $5.75 per share. Representatives of Latham revised the proposed merger agreement to reflect those terms.

 

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On the afternoon of June 23, 2016, the Strategic Transactions Committee held a special meeting by telephone, with members of management and representatives of PJSC and Latham participating, to consider approval of the Original Incipio Merger Agreement. At this meeting,

 

    representatives of Latham again reviewed with the Strategic Transactions Committee their fiduciary duties when considering the proposed transaction;

 

    management and representatives of Latham reviewed with the Strategic Transactions Committee the outcome of the negotiations with Incipio and the revised terms and conditions of the Original Incipio Merger Agreement; and

 

    representatives of PJSC reviewed with the Strategic Transactions Committee PJSC’s financial analysis of the $5.75 per share cash consideration, and reviewed with the Strategic Transactions Committee the opinion that PJSC was prepared to deliver to the Company Board to the effect that, as of the date of such opinion and based upon and subject to various assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken in preparing its opinion, the $5.75 per share cash consideration to be paid to the Company’s stockholders (other than as specified in such opinion) pursuant to the Original Incipio Merger Agreement was fair, from a financial point of view, to such stockholders.

The Strategic Transactions Committee considered various reasons for and against approving the proposed transaction with Incipio. The Strategic Transactions Committee also evaluated the proposal against the Company’s other strategic alternatives, including remaining an independent company. The Strategic Transactions Committee also considered the Company’s recent communications with the other bidders engaged in the Company’s strategic process and its belief that none of the other bidders would have the interest and ability to enter into a definitive agreement to acquire the Company for a price higher than $5.75 per share on similar or more favorable terms, on a timetable that would not expose the Company to significant risk of losing the proposed transaction with Incipio. In this regard, the Strategic Transactions Committee noted Party B’s and Mr. Alden’s failure to ever present any comments to the draft merger agreement to the Company and Mr. Alden’s lack of responsiveness to the Company in the beginning of the process. The Strategic Transactions Committee also noted the existence of the go-shop provision in the Original Incipio Merger Agreement, which would allow the Company to solicit additional potential bids in the future. After discussions with its financial and legal advisors and members of the Company’s senior management, and in light of the reasons considered, the Strategic Transactions Committee unanimously (i) recommended that the Company Board determine that it is in the best interests of the Company and its stockholders, and declared it advisable, to enter into the Original Incipio Merger Agreement, (ii) recommended that the Company Board approve the execution and delivery by the Company of the Original Incipio Merger Agreement, the performance by the Company of its covenants and agreements contained in the Original Incipio Merger Agreement and the consummation of the tender offer and the merger upon the terms and subject to the conditions contained in the Original Incipio Merger Agreement, and (iii) recommended, subject to the terms and conditions set forth in the Original Incipio Merger Agreement, that the Company Board recommend that the stockholders accept Incipio’s tender offer and tender their shares to Powder Merger Sub, Inc. (“Incipio Merger Sub”) pursuant thereto.

Immediately following the meeting of the Strategic Transactions Committee, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC and Latham to review and discuss the same information covered in the meeting of the Strategic Transactions Committee immediately prior. PJSC delivered to the Company Board an oral opinion, which was subsequently confirmed by delivery of a written opinion dated June 23, 2016, to the effect that, as of the date of such written opinion and based upon and subject to various assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken in preparing its opinion as set forth in such written opinion, the $5.75 per share cash consideration to be paid to the Company’s stockholders (other than as specified in such written opinion) pursuant to the Original Incipio Merger

 

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Agreement was fair, from a financial point of view, to such stockholders. The Company Board similarly considered the various reasons for and against approving the Original Incipio Merger Agreement. The Company Board also considered the recommendations of the Strategic Transactions Committee. After discussions with its financial and legal advisors and members of the Company’s senior management, and in light of the reasons considered, the Company Board, other than Mr. Darling, who recused himself from the vote, (i) determined that it is in the best interests of the Company and its stockholders, and declared it advisable, to enter into the Original Incipio Merger Agreement, (ii) approved the execution and delivery by the Company of the Original Incipio Merger Agreement, the performance by the Company of its covenants and agreements contained in the Original Incipio Merger Agreement and the consummation of the tender offer and the merger upon the terms and subject to the conditions contained in the Original Incipio Merger Agreement, and (iii) resolved, subject to the terms and conditions set forth in the Original Incipio Merger Agreement, to recommend that the stockholders accept Incipio’s tender offer and tender their Company Shares to Incipio Merger Sub pursuant thereto.

Later on June 23, 2016, Incipio, Incipio Merger Sub and the Company executed and delivered the Original Incipio Merger Agreement. Prior to the open of U.S. markets on June 24, 2016, the Company and Incipio issued press releases announcing the execution of the Original Incipio Merger Agreement.

Under the terms of the Original Incipio Merger Agreement, until 30 calendar days following the public announcement of the Original Incipio Merger Agreement (the “Go-Shop Period”), the Company, its subsidiaries and representatives had the right to, directly or indirectly (i) solicit, initiate, facilitate and encourage any acquisition proposals including by providing access to non-public information pursuant to an acceptable confidentiality agreement and (ii) enter into, continue or otherwise participate in any discussions or negotiations with respect to any acquisition proposal or otherwise cooperate with or assist or participate in or facilitate any such discussions or negotiations or any effort or attempt to make any acquisition proposal. The standstill provisions contained in the nondisclosure agreements, to which the Company and the potentially interested parties entered into in connection with the proposed exploration of strategic alternatives, terminated automatically by their terms upon execution of the Original Incipio Merger Agreement.

Beginning on June 24, 2016 and during the Go-Shop Period, representatives of PJSC contacted 98 third parties, including Mr. Alden and Party B, on behalf of the Company to determine whether those parties might be interested in pursuing a transaction with the Company that would be superior to the then current proposed transaction with Incipio.

On June 24, 2016, the Company received an unsolicited written indication of interest from MRC to acquire all of the Company’s outstanding shares of Common Stock for $6.05 per share in cash (the “June 24 Mill Road Proposal”), which was attached as an exhibit to MRC’s Schedule 13D filed with the SEC. The June 24 Mill Road Proposal was based on publicly available information and was conditioned upon completion of due diligence, final internal approvals and the negotiation and execution of a definitive merger agreement. The June 24 Mill Road Proposal also required that the Company grant exclusivity to MRC for 60 days and would expire by its terms on June 28, 2016. As part of that Schedule 13D, MRC also disclosed that it and its affiliates had acquired approximately 9.8% of the outstanding Company Shares.

On June 26, 2016, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC and Latham to discuss the June 24 Mill Road Proposal. The Company Board noted that, while the price was higher than that of the current proposed transaction with Incipio, the June 24 Mill Road Proposal was subject to significant conditions, including due diligence and a 60-day exclusivity period, which, the Company Board noted, would have violated the Original Incipio Merger Agreement and given Incipio the right to terminate the Original Incipio Merger Agreement. The Company Board also discussed the potential time necessary for MRC to complete its due diligence, the potential impact of such a delay on the current proposed transaction with Incipio or the delay on any transaction with MRC and the potential for such diligence to impact MRC’s proposed price. The Company Board determined that the June 24 Mill Road Proposal in its current form was too uncertain and contained too

 

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many conditions to be reasonably likely to lead to a “Superior Proposal” (as defined in the Original Incipio Merger Agreement) at that time. The Company Board instructed representatives of Latham and PJSC to promptly engage with MRC during the Go-Shop Period to facilitate MRC’s due diligence process and encourage the potential development of a revised proposal from MRC that may be superior to the current proposed transaction with Incipio. The Company Board also discussed the potential need to enter into a rights agreement, as to provide the Company Board with adequate time to fully assess and respond to any proposal. As a result of those discussions, the Company Board approved the adoption by the Company of a rights agreement.

On June 27, 2016, the Company entered into a rights agreement, dated as of June 27, 2016, between Skullcandy and Computershare Trust Company, N.A., as rights agent (as amended from time to time, the “Rights Agreement”).

On June 28, 2016, the June 24 Mill Road Proposal terminated by its terms.

Between June 28, 2016 and July 1, 2016, in addition to MRC, eight of the 98 initially contacted third parties, including Mr. Alden and Party B, expressed interest in pursuing a potential transaction with the Company. Each of the seven parties who had not previously entered into nondisclosure agreements with the Company entered into such an agreement with the Company, including MRC, who received a draft of such an agreement on June 24, 2016, and entered into such agreement on June 29, 2016. These seven nondisclosure agreements did not contain standstill provisions. Six parties expressed continued interest in a potential transaction with the Company after executing a nondisclosure agreement, and each such party was given access to the virtual data room on the same day that such party executed its nondisclosure agreement with the Company.

On June 30, 2016, MRC executed a clean team agreement substantively in the form executed by Incipio.

Between June 28, 2016 and July 23, 2016, management and representatives of PJSC held in-person and telephonic meetings and follow-up conversations by telephone with certain of the interested parties, including MRC and Mr. Alden, to facilitate their due diligence efforts and address any questions the parties may have had regarding the Company.

On July 1, 2016, representatives of MRC attended an in-person management presentation with the Company’s management and representatives of PJSC. Between July 1, 2016 and July 23, 2016, members of the Company’s management and representatives of PJSC held numerous in-person and telephonic meetings with MRC, and MRC attended various diligence calls with respect to the Company’s customers, legal matters, and the Company’s operations.

As a result of certain of the interested parties expressing an inability to submit a proposal to acquire the Company without working with a partner, upon the direction of the Company Board, certain parties, including MRC, Mr. Alden, and Party B, were permitted to discuss the possibility of partnering with other parties in connection with a potential alternative transaction involving the Company. Following the separate requests of both Mr. Alden and MRC, they were permitted to discuss the possibility of partnering together in connection with their interest in a potential alternative transaction involving the Company.

On July 5, 2016, following an inquiry from MRC, and at the direction of the Company Board, representatives of Latham delivered a letter to MRC that stated that, while the Company continued to welcome preliminary discussions between MRC and Mr. Alden, the Company Board would not at that time provide the requested waiver of Section 203 of the DGCL nor amend the Rights Agreement with respect to exploration of the possible establishment of an “agreement, arrangement or understanding” between MRC and Mr. Alden pursuant to which an offer would be submitted to acquire all of the outstanding Company Shares, since those discussions were too preliminary at that time. The letter specifically stated that the Company Board would be willing to reconsider the requested waiver and amendment later in the Go-Shop Period.

 

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Prior to July 23, 2016, representatives of each of the interested parties, including Mr. Alden and Party B, other than MRC, informed representatives of PJSC that each party would not submit a proposal related to a potential transaction with the Company.

In the afternoon on July 23, 2016, MRC submitted to the Company a written indication of interest to acquire all of the Company’s outstanding shares of Common Stock for $6.05 per share in cash (the “July 23 Mill Road Proposal”). Unlike the June 24 Mill Road Proposal, the July 23 Mill Road Proposal was not conditioned upon due diligence or the granting of exclusivity by the Company. As part of the July 23 Mill Road Proposal, MRC also submitted a draft of a definitive merger agreement, which contained terms and conditions that were substantively identical to the Original Incipio Merger Agreement, other than the increase of the per share price to $6.05, a reduced termination fee, and the removal of the go-shop provisions. The July 23 Mill Road Proposal also included drafts of equity and debt commitment papers and a limited sponsor guarantee under which Mill Road would guarantee the payment of the amount of the equity commitment under the proposed merger agreement, but not any damages resulting from a breach by Parent or Purchaser of the proposed merger agreement. On July 22, 2016, the closing price of the Company’s Common Stock was $5.97 per share.

On July 23, 2016, at 11:59 p.m., Eastern Time, the Go-Shop Period expired. Prior to the expiration of the Go-Shop Period, representatives of the Company informed MRC that, pursuant to the terms of the Original Incipio Merger Agreement, the Company had to immediately cease and cause to be terminated all existing discussions and negotiations with any party as of the expiration of the Go-Shop Period, including MRC. The Company did not receive any further indications of interest or proposals from any other potential bidder prior to the expiration of the Go-Shop Period. Pursuant to the terms of the Original Incipio Merger Agreement, the Company ceased all discussions and negotiations with all parties, including MRC, on July 23, 2016, at 11:59 p.m., Eastern Time, terminated all data room access for all parties and delivered destruction notices pursuant to each of the applicable nondisclosure agreements to all such parties.

On July 24, 2016, MRC submitted to the Company an unsolicited written indication of interest to acquire all of the Company’s outstanding shares of Common Stock for $6.05 per share in cash, on terms substantially identical to the July 23 Mill Road Proposal (the “July 24 Mill Road Proposal”).

Later that day, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the July 24 Mill Road Proposal. The Strategic Transactions Committee discussed the terms of the July 24 Mill Road Proposal, as well as the relative timing of the proposed transactions with Incipio and MRC, the potential risks associated with a delay in a proposed transaction with MRC relative to the current proposed transaction with Incipio, the potential required payment of the termination fee to Incipio under the Original Incipio Merger Agreement if the Company were to terminate the Original Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the July 24 Mill Road Proposal, and the terms of the equity and debt commitments and the sponsor guarantee presented by MRC as part of the July 24 Mill Road Proposal, including the Company’s potential recourse against MRC in the event of a breach of the proposed merger agreement. After further deliberations, the Strategic Transactions Committee determined that the July 24 Mill Road Proposal was reasonably likely to lead to a Superior Proposal. The Strategic Transactions Committee instructed representatives of PJSC and Latham to engage in discussions and negotiations with MRC and its advisors in accordance with the terms of the Original Incipio Merger Agreement to attempt to negotiate for improved terms, including strengthened recourse in the event of a potential breach of the proposed merger agreement.

From July 25, 2016 to July 28, 2016, at the direction of the Strategic Transactions Committee, representatives from PJSC and Latham negotiated with representatives from MRC, including MRC’s legal counsel, Foley Hoag LLP (“Foley Hoag”), to improve the terms of the July 24 Mill Road Proposal, particularly with respect to the Company’s potential recourse against MRC in the event of a breach of the proposed merger agreement and reduced time periods in which the parties would make required anti-trust filings and commence the tender offer, as to expedite the closing of a potential transaction with MRC. On July 25, 2016, representatives

 

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of Latham delivered to Foley Hoag a revised draft of the proposed merger agreement, reflecting the terms requested by the Strategic Transactions Committee.

On July 27, 2016, representatives from MRC orally suggested to representatives of PJSC and Latham that MRC would be prepared to reduce the time periods to make anti-trust filings and launch the tender offer in connection with the July 24 Mill Road Proposal and to grant the Company a $5.8 million reverse termination fee if the Company were to terminate the proposed merger agreement due to a breach of the agreement by Parent or Purchaser.

Later that evening, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the status of the negotiations with MRC since the prior meeting and the most recent terms suggested by MRC. The Strategic Transactions Committee emphasized that, given the fact that Parent and Purchaser, the affiliates of MRC that were to be parties to the proposed merger agreement, were holding companies, it was important that the Company obtain a guarantee from a MRC affiliate with liquidity and assets that would grant the Company and its stockholders adequate recourse if Parent or Purchaser were to breach the proposed merger agreement. The Strategic Transactions Committee instructed representatives of PJSC and Latham to engage in further discussions and negotiations with MRC and its advisors to attempt to negotiate for more favorable terms and to urge MRC to put such terms in a written proposal, so that the Strategic Transactions Committee could evaluate whether to recommend to the Company Board that such a proposal was a Superior Proposal.

On July 28, 2016, following further negotiations between representatives of PJSC and Latham and representatives of MRC, the Company received from MRC a revised written indication of interest to acquire all of the Company’s outstanding shares of Common Stock for $6.05 per share in cash, along with a revised draft of a definitive merger agreement, debt and equity commitment papers and the sponsor guarantee (the “July 28 Mill Road Proposal”), the terms of which were materially identical to those of the July 24 Mill Road Proposal, other than the revised sponsor guarantee, under which Mill Road agreed also to guarantee for the benefit of the Company damages caused by a breach of the proposed merger agreement by Parent or Purchaser up to the amount of the equity commitment, less the value of the Company Shares held by MRC and its affiliates.

Later that evening, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the July 28 Mill Road Proposal. The Strategic Transactions Committee discussed the terms of the July 28 Mill Road Proposal, as well as the relative timing of the proposed transactions with Incipio and MRC, the potential risks associated with a delay in a proposed transaction with MRC relative to the current proposed transaction with Incipio, the potential required payment of the termination fee to Incipio under the Original Incipio Merger Agreement if the Company were to terminate the Original Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal, the terms of the revised guarantee and its potential impact on the Company’s recourse in the event of a breach, and the terms of the equity and debt commitments and the sponsor guarantee presented by MRC as part of the July 28 Mill Road Proposal. After deliberations and consultation with representatives from Latham and PJSC, the Strategic Transactions Committee recommended to the Company Board that it determine that the July 28 Mill Road Proposal was a Superior Proposal and that failure to terminate the Original Incipio Merger Agreement and enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith would be inconsistent with its fiduciary duties under applicable law. The Strategic Transactions Committee also recommended that the Company Board authorize management to deliver written notice to Incipio of the Company Board’s determination and intention, at or after 12:00 a.m., Eastern Time, on August 3, 2016, to terminate the Original Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith, subject to Incipio’s rights pursuant to the Original Incipio Merger Agreement to make revised proposals to the Company during that period.

 

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Later that same night, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC and Latham to discuss the July 28 Mill Road Proposal. Following similar discussions and a discussion of the recommendation of the Strategic Transactions Committee, and upon further consultation with representatives of Latham and PJSC, the Company Board, other than Mr. Darling, who recused himself from the vote, determined that the July 28 Mill Road Proposal was a Superior Proposal and that failure to terminate the Original Incipio Merger Agreement and enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith would be inconsistent with its fiduciary duties under applicable law. The Company Board also authorized management to deliver a notice to Incipio consistent with the Strategic Transactions Committee’s recommendation. On July 28, 2016, the closing price of the Company’s Common Stock was $6.03 per share.

Later that night, the Company provided written notice to Incipio of the Company Board’s determination that the July 28 Mill Road Proposal was a Superior Proposal, and of the Company’s intention, at or after 12:00 a.m., Eastern Time, on August 3, 2016, to terminate the Original Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith. Until such termination, Incipio had the right to make revised proposals to the Company pursuant to the terms of the Original Incipio Merger Agreement.

On August 2, 2016, Incipio informed representatives of the Company orally that Incipio intended to submit a proposed amendment to the Original Merger Agreement at a revised offer price of $6.10 per share. Shortly before 12:00 a.m., Eastern Time, on August 2, 2016, Incipio delivered to the Company a signed copy of a proposed amendment to the Original Incipio Merger Agreement (the “Incipio Amendment” and, together with the Original Incipio Merger Agreement, the “Revised Incipio Merger Agreement”), which, among other things, increased the offer price from $5.75 per share to $6.10 per share, increased the termination fee to approximately $6.6 million to maintain a termination fee equal to 3.5% of the equity value, and removed the go-shop provisions from the Original Incipio Merger Agreement. Incipio provided, along with the proposed Incipio Amendment, updated debt and equity commitment papers in connection with the increased offer price.

In the early morning of August 3, 2016, the Strategic Transactions Committee held a special meeting by telephone, with members of management and representatives of PJSC and Latham participating, to discuss and evaluate the proposed Incipio Amendment and the July 28 Mill Road Proposal. At this meeting,

 

    representatives of Latham again reviewed with the Strategic Transactions Committee their fiduciary duties when considering the proposed transactions from Incipio and MRC;

 

    management and representatives of Latham reviewed with the Strategic Transactions Committee the outcome of the negotiations with Incipio and MRC and the terms and conditions of the proposed Incipio Amendment and the July 28 Mill Road Proposal; and

 

    representatives of PJSC reviewed with the Strategic Transactions Committee PJSC’s financial analysis of the $6.10 per share cash consideration, and reviewed with the Strategic Transactions Committee the opinion that PJSC was prepared to deliver to the Company Board to the effect that, as of August 3, 2016 and based upon and subject to the factors and assumptions set forth therein, the $6.10 in cash per Company Share to be paid to the holders (other than Incipio and its affiliates) of Company Shares pursuant to the Revised Incipio Merger Agreement was fair from a financial point of view to such holders.

The Strategic Transactions Committee considered various reasons for and against approving the proposed amendment with Incipio. The Strategic Transactions Committee also evaluated the July 28 Mill Road Proposal, and compared it against the proposal from Incipio in the Incipio Amendment. The Strategic Transactions Committee considered the various terms of each proposed transaction, as well as the relative timing and likelihood of closing of each proposed transaction. The Strategic Transactions Committee noted, among other things, that despite the higher

 

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termination fee, the proposal by Incipio was at a higher offer price and would likely close on a shorter timeline than the July 28 Mill Road Proposal. After discussions with its financial and legal advisors and members of the Company’s senior management, and in light of the reasons considered, the Strategic Transactions Committee unanimously (i) recommended that the Company Board determine that the July 28 Mill Road Proposal was no longer deemed to be a Superior Proposal under the Revised Incipio Merger Agreement and that failure to terminate the Revised Incipio Merger Agreement and enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith would no longer be inconsistent with the Company Board’s fiduciary duties, (ii) recommended that the Company Board approve and declare advisable and in the best interests of the Company and its stockholders the Incipio Amendment, including the revised offer price, (iii) recommended that the Company Board approve the execution and delivery by the Company of the Incipio Amendment and the transactions contemplated by the Revised Incipio Merger Agreement, and (iv) recommended, subject to the terms and conditions set forth in the Revised Incipio Merger Agreement, that the Company Board recommend that the stockholders accept Incipio’s offer and tender their shares to Incipio Merger Sub pursuant thereto.

Immediately following the meeting of the Strategic Transactions Committee, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC and Latham to review and discuss the same information covered in the meeting of the Strategic Transactions Committee. After a discussion of the same matters discussed in the Strategic Transactions Committee meeting, PJSC delivered to the Company Board an oral opinion, which was subsequently confirmed by delivery of a written opinion August 3, 2016, to the effect that, as of August 3, 2016 and based upon and subject to the factors and assumptions set forth therein, the $6.10 in cash per Company Share to be paid to the holders (other than Incipio and its affiliates) of Company Shares pursuant to the Revised Incipio Merger Agreement was fair from a financial point of view to such holders. The Company Board similarly considered the various reasons for and against approving the Incipio Amendment, including an evaluation of and comparison to the July 28 Mill Road Proposal. The Company Board also considered the recommendations of the Strategic Transactions Committee. After discussions with its financial and legal advisors and members of the Company’s senior management, and in light of the reasons considered, the Company Board, other than Mr. Darling, who recused himself from the vote, (i) determined that the July 28 Mill Road Proposal was no longer a Superior Proposal pursuant to the Revised Incipio Merger Agreement and that failure to terminate the Revised Incipio Merger Agreement and enter into a definitive merger agreement on the terms contemplated by the July 28 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith would no longer be inconsistent with the Company Board’s fiduciary duties, (ii) approved and declared advisable and in the best interests of the Company and its stockholders the Incipio Amendment, including the revised offer price, (iii) approved the execution and delivery by the Company of the Incipio Amendment and the transactions contemplated by the Revised Incipio Merger Agreement, and (iv) resolved, subject to the terms and conditions set forth in the Revised Incipio Merger Agreement, to recommend that the stockholders accept Incipio’s tender offer and tender their Company Shares to Incipio Merger Sub pursuant thereto.

Later in the morning on August 3, 2016, Incipio, Incipio Merger Sub and the Company executed and delivered the Incipio Amendment. Prior to the open of U.S. markets on August 3, 2016, the Company and Incipio issued a joint press release announcing the execution of the Incipio Amendment and that the Company Board had determined, after consultation with its outside counsel and financial advisor, that the July 28 Mill Road Proposal no longer constituted a Superior Proposal. Pursuant to and as required by the terms of the Revised Incipio Merger Agreement, upon the determination that the July 28 Mill Road Proposal was no longer a Superior Proposal, the Company ceased all discussions with MRC. On August 3, 2016, the closing price of the Company’s Common Stock was $6.20 per share.

From August 3, 2016 until August 13, 2016, the Company and representatives had no contact with MRC or its representatives.

 

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On August 13, 2016, MRC submitted to the Company an unsolicited written indication of interest to acquire all of the Company’s outstanding shares of Common Stock for $6.50 per share in cash, on terms materially identical to the July 28 Mill Road Proposal, other than the increased price per share and an increased termination fee of approximately $7.1 million (the “August 13 Mill Road Proposal”).

Later that day, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the August 13 Mill Road Proposal. The Strategic Transactions Committee discussed the terms of the August 13 Mill Road Proposal, as well as the relative timing of the proposed transactions with Incipio and MRC, the potential risks associated with a delay in a proposed transaction with MRC relative to the current proposed transaction with Incipio, the required payment of the $6.6 million termination fee to Incipio under the Revised Incipio Merger Agreement if the Company were to terminate the Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 13 Mill Road Proposal, and the terms of the equity and debt commitments and the sponsor guarantee presented by MRC as part of the August 13 Mill Road Proposal. However, the Strategic Transactions Committee also noted that MRC orally stated that it had not yet obtained approval from its debt financing sources and was not currently prepared to provide executed signature pages to be held in escrow pending a final determination of the Company Board. After deliberations, the Strategic Transactions Committee determined that the August 13 Mill Road Proposal was reasonably likely to lead to a Superior Proposal, and directed representatives from PJSC and Latham to seek to resolve those remaining open items from MRC, and to negotiate to have MRC pay for the $6.6 million termination fee payable under the Revised Incipio Merger Agreement if the Company were to terminate the Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 13 Mill Road Proposal.

Later that night and in the morning on August 14, 2016, the Company’s management and representatives of PJSC attended calls and discussions with representatives of MRC to provide initial bring-down diligence since the termination of the Go-Shop Period. Representatives of Latham also delivered a revised draft of the Company disclosure letter to Foley Hoag in connection therewith. Representatives of MRC and the Company also agreed that the Company would provide certain additional diligence materials to MRC.

On August 14, 2016, MRC rescinded the August 13 Mill Road Proposal, and provided to the Company a revised indication of interest to acquire all of the Company’s outstanding shares of Common Stock, which lowered the price to $6.25 per share from $6.50 per share in cash, and on terms materially identical to the August 13 Mill Road Proposal, other than the decreased price per share and a revised termination fee of approximately $6.8 million (the “August 14 Mill Road Proposal”). MRC informed the Company that it had still not obtained approval from its debt financing sources and was not currently prepared to provide executed signature pages to be held in escrow pending a final determination of the Company Board. MRC also communicated that it would be unwilling to pay the $6.6 million termination fee payable to Incipio under the Revised Incipio Merger Agreement if the Company were to terminate the Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 14 Mill Road Proposal.

Shortly before the receipt of the August 14 Mill Road Proposal, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the August 13 Mill Road Proposal, and, after the Company received the August 14 Mill Road Proposal, to discuss the August 14 Mill Road Proposal. The Strategic Transactions Committee discussed the terms of the August 14 Mill Road Proposal, including MRC’s reduction in price from the August 13 Mill Road Proposal, and the size of the $0.15 premium relative to Incipio’s revised offer price of $6.10 per share. The Strategic Transactions Committee also noted that MRC still had not obtained approval from its debt financing sources and was not currently prepared to provide executed signature pages to be held in escrow pending a final determination of the Company Board. The Strategic Transactions Committee also noted MRC’s unwillingness to pay the $6.6 million termination fee that would become payable to Incipio by the Company pursuant to the Revised Incipio Merger Agreement, which represented potential exposure to the Company that was greater than the additional consideration of the price premium proposed by MRC. The Strategic Transactions Committee also discussed the potential delay and risk to

 

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closing inherent in terminating the existing transaction with Incipio related to the proposed transaction with MRC. After deliberations and confirming MRC’s lower offer price proposed in the August 14 Mill Road Proposal, the Strategic Transactions Committee determined that the August 14 Mill Road Proposal was not reasonably likely to lead to a Superior Proposal. As a result of that determination, pursuant to the terms of the Revised Incipio Merger Agreement, the Company ceased all discussions and negotiations with MRC, and did not provide the additional diligence materials that had been requested by MRC.

On August 15, 2016, MRC submitted to the Company a revised unsolicited written indication of interest to acquire all of the Company’s outstanding shares of Common Stock for $6.25 per share in cash, on terms materially identical to the August 14 Mill Road Proposal (the “August 15 Mill Road Proposal”), except that the August 15 Mill Road Proposal indicated that MRC had now received the approval of its proposed debt financing sources in connection with the August 15 Mill Road Proposal, and that MRC was prepared to deliver into escrow its signature pages to the proposed merger agreement if the Company Board were to determine that the August 15 Mill Road Proposal constituted or was reasonably likely to lead to a Superior Proposal.

Later that day, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the August 15 Mill Road Proposal. The Strategic Transactions Committee discussed the terms of the August 15 Mill Road Proposal, including MRC’s reduction in price from the August 13 Mill Road Proposal and the size of the proposed $0.15 premium relative to Incipio’s revised offer price of $6.10 per share, as well as the relative timing of the proposed transactions with Incipio and MRC, the potential risks associated with a delay in a proposed transaction with MRC relative to the current proposed transaction with Incipio, the required payment of the $6.6 million termination fee to Incipio under the Revised Incipio Merger Agreement if the Company were to terminate the Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 15 Mill Road Proposal and the terms of the equity and debt commitments and the sponsor guarantee presented by MRC as part of the August 15 Mill Road Proposal. The Strategic Transactions Committee also noted that MRC had indicated that it had obtained approval from its debt financing sources and was prepared to deliver into escrow its signature pages to the proposed merger agreement if the Company Board were to determine that the August 15 Mill Road Proposal constituted or was reasonably likely to lead to a Superior Proposal. After deliberations, the Strategic Transactions Committee determined that the August 15 Mill Road Proposal was reasonably likely to lead to a Superior Proposal. The Strategic Transactions Committee instructed representatives of PJSC and Latham to engage in discussions and negotiations with MRC and its advisors in accordance with the terms of the Revised Incipio Merger Agreement to attempt to increase the price of MRC’s proposal.

On August 17, 2016, the Company’s management and representatives of PJSC attended additional calls and discussions with representatives of MRC to provide and discuss the additional diligence materials MRC had requested prior to the delivery of the August 14 Mill Road Proposal.

On August 17, 2016, MRC submitted to the Company a revised written indication of interest to acquire all of the Company’s outstanding shares of Common Stock for $6.35 per share in cash, on terms materially identical to the August 15 Mill Road Proposal, other than the increased price per share and an increased termination fee of approximately $6.9 million (the “August 17 Mill Road Proposal”). The August 17 Mill Road Proposal indicated that MRC has the approval of its proposed debt financing sources in connection with the August 17 Mill Road Proposal, and it delivered into escrow its signature pages to the proposed merger agreement.

Later that day, the Strategic Transactions Committee met by telephone with management and representatives of PJSC and Latham to discuss the August 17 Mill Road Proposal. The Strategic Transactions Committee discussed the terms of the August 17 Mill Road Proposal, including the proposed $0.25 premium relative to Incipio’s revised offer price of $6.10 per share, as well as the relative timing of the proposed transactions with Incipio and MRC, the potential risks associated with a delay in a proposed transaction with MRC relative to the current proposed transaction with Incipio, the required payment of the $6.6 million termination fee to Incipio under the Revised Incipio Merger Agreement if the Company were to terminate the

 

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Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 17 Mill Road Proposal and the terms of the equity and debt commitments and the sponsor guarantee presented by MRC as part of the August 17 Mill Road Proposal. The Strategic Transactions Committee also noted that MRC had indicated that it had obtained approval from its debt financing sources and it had delivered into escrow its signature pages to the proposed merger agreement. After deliberations and consultation with representatives from Latham and PJSC, the Strategic Transactions Committee recommended to the Company Board that it determine that the August 17 Mill Road Proposal was a Superior Proposal and that failure to terminate the Revised Incipio Merger Agreement and enter into a definitive merger agreement on the terms contemplated by the August 17 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith would be inconsistent with its fiduciary duties under applicable law. The Strategic Transactions Committee also recommended that the Company Board authorize management, pursuant to the terms of the Revised Incipio Merger Agreement, to deliver written notice to Incipio of the Company Board’s determination and intention, at or after 12:00 a.m., Eastern Time, on August 23, 2016, to terminate the Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 17 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith, subject to Incipio’s rights pursuant to the Revised Incipio Merger Agreement to negotiate with and make revised proposals to the Company during that period.

Later that same night, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC and Latham to discuss the August 17 Mill Road Proposal. Following similar discussions and a discussion of the recommendation of the Strategic Transactions Committee, and upon further consultation with representatives of Latham and PJSC, the Company Board, other than Mr. Darling, who recused himself from the vote, determined that the August 17 Mill Road Proposal was a Superior Proposal and that failure to terminate the Revised Incipio Merger Agreement and enter into a definitive merger agreement on the terms contemplated by the August 17 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith would be inconsistent with its fiduciary duties under applicable law. The Company Board also authorized management to deliver a notice to Incipio consistent with the Strategic Transaction Committee’s recommendation. On August 17, 2016, the closing price of the Company’s Common Stock was $6.41 per share.

On August 17, 2016, the Company delivered written notice to Incipio of the Company Board’s determination that the August 17 Mill Road Proposal was a Superior Proposal, and of the Company’s intention, at or after 12:00 a.m., Eastern Time, on August 23, 2016, to terminate the Revised Incipio Merger Agreement to enter into a definitive merger agreement on the terms contemplated by the August 17 Mill Road Proposal and change its recommendation to the Company’s stockholders in connection therewith. Until such termination, Incipio had the right to make revised proposals to the Company pursuant to the terms of the Revised Incipio Merger Agreement.

On August 23, 2016, representatives of Incipio notified representatives of the Company that Incipio did not intend to submit a proposed amendment to the terms of the Revised Incipio Merger Agreement to the Company.

Later that day, the Strategic Transactions Committee held a special meeting by telephone, with members of management and representatives of PJSC and Latham participating, to discuss and evaluate the August 17 Mill Road Proposal. At this meeting, following a summary of developments relating to Incipio’s indication that it would not be submitting a counterproposal to the August 17 Mill Road Proposal:

 

    representatives of Latham again reviewed with the Strategic Transactions Committee their fiduciary duties when considering the proposed transaction by MRC and the existing transaction with Incipio;

 

    management and representatives of Latham reviewed with the Strategic Transactions Committee the outcome of the negotiations with Incipio and MRC and the terms and conditions of the August 17 Mill Road Proposal, and compared those terms and conditions to the existing transaction with Incipio; and

 

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    representatives of PJSC reviewed with the Strategic Transactions Committee PJSC’s financial analysis of the $6.35 per share cash consideration, and reviewed with the Strategic Transactions Committee the opinion that PJSC was prepared to deliver to the Company Board to the effect that, as of August 23, 2016 and based upon and subject to the factors and assumptions set forth therein, the $6.35 in cash per Company Share to be paid to the holders (other than MRC and its affiliates) of Company Shares pursuant to the Merger Agreement was fair from a financial point of view to such holders.

The Strategic Transactions Committee considered various reasons for and against terminating the Revised Incipio Merger Agreement and entering into the Merger Agreement with Parent and Purchaser. The Strategic Transactions Committee discussed the terms of the August 17 Mill Road Proposal, including the proposed $0.25 premium relative to Incipio’s revised offer price of $6.10 per share, as well as the relative timing, terms and conditions of the proposed transactions with Incipio and MRC, the potential risks associated with a delay in a proposed transaction with MRC relative to the current proposed transaction with Incipio, the required payment of the $6.6 million termination fee to Incipio under the Revised Incipio Merger Agreement if the Company were to terminate the Revised Incipio Merger Agreement to enter into the Merger Agreement and the terms of the equity and debt commitments and sponsor guarantee presented by MRC as part of the August 17 Mill Road Proposal. The Strategic Transactions Committee also noted that MRC had indicated that it still had approval from its debt financing sources and it had delivered into escrow its signature pages to the proposed merger agreement. The Strategic Transactions Committee also discussed Incipio’s determination not to propose an amendment to the Revised Incipio Merger Agreement. After further deliberations, the Strategic Transactions Committee recommended that the Company Board adopt resolutions to (i) withdraw the Company Board’s recommendation that the stockholders of the Company accept Incipio’s tender offer and tender their Company Shares pursuant thereto, (ii) terminate the Revised Incipio Merger Agreement in order to enter into the Merger Agreement, and pay the $6.6 million termination fee payable to Incipio in connection therewith, (iii) determine that the entry into the Merger Agreement is advisable and in the best interests of the Company and its stockholders, (iv) approve the form, terms and conditions of the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger and (v) recommend that the stockholders of the Company accept the Offer and tender their Company Shares to Purchaser pursuant to the Offer.

Immediately following the meeting of the Strategic Transactions Committee, the Company Board, other than Messrs. Alden, Kearl and Warnock, who continued to recuse themselves, met by telephone with management and representatives of PJSC and Latham to review and discuss the same information covered in the meeting of the Strategic Transactions Committee immediately prior. PJSC delivered to the Company Board an oral opinion, which was subsequently confirmed by delivery of a written opinion dated August 23, 2016, to the effect that, as of the date of such written opinion and based upon and subject to various assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken in preparing its opinion as set forth in such written opinion, the $6.35 per share cash consideration to be paid to the Company’s stockholders (other than as specified in such written opinion) pursuant to the Merger Agreement was fair, from a financial point of view, to such stockholders. The Company Board similarly considered the various reasons for and against approving the Merger Agreement. The Company Board also considered the recommendations of the Strategic Transactions Committee. After discussions with its financial and legal advisors and members of the Company’s senior management, and in light of the reasons considered, the Company Board, other than Mr. Darling, who recused himself from the vote, resolved to (i) withdraw the Company Board’s recommendation that the stockholders of the Company accept Incipio’s tender offer and tender their Shares pursuant thereto, (ii) terminate the Revised Incipio Merger Agreement in order to enter into the Merger Agreement, and pay the $6.6 million termination fee payable to Incipio in connection therewith, (iii) determine that the entry into the Merger Agreement is advisable and in the best interests of the Company and its stockholders, (iv) approve the form, terms and conditions of the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger and (v) recommend that the stockholders of the Company accept the Offer and tender their Company Shares to Purchaser pursuant to the Offer.

 

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Later that day, the Company delivered a notice of termination of the Revised Incipio Merger Agreement to Incipio. The parties to the Merger Agreement signed the Merger Agreement immediately following the termination of the Revised Incipio Merger Agreement. On August 23, 2016, the closing price of the Company’s Common Stock was $6.42 per share.

On August 24, 2016, the Company and MRC issued a joint press release announcing the termination of the Revised Incipio Merger Agreement and entry into the Merger Agreement. A copy of the press release is attached to this Schedule 14D-9 as Exhibit (a)(7) and is incorporated herein by reference. Later that day, the Company paid Incipio the $6.6 million termination fee payable to Incipio as a result of the termination of the Revised Incipio Merger Agreement.

Reasons for the Recommendation of the Company Board

In evaluating the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, and recommending that the Company’s stockholders accept the Offer and tender all of their Company Shares pursuant to the Offer, the Company Board and the Strategic Transactions Committee consulted with the Company’s senior management, Latham and PJSC and considered and analyzed a wide and complex range of factors. The Company Board and the Strategic Transactions Committee also consulted with Latham regarding the Company Board’s and the Strategic Transactions Committee’s fiduciary duties, legal due diligence matters and the terms of the Merger Agreement and related agreements. Based on these consultations, considerations and analyses, and the factors discussed below, the Company Board and the Strategic Transactions Committee concluded that entering into the Merger Agreement with Parent and Purchaser would yield the highest value reasonably available for the Company’s stockholders and is fair to, and in the best interests of, the Company’s stockholders.

The Company Board and the Strategic Transactions Committee believed the following material factors and benefits supported its determination and recommendation:

 

    Premium to Incipio Offer Price. The Company Board and the Strategic Transactions Committee considered the terms of the Merger Agreement, the Offer, the Merger and the other transactions contemplated thereby as compared to the Revised Incipio Merger Agreement and the transactions contemplated thereby, including the fact that the Offer Price represents a premium of $0.25 per share (or approximately 4.1%) over the offer price that had been offered by Incipio pursuant to the Revised Incipio Merger Agreement, and the fact that the Merger Agreement provided substantially identical terms to the Revised Incipio Merger Agreement, other than the increased offer price and termination fee.

 

    Premium to Market Price. The Company Board and the Strategic Transactions Committee considered the relationship of the Offer Price to the current and historical market prices of the Company Shares. The Offer Price to be paid in cash for each Company Share would provide stockholders of the Company with the opportunity to receive a significant premium over the recent historical undisturbed market price of the Company Shares. The Company Board and the Strategic Transactions Committee reviewed historical market prices, volatility and trading information with respect to the Company Shares, including the fact that the Offer Price represents:

 

    a premium of approximately 61.6% over the closing price per share of the Company Shares on the Nasdaq Global Market on June 7, 2016, the last trading day before the public filing by Mr. Alden and Ptarmagin of a statement on Schedule 13D that they had decided to explore making an offer to acquire the Company; and

 

    a premium of approximately 42.7% over the closing price per share of the Company Shares on the Nasdaq Global Market on June 22, 2016, the trading day before the execution of the Original Incipio Merger Agreement.

 

   

The Prospects of the Company. The Company Board and the Strategic Transactions Committee considered the Company’s prospects and risks if the Company were to remain an independent publicly traded company in connection with the entry into the Original Incipio Merger Agreement. The Company Board and the Strategic Transactions Committee discussed the Company’s current business

 

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and financial plans, including the risks and uncertainties associated with achieving and executing upon the Company’s business and financial plans in the short- and long-term, as well as the general risks of market conditions that could reduce the price of the Common Stock. Among the potential risks identified by the Company Board were:

 

    the Company’s ability to continue to grow its revenues and to maintain sales of its currently marketed products;

 

    the Company’s ability to successfully manufacture, distribute, commercialize and make profitable new products, including with respect to changing compatibility and connectivity standards within the audio accessories business and increasing manufacturing costs;

 

    the Company’s available resources relative to its competitors, many of which are substantially larger with greater financial, technical, promotional and other resources than the Company and with greater diversification of product lines, which allow them to compete more effectively on price, negotiate more effectively with retailers and licensors, and diversify their risk across various product categories;

 

    the Company’s ability, and the ability of the Company’s in-licensors, to obtain and maintain patent coverage for its product candidates, including risks related to acquiring adequate intellectual property protection for new product lines and lines of business, pending and any future patent infringement lawsuits, re-examinations and the risk of generic products competing with any products marketed by the Company;

 

    the Company’s reliance on several key retailers for the majority of the Company’s sales;

 

    the competitive nature of the Company’s technology-driven industry and target markets, particularly in light of the recent consolidation activity involving certain of the Company’s competitors;

 

    the current challenges facing the consumer products market generally, including the financial challenges and bankruptcies affecting brick and mortar retailers and the reduction in consumer spending;

 

    the Company’s ability to accurately forecast and predict sales cycles with retailers in the current retail environment and its potential effects on the Company’s financial metrics;

 

    pending and potential future material litigation and investigative matters against the Company or its officers and directors; and

 

    general risks and market conditions that could reduce the market price of the Company Shares.

 

    Certainty of Value. The Company Board and the Strategic Transactions Committee considered that the consideration to be received by the Company’s stockholders in the Offer and the Merger will consist entirely of cash, which provides liquidity and certainty of value to stockholders. The Company Board and the Strategic Transactions Committee believed this certainty of value was compelling compared to the long-term value creation potential of the Company’s business taking into account the risks of remaining independent and pursing the Company’s current business and financial plans.

 

    Potential Strategic Alternatives. The Company Board and the Strategic Transactions Committee considered possible alternatives to the acquisition by Parent (including the transactions contemplated by the Revised Incipio Merger Agreement), potential benefits and risks to the Company’s stockholders of these alternatives and the timing and likelihood of effecting such alternatives. The Company Board and the Strategic Transactions Committee also considered the Company Board’s and the Strategic Transactions Committee’s assessment that none of these alternatives was reasonably likely to present superior opportunities for the Company to create greater value for the Company’s stockholders, taking into account risks of execution as well as business, competitive, industry and market risks. The Company Board and the Strategic Transactions Committee also considered the possibility that Parent could withdraw its proposal if the Company delayed in proceeding with Parent’s Offer.

 

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    Full and Fair Value. The Company Board and the Strategic Transactions Committee believed that the Offer Price of $6.35 per Company Share represents full and fair value for the Company Shares, taking into account the Company Board’s and the Strategic Transactions Committee’s familiarity with the business strategy, assets, prospects and projected results for the 2016 to 2020 fiscal years, and the relative certainty of the consideration in cash for the Offer as compared to forecasted financial results.

 

    Negotiations with Parent and Terms of the Merger Agreement. The Company Board and the Strategic Transactions Committee believed that the Offer Price of $6.35 per Company Share represented the highest value reasonably obtainable for the Company Shares, based on the progress and outcome of its negotiations with Parent and Incipio, as well as a number of changes in the terms and conditions of the Merger Agreement from the version initially proposed by Parent that were favorable to the Company, and that the Offer Price was the highest price per Company Share that Parent was willing to pay and that the Merger Agreement contained the most favorable terms to the Company to which Parent was willing to agree. Terms of the Merger Agreement supporting the Company Board’s and the Strategic Transactions Committee’s belief include:

 

    Ability to Respond to Certain Unsolicited Acquisition Proposals. The Merger Agreement permits the Company Board, in furtherance of the exercise of its fiduciary duties under Delaware law, to engage in negotiations or discussions with any third-party that has made an unsolicited and written acquisition proposal that the Company Board determines, in good faith, constitutes or is reasonably likely to lead to a Superior Proposal (as defined in the Merger Agreement).

 

    Change of Recommendation. The Company Board has the right, prior to the purchase of Company Shares pursuant to the Offer, to withhold, withdraw, amend, modify or qualify, in a manner adverse to Parent or Purchaser, its recommendation to its stockholders of the Offer or to terminate the Merger Agreement to concurrently enter into a definitive Alternative Acquisition Agreement (as defined in the Merger Agreement), including in connection with a Superior Proposal (as defined in the Merger Agreement), provided that the Company Board may not make such an adverse recommendation change unless (i) the Company notifies Parent in writing at least three business days before the adverse recommendation change of its intention to take such action, and provides Parent with certain information relating to the Superior Proposal (as defined in the Merger Agreement) or other basis for the adverse recommendation change and (ii) the Company Board determines, after consultation with outside legal counsel and financial advisors, that the failure to do so would be inconsistent with its fiduciary duties under applicable law. After delivering notice to Parent of the potential recommendation change, the Company must consider in good faith any revisions to the terms of the Merger Agreement made by Parent, and if such terms are revised, then the Company Board may not change its recommendation unless it again finds that the failure to do so would still be inconsistent with its fiduciary duties. In the event of any material amendment or modification to any Superior Proposal (as defined in the Merger Agreement) or any material change to the facts and circumstances relating to the adverse recommendation change, the Company must notify Parent within two business days of any such amendment or modification and must negotiate in good faith with Parent regarding revisions to the terms of the Merger Agreement.

 

    Fiduciary Termination Right. The Company Board may terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement) if (i) the Company has materially complied with requirements set forth in the previous bullet and (ii) in the case of a Superior Proposal (as defined in the Merger Agreement), the Company pays to Parent $6,881,952 (the “Termination Fee”), which the Company Board believed was reasonable and would not likely deter competing bids.

 

    Conditions to Consummation of the Offer and Merger; Likelihood of Closing. The fact that Parent’s obligations to purchase Company Shares in the Offer and to close the Merger are subject to limited conditions and the transactions contemplated by the Merger Agreement are reasonably likely to be consummated.

 

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    Extension of Offer Period. The fact that the Purchaser must, if requested by the Company, extend the Offer for successive extension periods of 10 business days each (or any longer period as may be approved in advance by the Company) if at any scheduled expiration of the Offer any condition to the Offer has not been satisfied or waived (other than the minimum condition set forth in the Merger Agreement, which may not be waived by Purchaser), and must extend the Offer twice (and for further extension periods, in its sole and absolute discretion) for an extension period of 10 business days if all conditions to the Offer other than the minimum condition have been met.

 

    No Financing Condition. The representation of Parent and Purchaser that they would have access to sufficient cash resources to pay the amounts required to be paid under the Merger Agreement and that the Offer and the Merger are not subject to a financing condition.

 

    Availability of Expectation Damages. The fact that the Company and its stockholders are entitled to seek expectation damages in the event that Parent or Purchaser breaches the Merger Agreement, and that the payment of such damages are guaranteed by Mill Road pursuant to the terms of the Sponsor Guarantee.

 

    Speed and Likelihood of Completion. The Company Board and the Strategic Transactions Committee considered the anticipated timing of the consummation of the transactions contemplated by the Merger Agreement, including the structure of the transaction as a cash tender offer for all outstanding Company Shares, with the anticipated result of allowing stockholders to receive the Offer Price in a relatively short time frame, followed by the Merger in which stockholders (other than Parent, Purchaser or the Company or any wholly owned subsidiary of the foregoing) who do not validly exercise appraisal rights will receive the same consideration received by those stockholders who tender their Company Shares in the Offer. The Company Board and the Strategic Transactions Committee considered that the potential of closing in a relatively short time frame could also reduce the amount of time in which the Company’s business would be subject to the potential uncertainty of closing and related disruption. The Company Board and the Strategic Transactions Committee also considered the availability of Section 251(h) of the DGCL, which would permit Parent to close the Merger under Delaware law more quickly than alternative structures, and increase the likelihood that the Merger is consummated.

 

    Business Reputation of Mill Road and MRC. The Company Board and the Strategic Transactions Committee considered the business reputation, management and financial resources of Mill Road and MRC, including the financing commitment that Mill Road obtained from Cerberus Business Finance, LLC and PNC Bank, N.A. with respect to the transaction and the equity commitment and guarantee from Mill Road. The Company Board and the Strategic Transactions Committee believed that these factors supported the conclusion that a transaction with Parent and Purchaser could be completed relatively quickly and in an orderly manner.

 

    Opinion of the Company’s Financial Advisor. The Company Board considered the opinion of PJSC rendered to the Company Board on August 23, 2016, which was subsequently confirmed by delivery of a written opinion dated such date, to the effect that, as of August 23, 2016 and based upon and subject to the factors and assumptions set forth therein, the $6.35 in cash per Company Share to be paid to the holders (other than Parent and its affiliates) of Company Shares pursuant to the Merger Agreement was fair from a financial point of view to such holders, as more fully described below under the heading “—Opinion of the Company’s Financial Advisor.”

 

    Appraisal Rights. The Company Board and the Strategic Transactions Committee considered the fact that the stockholders that do not tender their Company Shares in the Offer and who properly exercise their appraisal rights under Delaware law will be entitled to such appraisal rights in connection with the Merger.

 

   

The Recommendation of the Strategic Transactions Committee. The Company Board considered the recommendation as to the advisability of the Offer, the Merger and the transactions contemplated by

 

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the Merger Agreement from the Strategic Transactions Committee, based on its close contact with the transaction process.

The Company Board and the Strategic Transactions Committee also considered a variety of uncertainties and risks and other potentially negative factors in its deliberations concerning the Offer, the Merger and the other transactions contemplated by the Merger Agreement, including, but not limited to, the following:

 

    No Stockholder Participation in Future Growth or Earnings. The nature of the Offer and the Merger as a cash transaction means that the stockholders will not participate in future earnings or growth of the Company and will not benefit from any appreciation in value of the combined company.

 

    Risk Associated with Failure to Complete the Offer and Consummate the Merger. The possibility that the transactions contemplated by the Merger Agreement, including the Offer and the Merger, might not be consummated, and the fact that if the Offer and the Merger are not consummated, (i) the Company’s directors, senior management and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the transaction, (ii) the Company will have incurred significant transaction costs, (iii) the Company’s continuing business relationships consultants, licensors, business partners and employees may be adversely affected, (iv) the trading price of the Company Shares could be adversely affected, and (v) the market’s perceptions of the Company’s prospects could be adversely affected, and, in each case, as compared to the corresponding risks in connection with the tender offer pursuant to the Revised Incipio Merger Agreement.

 

    Payment of the Termination Fee to Incipio. Pursuant to the terms of the Revised Incipio Merger Agreement, the Company was required to pay a $6.6 million termination fee to Incipio in connection with the termination of the Revised Incipio Merger Agreement. This payment may impact the Company’s liquidity prior to the Effective Time, and increases the risks to the Company associated with failure to complete the Offer or consummate the Merger, since the termination fee paid to Incipio may not be recoverable from Parent, Purchaser, MRC or Mill Road in the event of such failure.

 

    Interim Restrictions on Business Pending the Completion of the Offer and the Merger. Restrictions on the conduct of the Company’s business prior to the Effective Time due to pre-closing covenants in the Merger Agreement whereby the Company agreed that it will carry on its business in the ordinary course of business consistent with past practice. Subject to specified exceptions, the Company will not take a number of actions related to the conduct of its business without the prior written consent of Parent, which may have a material adverse effect on the Company’s ability to respond to changing market and business conditions in a timely manner or at all.

 

    No Solicitation and Termination Fee. The Merger Agreement precludes the Company from soliciting alternative acquisition proposals, and requires the Company to pay to Parent the Termination Fee in certain circumstances, including those described above in connection with entering into a Superior Proposal (as defined in the Merger Agreement), as well as if the Company Board changes its recommendation with respect to the Offer, or if the Merger Agreement is terminated for Parent’s failure to satisfy the Minimum Condition (as defined in the Merger Agreement) within six months after the Merger Agreement was signed and the Company enters into an alternative transaction within 12 months of that termination. The Company Board and the Strategic Transactions Committee also considered the fact that the Termination Fee was larger than the termination fee that was payable under the Revised Incipio Merger Agreement.

 

    Effects of Transaction Announcement. The effect of the public announcement of the Merger Agreement, including effects on the Company’s stock price, and the Company’s ability to attract and retain key management and scientific and research personnel during the pendency of the transactions contemplated by the Merger Agreement, as well as the likelihood of litigation in connection with the Merger.

 

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    Timing Risks. The amount of time it could take to complete the Offer and the Merger, including the risk that Parent and Purchaser may not receive the necessary regulatory approvals or clearances to complete the Offer or the Merger, or that governmental authorities could attempt to condition their approvals or clearances of the Offer or the Merger on one or more of the parties’ compliance with certain burdensome terms or conditions which may cause one of the Offer conditions not to be satisfied, and, in each case, as compared to the corresponding risks and timing in connection with the tender offer pursuant to the Revised Incipio Merger Agreement.

 

    Taxable Consideration. The gains from the consideration to be received by the stockholders in the Offer and the Merger will be taxable to the stockholders for federal income tax purposes.

 

    Potential Conflicts of Interest. The fact that certain of the Company’s officers and directors, including those that were recused from the Company Board during the process, may have interests in the transactions contemplated by the Merger Agreement that are different from, or in addition to, those of the Company’s other stockholders.

 

    Potential that Minimum Condition may not be met. The fact that the Minimum Condition may not be met because certain stockholders hold a significant number of Company Shares, and such stockholders may decide not to tender.

The foregoing discussion of the information and factors considered by the Company Board and the Strategic Transactions Committee is intended to be illustrative and not exhaustive, but includes the material reasons and factors considered by the Company Board and the Strategic Transactions Committee in reaching their respective conclusions and recommendation in relation to the Offer, the Merger, the Merger Agreement and the transactions proposed thereby. In view of the wide variety of reasons and factors considered and the complexity of these matters, the Company Board and the Strategic Transactions Committee did not find it practical to, and did not, quantify or otherwise assign relative weights to the specified factors considered in reaching their determinations or the reasons for such determinations. Individual directors may have given differing weights to different factors or may have had different reasons for their ultimate determination. In addition, the Company Board and the Strategic Transactions Committee did not reach any specific conclusion with respect to any of the factors or reasons considered. Instead, the Company Board and the Strategic Transactions Committee conducted an overall analysis of the factors and reasons described above and determined in their business judgment that, in the aggregate, the potential benefits of the Offer and the Merger to the stockholders of the Company outweighed the risks or potential negative consequences.

Opinion of the Company’s Financial Advisor

PJSC delivered its opinion to the Company Board that, as of August 23, 2016 and based upon and subject to the factors and assumptions set forth therein, the $6.35 in cash per Company Share to be paid to the holders (other than Parent and its affiliates) of Company Shares pursuant to the Merger Agreement was fair from a financial point of view to such holders.

The full text of the written opinion of PJSC, dated August 23, 2016, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex I. PJSC provided its opinion for the information and assistance of the Company Board in connection with its consideration of the Offer and the Merger. The PJSC opinion is not a recommendation as to whether or not any holder of Company Shares should tender such Company Shares in connection with the Offer or how any such holder should act on any matter relating to the Offer and the Merger.

For purposes of its opinion, PJSC:

 

    reviewed certain publicly available financial statements and other information of the Company;

 

    reviewed certain internal financial statements and other financial and operating data concerning the Company prepared and provided to PJSC by the management of the Company and approved for PJSC’s use by the Company;

 

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    reviewed certain financial projections for the Company prepared and provided to PJSC by the management of the Company and approved for PJSC’s use by the Company (the “Projections”);

 

    discussed the past and current operations, financial condition and prospects of the Company with management of the Company;

 

    reviewed the reported prices and trading activity of the Company Shares;

 

    compared the financial performance and condition of the Company and the reported prices and trading activity of the Company Shares with that of certain other publicly traded companies that PJSC deemed relevant;

 

    reviewed publicly available information regarding the financial terms of certain transactions that PJSC deemed relevant, in whole or in part, to the Offer and the Merger;

 

    participated in certain discussions among management and other representatives of each of Parent and the Company;

 

    reviewed the Merger Agreement; and

 

    performed such other analyses as PJSC deemed appropriate.

PJSC assumed and relied upon the accuracy and completeness of the information reviewed by PJSC for the purposes of its opinion and PJSC did not assume any responsibility for the independent verification of such information and relied on such information being complete and correct. PJSC relied on assurances of the management of the Company that they are not aware of any facts or circumstances that would make such information inaccurate or misleading in any respect material to PJSC’s opinion. With respect to the Projections, PJSC assumed that the Projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. PJSC did not conduct a physical inspection of the facilities or property of the Company. PJSC did not assume any responsibility for or perform any independent valuation or appraisal of the assets or liabilities of the Company, nor was PJSC furnished with any such valuation or appraisal. Furthermore, PJSC did not consider any tax, accounting or legal effects of the Offer and the Merger or transaction structure on any person or entity.

PJSC also assumed that the Offer and the Merger will be consummated in accordance with the terms of the Merger Agreement, without waiver, modification or amendment of any material term, condition or agreement (including, without limitation, the consideration to be received by the holders of the Company Shares in the Offer and the Merger), and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Offer and the Merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Company or the contemplated benefits of the Offer and the Merger. PJSC further assumed that all representations and warranties set forth in the Merger Agreement were and will be true and correct as of all the dates made or deemed made and that all parties to the Merger Agreement will comply with all covenants of such parties thereunder.

PJSC’s opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to PJSC as of, August 22, 2016. In particular, PJSC does not express any opinion as to the prices at which the Company Shares may trade at any future time or as to the impact of the Offer and the Merger on the solvency or viability of the Company, Parent or Purchaser or the ability of the Company, Parent or Purchaser to pay their respective obligations when they come due. Furthermore, PJSC’s opinion does not address the Company’s underlying business decision to undertake the Offer and the Merger, and the opinion does not address the relative merits of the Offer and the Merger as compared to any alternative transactions that might be available to the Company. PJSC’s opinion does not address any other aspect or implication of the Offer and the Merger or any other agreement, arrangement or understanding entered into in connection with the Offer and the Merger or otherwise except as expressly identified therein. PJSC expresses no view as to, and PJSC’s opinion does not address, the fairness (financial or otherwise) of the amount or nature or any other aspect of any

 

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compensation to any officers, directors or employees of any parties to the Offer and the Merger, or any class of such persons, relative to the consideration to be paid to the holders (other than Parent and its affiliates) of the Company Shares pursuant to the Merger Agreement. The issuance by PJSC of its opinion was authorized by PJSC’s fairness opinion committee.

The following summarizes the significant financial analyses performed by PJSC and provided to, and reviewed with, the Company Board in connection with the delivery of PJSC’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJSC’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of PJSC’s financial analyses. The following summary, however, does not purport to be a complete description of the financial analyses performed by PJSC, nor does the order of analyses described represent relative importance or weight given to those analyses by PJSC. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before August 22, 2016, and is not necessarily indicative of current market conditions.

Historical Company Share Trading Analysis.

PJSC reviewed the historical trading prices and volumes for the Company Shares for the 52-week period ending August 22, 2016. In addition, PJSC analyzed the consideration to be paid to holders of Company Shares pursuant to the Merger Agreement in relation to, among other things, (i) the closing price per Company Share on June 7, 2016 (the “Undisturbed Date”), the last trading day before the public filing by a stockholder of a statement on Schedule 13D that such stockholder has decided to explore making an offer to acquire the Company, (ii) the closing price per Company Share as of June 22, 2016 (the “Pre Announcement Date”), the last trading day prior to the announcement of the Original Incipio Merger Agreement, (iii) the closing price per Company Share as of August 22, 2016, (iv) the highest closing price per Company Share for the 52-week period ending August 22, 2016, and (v) the lowest closing price per Company Share for the 52-week period ending August 22, 2016.

This analysis indicated that the price per Company Share to be paid to holders of Company Shares pursuant to the Merger Agreement represented:

 

    a premium of 61.6% based on the closing price per Company Share, as of the Undisturbed Date, of $3.93;

 

    a premium of 42.7% based on the closing price per Company Share, as of the Pre-Announcement Date, of $4.45;

 

    a discount of 1.1% based on the closing price per Company Share, as of August 22, 2016, of $6.42;

 

    a discount of 10.3% based on the closing price per Company Share, as of August 28, 2015, of $7.08, which was the highest closing price for the 52-week period ending August 22, 2016; and

 

    a premium of 116.0% based on the closing price per Company Share, as of January 20, 2016, of $2.94, which was the lowest closing price for the 52-week period ending August 22, 2016.

PJSC also analyzed the enterprise value (which represents the equity value plus book values of total debt, including preferred stock and minority interest, less cash) (“EV”) calculated based on (i) the closing price per Company Share as of the Undisturbed Date, (ii) the closing price per Company Share as of the Pre-Announcement Date, and (iii) the closing price per Company Share as of August 22, 2016.

 

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This analysis indicated that the EV of $155.4 million, calculated based on the price per Company Share to be paid to holders of Company Shares pursuant to the Merger Agreement, represented:

 

    a premium of 116.1% to the EV of $71.9 million based on the closing price per Company Share as of the Undisturbed Date;

 

    a premium of 78.5% to the EV of $87.1 million based on the closing price per Company Share as of the Pre-Announcement Date; and

 

    a premium of 6.4% to the EV of $146.0 million based on the closing price per Company Share as of August 22, 2016.

Equity Research Analyst Price Targets.

PJSC reviewed selected public market trading price targets for the Company Shares prepared and published by three Wall Street research analysts that published or confirmed price targets as of (i) the Undisturbed Date and (ii) August 22, 2016. PJSC reviewed the most recent 12-month price target published by each analyst as of those two dates. These targets reflect each analyst’s estimate of the public market trading price of the Company Shares within 12 months from the time the price target was published. As of the Undisturbed Date, the range of selected equity analyst price targets for the Company Shares was from $4.50 to $7.00 per Company Share. As of August 22, 2016, the range of selected equity analyst price targets for the Company Shares was from $6.00 to $6.65 per Company Share.

PJSC also reviewed the potential acquisition prices for the Company Shares prepared and published by the three Wall Street research analysts after the Undisturbed Date. The range of potential acquisition prices for the Company Shares was from $5.50 to $6.65 per Company Share.

The public market trading price targets published by securities research analysts do not necessarily reflect current market trading prices for the Company Shares, and these estimates are subject to uncertainties, including the future financial performance of the Company and future financial market conditions.

Selected Publicly Traded Companies Analysis.

PJSC reviewed and compared certain financial information for the Company to corresponding financial information for the following publicly traded corporations in the electronics industry (collectively, the “selected companies”), which PJSC divided into a large-cap category and a small-cap category:

Large-Cap

 

    Garmin;

 

    Harman;

 

    Logitech; and

 

    Plantronics.

Small-Cap

 

    ZAGG;

 

    Voxx;

 

    BigBen Interactive;

 

    Turtle Beach; and

 

    Mad Catz.

 

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Although none of the selected companies is directly comparable to the Company, the companies included were chosen because they are publicly traded companies with operations that, for purposes of analysis, may be considered similar to certain operations of the Company.

PJSC also calculated and compared various financial multiples for the selected companies and the Company based on historical financial data from publicly available sources, forecasts from Wall Street research available as of August 22, 2016 for the selected companies, and the Projections.

With respect to the selected companies and the Company, PJSC calculated:

 

    EV as a multiple of latest twelve months (“LTM”) net sales

 

    EV as a multiple of LTM earnings before interest, tax, depreciation, amortization (“EBITDA”);

 

    EV as a multiple of estimated EBITDA for 2016;

 

    EV as a multiple of estimated EBITDA for 2017;

 

    EV as a multiple of LTM earnings before interest and tax (“EBIT”);

 

    price per share as a multiple of estimated earnings per share (“EPS”) for 2016; and

 

    price per share as a multiple of estimated EPS for 2017.

The table below summarizes the results of these calculations:

 

Enterprise Value as

a Multiple of:

       

Large Cap Selected
Companies

  

Small Cap Selected
Companies

LTM Net Sales

   Range:    1.0x – 3.2x    0.2x – 0.8x
   Median:    1.8x    0.5x

LTM EBITDA

   Range:    8.0x – 15.3x    6.7x – 10.3x
   Median:    13.2x    7.6x

2016E EBITDA

   Range:    7.9x – 16.4x    4.4x – 7.4x
   Median:    12.2x    5.7x

2017E EBITDA

   Range:    7.1x – 14.1x    3.7x – 8.1x
   Median:    11.1x    4.3x

LTM EBIT

   Range:    10.0x – 20.9x    13.4x – 15.0x
   Median:    15.2x    14.2x

Price as a Multiple of:

              

2016E EPS

   Range:    13.5x – 24.6x    11.9x – 15.9x
   Median:    19.1x    14.1x

2017E EPS

   Range:    11.9x – 20.6x    7.4x – 10.3x
   Median:    16.8x    9.2x

 

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PJSC then used an illustrative range of multiples to calculate a range of implied values for the Company Shares based on the Projections, as summarized below. The ranges of multiples used by PJSC were chosen by PJSC utilizing its professional judgment and experience, taking into account PJSC’s review of the multiples of the selected companies.

 

Enterprise Value
as a multiple of:

  

Range of Multiples

  

Implied Per Company
Share Value

LTM Net Sales

   0.25x – 0.60x    $3.75 – $6.88

LTM EBITDA

   6.5x – 9.0x    4.76 – 6.00

Estimated 2016 EBITDA

   4.5x – 7.5x    4.99 – 7.25

Estimated 2017 EBITDA

   3.5x – 4.5x    4.90 – 5.86

LTM EBIT

   13.5x – 15.0x    3.56 – 3.79

Price Per Company Share
as a multiple of:

  

Range of Multiples

  

Implied Per Company
Share Value

Estimated 2016 EPS

   12.0x – 16.0x    $2.88 – 3.84

Estimated 2017 EPS

   7.5x – 10.5x    2.74 – 3.84

PJSC then adjusted this range of implied values per Company Share by applying to them an illustrative “control premium” of 35.5%, which reflects the average control premium (to the closing price one day prior to announcement) paid in all announced cash transactions for U.S. based targets with enterprise values ranging from $100 million to 300 million from August 2013 to August 2016, excluding finance, brokerage, insurance and real estate companies, as reported by publicly available sources. The implied per Company Share values, including a “control premium,” resulting from this analysis were as follows:

 

Enterprise Value
as a multiple of:

  

Implied Per Company Share Value Including 35.5%
Control Premium

LTM Net Sales

   $5.08 – $9.33

LTM EBITDA

   6.45 – 8.13

Estimated 2016 EBITDA

   6.76 – 9.83

Estimated 2017 EBITDA

   6.65 – 7.94

LTM EBIT

   4.82 – 5.14

Price Per Company Share
as a multiple of:

  

Implied Per Company Share Value Including 35.5%
Control Premium

Estimated 2016 EPS

   $3.90 – 5.20

Estimated 2017 EPS

   3.72 – 5.20

 

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Selected Precedent Transactions Analysis.

PJSC analyzed certain publicly available information relating to the following selected transactions in the electronics industry since 2005 (collectively, the “selected transactions”):

 

Target

  

Acquiror

  

Announcement Date

mophie, inc.

   ZAGG Inc    February 2016

Cobra Electronics Corp

   Monomoy Capital Partners    August 2014

Teac Corporation

   Gibson Guitar Corp    March 2013

Nixon, Inc.

   Trilantic Capital Management    February 2012

iFrogz Inc.

   ZAGG Inc.    June 2011

Klipsch Group Inc.

   VOXX International Corporation    January 2011

D&M Holdings Inc.

   Bain Capital Private Equity    June 2008

Martin Audio Ltd.

   LOUD Technologies    March 2007

International DisplayWorks, Inc.

   Flextronics International Ltd.    September 2006

Polk Audio, Inc.

   DEI Holdings, Inc.    August 2006

Altec Lansing Technologies, Inc.

   Plantronics, Inc.    July 2005

Boston Acoustics, Inc.

   D&M Holdings Inc.    June 2005

Although none of the selected transactions is directly comparable to the Offer and the Merger, the target companies in the selected transactions were companies with operations that, for the purposes of analysis, may be considered similar to certain of the Company’s results and product candidate profile, and as such, for purposes of analysis, the selected transactions may be considered similar to the Offer and the Merger.

For each of the selected transactions, PJSC calculated and compared the enterprise value implied by the transaction as a multiple of the LTM Net Sales, LTM EBITDA and LTM EBIT of the target (each, a “EV/LTM Net Sales Multiple”, a “EV/LTM EBITDA Multiple” and a “EV/LTM EBIT Multiple,” respectively). The following table presents the results of this analysis:

 

Transaction Enterprise Value as

a Multiple of:

   Selected Transactions
  

Range

   Median   Mean

LTM Net Sales

   38.3% – 371.2%    117.5%   138.6%

LTM EBITDA

   5.6x – 34.4x    8.7x   11.4x

LTM EBIT

   6.2x – 59.9x    10.2x   17.3x

PJSC calculated an illustrative range of implied values per Company Share by applying a range of EV/LTM Net Sales Multiples of 50% to 180%, EV/LTM EBITDA Multiples of 6.0x to 11.0x, and EV/LTM EBIT Multiples of 7.0x to 17.0x to the LTM Net Sales, LTM EBITDA, and LTM EBIT, respectively, of the Company, as provided by Company management. This analysis resulted in an illustrative range of implied equity values of $4.25 to $6.58 per Company Share. The range of EV/LTM Net Sales Multiples, EV/LTM EBITDA Multiples, and EV/LTM EBIT Multiples used by PJSC were chosen by PJSC utilizing its professional judgment and experience, taking into account PJSC’s review of the selected transactions.

Illustrative Discounted Cash Flow Analysis.

PJSC performed an illustrative discounted cash flow analysis on the Company using the Projections. Using discount rates ranging from 13.0% to 15.0%, reflecting estimates of the Company’s weighted average cost of capital, PJSC discounted to present value as of August 22, 2016, (i) estimates of free cash flow for the Company for the fourth quarter of 2016 through 2020, calculated as provided below based on the Projections, and (ii) a range of illustrative terminal values for the Company, which were calculated by applying perpetuity growth rates ranging from 3.0% to 7.0% to a terminal year estimate of the free cash flow to be generated by the Company, as reflected in the Projections.

 

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The estimates of free cash flow for the Company for the fourth quarter of 2016 through 2020 were derived by PJSC using the EBIT provided in the Projections. Using the EBIT provided in the Projections and a tax rate of 30.5% for the fourth quarter of 2016 and of 29.0% for 2017 through 2020, PJSC first calculated tax-effected EBIT for the fourth quarter of 2016 through 2020. PJSC then added depreciation and amortization estimates provided in the Projections, and subtracted estimated expenditures and changes in net working capital, also provided in the Projections.

Adding the ranges of present values of the estimates of free cash flow and terminal values generated above, PJSC derived ranges of illustrative enterprise values for the Company. PJSC then added to the range of illustrative enterprise values it derived for the Company the amount of net cash, as provided by the management of the Company, to derive a range of illustrative equity values for the Company. PJSC then divided this range of illustrative equity values by the number of the Company’s fully diluted shares, as provided by the management of the Company, to derive a range of illustrative present values of $5.61 to $9.06 per Company Share.

Illustrative Present Value of Future Company Share Price Analysis.

PJSC performed illustrative analysis of the implied present values per Company Share, as of August 22, 2016, based on theoretical future values of the Company Shares, as of August 22, 2016 and as of January 1 of each year from 2017 through 2019, derived by PJSC based on the Projections.

Using the Projections, PJSC derived a range of theoretical values per Company Share as of August 22, 2016 and as of January 1 of each year from 2017 through 2020, by applying, with respect to each such date, illustrative one year forward price to earnings per Company Share multiples ranging from 12.0x to 19.1x to the estimate of the earnings per Company Share for the current year, as reflected in the Projections, to derive ranges of implied equity values per Company Share as of such dates. As noted above, PJSC assumed that the Projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company.

By applying a discount rate of 14.5%, reflecting an estimate of the Company’s cost of equity, PJSC discounted to present value, as of August 22, 2016, the ranges of theoretical values of the Company Shares, as of August 22, 2016 and as of January 1 of each year from 2017 through 2020. PJSC then compared the $6.35 in cash per Company Share to be paid to the holders (other than Parent and its affiliates) of Company Shares pursuant to the Merger Agreement, to the range of illustrative present values per Company Share of $3.12 to $9.43, which is the range derived from this analysis when calculating the implied present values per Company Share as of August 22, 2016 and as of January 1 of each year from 2017 through 2019 and applying illustrative one year forward price to earnings per Company Share multiples ranging from 13.0x to 19.1x.

Illustrative Leveraged Buyout Analysis.

PJSC performed an illustrative leveraged buyout analysis to determine the range of illustrative prices per Company Share a hypothetical financial buyer would be willing to pay to acquire the Company on a standalone basis, factoring in the payment of a $6.6 million termination fee by the buyer. For purposes of this analysis, PJSC assumed a transaction date of September 30, 2016, a target exit of year-end of 2020, an illustrative annual internal rate of return to equity ranging from 20.0% to 25.0% to be realized upon exit, an exit EBITDA multiple ranging from 5.0x to 7.0x, a hypothetical revolver draw of $25 million at an interest rate of LIBOR plus 2.75%, and a hypothetical institutional term loan of $85 million at an interest rate of LIBOR plus 7.5% per annum. Based upon the foregoing assumptions, PJSC derived an illustrative range of prices per share of the Company Shares of $6.39 to $8.31.

Miscellaneous

In arriving at PJSC’s opinion, PJSC performed a variety of financial analyses, the material portions of which are summarized above. The preparation of a fairness opinion is a complex process and is not necessarily

 

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susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying PJSC’s opinion. In arriving at its fairness determination, PJSC considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, PJSC made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to the Company or the Offer and the Merger.

PJSC prepared these analyses for purposes of PJSC’s providing its opinion to the Company Board as to the fairness from a financial point of view to the holders (other than Parent and its affiliates) of Company Shares of the $6.35 in cash per Company Share to be paid to such holders of Company Shares pursuant to the Merger Agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Company, Parent, PJSC or any other person assumes responsibility if future results are materially different from those forecast.

The $6.35 in cash per Company Share was determined through arm’s-length negotiations between the Company and Parent and was approved by the Company Board. PJSC provided advice to the Company during these negotiations. PJSC did not, however, recommend any specific amount of consideration to the Company or the Company Board or that any specific amount of consideration constituted the only appropriate consideration for the Offer and the Merger.

As described above, PJSC’s opinion to the Company Board was one of many factors taken into consideration by the Company Board in making its determination to approve the Merger Agreement. The foregoing summary does not purport to be a complete description of the analyses performed by PJSC in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of PJSC attached as Annex I.

Natixis, S.A. (“Natixis”), which became the holder of a majority of PJSC’s outstanding equity on June 8, 2016, is, together with its affiliates, engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management, insurance and other financial and non-financial activities and services for various persons and entities. Natixis and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of the Company, Parent, any of their respective affiliates and third parties, including MRC and its affiliates and portfolio companies, or any currency or commodity that may be involved in the Offer and the Merger.

The Company selected PJSC as its financial advisor because it is a recognized financial advisory firm that has substantial experience in transactions similar to the Offer and the Merger. Pursuant to a letter agreement dated July 17, 2015, as amended on February 26, 2016 and on August 3, 2016, the Company engaged PJSC to act as its financial advisor in connection with the Offer and the Merger. The engagement letter between the Company and PJSC provides for a transaction fee that is estimated, based on the information available as of the date of announcement, at approximately $4.9 million, a substantial portion of which is contingent upon consummation of the Offer and the Merger and a portion of which was payable upon the delivery by PJSC of its opinion. In addition, the Company has agreed to reimburse PJSC for its expenses and to indemnify PJSC against certain liabilities arising out of its engagement by the Company. In the past, PJSC has provided financial advisory services to the Company and its affiliates, including having delivered opinions on June 23, 2016 and August 3, 2016 to the Company Board as to the fairness to the holders (other than Incipio and its affiliates) of Company Shares from a financial point of view of the consideration to be paid to such holders pursuant to

 

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respective merger agreements with Incipio. In the past two years, other than fees received in connection with the delivery of the opinions on June 23, 2016 and August 3, 2016, which fees will be credited against the amount, if any, of the aforementioned estimated transaction fee actually paid to PJSC, PJSC has not received any material fees for rendering these services. In the future, PJSC, Natixis and their respective affiliates may provide financial advisory services to the Company, Parent, MRC and their respective affiliates and, in the case of MRC, portfolio companies and in the future may receive compensation for rendering these services. In addition, Natixis or its affiliates may have co-invested with MRC from time to time and may have invested in limited partnership units of affiliates of MRC. PJSC has not provided financial advisory services to Parent, Purchaser and any of their respective affiliates, and Natixis has advised PJSC that, in the past two years, it has not provided any corporate or investment banking services to Parent, Purchaser or any of their respective affiliates.

Certain Projections.

The Company does not, as a matter of course, publicly disclose forecasts or projections as to future performance, earnings or other results due to the inherent unpredictability of the underlying assumptions, estimates and projections. However, the Company’s management regularly prepares internal financial forecasts regarding its future operations for subsequent fiscal years.

In connection with the Company’s strategic planning process, the Company’s management prepared and provided to the Company Board, MRC and PJSC risk-adjusted, forward-looking financial information for the fiscal years 2016 through 2020 based upon projections developed by the Company. These internal, risk-adjusted financial forecasts for the fiscal years 2016 through 2020 (the “Forecasts”) were reviewed by the Company Board and used by PJSC in connection with their opinion, dated August 23, 2016, to the Company Board and related financial analyses. The Forecasts are subject to certain assumptions, risks and limitations, as described below. A summary of the Forecasts is set forth below.

The Forecasts were not prepared with a view toward public disclosure, nor were they prepared with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or generally accepted accounting principles. In addition, the Forecasts were not prepared with the assistance of or reviewed, compiled or examined by independent accountants. The Forecasts do not comply with U.S. generally accepted accounting principles (“GAAP”). The summary of the Forecasts is not being included in this Schedule 14D-9 to influence any stockholder’s decision whether to tender his, her or its Company Shares in the Offer, but because these Forecasts were made available to the Company Board, MRC and PJSC. The Forecasts may differ from publicized analyst estimates and forecasts and do not take into account any events or circumstances after the date they were prepared, including the announcement of the Offer and Merger.

The Forecasts were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of the Company’s management. Important factors that may affect actual results and result in such forecasts not being achieved include, but are not limited to: failure to consummate the Merger; the effects of disruption caused by the transaction making it more difficult to maintain relationships with employees, collaborators, vendors and other business partners; the risk that stockholder litigation in connection with the Offer or the Merger may result in significant costs of defense, indemnification and liability; and risks and uncertainties pertaining to the Company’s business, including the risks and uncertainties detailed in the Company’s public periodic filings with the SEC. In addition, the Forecasts may be affected by the Company’s ability to achieve strategic goals, objectives and targets over the applicable period. These assumptions upon which the Forecasts were based necessarily involve judgments with respect to, among other things, future economic, competitive and regulatory conditions and financial market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. The Forecasts also reflect assumptions as to certain business decisions that are subject to change.

Accordingly, there can be no assurance that the projections will be realized, and actual results may vary materially from those shown. The inclusion of the Forecasts in this Schedule 14D-9 should not be regarded as an

 

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indication that the Company, Parent, Purchaser, Mill Road or MRC or PJSC or their respective affiliates, officers, directors, advisors or other representatives considered or consider the Forecasts necessarily predictive of actual future events, and the Forecasts should not be relied upon as such. None of the Company, PJSC, or their respective affiliates, officers, directors, advisors or other representatives can give any assurance that actual results will not differ from these Forecasts, and the Company undertakes no obligation to update or otherwise revise or reconcile the Forecasts to reflect circumstances existing after the date such Forecasts were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error. Neither the Company, nor, to the knowledge of the Company, PJSC intends to make publicly available any update or other revisions to these Forecasts. None of the Company or its respective affiliates, officers, directors, advisors or other representatives has made or makes any representation to any stockholder or other person regarding the ultimate performance of the Company compared to the information contained in the Forecasts or that forecasted results will be achieved. The Company has made no representation to Parent or Purchaser, in the Merger Agreement or otherwise, concerning these Forecasts.

The estimates of EBITDA included in the Forecasts were calculated using GAAP and other measures which are derived from GAAP, but such estimates constitute non-GAAP financial measures within the meaning of applicable rules and regulations of the SEC. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies.

In light of the foregoing factors and the uncertainties inherent in these projections, stockholders are cautioned not to place undue, if any, reliance on these projections.

 

(Amounts in millions)    Q4 2016     2016     2017     2018     2019     2020  

Net Revenue

   $ 119.6      $ 287.0      $ 320.2      $ 369.2      $ 428.6      $ 482.8   

EBITDA Pre-Stock Based Compensation

     23.0        27.6        33.8        41.5        49.8        58.6   

EBITDA Post-Stock Based Compensation

     21.9        22.8        28.7        36.7        44.8        53.4   

EBIT

     18.6        11.0        16.3        23.0        30.7        39.4   

Tax Rate

     30.5     30.5     29.0     29.0     29.0     29.0

Diluted E.P.S.

     0.45        0.24        0.37        0.52        0.68        0.86   

Capital Expenditures

     2.2        9.7        11.7        11.7        13.3        13.2   

Source / (Use) of Cash from Change in Net Working Capital

     (10.3     22.4        (7.7     (9.8     (11.8     (10.2

Unlevered Free Cash Flow

     2.2        28.8        3.5        8.5        10.9        18.6   

Intent to Tender.

To the knowledge of the Company after making reasonable inquiry, all of the Company’s executive officers and directors currently intend to tender or cause to be tendered all Company Shares held of record or beneficially owned by such person or entity pursuant to the Offer. The foregoing does not include any Company Shares over which, or with respect to which, any such executive officer, director or affiliate acts in a fiduciary or representative capacity or is subject to the instructions of a third party with respect to such tender.

 

Item 5. Persons/Assets Retained, Employed, Compensated or Used.

In connection with PJSC’s services as the financial advisor to the Company Board, the Company has agreed to pay PJSC an aggregate fee of approximately $4.9 million, $1.1 million of which was payable upon the rendering of PJSC’s opinion to the Company Board dated June 23, 2016 in connection with the Original Incipio Merger Agreement, $250,000 of which was payable upon the rendering of PJSC’s opinion to the Company Board dated August 3, 2016 in connection with the Revised Incipio Merger Agreement, $250,000 of which was payable upon the rendering of PJSC’s opinion to the Company Board dated June 23, 2016 in connection with the Merger Agreement, and approximately $3.3 million of which is payable contingent upon consummation of the

 

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Transactions. In addition, the Company has agreed to reimburse certain of PJSC’s expenses arising, and to indemnify PJSC against certain liabilities that may arise, out of PJSC’s engagement.

Additional information pertaining to the retention of PJSC by the Company in Item 4 under the heading “Background and Reasons for the Company Board’s Recommendation—Opinion of the Company’s Financial Advisor” is hereby incorporated by reference in this Item 5.

Neither the Company, nor any person acting on its behalf, has employed, retained or agreed to compensate any other person or class of persons to make solicitations or recommendations in connection with the Offer or the Merger, except that such solicitations or recommendations may be made by directors, officers or employees of the Company, for which services no additional compensation will be paid.

 

Item 6. Interest in Securities of the Subject Company.

No transactions in the Company Shares have been effected during the past 60 days by the Company, or, to the Company’s knowledge after making reasonable inquiry, any of the directors, executive officers, subsidiaries or affiliates of the Company, except for the transactions set forth below:

See chart of transactions below:

 

Name of Person

   Transaction
Date
     Number of
Shares
     Sale,
Purchase or
Exercise Price
per Share
(If Applicable)
     Nature of Transaction  

Rick Alden

     08/09/16         25,000       $ 6.17         Sale (1) 

Samuel Paschel

     08/06/16         5,816       $ 6.24         Sale (2) 

Patrick Grosso

     07/15/16         2,189       $ 6.10         Sale (2) 

Rick Alden

     07/12/16         25,000       $ 6.11         Sale (1) 

 

(1) The sale was effected pursuant to a Rule 10b5-1 trading plan by Rick Alden.
(2) Represents shares withheld for tax purposes upon the vesting of Company RSU Awards.

 

Item 7. Purposes of the Transaction and Plans or Proposals.

Except as indicated in this Schedule 14D-9 (including in the exhibits and annexes hereto), (a) the Company is not undertaking or engaged in any negotiations in response to the Offer that relate to, or would result in: (i) a tender offer for or other acquisition of the Company’s securities by the Company, any of its subsidiaries, or any other person; (ii) any extraordinary transaction such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (iii) any purchase, sale or transfer of a material amount of assets of the Company or any of its subsidiaries; or (iv) any material change in the present dividend rates or policy, or indebtedness or capitalization of the Company and (b) there are no transactions, board resolutions or agreements in principle or signed contracts in response to the Offer that relate to, or would result in, one or more of the events referred to in clause (a) of this paragraph.

 

Item 8. Additional Information.

Named Executive Officer Golden Parachute Compensation.

The information set forth in the table below is intended to comply with Item 402(t) of Regulation S-K, which requires disclosure of information about certain compensation for each named executive officer that is based on or otherwise relates to the Offer and the Merger.

If the Offer is completed in accordance with the terms of the Merger Agreement, the consummation of the Offer will constitute a “change in control” under the terms of the Amended and Restated Employment

 

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Agreements with the Company’s named executive officers. The table below describes the estimated potential payments to each of the Company’s named executive officers under the terms of their Amended and Restated Employment Agreements and equity awards. The amounts shown reflect only the additional payments or benefits that a named executive officer would have received upon the occurrence of the named executive officer’s termination by the Company other than for cause or the named executive officer’s resignation with good reason, each within 18 months following a change in control of the Company. The amounts shown do not include the value of payments or benefits that would have been earned, or any amounts associated with equity awards that would vest pursuant to their terms on or prior to the closing of the Offer and the Merger, absent such a termination. Please note that the amounts indicated below are estimates based on the material assumptions described in the notes to the table below, which may or may not actually occur. Some of these assumptions are based on information currently available and, as a result, the actual amounts, if any, that may become payable to a named executive officer may differ in material respects from the amounts set forth below. Furthermore, for purposes of calculating such amounts, the Company has assumed:

 

    a price per share of the Company Shares of $6.35, which is the Offer Price;

 

    the closing of the Offer and the Merger on September 30, 2016; and

 

    with respect to each named executive officer, a termination of employment by the executive for good reason or by the Company without cause, in each case, on September 30, 2016, in which case such executive would be entitled to receive each of the payments and benefits described in further detail below.

Golden Parachute Compensation

 

Name

   Cash(1)      Equity(2)      Perquisites/
Benefits(3)
     Other(4)      Total  

S. Hoby Darling

   $ 2,586,885       $ 1,068,787       $ 22,095       $ 25,000       $ 3,702,767   

Jason Hodell

   $ 1,043,339       $ 1,279,460       $ 20,752       $ 25,000       $ 2,368,551   

Sam Paschel, Jr.

   $ 811,439       $ 481,360       $ 11,891       $ 25,000       $ 1,329,690   

David Raffone

   $ 635,872       $ 482,724       $ 4,957       $ 25,000       $ 1,148,553   

Patrick Grosso

   $ 817,597       $ 214,200       $ 17,676       $ 25,000       $ 1,074,473   

 

(1) Under the Amended and Restated Employment Agreements, cash severance would be payable in a lump sum on the 60th day following a termination without cause or for good reason, in either case, during the period on or within 18 months following a change of control (i.e., pursuant to a “double trigger” arrangement), subject, in either case, to such executive’s timely execution, delivery and non-revocation of a general release of claims. In either such event, pursuant to the Amended and Restated Employment Agreements, the named executive officer will receive severance payments equal to the sum of the executive’s base salary and target bonus for the fiscal year in which such termination occurs, multiplied by 2.5 (for Mr. Darling), 2.0 (for Messrs. Hodell and Grosso) and 1.5 (for Messrs. Raffone and Paschel), plus a pro-rata portion of such executive’s annual bonus based on such executive’s service during the year of termination.

The following table quantifies the base salary severance and bonus component of severance included in the aggregate total reported in the column.

 

Name

   Base Salary
Severance
     Target
Bonus
Component
of Severance
     Pro-Rata
Bonus
Component
of Severance
 

S. Hoby Darling

   $ 1,125,000       $ 1,125,000       $ 336,885   

Jason Hodell

   $ 618,400       $ 309,200       $ 115,739   

Sam Paschel, Jr.

   $ 463,800       $ 231,900       $ 115,739   

David Raffone

   $ 363,450       $ 181,725       $ 90,697   

Patrick Grosso

   $ 484,600       $ 242,300       $ 90,697   

 

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(2) Under the Amended and Restated Employment Agreements, each named executive officer would be entitled to accelerated vesting of his unvested equity-based compensation pursuant to a “double trigger” arrangement (i.e., the occurrence of a change of control and such executive’s qualifying termination as described in footnote (1) above).

Additionally, pursuant to the Merger Agreement, (i) each Company Option will be accelerated in full and each Company Option will be canceled and converted into the right to receive an amount in cash, if any, without interest and less any required withholding taxes, equal to the product obtained by multiplying (A) the excess, if any, of (1) the Offer Price minus (2) the exercise price per share of such Company Option, and (B) the number of Company Shares underlying such Company Option and (ii) each Company RSU Award will be accelerated in full (which, in the case of a Company RSU Award that vests in whole or in part on the basis of achievement of performance goals, shall be determined as if performance were at 100% of targeted performance) and each Company RSU Award will be canceled and converted into the right to receive an amount in cash, if any, without interest and less any required withholding taxes, equal to the product obtained by multiplying (A) the Offer Price and (B) the number of Company Shares underlying such Company RSU Award immediately prior to the Effective Time.

Amounts included in this column as they relate to payment for Company Options and Company RSU Awards are “single trigger” payments (closing of the Offer and the Merger) because they would be paid at the Effective Time, without regard to whether the named executive officer experiences a termination of employment.

The following table quantifies the value of the unvested Company Options and Company RSU Awards held by the named executive officers, assuming a price per share of Company Common Stock equal to the Offer Price of $6.35, consistent with the methodology applied under SEC Regulation M-A Item 1011(b) and Regulation S-K Item 402(t)(2).

 

Name

   Number
of
Unvested
Stock
Options
     Value of
Unvested
Stock
Options
     Number
of
Restricted
Stock
Units
     Value of
Restricted
Stock
Units
 

S. Hoby Darling

     368,632       $ 440,435         98,953       $ 628,352   

Jason Hodell

     317,116       $ 317,321         151,518       $ 962,139   

Sam Paschel, Jr.

     195,683       $ 248,353         36,694       $ 233,007   

David Raffone

     93,005       $ 116,685         57,644       $ 366,039   

Patrick Grosso

     93,294       $ 121,179         14,649       $ 93,021   

 

(3) Amounts include the estimated value of Company-paid or subsidized continued healthcare coverage for each named executive officer for up to 30 months (for Mr. Darling), 24 months (for Messrs. Hodell and Grosso) and 18 months (for Messrs. Raffone and Paschel), which the named executive officers are entitled to receive under the Amended and Restated Employment Agreements upon a qualifying termination in connection with a change in control as described in footnote (1) above. As a result, these amounts are “double trigger” benefits.
(4) Under the Amended and Restated Employment Agreements, each named executive officer would be entitled to a reimbursement of up to $25,000 for outplacement services upon the occurrence of a change of control and such executive’s qualifying termination as described in footnote (1) above. As a result, these benefits are “double trigger” benefits.

Narrative Disclosure to Named Executive Officer Golden Parachute Compensation Table

The Company has entered into Amended and Restated Employment Agreements with each named executive officer, each of which provides for severance payments and benefits, including equity award acceleration, upon certain terminations of employment. For more information relating to these arrangements, see the description of such agreements in Item 3 above under the heading “Arrangements with Current Executive Officers and Directors of the Company—Other Compensatory Arrangements with Executive Officers and Directors.”

 

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Stockholder Approval Not Required.

Parent and Purchaser have represented and warranted to the Company in the Merger Agreement that neither Parent nor Purchaser, nor any of their respective “affiliates” or “associates,” is, or at any time for the past three years has been, an “interested stockholder” of the Company (as such terms are defined in Section 203 of the DGCL). Section 251(h) of the DGCL provides that following consummation of a successful tender offer for a public corporation, and subject to certain statutory provisions, if the acquiror holds at least the amount of shares of each class of stock of the acquired corporation that would otherwise be required to approve a merger of the acquired corporation, and the stockholders that did not tender their shares in the tender offer receive the same consideration for their stock in the merger as was payable in the tender offer, the acquiror can effect a merger without the action of the stockholders of the acquired corporation. Accordingly, if Purchaser consummates the Offer, the Merger Agreement contemplates that the parties will effect the closing of the Merger without a vote of the stockholders of the Company in accordance with Section 251(h) of the DGCL. If the Merger is effected, (i) Company stockholders who do not tender their Company Shares in the Offer will be entitled to appraisal rights under Delaware law, provided that the relevant requirements under the DGCL have been satisfied and (ii) Company stockholders (other than Purchaser, Parent, the Company and each of their respective wholly owned subsidiaries) who do not validly exercise appraisal rights under Delaware law will receive the same cash consideration for their Company Shares as was payable in the Offer following the consummation of the Merger.

Appraisal Rights.

Holders of Company Shares will not have appraisal rights in connection with the Offer. However, if Purchaser purchases Company Shares in the Offer, and the Merger is consummated, holders of Company Shares immediately prior to the Effective Time will be entitled to appraisal rights under Section 262 of the DGCL, provided they comply with the applicable statutory procedures under Section 262. Holders whose Company Shares are tendered pursuant to the Offer will not be entitled to appraisal rights.

The following discussion summarizes appraisal rights of stockholders under the DGCL in connection with the Merger assuming that the Merger is consummated pursuant to Section 251(h) of the DGCL and is qualified in its entirety by the full text of Section 262 of the DGCL, which is attached to this Schedule 14D-9 as Annex II. All references in Section 262 of the DGCL and in this summary to a “stockholder” or “holder” are to the record holder of Company Shares immediately prior to the Effective Time as to which appraisal rights are demanded. A person having a beneficial interest in Company Shares held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below properly and in a timely manner to perfect appraisal rights. Stockholders should carefully review the full text of Section 262 of the DGCL as well as the information discussed below.

Under the DGCL, if the Merger is completed, holders of Company Shares immediately prior to the Effective Time and who (i) did not tender their Company Shares in the Offer, (ii) follow the procedures set forth in Section 262 of the DGCL and (iii) do not thereafter withdraw their demand for appraisal of such Company Shares or otherwise lose their appraisal rights, in each case in accordance with the DGCL, will be entitled to have their Company Shares appraised by the Delaware Court of Chancery and to receive payment in cash of the “fair value” of such shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a rate of interest, if any, as determined by such court on the amount determined to be the fair value (or, in certain circumstances described below, on the difference between the amount determined to be the fair value and the amount paid by the Surviving Corporation to each stockholder entitled to appraisal prior to the entry of judgment in the appraisal proceeding). The “fair value” as so determined by the court could be greater than, less than or the same as the Offer Price.

Under Section 262 of the DGCL, where a merger is approved under Section 251(h), either a constituent corporation before the effective date of the merger, or the surviving 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

 

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Section 262. This Schedule 14D-9 constitutes the formal notice of appraisal rights under Section 262 of the DGCL. Any holder of Company Shares who wishes to exercise such appraisal rights or who wishes to preserve his, her or its right to do so, should review the following discussion and Annex II carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under the DGCL.

Any stockholder wishing to exercise appraisal rights is urged to consult legal counsel before attempting to exercise such rights.

If a stockholder elects to exercise appraisal rights under Section 262 of the DGCL and the Merger is consummated pursuant to Section 251(h) of the DGCL, such stockholder must do all of the following:

 

    within the later of the consummation of the Offer and 20 days after the date of mailing of this Schedule 14D-9 (which date of mailing is September 1, 2016), mail or otherwise transmit to the Company at the address indicated below a written demand for appraisal of Company Shares held, which demand must reasonably inform the Company of the identity of the stockholder and that the stockholder is demanding appraisal;

 

    not tender such stockholder’s Company Shares in the Offer;

 

    continuously hold of record such Company Shares from the date on which the written demand for appraisal is made through the Effective Time; and

 

    any stockholder (or beneficial owner of Company Shares) who has otherwise perfected his, her or its appraisal rights or the Surviving Corporation must file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the stock of all such stockholders within 120 days after the Effective Time.

Notwithstanding a stockholder’s compliance with foregoing requirements, the Court of Chancery shall dismiss the appraisal proceedings as to all stockholders who are otherwise entitled to appraisal rights, and such stockholders will effectively lose their appraisal rights, unless (1) the total number of Company Shares entitled to appraisal rights exceeds 1% of the outstanding Company Shares eligible for appraisal or (2) the value of the consideration provided in the Merger for such total number of Company Shares entitled to appraisal rights exceeds $1 million.

If the Merger is consummated pursuant to Section 251(h) of the DGCL, Parent will cause the Surviving Corporation to deliver an additional notice of the effective date of the Merger to all stockholders of the Company who delivered a written demand to the Company (in accordance with the first bullet above) within 10 days after the closing of the Merger, as required by Section 262(d)(2) of the DGCL. However, only stockholders who have delivered a written demand in accordance with the first bullet above will receive such notice of the effective date. If the Merger is consummated pursuant to Section 251(h) of the DGCL, a failure to deliver a written demand for appraisal in accordance with the time periods specified in the first bullet above (or to take any of the other steps specified in the above bullets or summarized below) will be deemed to be a waiver or a termination of your appraisal rights.

Written Demand by the Record Holder

All written demands for appraisal should be addressed to Skullcandy, Inc., 1441 West Ute Boulevard, Suite 250, Park City, Utah 84098, attention: Corporate Secretary. The written demand for appraisal must be executed by or for the record holder of Company Shares and must reasonably inform the Company of the identity of the stockholder of record and that such stockholder intends thereby to demand appraisal of his, her or its Company Shares. If the Company Shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand must be made in that capacity, and if the Company Shares are owned of record by more than one person, such as in a joint tenancy or tenancy in common, the demand must be

 

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executed by or for all joint owners. An authorized agent, including one of two or more joint owners, may execute the demand for appraisal for a holder of record. However, the agent must identify the record owner(s) and expressly disclose the fact that, in executing the demand, the agent is acting as agent for the record owner(s).

A beneficial owner of Company Shares held in “street name” who wishes to exercise appraisal rights should take such actions as may be necessary to ensure that a timely and proper demand for appraisal is made by the record holder of the Company Shares. If Company Shares are held through a brokerage firm, bank or other nominee who in turn holds the Company Shares through a central securities depository nominee, such as Cede & Co., a demand for appraisal of such Company Shares must be made by or on behalf of the depository nominee, and must identify the depository nominee as the record holder. Any beneficial owner who wishes to exercise appraisal rights and holds Company Shares through a nominee holder is responsible for ensuring that the demand for appraisal is timely made by the record holder. The beneficial holder of the Company Shares should instruct the nominee holder that the demand for appraisal should be made by the record holder of the Company Shares, which may be a central securities depository nominee if the Company Shares have been so deposited.

A record holder, such as a broker, bank, fiduciary, depository or other nominee, who holds Company Shares as a nominee for several beneficial owners may exercise appraisal rights with respect to the Company Shares held for one or more beneficial owners while not exercising such rights with respect to the Company Shares held for other beneficial owners. In such case, the written demand must set forth the number of Company Shares covered by the demand. Where the number of Company Shares is not expressly stated, the demand will be presumed to cover all Company Shares held in the name of the record owner.

Filing a Petition for Appraisal

Within 120 days after the Effective Time, the Surviving Corporation, or any holder of Company Shares who has complied with Section 262 of the DGCL and is entitled to appraisal rights under Section 262, or the beneficial owner of any such shares, may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery demanding a determination of the fair value of the Company Shares held by all holders who did not tender their shares in the Offer and who timely and properly demanded appraisal. If no such petition is filed within that 120-day period, appraisal rights will be lost for all holders of Company Shares who had previously demanded appraisal of their Company Shares. The Company is under no obligation to and has no present intention to file a petition, and holders should not assume that the Company will file a petition or that it will initiate any negotiations with respect to the fair value of the Company Shares. Accordingly, it is the obligation of the holders of Company Shares to initiate all necessary action to perfect their appraisal rights in respect of the Company Shares within the period prescribed in Section 262 of the DGCL.

Within 120 days after the Effective Time, any holder of Company Shares 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 Company Shares not voted in favor of the Merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such Company Shares. Such 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 requirement that a demand for appraisal must be made by or on behalf of the record owner of the Company Shares, a person who is the beneficial owner of Company Shares held either in a voting trust or by a nominee on behalf of such person, and as to which demand has been properly made and not effectively withdrawn, may, in such person’s own name, file a petition for appraisal or request from the Surviving Corporation the statement described in this paragraph.

Upon the filing of such petition by any such holder of Company Shares, service of a copy thereof must be made upon the Surviving Corporation, which will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list (the “Verified List”) containing the names and addresses of all stockholders who have demanded payment for their Company Shares and with whom agreements as to the value

 

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of their Company Shares have not been reached. Upon the filing of any such petition, the Delaware Court of Chancery may order that notice of the time and place fixed for the hearing on the petition be mailed to the Surviving Corporation and all of the stockholders shown on the Verified List. Such notice will also be published at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or in another publication determined by the Delaware Court of Chancery. The costs of these notices are borne by the Surviving Corporation.

After notice to the stockholders as required by the Delaware Court of Chancery, the Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 of the DGCL and who have become entitled to appraisal rights thereunder. The Court of Chancery may require the stockholders who demanded payment for their Company Shares to submit their stock certificates to the Delaware 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 that stockholder. Notwithstanding a stockholder’s compliance with the requirements of Section 262 of the DGCL, the Court of Chancery shall dismiss the proceedings as to all stockholders who are otherwise entitled to appraisal rights unless (1) the total number of Company Shares entitled to appraisal rights exceeds 1% of the outstanding Company Shares eligible for appraisal or (2) the value of the consideration provided in the Merger for such total number of Company Shares entitled to appraisal rights exceeds $1 million.

Determination of Fair Value

After the Delaware Court of Chancery determines which stockholders are entitled to appraisal, the appraisal proceeding will 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 will determine the fair value of the Company 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 (or, in certain circumstances described below, on the difference between the amount determined to be the fair value and the amount paid by the Surviving Corporation to each stockholder entitled to appraisal prior to the entry of judgment in the appraisal proceeding). Unless the Court of Chancery in its discretion determines otherwise for good cause shown, interest from the Effective Time through the date of payment of the judgment will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the Effective Time and the date of payment of the judgment. Notwithstanding the foregoing, at any time before the entry of judgment in the proceedings, the Surviving Corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided in the immediately preceding sentence only upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the Company Shares as determined by the Court, and (2) interest theretofore accrued, unless paid at that time. The Company, MRC and Parent have made no determination as to whether such a payment may be made if the Merger is consummated, and the Company reserves the right to make such a payment upon the consummation of the Merger.

In determining fair value, the Delaware Court of Chancery will take into account all relevant factors. In Weinberger v. UOP, Inc., the Supreme Court of Delaware discussed the factors that could be considered in determining fair value in an appraisal proceeding, 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 of Chancery must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merged corporation. Section 262 of the DGCL provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such

 

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accomplishment or expectation. In Weinberger, the Supreme Court of Delaware also stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.”

Stockholders considering appraisal should be aware that the fair value of their Company Shares as so determined could be more than, the same as or less than the Offer Price and that an investment banking opinion as to the fairness, from a financial point of view, of the consideration payable in a sale transaction, such as the Offer and the Merger, is not an opinion as to, and does not otherwise address, “fair value” under Section 262 of the DGCL. Although the Company believes that the Offer Price is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware 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 Offer Price. Neither Parent nor the Company anticipates offering more than the Offer Price to any stockholder exercising appraisal rights, and they reserve the right to assert, in any appraisal proceeding, that for purposes of Section 262 of the DGCL, the fair value of a Company Share is less than the Offer Price.

Upon application by the Surviving Corporation or by any holder of Company Shares entitled to participate in the appraisal proceeding, the Delaware Court of Chancery may, in its discretion, proceed to trial upon the appraisal prior to the final determination of the stockholders entitled to an appraisal. Any holder of Company Shares whose name appears on the Verified List and who has submitted such stockholder’s certificates of stock to the Delaware 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. The Court of Chancery will direct the payment of the fair value of the Company Shares, together with interest, if any, on the amount determined to be the fair value (or, in certain circumstances described herein on the difference between the amount determined to be the fair value and the amount paid by the Surviving Corporation to each stockholder entitled to appraisal prior to the entry of judgment in the appraisal proceeding), by the Surviving Corporation to the stockholders entitled thereto. Payment will be so made to each such stockholder upon the surrender to the Surviving Corporation of such stockholder’s certificates. The Court of Chancery’s decree may be enforced as other decrees in such Court may be enforced.

If a petition for appraisal is not timely filed, or if both (1) the total number of Company Shares entitled to appraisal rights does not exceed 1% of the outstanding Company Shares eligible for appraisal and (2) the value of the consideration provided in the Merger for such total number of Company Shares entitled to appraisal rights does not exceed $1 million, then the right to an appraisal will cease. The costs of the action (which do not include attorneys’ fees or the fees and expenses of experts) may be determined by the Delaware Court of Chancery and taxed upon the parties as the Court of Chancery deems equitable. Upon application of a stockholder, the Court of Chancery may order all or a portion of the expenses incurred by a stockholder in connection with an appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, to be charged pro rata against the value of all the Company Shares entitled to appraisal. In the absence of such determination or assessment, each party bears its own expenses.

Any stockholder who has duly demanded and perfected appraisal rights in compliance with Section 262 of the DGCL will not, after the Effective Time, be entitled to vote his or her Company Shares for any purpose or be entitled to the payment of dividends or other distributions thereon, except dividends or other distributions payable to holders of record of Company Shares as of a date prior to the Effective Time.

If any stockholder who demands appraisal of Company Shares under Section 262 of the DGCL fails to perfect, successfully withdraws or loses such holder’s right to appraisal, such stockholder’s Company Shares will be deemed to have been converted at the Effective Time into the right to receive the consideration payable in connection with the Merger (which is equal to the Offer Price, without interest). A stockholder will fail to perfect, or effectively lose, the stockholder’s right to appraisal if no petition for appraisal is filed within 120 days after the Effective Time. Moreover, the Court of Chancery shall dismiss the proceedings as to all stockholders who are otherwise entitled to appraisal rights, and such stockholders will effectively lose their appraisal rights,

 

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unless either (1) the total number of Company Shares entitled to appraisal rights exceeds 1% of the outstanding Company Shares immediately prior to the Effective Time or (2) the value of the consideration provided in the Merger for such total number of Company Shares entitled to appraisal rights exceeds $1 million. In addition, a stockholder may withdraw his, her or its demand for appraisal in accordance with Section 262 of the DGCL and accept the consideration payable in connection with the Merger by delivering to the Surviving Corporation a written withdrawal of such stockholder’s demand for appraisal and acceptance of the merger either within 60 days after the effective date of the Merger or thereafter with the written approval of the Surviving Corporation. Notwithstanding the foregoing, no appraisal proceeding in the Delaware 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 the limitation set forth in this sentence 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 stockholder’s demand for appraisal and to accept the terms offered upon the Merger within 60 days after the effective date of the Merger.

If you wish to exercise your appraisal rights, you must NOT tender your Company Shares in the Offer and must strictly comply with the procedures set forth in Section 262 of the DGCL. If you fail to take any required step in connection with the exercise of appraisal rights, it will result in the termination or waiver of your appraisal rights.

The foregoing summary of the rights of the Company’s stockholders to seek appraisal rights under Delaware law is qualified in its entirety by reference to Section 262 of the DGCL. The proper exercise of appraisal rights requires strict adherence to the applicable provisions of the DGCL. A copy of Section 262 of the DGCL is included as Annex II to this Schedule 14D-9.

Anti-Takeover Statutes.

As a Delaware corporation, the Company is subject to Section 203 of the DGCL (“Section 203”). In general, Section 203 restricts an “interested stockholder” (in general, a person who owns or has the right to acquire 15% or more of a corporation’s outstanding voting stock) from engaging in a “business combination” (defined to include mergers and certain other actions) with a Delaware corporation for three years following the date such person became an interested stockholder unless: (i) before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (ii) upon consummation of the transaction which resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (A) persons who are directors and also officers and (B) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) following the transaction in which such person became an interested stockholder, the business combination is (A) approved by the board of directors of the corporation and (B) authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock of the corporation not owned by the interested stockholder. In accordance with the provisions of Section 203, the Company Board has approved the Merger, the Merger Agreement, the Offer and the transactions contemplated thereby, as described in this Schedule 14D-9, and Parent and Purchaser have represented that neither they nor any of their “affiliates” or “associates” (as defined in Section 203) are or have been an interested stockholder at any time during the past three years. Therefore, the restrictions of Section 203 are inapplicable to the Merger and the transactions contemplated under the Merger Agreement.

Many other states also have adopted laws and regulations applicable to attempts to acquire securities of corporations that are incorporated or have substantial assets, stockholders, principal executive offices or principal places of business or whose business operations otherwise have substantial economic effects in such states. In the

 

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event it is asserted that any such provisions apply to the Offer or the Merger, the Company may be required to take certain actions with respect to such provisions.

Regulatory Approvals.

Under the HSR Act and the rules promulgated thereunder, certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the “Antitrust Division”) and the Federal Trade Commission (“FTC”) in Notification and Report Forms provided by the acquiring and acquired persons, and certain waiting period requirements have been satisfied. The initial waiting period for a cash tender offer is 15 days, but this period may be (i) shortened if the reviewing agency grants “early termination,” (ii) it may be restarted if the acquiring person voluntarily withdraws and re-files its Notification and Report Form, or (iii) it may be extended if the reviewing agency issues a request for additional information and documentary material, in which case the waiting period expires 10 days after the date when the acquiring person has substantially complied with such request. The purchase of Company Shares pursuant to the Offer is subject to such requirements. The Company will file the Premerger Notification and Report Forms with the FTC and the Antitrust Division in connection with the purchase of Company Shares in the Offer and the Merger no later than seven business days following the date of the Merger Agreement and the required waiting period with respect to the Offer will expire at 11:59 p.m., New York Time, 15 calendar days after such filings, unless earlier terminated by the FTC or the Antitrust Division or extended by a request for additional information and documentary material prior to that time. The Antitrust Division and the FTC assess the legality under the antitrust laws of transactions such as the acquisition of Company Shares by Purchaser pursuant to the Offer. At any time before or after the consummation of any such transactions, the Antitrust Division or the FTC could take such action under the antitrust laws of the United States as it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Company Shares pursuant to the Offer or seeking divestiture of the Company Shares so acquired or divestiture of substantial assets of Parent, Purchaser and/or the Company. Private parties and individual States of the United States may also bring legal actions under the antitrust laws of the United States. The Company does not believe that the consummation of the Offer will result in a violation of any applicable antitrust laws. However, there can be no assurance that a challenge to the Offer on antitrust grounds will not be made, or if such a challenge is made, what the result would be.

The Company is not aware of any other filings, approvals or other actions by or with any governmental authority or administrative or regulatory agency (other than the forgoing filings under the HSR Act, consents as may be required by federal or state securities laws, and the filing and recordation of the certificate of merger with the Secretary of State of the State of Delaware and such filings with any other governmental authorities to satisfy the applicable laws of states and foreign jurisdictions in which the Company and its subsidiaries are qualified to do business) that would be required for Parent’s or Purchaser’s acquisition or ownership of the Company Shares.

Annual and Quarterly Reports.

For additional information regarding the business and the financial results of the Company, please see the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 filed with the SEC.

Certain Litigation.

Following the announcement of the tender offer and proposed merger in connection with the Original Incipio Merger Agreement, two alleged shareholders filed putative securities class action complaints against the Company and certain of its officers and directors in the United States District Court for the District of Utah: Paprakis v. Skullcandy, Inc., et al., No. 2:16-cv-00810-BCW (filed July 19, 2016); Bernicke v. Darling, et al., No. 2:16-cv-00831-DN (filed July 26, 2016) (together, the “M&A Securities Actions”). The M&A Securities Actions assert that the Company and certain of its officers and directors violated sections 14(e), 14(d)(4), and 20(a) of the Securities Exchange Act of 1934, as amended, by forcing a sale of the Company to Incipio and

 

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Incipio Merger Sub at an unfair price and by providing incomplete and misleading disclosures regarding the Offer and proposed Merger. The Bernicke complaint also alleges that the proposed merger in connection with the Original Incipio Merger Agreement was the result of preclusive deal protection devices and self-interested decisions made by the Company’s officers and directors. The M&A Securities Actions seek to enjoin the tender offer and any steps taken to consummate the merger in connection with the Original Incipio Merger Agreement, as well as damages in the event that such merger was consummated.

Cautionary Note Regarding Forward-Looking Statements.

The statements included in this Schedule 14D-9 that are not a description of historical facts are forward-looking statements. Words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” “would” or similar expressions are intended to identify forward-looking statements and are based on the Company’s current beliefs and expectations. These forward-looking statements include: statements regarding the planned completion of the Offer and the Merger; statements regarding the anticipated timing of filings and approvals relating to the Offer and the Merger; statements regarding the expected timing of the completion of the Offer and the Merger; statements regarding the ability to complete the Offer and the Merger considering the various closing conditions; and projected financial information. The Company’s actual future results may differ materially from the Company’s current expectations due to the risks and uncertainties inherent in its business. These risks include, but are not limited to: uncertainties as to the timing of the Offer and the Merger; uncertainties as to the percentage of the Company stockholders tendering their shares in the Offer; the possibility that competing offers will be made; the possibility that various closing conditions for the Offer or the Merger may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the Merger; the effects of disruption caused by the transaction making it more difficult to maintain relationships with employees, collaborators, vendors and other business partners; the risk that stockholder litigation in connection with the Offer or the Merger may result in significant costs of defense, indemnification and liability; and risks and uncertainties pertaining to the business of the Company, including the risks and uncertainties detailed under “Risk Factors” and elsewhere in the Company’s public periodic filings with the SEC, as well as the tender offer materials filed by Mill Road, Parent and Purchaser in connection with the Offer.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement and the Company undertakes no obligation to revise or update this report to reflect events or circumstances after the date hereof, except as required by law.

 

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Item 9. Exhibits.

 

Exhibit

Number

 

Description

(a)(1)   Offer to Purchase, dated September 1, 2016 (incorporated by reference to Exhibit (a)(1)(A) to the Schedule TO filed with the SEC on July 6, 2016 by Mill Road, Parent and Purchaser (the “Schedule TO”)).
(a)(2)   Form of Letter of Transmittal (including Internal Revenue Service Form W-9, including instructions for completing the form) (incorporated by reference to Exhibit (a)(1)(B) to the Schedule TO).
(a)(3)*   Opinion of Peter J. Solomon Securities Company, LLC, dated August 23, 2016 (included as Annex I to this Schedule 14D-9).
(a)(4)   Form of Notice of Guaranteed Delivery (incorporated by reference to Exhibit (a)(1)(C) to the Schedule TO).
(a)(5)   Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (incorporated by reference to Exhibit (a)(1)(D) to the Schedule TO).
(a)(6)   Form of Letter to Clients for Use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (incorporated by reference to Exhibit (a)(1)(E) to the Schedule TO).
(a)(7)   Joint Press Release issued by MRC and the Company, dated August 24, 2016 (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 24, 2016).
(a)(8)   Summary Newspaper Advertisement, published September 1, 2016 in The New York Times (incorporated by reference to Exhibit (a)(5)(B) to the Schedule TO).
(a)(9)*   Letter to Stockholders of the Company, dated September 1, 2016, from S. Hoby Darling, President and Chief Executive Officer of the Company.
(e)(1)   Agreement and Plan of Merger, dated as of August 23, 2016, by and among Parent, Purchaser and the Company (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on August 24, 2016).
(e)(2)   Confidentiality Letter Agreement, dated as of June 29, 2016, by and between MRC and the Company (incorporated by reference to Exhibit (d)(2) to the Schedule TO).
(e)(3)   Amendment to Confidentiality Letter Agreement, dated as of July 24, 2016, by and between MRC and the Company (incorporated by reference to Exhibit (d)(4) to the Schedule TO).
(e)(4)   Clean Team Agreement, dated as of June 30, 2016, by and between MRC and the Company (incorporated by reference to Exhibit (d)(3) to the Schedule TO).
(e)(5)   Sponsor Guarantee, dated August 23, 2016, by and between Mill Road and the Company (incorporated by reference to Exhibit (d)(5) to the Schedule TO).
(e)(6)   Form of Indemnification Agreement (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1/A, filed on July 6, 2011).
(e)(7)   2005 Stock Plan (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1, filed on January 28, 2011).
(e)(8)   Form of Stock Option Agreement under the 2005 Stock Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1, filed on January 28, 2011).
(e)(9)   Form of Stock Option Agreement under the 2005 Stock Plan—With Early Exercise Option (incorporated by reference to Exhibit 10.14(B) to the Company’s Registration Statement on Form S-1/A, filed on July 6, 2011).

 

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Exhibit

Number

 

Description

(e)(10)   2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1, filed on January 28, 2011).
(e)(11)   Form of Stock Option Agreement under the 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to Skullcandy, Inc.’s Registration Statement on Form S-1, filed on January 28, 2011).
(e)(12)   Form of Stock Option Agreement under the 2011 Incentive Award Plan (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form S-1/A, filed on July 6, 2011).
(e)(13)   Board of Directors Services Agreement, dated March 21, 2011, by and between the Company and Richard Alden (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1/A, filed on April 28, 2011).
(e)(14)   Form of Performance-Vesting Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on May 25, 2012).
(e)(15)   Amended and Restated Skullcandy, Inc. 2011 Incentive Award Plan (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed on April 30, 2012).
(e)(16)   Skullcandy, Inc. Nonqualified Inducement Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8, filed on May 10, 2013).
(e)(17)   Amended and Restated Employment Agreement, dated June 23, 2016, by and between the Company and S. Hoby Darling (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2016).
(e)(18)   Amended and Restated Employment Agreement, dated June 23, 2016, by and between the Company and Jason Hodell (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2016).
(e)(19)   Amended and Restated Employment Agreement, dated June 23, 2016, by and between the Company and Patrick Grosso (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2016).
(e)(20)   Amended and Restated Employment Agreement, dated June 23, 2016, by and between the Company and Samuel Paschel, Jr. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2016).
(e)(21)   Amended and Restated Employment Agreement, dated June 23, 2016, by and between the Company and David Raffone (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2016).
(e)(22)   Skullcandy, Inc. Inducement Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8, filed on May 10, 2013).
(e)(23)*   Excerpts from the Company’s Definitive Proxy Statement on Schedule 14A, filed with the SEC on April 6, 2016.
(e)(24)   Astro Gaming Supplemental Compensation Plan (incorporated by reference to Exhibit 10.35 to the Company’s Form 10-K, filed March 17, 2014).

 

* Filed herewith

 

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SIGNATURE

After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

 

Skullcandy, Inc.
By:  

/s/ Patrick Grosso

  Name:   Patrick Grosso
  Title:   Vice President, Strategic Initiatives and Corporate Affairs, Chief Legal Officer and Secretary

Dated: September 1, 2016

 

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ANNEX I

August 23, 2016

Board of Directors

Skullcandy, Inc.

1441 West Ute Boulevard

Suite 250

Park City, UT 84098

Ladies and Gentlemen:

You have asked us to advise you with respect to the fairness to the holders (other than MRSK Hold Co. (“Parent”) and its affiliates) of the outstanding shares of common stock, par value $0.0001 per share (the “Shares”), of Skullcandy, Inc. (the “Company”) from a financial point of view of the $6.35 in cash per Share (the “Consideration”) to be paid to the holders of the Shares pursuant to the Agreement and Plan of Merger, dated as of August 23, 2016 (the “Agreement”) by and among Parent, MRSL Merger Co., a direct wholly owned subsidiary of Parent (“Acquisition Sub”), and the Company.

We understand that the Agreement provides that Parent will cause Acquisition Sub to commence a tender offer (the “Tender Offer”) for all of the issued and outstanding Shares pursuant to which Acquisition Sub will pay the Consideration for each Share accepted. The Agreement further provides that, following the consummation of the Tender Offer, under circumstances specified in the Agreement, Acquisition Sub will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger as a wholly-owned subsidiary of Parent (the “Merger” and, together with the Tender Offer, the “Transactions”) and that, upon the effectiveness of the Merger, each Share not tendered and accepted in the Tender Offer (other than Shares held by (i) the Company, Parent or Acquisition Sub, or by any of their respective direct or indirect wholly owned subsidiaries, or (ii) stockholders that shall have neither voted in favor of the adoption of the Agreement nor consented thereto in writing and that shall have properly and validly perfected their statutory rights of appraisal in respect of such Shares) will be cancelled and converted into the right to be paid the Consideration.

For purposes of the opinion set forth herein, we have:

(i) reviewed certain publicly available financial statements and other information of the Company;

(ii) reviewed certain internal financial statements and other financial and operating data concerning the Company prepared and provided to us by the management of the Company and approved for our use by the Company;

(iii) reviewed certain financial projections for the Company prepared and provided to us by the management of the Company and approved for our use by the Company;

(iv) discussed the past and current operations, financial condition and prospects of the Company with management of the Company;

(v) reviewed the reported prices and trading activity of the Shares;

(vi) compared the financial performance and condition of the Company and the reported prices and trading activity of the Shares with that of certain other publicly traded companies that we deemed relevant;

(vii) reviewed publicly available information regarding the financial terms of certain transactions that we deemed relevant, in whole or in part, to the Transactions;

(viii) participated in certain discussions among management and other representatives of each of Parent and the Company;

(ix) reviewed the Agreement; and

(x) performed such other analyses as we have deemed appropriate.

 

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We have assumed and relied upon the accuracy and completeness of the information reviewed by us for the purposes of this opinion and we have not assumed any responsibility for independent verification of such information and have relied on such information being complete and correct. We have relied on assurances of the management of the Company that they are not aware of any facts or circumstances that would make such information inaccurate or misleading in any respect material to our opinion. With respect to the financial projections, we have assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. We have not conducted a physical inspection of the facilities or property of the Company. We have not assumed any responsibility for or performed any independent valuation or appraisal of the assets or liabilities of the Company, nor have we been furnished with any such valuation or appraisal. Furthermore, we have not considered any tax, accounting or legal effects of the Transactions or transaction structure on any person or entity.

We have also assumed that the Transactions will be consummated in accordance with the terms of the Agreement, without waiver, modification or amendment of any material term, condition or agreement (including, without limitation, the Consideration to be paid to the holders of the Shares in the Transactions), and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Transactions, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Company or the contemplated benefits of the Transactions. We have further assumed that all representations and warranties set forth in the Agreement are and will be true and correct as of all the dates made or deemed made and that all parties to the Agreement will comply with all covenants of such parties thereunder.

Our opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to us as of, August 22, 2016. In particular, we do not express any opinion as to the prices at which the Shares may trade at any future time or as to the impact of the Transactions on the solvency or viability of the Company, Parent or Acquisition Sub or the ability of the Company, Parent or Acquisition Sub to pay their respective obligations when they come due. Furthermore, our opinion does not address the Company’s underlying business decision to undertake the Transactions, and our opinion does not address the relative merits of the Transactions as compared to any alternative transactions that might be available to the Company. Our opinion does not address any other aspect or implication of the Transactions or any other agreement, arrangement or understanding entered into in connection with the Transactions or otherwise except as expressly identified herein.

Natixis, S.A. (“Natixis”), which became the holder of a majority of our outstanding equity on June 8, 2016, is, together with its affiliates, engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management, insurance and other financial and non-financial activities and services for various persons and entities. Natixis and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of the Company, Parent, any of their respective affiliates and third parties, including Mill Road Capital (“Mill Road”), a significant shareholder of Parent, and its affiliates and portfolio companies, or any currency or commodity that may be involved in the Transactions.

We have acted as financial advisor to the Company in connection with this transaction and will receive a fee for our services, a substantial portion of which is contingent upon the closing of the Merger and a portion of which is payable upon the delivery of this letter. In addition, the Company has agreed to reimburse our expenses and indemnify us against certain liabilities arising out of our engagement. In the past we have provided and are currently providing financial advisory services to the Company and its affiliates, including having delivered opinions on June 23, 2016 and August 3, 2016 to the Board of Directors of the Company as to the fairness to the holders (other than Incipio LLC (“Incipio”) and its affiliates) of Shares from a financial point of view of the consideration to be paid to such holders pursuant to respective merger agreements with Incipio. We have received and in the future may receive compensation for rendering the aforementioned services. In the future, we, Natixis and our respective affiliates may provide financial advisory services to the Company, Parent, Mill Road

 

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and their respective affiliates and, in the case of Mill Road, portfolio companies and in the future may receive compensation for rendering these services. In addition, Natixis or its affiliates may have co-invested with Mill Road from time to time and may have invested in limited partnership units of affiliates of Mill Road.

This letter and our advisory services are provided for the information and assistance of the Board of Directors of the Company in connection with its consideration of the Transactions. This letter may not be reproduced, summarized, described, referred to or used for any other purpose without our prior written consent, except as part of a recommendation statement on Schedule 14D-9 related to the Tender Offer or a proxy statement that is required to be filed by the Company in connection with the Transactions, provided that this letter is quoted in full in such recommendation statement or proxy statement, as the case may be. We express no view as to, and our opinion does not address, the fairness (financial or otherwise) of the amount or nature or any other aspect of any compensation to any officers, directors or employees of any parties to the Transactions, or any class of such persons, relative to the Consideration to be paid to the holders (other than Parent and its affiliates) of the Shares pursuant to the Agreement. This letter does not constitute a recommendation to any holder of Shares as to whether or not such holder should tender Shares pursuant to the Tender Offer or how any such holder should act on any matter relating to the Transactions. The issuance of this opinion has been authorized by our fairness opinion committee.

Based on, and subject to, the foregoing, we are of the opinion that on the date hereof, the Consideration to be paid to the holders (other than Parent and its affiliates) of the Shares pursuant to the Agreement is fair from a financial point of view to such holders.

Very truly yours,

PETER J. SOLOMON SECURITIES COMPANY, LLC

/s/ Peter J. Solomon Securities Company, LLC

 

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ANNEX II

SECTION 262 OF THE

GENERAL CORPORATION LAW OF THE STATE OF DELAWARE

APPRAISAL RIGHTS

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 § 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s 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 corporation; the words “stock” and “share” mean and include what is ordinarily meant by those words; and the words “depository receipt” mean a receipt or other instrument issued by a depository representing an interest in 1 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 and, subject to paragraph (b)(3) of this section, § 251(h) of this title), § 252, § 254, § 255, § 256, § 257, § 258, § 263 or § 264 of this title:

(1) Provided, however, that, except as expressly provided in § 363(b) of this title, 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 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 § 251(f) of this title.

(2) Notwithstanding paragraph (b)(1) of this section, 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, 255, 256, 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 paragraphs (b)(2)a. and b. of this section; 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 paragraphs (b)(2)a., b. and c. of this section.

(3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under § 251(h), § 253 or § 267 of this title is not owned by the parent immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation.

 

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(4) In the event of an amendment to a corporation’s certificate of incorporation contemplated by § 363(a) of this title, appraisal rights shall be available as contemplated by § 363(b) of this title, and the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as practicable, with the word “amendment” substituted for the words “merger or consolidation,” and the word “corporation” substituted for the words “constituent corporation” and/or “surviving or resulting 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 provisions of this section, including those set forth in subsections (d), (e), and (g) of this section, shall apply as nearly as is practicable.

(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 notice of such meeting (or such members who received notice in accordance with §255(c) of this title) with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) of this section 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 and, if 1 of the constituent corporations is a nonstock corporation, a copy of § 114 of this title. Each stockholder electing to demand the appraisal of such stockholder’s shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder’s 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 stockholder’s 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, § 251(h), § 253, or § 267 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 and, if 1 of the constituent corporations is a nonstock corporation, a copy of § 114 of this title. 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 or, in the case of a merger approved pursuant to § 251(h) of this title, within the later of the consummation of the offer contemplated by § 251(h) of this title and 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder’s 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 holder’s 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

 

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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 or, in the case of a merger approved pursuant to § 251(h) of this title, later than the later of the consummation of the offer contemplated by § 251(h) of this title and 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 holder’s 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 stockholder’s 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 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 stockholder’s 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 person’s 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. If immediately before the merger or consolidation the shares of the class or series of stock of the constituent

 

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corporation as to which appraisal rights are available were listed on a national securities exchange, the Court shall dismiss the proceedings as to all holders of such shares who are otherwise entitled to appraisal rights unless (1) the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of the class or series eligible for appraisal, (2) the value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million, or (3) the merger was approved pursuant to § 253 or § 267 of this title.

(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, and except as provided in this subsection, 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. At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided herein only upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Court, and (2) interest theretofore accrued, unless paid at that time. 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 stockholder’s 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 Court’s 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 attorney’s fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal.

(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 stockholder’s 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

 

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commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such stockholder’s 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.

 

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