<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of
[x] Definitive Proxy Statement the Commission only (as
[ ] Definitive Additional Materials permitted by Rule
14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ESS TECHNOLOGY, INC.
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
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[ ] Check box if any part of the fee is offset as provided by
exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
- --------------------------------------------------------------------------------
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
LOGO
May 9, 1997
To Our Shareholders:
You are cordially invited to attend the 1997 Annual Meeting of Shareholders
of ESS Technology, Inc. to be held at The Westin Hotel, 5101 Great America
Parkway, Santa Clara, California 95054, on Tuesday, May 27, 1997 at 2:30 p.m.
P.D.T.
The matters expected to be acted upon at the meeting are described in
detail in the following Notice of Annual Meeting of Shareholders and Proxy
Statement.
It is important that you use this opportunity to take part in the affairs
of ESS Technology, Inc. by voting on the business to come before this meeting.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. Returning the Proxy does not
deprive you of your right to attend the meeting and to vote your shares in
person.
We look forward to seeing you at the meeting.
Sincerely,
John H. Barnet
Vice President, Chief Financial
Officer and Secretary
LOGO
<PAGE> 3
ESS TECHNOLOGY, INC.
48401 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Shareholders:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of ESS
Technology, Inc. (the
"Company") will be at The Westin Hotel, 5101 Great America Parkway, Santa Clara,
California 95054, on Tuesday, May 27, 1997 at 2:30 p.m. P.D.T. for the following
purposes:
1. To elect directors of the Company, each to serve until the next Annual
Meeting of Shareholders and until his successor has been elected and
qualified or until his earlier resignation or removal. The Company's
Board of Directors intends to present the following nominees for
election as directors:
Fred S.L. Chan Ilbok Lee
Annie M.H. Chan Peter T. Mok
Michael A. Aymar
2. To approve the adoption of the 1997 Equity Incentive Plan and the
reservation of 3,000,000 shares for issuance thereunder.
3. To ratify the selection of Price Waterhouse LLP as independent
accountants for the Company for the fiscal year ending December 31,
1997.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on April 29, 1997 are
entitled to notice of and to vote at the meeting or any adjournment thereof.
By Order of the Board of Directors
John H. Barnet
Vice President, Chief Financial
Officer and Secretary
Fremont, California
May 9, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
<PAGE> 4
ESS TECHNOLOGY, INC.
48401 FREMONT BOULEVARD
FREMONT, CALIFORNIA 94538
------------------------
PROXY STATEMENT
------------------------
MAY 9, 1997
The accompanying proxy is solicited on behalf of the Board of Directors of
ESS Technology, Inc., a California corporation (the "Company"), for use at the
Annual Meeting of Shareholders of the Company to be held at The Westin Hotel,
5101 Great America Parkway, Santa Clara, California 95054, on Tuesday, May 27,
1997 at 2:30 p.m. P.D.T. (the "Meeting"). Only holders of record of the
Company's Common Stock at the close of business on April 29, 1997 (the "Record
Date") will be entitled to vote at the Meeting. At the close of business on
April 29, 1997, the Company had 38,608,918 shares of Common Stock outstanding
and entitled to vote. A majority of the shares outstanding on the record date
will constitute a quorum for the transaction of business. All proxies will be
voted in accordance with the instructions contained therein and, if no choice is
specified, the proxies will be voted in favor of the nominees and the proposals
set forth in the accompanying Notice of Meeting and this Proxy Statement. This
Proxy Statement and the accompanying form of proxy were first mailed to
shareholders on or about May 9, 1997. An annual report for the fiscal year ended
December 31, 1996 is enclosed with this Proxy Statement.
VOTING RIGHTS AND SOLICITATION OF PROXIES
Holders of the Company's Common Stock are entitled to one vote for each
share held as of the foregoing record date, except that in the election of
directors each shareholder has cumulative voting rights and is entitled to a
number of votes equal to the number of shares held by such shareholder
multiplied by the number of directors to be elected. The shareholder may cast
these votes all for a single candidate or distribute the votes among any or all
of the candidates. No shareholder will be entitled to cumulate votes for a
candidate, however, unless that candidate's name has been placed in nomination
prior to the voting and the shareholder, or any other shareholder, has given
notice at the Meeting prior to the voting of an intention to cumulate votes. In
such an event, the proxy holder may allocate among the Board of Directors'
nominees the votes represented by proxies in the proxy holder's sole discretion.
With respect to Proposal No. 1, the five (5) directors receiving the
highest number of votes of the shares of Common Stock present in person or
represented by proxy at the Meeting and voting on the election of directors will
be elected. Proposals No. 2 and No. 3 require for approval the affirmative vote
of a majority of the shares of Common Stock present in person or represented by
proxy at the Meeting and voting on such proposals. For purposes of such
calculation (i) the aggregate number of votes cast by all shareholders present
in person or represented by proxy at the Meeting, whether such shareholders vote
"for," "against" or give no instructions, will be counted for purposes of
determining the absence or presence of a quorum and the minimum number of
affirmative votes required to approve Proposals No. 2 and No. 3, (ii) the total
number of shares cast for Proposals No. 2 and No. 3 or giving no instructions
will be considered to have been voted in favor of the proposal, and (iii) an
abstention from voting on Proposal No. 2 or No. 3 by a shareholder present in
person or represented by proxy at the Meeting will count as neither a vote for
nor a vote against such proposal. (Accordingly, an abstention from voting on a
proposal will have the same effect as a vote against such proposal). In the
event that a broker indicates on a proxy that it does not have discretionary
authority as to certain shares to vote on a particular proposal (otherwise known
as a "broker non-vote"), those shares will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business
but will not be considered present and voting with respect to that proposal.
<PAGE> 5
In the event that sufficient votes in favor of the proposals are not
received by the date of the Meeting, the persons named as proxies may propose
one or more adjournments of the Meeting to permit further solicitations of
proxies. Any such adjournment would require the affirmative vote of the majority
of the outstanding shares present in person or represented by proxy at the
Meeting.
The expenses of soliciting proxies to be voted at the Meeting will be paid
by the Company. Following the original mailing of the proxies and other
soliciting materials, the Company and/or its agents may also solicit proxies by
mail, telephone, telegraph or in person. Following the original mailing of the
proxies and other soliciting materials, the Company will request that brokers,
custodians, nominees and other record holders of the Company's Common Stock
forward copies of the proxy and other soliciting materials to persons for whom
they hold shares of Common Stock and request authority for the exercise of
proxies. In such cases, the Company, upon the request of the record holders,
will reimburse such holders for their reasonable expenses.
REVOCABILITY OF PROXIES
Any person signing a proxy in the form accompanying this Proxy Statement
has the power to revoke it prior to the Meeting or at the Meeting prior to the
vote pursuant to the proxy. A proxy may be revoked by any of the following
methods: (i) a written instrument delivered to the Company stating that the
proxy is revoked; (ii) a subsequent proxy that is signed by the person who
signed the earlier proxy and is presented at the Meeting; or (iii) attendance at
the Meeting and voting in person. Please note, however, that if a shareholder's
shares are held of record by a broker, bank or other nominee and that
shareholder wishes to vote at the Meeting, the shareholder must bring to the
Meeting a letter from the broker, bank or other nominee confirming that
shareholder's beneficial ownership of the shares.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
At the Meeting, shareholders will elect directors to hold office until the
next Annual Meeting of Shareholders and until their respective successors have
been elected and qualified or until such directors' earlier resignation or
removal. The size of the Company's Board of Directors (the "Board") is currently
set at five members. Accordingly, five nominees will be elected at the Meeting
to be the five directors of the Company. If any nominee for any reason is unable
to serve, or for good cause, will not serve as a director, the proxies may be
voted for such substitute nominee as the proxy holder may determine. The Company
is not aware of any nominee who will be unable to or, for good cause, will not
serve as a director.
DIRECTORS/NOMINEES
The names of the nominees, and certain information about them as of April
22, 1997, are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- -------------------- ---- ----------------------------------- --------
<S> <C> <C> <C>
Fred S.L. Chan 50 President, Chief Executive Officer 1986
and Chairman of the Board of
Directors of the Company
Annie M.H. Chan 45 Independent Investor and Management 1993
Consultant
Michael A. Aymar(2) 49 Vice President/General Manager, 1993
Desktop Products Group of Intel
Corporation
Ilbok Lee(1) 51 President and Chief Executive 1995
Officer of IC WORKS, Inc.
Peter T. Mok(1)(2) 43 President and CEO of KLM Capital, a 1993
venture capital management company
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
2
<PAGE> 6
Mr. Chan joined the Company in November 1985 as President and has been a
director since January 1986. He was appointed Chairman of the Board of Directors
in October 1992 and Chief Executive Officer in June 1994. Mr. Chan has been
serving as President since February 1997. Mr. Chan served as Secretary from
October 1992 to August 1995 and Chief Financial Officer from October 1992 to May
1995. From 1984 to 1985, Mr. Chan was founder, President and Chief Executive
Officer of AC Design Inc., a VLSI chip design center providing CAD, engineering
and design services. From 1982 to 1984, he was cofounder, President and Chief
Executive Officer of CADCAM Technology, Inc., a company in the business of CAE
systems development. Mr. Chan holds B.S.E.E. and M.S.C. degrees from the
University of Hawaii. Mr. Chan is the husband of Annie M.H. Chan.
Mrs. Chan has served as a director of the Company since May 1993 and has
been an independent investor and management consultant since April 1996. Mrs.
Chan was a member of the Senior Technical Staff of the Company from May 1995
until March 1996. From September 1994 to May 1995, she was Vice President,
Administration of the Company and, from May 1993 to August 1994, she was Vice
President, CAD of the Company. From October 1991 to May 1993, Mrs. Chan was a
director and Vice President of Niche Tech. From 1990 to October 1991, Mrs. Chan
was an integrated circuit design consultant. From 1987 to 1990, Mrs. Chan was
Operations Manager at Integrated Information Technology, a semiconductor
company. Mrs. Chan holds a B.S. degree in Organizational Behavior from the
University of San Francisco. Mrs. Chan is the wife of Fred S.L. Chan.
Mr. Aymar has served as a director of the Company since February 1993. He
has been employed at Intel Corporation since 1976 and is currently
Vice-President/General Manager, Desktop Products Group. Prior to his current
assignment, he held various positions in system and software engineering,
microprocessor marketing and VLSI design automation. Mr. Aymar holds B.S.E.E.
and M.S.E.E. degrees from Stanford University.
Mr. Lee has served as a director of the Company since April 1995. He has
served as the President and Chief Executive Officer and a director of IC WORKS,
Inc., a company engaged in the semiconductor design and foundry business, since
May 1992. From 1989 to May 1992, he was President and a director of Samsung
Semiconductor, Inc., a semiconductor manufacturer. Mr. Lee holds a B.S.E.E.
degree from Seoul National University and also holds M.S.E.E. and Ph.D.E.E.
degrees from the University of Minnesota.
Mr. Mok has served as a director of the Company since May 1993. At the
Company's annual meeting of shareholders in 1995, Mr. Mok was elected a director
of the Company as the nominee of Transpac Capital Pte. Ltd. ("Transpac") and the
Development Bank of Singapore Ltd. ("DBS Ltd.") pursuant to a shareholders'
agreement that ended upon the closing of the Company's initial public offering.
Mr. Mok's employment agreement with DBS Ltd. ended at the end of June 1996, and
Mr. Mok's relationship with DBS Ltd. and Transpac was concluded or substantially
reduced. Consequently, if reelected to the Board, Mr. Mok will act independently
and will no longer represent DBS Ltd. or Transpac on the Board of Directors. Mr.
Mok has served as President and CEO of KLM Capital, a venture capital management
company, since July 1996. From July 1994 to July 1996, Mr. Mok was Senior
Manager, Investment Banking, of DBS Ltd. From June 1992 to July 1994, he was
Senior Vice President, Manager and a director of Transpac Capital, Inc., a
venture capital management company that is a wholly-owned subsidiary of
Transpac. From June 1990 to June 1992, he was Vice President and Manager of the
Pacific Rim Group of Silicon Valley Bank, a commercial bank. Mr. Mok holds a
B.S. degree in Business Administration from San Jose State University.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
The Board met 10 times, including telephone conference meetings, and did
not act by written consent during 1996. Annie Chan attended fewer than 75% of
the aggregate of the total number of meetings of the Board held during the
period for which she was a director. No director attended fewer than 75% of the
total number of meetings held by all committees of the Board on which such
director served during the period that such director served.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or a
committee performing similar functions.
3
<PAGE> 7
Messrs. Lee and Mok are the current members of the Audit Committee. From
January 1, 1996 to October 28, 1996, Messrs. Aymar and Mok were members of the
Audit Committee. The Audit Committee was formed in August 1995 and held one
meeting during 1996. The Audit Committee meets with the Company's independent
accountants to review the adequacy of the Company's internal control systems and
financial reporting procedures; reviews the general scope of the Company's
annual audit and the fees charged by the independent accountants; reviews and
monitors the performance of non-audit services by the Company's auditors;
reviews the fairness of any proposed transaction between any officer, director
or other affiliate of the Company and the Company, and after such review, makes
recommendations to the full Board; and performs such further functions as may be
required by any stock exchange or over-the-counter market upon which the
Company's Common Stock may now or in the future be listed.
Messrs. Mok and Aymar are the current members of the Compensation
Committee. From January 1, 1996 to October 28, 1996, Messrs. Mok and Lee were
members of the Compensation Committee. The Compensation Committee was formed in
August 1995 and met four times during 1996. The Compensation Committee reviews
and approves compensation and benefits for the Company's key executive officers,
administers the Company's stock purchase and equity incentive plans and makes
recommendations to the Board of Directors regarding such matters.
THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF
EACH OF THE NOMINATED DIRECTORS
PROPOSAL NO. 2 -- APPROVAL OF 1997 EQUITY INCENTIVE PLAN AND THE
RESERVATION OF 3,000,000 SHARES OF COMMON STOCK FOR ISSUANCE
THEREUNDER
At the Annual Meeting, the Company's shareholders are being asked to
approve the Company's 1997 Equity Incentive Plan (the "1997 Incentive Plan") and
to authorize the reservation of 3,000,000 shares for issuance thereunder. The
following is a summary of principal features of the 1997 Incentive Plan. The
summary, however, does not purport to be a complete description of all the
provisions of the 1997 Incentive Plan. Any shareholder of the Company who wishes
to obtain a copy of the actual plan document may do so upon written request to
the Vice President of Finance at the Company's principal offices in Fremont,
California.
1997 EQUITY INCENTIVE PLAN HISTORY
The Board approved the 1997 Incentive Plan in April 1997. The purpose of
the 1997 Incentive Plan is to provide incentives to attract, retain and motivate
qualified employees, consultants, independent contractors and advisors whose
present and potential contributions are important to the success of the Company,
by offering them an opportunity to participate in the Company's future
performance through awards of stock options, restricted stock and stock bonuses.
SHARES SUBJECT TO THE 1997 INCENTIVE PLAN
An aggregate of 3,000,000 shares of the Common Stock of the Company was
initially reserved by the Board for issuance under the 1997 Incentive Plan. If
any option granted pursuant to the 1997 Incentive Plan expires or terminates for
any reason without being exercised in whole or in part, or any award terminates
without being issued, or any award is forfeited or repurchased by the Company at
the original purchase price, the shares released from such option will again
become available for grant and purchase under the 1997 Incentive Plan. This
number of shares is subject to proportional adjustment to reflect stock splits,
stock dividends and other similar events.
Shareholders are being asked to approve the 1997 Incentive Plan and the
reservation of Common Stock for issuance thereunder at the Annual Meeting.
4
<PAGE> 8
ADMINISTRATION
The 1997 Incentive Plan is administered by the Compensation Committee (the
"Committee"), the members of which are appointed by the Board. The Committee
currently consists of Messrs. Mok and Aymar, both of whom are "non-employee
directors", as that term is defined in Rule 16b-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and "outside directors", as that
term is defined pursuant to Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code").
Subject to the terms of the 1997 Incentive Plan, the Committee determines
the persons who are to receive awards, the number of shares subject to each such
award and the terms and conditions of each such award. The Committee has the
authority to construe and interpret any of the provisions of the 1997 Incentive
Plan or any awards granted thereunder.
ELIGIBILITY
Employees, officers, directors, consultants, independent contractors and
advisors of the Company (and of any subsidiaries and affiliates) are eligible to
receive awards under the 1997 Incentive Plan (the "Participants"). No
Participant is eligible to receive more than 375,000 shares of Common Stock in
any calendar year under the 1997 Incentive Plan, other than new employees of the
Company (including directors and officers who are also new employees) who are
eligible to receive up to a maximum of 750,000 shares of Common Stock in the
calendar year in which they commence their employment with the Company. As of
April 1997, approximately 306 persons were eligible to participate in the 1997
Incentive Plan.
STOCK OPTIONS
The 1997 Incentive Plan permits the granting of options that are intended
to qualify either as Incentive Stock Options ("ISOs") or Nonqualified Stock
Options ("NQSOs"). ISOs may be granted only to employees (including officers and
directors who are also employees) of the Company or any parent or subsidiary of
the Company.
The option exercise price for each ISO share must be no less than 100% of
the "fair market value" (as defined in the 1997 Incentive Plan) of a share of
Common Stock at the time the ISO is granted. In the case of an ISO granted to a
10% shareholder, the exercise price for each such ISO share must be no less than
110% of the fair market value of a share of Common Stock at the time the ISO is
granted. The option exercise price for each NQSO share must be no less than 85%
of the fair market value of a share of Common Stock at the time of grant. To
date, the Company has not granted options under the Incentive plan at less than
fair market value.
The exercise price of options granted under the 1997 Incentive Plan may be
paid as approved by the Committee at the time of grant: (1) in cash (by check);
(2) by cancellation of indebtedness of the Company to the Participant; (3) by
surrender of shares of the Company's Common Stock owned by the Participant for
at least six months and having a fair market value on the date of surrender
equal to the aggregate exercise price of the option; (4) by tender of a full
recourse promissory note; (5) by waiver of compensation due to or accrued by the
Participant for services rendered; (6) by a "same-day sale" commitment from the
Participant and a National Association of Securities Dealers, Inc. ("NASD")
broker; (7) by a "margin" commitment from the Participant and a NASD broker; or
(8) by any combination of the foregoing.
TERMINATION OF OPTIONS
Options are generally exercisable for a period of 10 years. Options granted
under the 1997 Incentive Plan terminate three months (or such shorter or longer
period as determined by the Committee not exceeding five years) after the
Participant ceases to be employed or retained by the Company unless the
termination of employment or retention is due to permanent and total disability
or death, in which case the option may, but need not, provide that it may be
exercised at any time within 12 months of termination to the extent the option
was exercisable to the date of termination. In no event will an option be
exercisable after the expiration date of the option.
5
<PAGE> 9
STOCK BONUS AWARDS
The Committee may grant Participants stock bonus awards either in addition
to, or in tandem with, other awards under the 1997 Incentive Plan, under such
terms, conditions and restrictions as the Committee may determine. To date, the
Company has not granted any stock bonus awards.
MERGERS, CONSOLIDATIONS, CHANGE OF CONTROL
In the event of a merger, consolidation, dissolution or liquidation of the
Company, the sale of substantially all the assets of the Company or any other
similar corporate transaction, the successor corporation may assume, replace or
substitute equivalent options in exchange for those granted under the 1997
Incentive Plan or provide substantially similar consideration, shares or other
property as was provided to Shareholders of the Company (after taking into
account provisions of the awards) under the 1997 Incentive Plan. In the event
that the successor corporation, if any, does not assume or substitute the
options awarded, such options shall expire upon the closing of such transaction
at the time and upon the conditions as the Board determines.
AMENDMENT OF THE 1997 INCENTIVE PLAN
The Board may at any time amend or terminate the 1997 Incentive Plan,
including amendment of any form of award agreement or instrument to be executed
pursuant to the 1997 Incentive Plan. However, the Board may not amend the 1997
Incentive Plan in any manner that requires shareholder approval pursuant to the
Code or the regulations promulgated thereunder, or the Exchange Act or Rule
16b-3 (or its successor) promulgated thereunder.
TERM OF THE 1997 INCENTIVE PLAN
Unless terminated earlier as provided in the 1997 Incentive Plan, the 1997
Incentive Plan will terminate in April 2007, ten (10) years from the date the
1997 Incentive Plan was adopted by the Board.
FEDERAL INCOME TAX INFORMATION
THE FOLLOWING IS A GENERAL SUMMARY AS OF THE DATE OF THIS PROXY STATEMENT
OF THE FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND PARTICIPANTS UNDER THE
INCENTIVE PLAN. THE FEDERAL TAX LAWS MAY CHANGE AND THE FEDERAL, STATE AND LOCAL
TAX CONSEQUENCES FOR ANY PARTICIPANT WILL DEPEND UPON HIS OR HER INDIVIDUAL
CIRCUMSTANCES. EACH PARTICIPANT HAS BEEN, AND IS, ENCOURAGED TO SEEK THE ADVICE
OF A QUALIFIED TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PARTICIPATION IN
THE INCENTIVE PLAN.
Incentive Stock Options. A Participant will not recognize income upon grant
of an ISO and will not incur tax on its exercise (unless the Participant is
subject to the alternative minimum tax described below). If the Participant
holds the stock acquired upon exercise of an ISO (the "ISO Shares") for one year
after the date the option was exercised and for two years after the date the
option was granted, the Participant generally will realize long-term capital
gain or loss (rather than ordinary income or loss) upon disposition of the ISO
Shares. This gain or loss will be equal to the difference between the amount
realized upon such disposition and the amount paid for the ISO shares.
If the Participant disposes of ISO Shares prior to the expiration of either
required holding period (a "disqualifying disposition"), then gain realized upon
such disposition, up to the difference between the fair market value of the ISO
Shares on the date of exercise (or, if less, the amount realized on a sale of
such shares) and the option exercise price, generally will be treated as
ordinary income. Any additional gain will be long-term or short-term capital
gain, depending upon the amount of time the ISO Shares were held by the
Participant.
Alternative Minimum Tax. The difference between the fair market value of
the ISO shares on the date of exercise and the exercise price is an adjustment
to income for purposes of the alternative minimum tax (the
6
<PAGE> 10
"AMT"). The AMT (imposed to the extent it exceeds the taxpayer's regular tax) is
26% of an individual taxpayer's alternative minimum taxable income (28% in the
case of alternative minimum taxable income in excess of $175,000, or $87,500 for
married taxpayers filing separately). Alternative minimum taxable income is
determined by adjusting regular taxable income for certain items, increasing
that income by certain tax preference items (including the difference between
the fair market value of the ISO shares on the date of exercise and the exercise
price) and reducing this amount by the applicable exemption amount ($45,000 in
the case of a joint return and $33,750 for individual returns, subject to
reduction under certain circumstances). If a disqualifying disposition of the
ISO Shares occurs in the same calendar year as exercise of the ISO, there is no
AMT adjustment with respect to those shares. Because the alternative minimum tax
calculation may be complex, any optionee who upon exercising an incentive stock
option would recognize (together with other alternative minimum taxable income
preference and adjustment items for the year) alternative minimum taxable income
in excess of the exclusion amount noted above should consult his or her own tax
advisor prior to exercising the incentive stock option. If an optionee pays
alternative minimum tax, the amount of such tax may be carried forward as a
credit against any subsequent year's regular tax in excess of the alternative
minimum tax for such year.
Nonqualified Stock Options. A Participant will not recognize any taxable
income at the time a NQSO is granted. However, upon exercise of a NQSO the
Participant will include in income as compensation an amount equal to the
difference between the fair market value of the shares on the date of exercise
and the Participant's exercise price. The included amount will be treated as
ordinary income by the Participant and may be subject to income tax and FICA
withholding by the Company (either by payment in cash or withholding out of the
Participant's salary). Upon resale of the shares by the Participant, any
subsequent appreciation or depreciation in the value of the shares will be
treated as capital gain or loss. Special rules apply where all or a portion of
the exercise price is paid by tendering shares of Common Stock.
Tax Treatment of the Company. The Company will be entitled to a deduction
in connection with the exercise of a NQSO by a Participant or the receipt of
restricted stock or stock bonuses by a Participant to the extent that the
Participant recognizes ordinary income and the Company withholds tax. The
Company will be entitled to a deduction in connection with the disposition of
ISO Shares only to the extent that the Participant recognizes ordinary income on
a disqualifying disposition of the ISO Shares.
ERISA
The 1997 Incentive Plan is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA") and is not qualified
under Section 401(a) of the Code.
REQUIRED VOTE
The approval the 1997 Equity Incentive Plan and the reservation of
3,000,000 shares of Common Stock for issuance thereunder requires the
affirmative vote of the holders of a majority of the shares of the Company's
Common Stock present at the Annual Meeting in person or by proxy and entitled to
vote.
THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL OF THE
1997 EQUITY INCENTIVE PLAN.
PROPOSAL NO. 3 -- RATIFICATION OF SELECTION
OF INDEPENDENT ACCOUNTANTS
The Company has selected Price Waterhouse LLP as its independent
accountants to perform the audit of the Company's financial statements for 1997,
and the shareholders are being asked to ratify such selection. Representatives
of Price Waterhouse LLP are expected to be present at the Meeting, will have the
opportunity to make a statement at the Meeting if they desire to do so and are
expected to be available to respond to appropriate questions.
7
<PAGE> 11
REQUIRED VOTE
The ratification of the appointment of Price Waterhouse LLP as the
Company's independent auditors requires the affirmative vote of the holders of a
majority of the shares of the Company's Common Stock present at the Annual
Meeting in person or by proxy and entitled to vote.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION
OF THE SELECTION OF PRICE WATERHOUSE LLP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 22, 1997,
known to the Company regarding the beneficial ownership of the Company's Common
Stock by (i) each person known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock, (ii) each director and nominee, (iii)
each executive officer named in the Summary Compensation Table below and (iv)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(1)
------------------------------------------ ----------------------- ---------------
<S> <C> <C>
Fred S.L. Chan............................ 11,738,652(2) 30.3%
President, Chief Executive Officer,
Chairman of the Board of Directors
Annie M.H. Chan........................... 11,738,652(2) 30.3%
Director
Trusts benefiting the children of
Fred S.L. Chan and Annie M.H. Chan...... 3,680,954(3) 9.5%
Nicholas A. Aretakis...................... 50,500(4) *
Vice President, Sales
Michael A. Aymar.......................... 31,253(5) *
Director
John H. Barnet............................ 50,000(6) *
Vice President, Finance and
Chief Financial Officer
Robert L. Blair........................... 15,500(7) *
Executive Vice President, Operations
Johston Chen.............................. 28,500(8) *
Vice President -- Asia Pacific Sales
Bo Ericsson............................... 0(9) *
Vice President, Marketing
Ilbok Lee................................. 13,750(10) *
Director
Herbert J. Martin......................... 45,000(11) *
Director
Peter T. Mok.............................. 12,500(12) *
Director
Chi Shin Wang............................. 167,200(13) *
Chief Technical Officer
All executive officers and directors as a
group (11 persons)...................... 12,152,855(14) 31.2%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options that are currently exercisable or
exercisable within 60 days after April 22, 1997 are deemed to be
outstanding and to be beneficially
8
<PAGE> 12
owned by the person holding such options for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Includes 900,000 shares held by Mrs. Chan (Mr. Fred Chan's wife) and
10,688,652 shares held by Annie M.H. Chan Living Trust. Also includes
options held by Mr. Chan to purchase 150,000 shares of common stock. Mr. and
Mrs. Chan's address is c/o ESS Technology, Inc., 48401 Fremont Boulevard,
Fremont, CA 94538.
(3) Represents 814,578 shares held by a trust benefiting David Y.W. Chan (the
"David Chan Trust"), 814,576 shares held by a trust benefiting Edward Y.C.
Chan (the "Edward Chan Trust"), 280,000 shares held by a trust benefiting
Michael Y.J. Chan (the "Michael Chan Trust") and 1,771,800 shares held by a
trust benefiting David, Edward and Michael Chan jointly. David, Edward and
Michael Chan are the sons of Fred S.L. Chan and Annie M.H. Chan. Mee Sim
Chan Lee and Sung Kook Kim are trustees of the four above-mentioned trusts.
In addition, Myong Shin Kim is a trustee of the David Chan Trust, the
Michael Chan Trust and the Edward Chan Trust. The address of the trusts is
P.O. Box 590, Cupertino, CA 95015-0590.
(4) Represents 500 shares held through 1995 Employee Stock Purchase Plan and
options to purchase 50,000 shares.
(5) Includes options to purchase 1,250 shares.
(6) Includes options to purchase 40,000 shares.
(7) Includes 500 shares held through 1995 Employee Stock Purchase Plan.
(8) Includes 500 shares held through 1995 Employee Stock Purchase Plan and
options to purchase 16,000 shares.
(9) Mr. Ericsson joined the Company in November 1996 and has received an option
to purchase a total of 125,000 shares. Options to purchase 18,750 shares
will become vested on November 4, 1997.
(10) Represents options to purchase 13,750 shares.
(11) Represents options to purchase 45,000 shares.
(12) Represents options to purchase 12,500 shares.
(13) Includes options to purchase 25,000 shares.
(14) Includes an aggregate of 337,500 shares which the directors and executive
officers have the right to acquire by June 23, 1997. Does not include an
aggregate of 3,680,954 shares held by trusts benefiting Mr. & Mrs. Chan's
children.
9
<PAGE> 13
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to or earned or
paid for services rendered in all capacities to the Company during each of 1994,
1995, and 1996 by the Company's Chief Executive Officer and the Company's four
other most highly compensated executive officers who were serving as executive
officers at the end of 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------------------- ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Fred S.L. Chan................. 1996 $226,000 $480,000 -- -- --
President and 1995 168,000 321,421 -- 375,000 --
Chief Executive Officer 1994 127,628 251,000 -- -- --
John H. Barnet................. 1996 $ 46,250 $400,000 -- 200,000 --
Vice President, Finance and 1995 -- -- -- -- --
Chief Financial Officer(1) 1994 -- -- -- -- --
Nicholas A. Aretakis........... 1996 $113,272 $ 73,003 -- -- --
Vice President, Sales 1995 115,000 70,508 -- -- --
1994 40,091 11,783 -- 240,000 --
Robert L. Blair................ 1996 $118,223 -- -- 50,000 --
Executive Vice President, 1995 120,000 -- -- -- --
Operations 1994 5,000 100 -- 150,000 --
Chi Shin Wang.................. 1996 $117,048 $ 22,500 -- 100,000 --
Chief Technical Officer 1995 -- -- -- -- --
1994 -- -- -- -- --
</TABLE>
- ---------------
(1) Mr. Barnet joined the Company in October 1996. (See "Employment Agreements
and Certain Transactions.")
The following table sets forth further information regarding the option
grants pursuant to the Company's 1992 Stock Option Plan or 1995 Equity Incentive
Plan during 1996 to each of the Named Executive Officers. In accordance with the
rules of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective ten-year terms. These gains are based on assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
option was granted to the end of the option term.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM(4)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL 1996 PER SHARE DATE 5% 10%
- --------------------------- ---------- ------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Fred S.L. Chan............. -- -- -- -- -- --
John H. Barnet............. 200,000(1) 7.7% $14.8125 9/17/05 $1,863,100 $4,721,462
Nicholas A. Aretakis....... -- -- -- -- -- --
Robert L. Blair............ 50,000(2) 1.9% 16.00 9/24/06 503,116 1,274,994
Chi Shin Wang.............. 100,000(3) 3.9% 19.25 1/20/05 1,210,622 3,067,954
</TABLE>
- ---------------
(1) The incentive stock option shown in the table was granted at fair market
value. The option became exercisable with respect to 20% of the shares on
the date of the grant and becomes exercisable with respect to 20% of the
shares for each full year that the optionee renders services to the Company
after the date of the grant. The option shown in the table will expire ten
years from the date of grant, subject to earlier termination upon
termination of employment.
10
<PAGE> 14
(2) The incentive stock option shown in the table was granted at fair market
value and becomes exercisable with respect to 20% of the shares for each
full year that the optionee renders services to the Company after the date
of grant. The option shown in the table will expire ten years from the date
of grant, subject to earlier termination upon termination of employment.
(3) The incentive stock option shown in the table was granted at fair market
value and becomes exercisable with respect to 25% of the shares for each
full year that the optionee renders services to the Company after the date
of grant. The option shown in the table will expire ten years from the date
of grant, subject to earlier termination upon termination of employment.
(4) The 5% and 10% assumed annual compound rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
The following table sets forth certain information concerning the exercise
of options by each of the Named Executive Officers during fiscal 1996, including
the aggregate amount of gains on the date of exercise. In addition, the table
includes the number of shares covered by both exercisable and unexercisable
stock options as of December 31, 1996. Also reported are values of
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and $28.13 per share, which was the
closing price of the Company's Common Stock as reported on the Nasdaq National
Market on December 31, 1996.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred S.L. Chan............. -- -- 75,000 300,000 $ 1,909,748 $ 7,638,990
John H. Barnet............. -- -- 40,000 160,000 532,700 2,130,800
Nicholas A. Aretakis....... 30,000 $ 550,517 90,000 120,000 2,405,700 3,207,600
Robert L. Blair............ 10,000 200,786 50,000 140,000 1,336,500 3,012,200
Chi Shin Wang.............. -- -- -- 100,000 -- 880,000
</TABLE>
- ---------------
(1) "Value Realized" represents the fair market value of the shares of Common
Stock underlying the option on the date of exercise less the aggregate
exercise price of the option.
(2) These values, unlike the amounts set forth in the column entitled "Value
Realized," have not been, and may never be, realized and are based on the
positive spread between the respective exercise prices of outstanding
options and the closing price of the Company's Common Stock on December 31,
1996, the last day of trading for the fiscal year.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their
services, with the exception of Mr. Aymar, Mrs. Chan, Mr. Lee and Mr. Mok each
of whom receives $1,000 for each board meeting he or she attends. The Directors
are reimbursed for their reasonable expenses in attending meetings of the Board
of Directors. All members of the Board of Directors who are not also employees
of the Company, or of a parent, subsidiary or affiliate of the Company, are
eligible to receive options under the 1995 Directors Stock Option Plan
("Directors Plan"). Each non-employee director who becomes a member of the Board
on or after October 5, 1995, the effective date of the Company's initial public
offering of its Common Stock (the "Effective Date"), will be automatically
granted an option to purchase 20,000 shares of Common Stock under the Director
Plan (the "Initial Grant"). On each anniversary of his or her Initial Grant,
each non-employee director will be automatically granted an additional option to
purchase 5,000 shares of Common Stock under the Directors Plan, so long as he or
she continuously remains a director of the Company (the 'Succeeding Grant'). In
addition, a non-employee director who does not receive an Initial Grant shall
nevertheless automatically receive a Succeeding Grant on the anniversary of the
most recent grant of an option to such director.
11
<PAGE> 15
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1996 until October 28, 1996, the Compensation Committee
consists of Messrs. Lee and Mok. Mr. Lee is the President and Chief Executive
Officer, director and principal shareholder of IC WORKS, Inc. ("ICW"). In March
and May 1993, the Company and ESS (Far East) Ltd., a wholly-owned Hong Kong
subsidiary of the Company, respectively, each entered into separate foundry
agreements with ICW for the manufacture of semiconductor chips for the Company
and such subsidiary. The subsidiary ceased manufacturing and selling
speech/sound semiconductors for use in toys, games and other consumer products
in 1994. Accordingly, the foundry agreement between ICW and the subsidiary was
terminated in August 1995. The Company and its subsidiary in the aggregate paid
ICW $2,898,484 and $1,941,769 in 1995 and 1996, respectively, for foundry
services. No other interlocking relationships exist between the Company's Board
of Directors or Audit Committee and the board of directors or audit committee of
any other company.
REPORT ON EXECUTIVE COMPENSATION
The report on executive compensation below is required by the Securities
and Exchange Commission ("SEC") and shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed soliciting material or filed under such Acts.
Final decisions regarding executive compensation and stock option grants to
executives are made by the Compensation Committee of the Board of Directors (the
"Committee"). Prior to the Company's initial public offering in October 1995,
the Board of Directors participated in compensation decisions and granted stock
options. The Committee is composed of two independent non-employee directors,
neither of whom have any interlocking relationships as defined by the Securities
and Exchange Commission.
GENERAL COMPENSATION POLICY
The Committee acts on behalf of the Board to establish the general
compensation policy of the Company for all employees of the Company. The
Committee reviews base salary levels and target bonuses for the Chief Executive
Officer ("CEO") at or about the beginning of each year. The Committee
administers the Company's incentive and equity plans, including the 1992 Stock
Option Plan (which was terminated October 5, 1995), the 1995 Equity Incentive
Plan and the 1995 Employee Stock Purchase Plan. The Company no longer grants
options under the 1992 Stock Option Plan.
The Committee's philosophy in compensating the CEO is to relate
compensation directly to corporate performance. Thus, the Company's compensation
policy for the CEO relates a portion of his total compensation to the Company
profit objectives and individual objectives set forth at the beginning of the
Company's year. Consistent with this policy, a designated portion of the CEO's
compensation is contingent on corporate performance, and is also based on his
performance as measured against objectives established under the CEO Incentive
Plan, as determined by the Committee in its discretion. Long-term equity
incentives for the CEO are effected through the granting of stock options under
the 1995 Equity Incentive Plan. Stock options have value for the CEO only if the
price of the Company's stock increases above the fair market value on the grant
date and the CEO remains in the Company's employ for the period required for the
shares to vest.
The base salary, incentive compensation and stock option grants of the CEO
are determined in part by the Committee reviewing data on prevailing
compensation practices in technology companies with whom the Company competes
for executive talent and by their evaluating such information in connection with
the Company's corporate goals. To this end, the Committee attempts to compare
the compensation of the Company's CEO with the compensation practices of
comparable companies to determine base salary, target bonuses and target total
cash compensation. In addition to his base salary, the Company's CEO is eligible
to receive cash bonuses and to participate in the 1995 Equity Incentive Plan.
12
<PAGE> 16
FISCAL 1996 EXECUTIVE COMPENSATION
Base Compensation. The foregoing information was presented to the Board on
April 19, 1996. The Board reviewed the recommendations and performance and
market data outlined above and established a base salary level to be effective
January 1, 1996 for the CEO. Mr. Chan's salary was increased to $226,000 from
the $168,000 previously paid to him in fiscal 1995 pursuant to his employment
agreement.
Incentive Compensation. A cash bonus is awarded to the extent that an
individual achieves predetermined individual objectives and the Company meets
predetermined profit objectives set by the Board at the beginning of the year.
Performance is measured at the end of the year. For fiscal 1996, the basis of
incentive compensation was Company revenue, percentage of growth of revenue and
profit margin after tax. The targets and actual bonus payments are determined by
the Committee, in its discretion.
Stock Options. In fiscal 1996 stock options were granted to certain
executive officers to aid in the retention of executive officers and to align
their interests with those of the shareholders. Stock options typically have
been granted to executive officers when the executive first joins the Company in
connection with a significant change in responsibilities and, occasionally, to
achieve equity within a peer group. The Committee may, however, grant additional
stock options to executives for other reasons. The number of shares subject to
each stock option granted is within the discretion of the Committee and is based
on anticipated future contribution and ability to impact corporate and/or
business unit results, past performance or consistency within the executive's
peer group. In fiscal 1996, the Committee considered these factors, as well as
the number of options held by such executive officers as of the date of grant
that remained unvested. In the discretion of the Committee, executive officers
may also be granted stock options to provide greater incentives to continue
their employment with the Company and to strive to increase the value of the
Company's Common Stock. The stock options generally become exercisable over a
four-year or five-year period and are granted at a price that is equal to the
closing price of the Company's Common Stock on the Nasdaq National Market System
on the last business day before the date of the grant.
Company Performance and CEO Compensation. As noted above, Mr. Chan's base
salary was increased to $226,000 commencing January 1, 1996. In addition, as an
incentive to Mr. Chan to achieve the objectives established by the Committee for
fiscal 1996, the Board of Directors exercised its discretion and recommended
that Mr. Chan be awarded incentive compensation of $480,000. All of Mr. Chan's
incentive compensation was based upon obtaining and surpassing corporate
operating profit objectives. This figure represents approximately 100% of the
target bonus for Mr. Chan for fiscal 1996. The Committee reviewed the
compensation practices of comparable companies in making these awards.
Compliance with Section 162(m) of the Internal Revenue Code of 1986. The
Company intends to comply with the requirements of Section 162(m) of the
Internal Revenue Code of 1986 for 1997. The 1995 Directors Stock Option Plan is
already in compliance with Section 162(m) by limiting stock awards to named
executive officers. The Company does not expect cash compensation for 1997 to be
in excess of $1,000,000 or consequently affected by the requirements of Section
162(m).
BOARD OF DIRECTORS
Fred S.L Chan
Annie M.H. Chan
Michael A. Aymar
Ilbok Lee
Peter T. Mok
Herbert J. Martin
COMPENSATION COMMITTEE
Peter T. Mok
Michael Aymar
13
<PAGE> 17
COMPANY STOCK PRICE PERFORMANCE
The stock price performance graph below is required by the SEC and shall
not be deemed to be incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act of 1933, as amended, or under the Securities Exchange Act of
1934, as amended, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
soliciting material or filed under such Acts.
The graph below compares the cumulative total shareholder return on the
Common Stock of the Company from the first day of trading of the Company's
Common Stock upon the Company's initial public offering (October 6, 1995) to
December 31, 1996 with the cumulative total return on the Nasdaq Stock Market
and the Hambrecht & Quist Technology Index (assuming the investment of $100 in
the Company's Common Stock and in each of the indexes on the date of the
Company's initial public offering, and reinvestment of all dividends).
<TABLE>
<CAPTION>
NASDAQ STOCK
ESS TECHNOLOGY, INC. MARKET -- US INDEX H&Q TECHNOLOGY INDEX
---------------------- ----------------------- -----------------------
MARKET INVESTMENT INVESTMENT INVESTMENT
PRICE VALUE INDEX VALUE INDEX VALUE
------ ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
10/6/1995................................ $15.00 $ 100.00 331.141 $ 100.00 758.66 $ 100.00
12/31/1995............................... $23.00 $ 153.33 345.715 $ 102.16 775.02 $ 104.42
3/31/1996................................ $18.75 $ 125.00 361.864 $ 104.20 790.50 $ 109.29
6/30/1996................................ $18.50 $ 123.33 391.401 $ 108.98 826.80 $ 118.21
9/30/1996................................ $17.13 $ 114.20 405.339 $ 116.05 880.39 $ 122.42
12/31/1996............................... $28.13 $ 187.53 425.258 $ 122.58 929.94 $ 128.43
</TABLE>
EMPLOYMENT AGREEMENTS AND CERTAIN TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer, or holder of more than 5% of the Company's Common
Stock had or will have a direct or indirect material interest other than (i)
normal compensation arrangements,
14
<PAGE> 18
which are described under "Executive Compensation" above, (ii) the transactions
described under "Audit Committee Interlocks and Insider Participation" above,
and (iii) the transactions described below:
In January 1996, the Company completed its acquisition of VideoCore
Technology, Inc. ("VideoCore") pursuant to which the Company acquired all of the
outstanding stock of VideoCore in exchange for 525,000 shares of Common Stock of
the Company and $5.4 million in cash. Chi-Shin Wang, Chief Technical Officer of
the Company, joined the Company as a result of such merger and was a shareholder
of VideoCore. As a result of the merger, Dr. Wang received 164,700 shares of the
Company's Common Stock in exchange for his shares of VideoCore. Upon joining the
Company, Dr. Wang received options to purchase 100,000 shares of the Company's
Common Stock. The merger was an arm's-length transaction and Dr. Wang received
his shares on the same terms as all other VideoCore shareholders.
In October 1996 the Company entered into an employment agreement with Mr.
Barnet. In addition to providing for Mr. Barnet's annual salary and bonus, the
employment agreement provided for a sign-up bonus of $400,000, a loan of
$400,000 at a rate of 6.02% and options to purchase 200,000 shares of the
Company's Common Stock priced at 100% of the fair market value of the Company's
Common Stock as of the date of grant. The employment agreement provides that Mr.
Barnet has the right to receive at least a $5.00 per share appreciation on
40,000 shares under the option grant. In addition, the employment agreement
provides that, in the event that Mr. Barnet is terminated without cause in the
first year of his employment with the Company, 40,000 shares underlying his
option grant will vest immediately and that, if there is a change in control of
the Company such that shareholders of the Company no longer hold a majority of
the capital stock of the new entity, the shares underlying Mr. Barnet's option
will become vested immediately unless Mr. Barnet is hired by the new entity with
similar compensation package.
SHAREHOLDER PROPOSALS
Proposals of Shareholders intended to be presented at the Company's 1998
Annual Meeting of Shareholders must be received by the Company at its principal
executive offices no later than January 15, 1998 in order to be included in the
Company's Proxy Statement and form of proxy relating to the meeting.
SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and officers, and persons who own more than 10% of the
Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the SEC and the Nasdaq National Market. Such persons
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely on its review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements for the year
ended December 31, 1996 were met, except that a Form 5 was filed for Fred and
Annie Chan to correct the total number of shares they jointly beneficially owned
and for Michael Aymar and Robert Blair to correct the total number of shares
each beneficially owned.
OTHER BUSINESS
The Board does not presently intend to bring any other business before the
Meeting, and, so far as is known to the Board, no matters are to be brought
before the Meeting except as specified in the Notice of the Meeting. As to any
business that may properly come before the Meeting, however, it is intended that
proxies, in the form enclosed, will be voted in respect thereof in accordance
with the judgment of the persons voting such proxies.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE SO
THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
15
<PAGE> 19
ESS TECHNOLOGY, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
May 9, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY.
The undersigned hereby appoints Fred S.L. Chan and John Barnet or either of
them, as proxies, each with full power of substitution, and hereby authorizes
them to represent and to vote, as designated below, all shares of Common Stock,
no par value, of ESS Technology, Inc. (the "Company"), held of record by the
undersigned on April 29, 1997, at the Annual Meeting of Shareholders of the
Company to be held at the Westin Hotel, 5101 Great America Parkway, Santa Clara,
California 95054, on Tuesday, May 27, 1997, at 2:30 p.m. Pacific Daylight Time,
and at any adjournments or postponements thereof.
1. ELECTION OF DIRECTORS.
[ ] FOR all nominees listed [ ] WITHHOLDING AUTHORITY
below (except as indicated to vote for all nominees
to the contrary below) listed below
Nominees: Fred S.L. Chan, Annie M.H. Chan, Michael A. Aymar, Ilbok Lee,
Peter T. Mok.
Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.
------------------------------------------------------------
2. APPROVE 1997 EQUITY INCENTIVE PLAN AND THE RESERVATION OF 3,000,000
SHARES OF COMMON STOCK FOR ISSUANCE THERUNDER.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE COMPANY'S
INDEPENDENT ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends that you vote FOR the election of the
five nominees listed in Proposal 1 and FOR Proposals No. 2 and No. 3.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 20
(CONTINUED FROM OTHER SIDE)
THIS PROXY WILL BE VOTED AS DIRECTED ABOVE. WHEN NO CHOICE IS INDICATED,
THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES LISTED IN PROPOSAL 1
AND FOR PROPOSALS 2 and 3. In their discretion, the proxy holders are authorized
to vote upon such other business as may properly come before the meeting or any
adjournments or postponements thereof to the extent authorized by Rule 14a-4(c)
promulgated under the Securities Exchange Act of 1934, as amended.
-------------------------------------------
(Print Shareholder(s) name)
-------------------------------------------
(Signature(s) of Shareholder or Authorized
Signatory)
-------------------------------------------
Dated: __________, 1997
Please sign exactly as your name(s) appear(s) on your stock certificate. If
shares of stock stand of record in the names of two or more persons or in the
name of husband and wife, whether as joint tenants or otherwise, both or all of
such persons should sign the proxy. If shares of stock are held of record by a
corporation, the proxy should be executed by the president or vice president and
the secretary or assistant secretary. Executors, administrators or other
fiduciaries who execute the above proxy for a deceased shareholder should give
their full title. Please date the proxy.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
<PAGE> 21
APPENDIX I
ESS TECHNOLOGY, INC.
1997 EQUITY INCENTIVE PLAN
The following constitute the provisions of the 1997 Equity Incentive Plan
of ESS Technology, Inc.
1. PURPOSES OF THE PLAN. The purposes of this Equity Incentive Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the Employees and
Consultants of the Company and to promote the success of the Company's business.
Options granted hereunder may be either Incentive Stock Options
(as defined under Section 422 of the Code) or Nonstatutory Stock Options, at the
discretion of the Board and as reflected in the terms of the written option
agreement.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "Administrator" shall mean the Board or any of its
Committees appointed pursuant to Section 4 of the Plan.
(b) "Affiliate" shall mean an entity other than a Subsidiary
(as defined below) in which the Company owns an equity interest.
(c) "Applicable Laws" shall have the meaning set forth in
Section 4(a) below.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) "Committee" shall mean the Committee appointed by the
Board of Directors in accordance with Section 4(a) of the Plan, if one is
appointed.
(g) "Common Stock" shall mean the Common Stock of the Company.
(h) "Company" shall mean ESS Technology, Inc., a California
corporation.
(i) "Consultant" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(j) "Continuous Status as an Employee or Consultant" shall
mean the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator; provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute. For purposes of this Plan, a change
in status from an Employee to a Consultant or from a Consultant to an Employee
will not constitute a termination of employment.
<PAGE> 22
(k) "Director" shall mean a member of the Board.
(l) "Employee" shall mean any person (including any Named
Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute "employment"
of such Director by the Company.
(m) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(n) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock as quoted on such system on the date of
determination (if for a given day no sales were reported, the closing bid on
that day shall be used), as such price is reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(o) "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable written option agreement.
(p) "Named Executive" shall mean any individual who, on the last
day of the Company's fiscal year, is the chief executive officer of the Company
(or is acting in such capacity) or among the four highest compensated officers
of the Company (other than the chief executive officer). Such officer status
shall be determined pursuant to the executive compensation disclosure rules
under the Exchange Act.
(q) "Nonstatutory Stock Option" shall mean an Option not intended
to qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(r) "Officer" shall mean a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
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(s) "Option" shall mean a stock option granted pursuant to the
Plan.
(t) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(u) "Optionee" shall mean an Employee or Consultant who
receives an Option.
(v) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(w) "Plan" shall mean this 1997 Equity Incentive Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor
provision.
(y) "Share" shall mean a share of the Common Stock, as
adjusted in accordance with Section 14 of the Plan.
(z) "Subsidiary" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section
14 of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 3,000,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares that were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. Notwithstanding any other provision of the Plan,
shares issued under the Plan and later repurchased by the Company shall not
become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF ADMINISTRATOR.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by
Rule 16b-3, and by the legal requirements relating to the administration of
incentive stock option plans, if any, of applicable securities laws and the Code
(collectively, the "Applicable Laws"), grants under the Plan may (but need not)
be made by different administrative bodies with respect to Directors, Officers
who are not directors and Employees who are neither Directors nor Officers.
(ii) ADMINISTRATION WITH RESPECT TO DIRECTORS AND
OFFICERS. With respect to grants of Options to Employees or Consultants who are
also Officers or Directors of the Company, grants under the Plan shall be made
by (A) the Board, if the Board may make grants under the Plan in compliance with
Rule 16b-3 and Section 162(m) of the Code as it applies so as to qualify grants
of Options to Named Executives as performance-based
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<PAGE> 24
compensation, or (B) a Committee designated by the Board to make grants under
the Plan, which Committee shall be constituted in such a manner as to permit
grants under the Plan to comply with Rule 16b-3, to qualify grants of Options to
Named Executives as performance-based compensation under Section 162(m) of the
Code and otherwise so as to satisfy the Applicable Laws.
(iii) ADMINISTRATION WITH RESPECT TO OTHER PERSONS. With
respect to grants of Options to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws.
(iv) GENERAL. If a Committee has been appointed
pursuant to subsection (ii) or (iii) of this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws and, in the case of a
Committee appointed under subsection (ii), to the extent permitted by Rule 16b-3
and to the extent required under Section 162(m) of the Code to qualify grants of
Options to Named Executives as performance-based compensation.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(m) of the Plan;
(ii) to select the Employees and Consultants to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock
to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the share price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option and/or the shares of Common Stock relating thereto, based
in each case on such factors as the Administrator shall determine, in its sole
discretion);
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<PAGE> 25
(vii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees, provided, however, that Employees of an Affiliate shall not
be eligible to receive Incentive Stock Options. An Employee or Consultant who
has been granted an Option may, if he or she is otherwise eligible, be granted
an additional Option or Options.
(b) TYPE OF OPTION. Each Option shall be designated in the
written option agreement as either an Incentive Stock Option or a Nonstatutory
Stock Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) NO EMPLOYMENT RIGHTS. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 20 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 16 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Option shall be five (5) years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
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<PAGE> 26
8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided
in this Plan, the maximum number of Shares which may be subject to options
granted to any one Employee under this Plan for any fiscal year of the Company
shall be 375,000, except that new employees of the Company or of a Parent or
Subsidiary of the Company (including new employees who are also officers and
directors of the Company or any Parent or Subsidiary of the Company) are
eligible to receive up to a maximum of 750,000 Shares in the calendar year in
which they commence their employment.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant; or
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the
grant of such Option, is a Named Executive of the Company, the per share
Exercise Price shall be no less than 100% of the Fair Market Value on the date
of grant; or
(B) granted to any person other than a Named
Executive, the per Share exercise price shall be no less than [85%] [100%] of
the Fair Market Value per Share on the date of grant.
(iii) Notwithstanding anything to the contrary in
subsections 9(a)(i) or 9(a)(ii) above, in the case of an Option granted on or
after the effective date of registration of any class of equity security of the
Company pursuant to Section 12 of the Exchange Act and prior to six months after
the termination of such registration, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(b) PERMISSIBLE CONSIDERATION. The consideration to be paid for
the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares
that (x) in the case of Shares acquired upon exercise of an Option either have
been owned by the Optionee for more than six months on the date of surrender or
were not acquired, directly
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<PAGE> 27
or indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised, (5) authorization from the Company to retain from the
total number of Shares as to which the Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of Shares as to which the Option is exercised, (6) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) any combination of the foregoing methods
of payment, or (8) such other consideration and method of payment for the
issuance of Shares to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 14 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within thirty (30) days (or such other
period of time, not exceeding three (3) months in the case of an Incentive Stock
Option or six (6) months in the case of a Nonstatutory Stock Option, as is
determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option) after the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set
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<PAGE> 28
forth in the Option Agreement), exercise his or her Option to the extent that he
or she was entitled to exercise it at the date of such termination. To the
extent that the Optionee was not entitled to exercise the Option at the date of
such termination, or if the optionee does not exercise such Option (which he or
she was entitled to exercise) within the time specified herein, the Option shall
terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding Section 10(b) above,
in the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within six (6) months
(or such other period of time not exceeding twelve (12) months as is determined
by the Administrator, with such determination in the case of an Incentive Stock
Option being made at the time of grant of the Option) from the date of such
termination (but in no event later than the date of expiration of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent he or she was entitled to exercise it at the date of such
termination. To the extent that he or she was not entitled to exercise the
Option at the date of termination, or if he does not exercise such Option (which
he was entitled to exercise) within the time specified herein, the Option shall
terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of
his death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or such
other period of time, not exceeding twelve (12) months, as is determined by the
Administrator, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option) following the date of death (but
in no event later than the date of expiration of the term of such Option as set
forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance but only to
the extent of the right to exercise that would have accrued had the Optionee
continued living and remained in Continuous Status as an Employee or Consultant
three (3) months (or such other period of time as is determined by the
Administrator as provided above) after the date of death, subject to the
limitation set forth in Section 5(b); or
(ii) within thirty (30) days (or such other period of
time not exceeding three (3) months as is determined by the Administrator, with
such determination in the case of an Incentive Stock Option being made at the
time of grant of the Option) after the termination of Continuous Status as an
Employee or Consultant, the Option may be exercised, at any time within six (6)
months following the date of death (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
(e) RULE 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or
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<PAGE> 29
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to Plan transactions.
11. WITHHOLDING TAXES. As a condition to the exercise of Options granted
hereunder, the Optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by one or some combination of the
following methods: (a) by cash payment, or (b) out of Optionee's current
compensation, or (c) if permitted by the Administrator, in its discretion, by
surrendering to the Company Shares that (i) in the case of Shares previously
acquired from the Company, have been owned by the Optionee for more than six
months on the date of surrender, and (ii) have a fair market value on the date
of surrender equal to or less than Optionee's marginal tax rate times the
ordinary income recognized, or (d) by electing to have the Company withhold from
the Shares to be issued upon exercise of the Option that number of Shares having
a fair market value equal to the amount required to be withheld. For this
purpose, the fair market value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined (the "Tax
Date").
Any surrender by an Officer or Director of previously owned
Shares to satisfy tax withholding obligations arising upon exercise of this
Option must comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy
tax withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to
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<PAGE> 30
which the Option is exercised but such Optionee shall be unconditionally
obligated to tender back to the Company the proper number of Shares on the Tax
Date.
13. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a beneficiary
by an Optionee will not constitute a transfer. An Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or a transferee
permitted by this Section 13.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE
TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, the number of shares of Common Stock that have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, the maximum number of shares of Common Stock for which Options may
be granted to any employee under Section 8 of the Plan, and the price per share
of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option.
(b) CORPORATE TRANSACTIONS. In the event of the proposed
dissolution or liquidation of the Company, the Option will terminate immediately
prior to the consummation of such proposed action, unless otherwise provided by
the Administrator. The Administrator may, in the exercise of its sole discretion
in such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Administrator
determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to some or all of the Optioned Stock, including Shares as to which
the Option would not otherwise be exercisable. If the Administrator makes an
Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be
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exercisable for a period of fifteen (15) days from the date of such notice, and
the Option will terminate upon the expiration of such period.
15. TIME OF GRANTING OPTIONS. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the determination
granting such Option or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.
16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval of
the shareholders of the Company in the manner described in Section 20 of the
Plan:
(i) any increase in the number of Shares subject to the
Plan, other than an adjustment under Section 14 of the Plan;
(ii) any change in the designation of the class of
persons eligible to be granted Options; or
(iii) any change in the limitation on grants to employees
as described in Section 8 of the Plan or other changes which would require
shareholder approval to qualify options granted hereunder as performance-based
compensation under Section 162(m) of the Code.
(b) SHAREHOLDER APPROVAL. If any amendment requiring shareholder
approval under Section 16(a) of the Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 20 of the Plan.
(c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
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then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
20. SHAREHOLDER APPROVAL.
(a) Continuance of the Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months before or after the date
the Plan is adopted. Such shareholder approval shall be obtained in the manner
and to the degree required under applicable federal and state law and the rules
of any stock exchange upon which the Shares are listed.
(b) In the event that the Company registers any class of equity
securities pursuant to Section 12 of the Exchange Act, any required approval of
the shareholders of the Company obtained after such registration shall be
solicited substantially in accordance with Section 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.
(c) If any required approval by the shareholders of the Plan
itself or of any amendment thereto is solicited at any time otherwise than in
the manner described in Section 20(b) hereof, then the Company shall, at or
prior to the first annual meeting of shareholders held subsequent to the later
of (1) the first registration of any class of equity securities of the Company
under Section 12 of the Exchange Act or (2) the granting of an Option hereunder
to an officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to vote
for the Plan substantially the same information that would be required (if
proxies to be voted with respect to approval or disapproval of the Plan or
amendment were then being solicited) by the rules and regulations in effect
under Section 14(a) of the Exchange Act at the time such information is
furnished; and
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<PAGE> 33
(ii) file with, or mail for filing to, the Securities
and Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to shareholders.
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<PAGE> 34
[Company Name]
[PLANYEAR]EQUITY INCENTIVE PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
[Optionee]
[OptioneeAddress1]
[OptioneeAddress2]
You have been granted an option to purchase Common Stock of ESS
Technology, Inc., (the "Company") as follows:
Board Approval Date:
--------------------------
Date of Grant (Later of Board
Approval Date or
Commencement of
Employment/Consulting): [ExercisePrice]
Exercise Price Per Share: [ExercisePrice]
Total Number of Shares Granted: [NoofShares]
Total Price of Shares Granted: [TotalExercisePrice]
Type of Option: [NoSharesISO] Shares Incentive Stock
Option
[NoSharesNSO] Shares Nonstatutory Stock
Option
Term/Expiration Date: [Term]/[ExpirDate]
Vesting Commencement Date: [VestingCommencementDate]
Vesting Schedule: [CliffVestAmount]
Termination Period: Option may be exercised for a period
of 30 days after termination of
employment or consulting relationship
except as set out in Sections 7 and 8
of the Stock Option Agreement (but in
no event later than the Expiration Date).
<PAGE> 35
By your signature and the signature of the Company's representative
below, you and the Company agree that this option is granted under and governed
by the terms and conditions of the ESS Technology, Inc. 1997 Equity Incentive
Plan and the Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: ESS Technology, Inc.
- -------------------------- --------------------------
Signature By:
- -------------------------- --------------------------
Print Name Title:
-2-
<PAGE> 36
ESS Technology, Inc.
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. ESS Technology, Inc., a California corporation
(the "Company"), hereby grants to the Optionee named in the Notice of Stock
Option Grant attached to this Agreement ("Optionee"), an option (the "Option")
to purchase the total number of shares of Common Stock (the "Shares") set forth
in the Notice of Stock Option Grant, at the exercise price per share set forth
in the Notice of Stock Option Grant (the "Exercise Price") subject to the terms,
definitions and provisions of the 1997 Equity Incentive Plan (the "Plan")
adopted by the Company, which is incorporated in this Agreement by reference. In
the event of a conflict between the terms of the Plan and the terms of this
Agreement, the terms of the Plan shall govern. Unless otherwise defined in this
Agreement, the terms used in this Agreement shall have the meanings defined in
the Plan.
To the extent designated an Incentive Stock Option in the Notice of
Stock Option Grant, this Option is intended to qualify as an Incentive Stock
Option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and, to the extent not so designated, this Option is
intended to be a Nonstatutory Stock Option.
2. EXERCISE OF OPTION. This Option shall be exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Stock
Option Grant and with the provisions of Sections 9 and 10 of the Plan as
follows:
(a) RIGHT TO EXERCISE.
(i) This Option may not be exercised for a fraction of
a share.
(ii) In the event of Optionee's death, disability or
other termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below, subject to the limitations contained in paragraphs
(iii) and (iv) below.
(iii) In no event may this Option be exercised after the
date of expiration of the term of this Option as set forth in the Notice of
Stock Option Grant.
(iv) If designated an Incentive Stock Option in the
Notice of Stock Option Grant, in the event that the Shares subject to this
Option (and all other Incentive Stock Options granted to Optionee by the Company
or any Parent or Subsidiary) that vest in any calendar year have an aggregate
fair market value (determined for each Share as of the Date of Grant of the
option covering such Share) in excess of $100,000, the Shares in excess of
$100,000 shall be treated as subject to a Nonstatutory Stock Option, in
accordance with Section 5 of the Plan.
(b) METHOD OF EXERCISE.
(i) This Option shall be exercisable by delivering to
the Company a written notice of exercise (in the form attached as Exhibit A)
which shall state the election to
<PAGE> 37
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such Shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
(ii) As a condition to the exercise of this Option,
Optionee agrees to make adequate provision for federal, state or other tax
withholding obligations, if any, which arise upon the exercise of the Option or
disposition of Shares, whether by withholding, direct payment to the Company, or
otherwise.
(iii) No Shares will be issued pursuant to the exercise
of an Option unless such issuance and such exercise shall comply with all
relevant provisions of law and the requirements of any stock exchange upon which
the Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to Optionee on the date on which the
Option is exercised with respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
Option is exercised, Optionee shall, if required by the Company, concurrently
with the exercise of all or any portion of this Option, deliver to the Company
an investment representation statement in customary form, a copy of which is
available for Optionee's review from the Company upon request.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of
the following, or a combination of the following, at the election of Optionee:
(a) cash; (b) check; (c) surrender of other Shares of Common Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired, directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised; (d) authorization from the Company to retain from the total number of
Shares as to which the Option is exercised that number of Shares having a Fair
Market value on the date of exercise equal to the exercise price for the total
number of Shares as to which the Option is exercised; or (e) if there is a
public market for the Shares and they are registered under the Securities Act,
delivery of a properly executed exercise notice together with irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds required to pay the exercise price.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
-2-
<PAGE> 38
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
6. TERMINATION OF RELATIONSHIP. In the event of termination of
Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the
extent otherwise so entitled at the date of such termination (the "Termination
Date"), exercise this Option during the Termination Period set out in the Notice
of Stock Option Grant. To the extent that Optionee was not entitled to exercise
this Option at the date of such termination, or if Optionee does not exercise
this Option within the time specified in the Notice of Stock Option Grant, the
Option shall terminate.
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 6 above, in the event of termination of Optionee's Continuous Status as
an Employee or Consultant as a result of total and permanent disability (as
defined in Section 22(e)(3) of the Code), Optionee may, but only within six (6)
months from the date of termination of employment (but in no event later than
the date of expiration of the term of this Option as set forth in Section 10
below), exercise the Option to the extent otherwise so entitled at the date of
such termination. To the extent that Optionee was not entitled to exercise the
Option at the date of termination, or if Optionee does not exercise such Option
(to the extent otherwise so entitled) within the time specified in this
Agreement, the Option shall terminate.
8. DEATH OF OPTIONEE. In the event of the death of Optionee:
(a) during the term of this Option and while an Employee of the
Company and having been in Continuous Status as an Employee or Consultant since
the date of grant of the Option, the Option may be exercised, at any time within
six (6) months following the date of death (but in no event later than the date
of expiration of the term of this Option as set forth in Section 10 below), by
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
would have accrued had Optionee continued living and remained in Continuous
Status as an Employee or Consultant three (3) months after the date of death,
subject to the limitation contained in Section 2(i)(d) above in the case of an
Incentive Stock Option; or
(b) within thirty (30) days after the termination of Optionee's
Continuous Status as an Employee or Consultant, the Option may be exercised, at
any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of this Option as set forth in
Section 10 below), by Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of termination.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or distribution.
The designation of a beneficiary does not constitute a transfer. An Option may
be exercised during the lifetime of Optionee only by Optionee or a transferee
permitted by this section. The terms of this Option shall be binding upon the
executors, administrators, heirs, successors and assigns of Optionee.
-3-
<PAGE> 39
10. TERM OF OPTION. This Option may be exercised only within the
term set out in the Notice of Stock Option Grant, and may be exercised during
such term only in accordance with the Plan and the terms of this Option.
11. NO ADDITIONAL EMPLOYMENT RIGHTS. Optionee understands and agrees
that the vesting of Shares pursuant to the Vesting Schedule is earned only by
continuing as an Employee or Consultant at the will of the Company (not through
the act of being hired, being granted this Option or acquiring Shares under this
Agreement). Optionee further acknowledges and agrees that nothing in this
Agreement, nor in the Plan which is incorporated in this Agreement by reference,
shall confer upon Optionee any right with respect to continuation as an Employee
or Consultant with the Company, nor shall it interfere in any way with his or
her right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
12. TAX CONSEQUENCES. Optionee acknowledges that he or she has read
the brief summary set forth below of certain federal tax consequences of
exercise of this Option and disposition of the Shares under the law in effect as
of the date of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT HIS OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option is an
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price will be
treated as an item of alternative minimum taxable income for federal tax
purposes and may subject Optionee to the alternative minimum tax in the year of
exercise.
(b) EXERCISE OF NONSTATUTORY STOCK OPTION. If this Option does
not qualify as an Incentive Stock Option, Optionee may incur regular federal
income tax liability upon the exercise of the Option. Optionee will be treated
as having received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the fair market value of the Shares on the date
of exercise over the Exercise Price. In addition, if Optionee is an employee of
the Company, the Company will be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
(c) DISPOSITION OF SHARES. If this Option is an Incentive Stock
Option and if Shares transferred pursuant to the Option are held for more than
one year after exercise and more than two years after the Date of Grant, any
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an Incentive
Stock Option are disposed of before the end of either of such two holding
periods, then any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the lesser of (i) the fair market value of the Shares on the
date of exercise, or (ii) the sales proceeds, over the Exercise Price. If this
Option is
-4-
<PAGE> 40
a Nonstatutory Stock Option, then gain realized on the disposition of
Shares will be treated as long-term or short-term capital gain depending on
whether or not the disposition occurs more than one year after the exercise
date.
(d) NOTICE OF DISQUALIFYING DISPOSITION. If the Option granted to
Optionee in this Agreement is an Incentive Stock Option, and if Optionee sells
or otherwise disposes of any of the Shares acquired pursuant to the Incentive
Stock Option on or before the later of (i) the date two years after the Date of
Grant, or (ii) the date one year after transfer of such Shares to Optionee upon
exercise of the Incentive Stock Option, Optionee shall notify the Company in
writing within thirty (30) days after the date of any such disposition. Optionee
agrees that Optionee may be subject to income tax withholding by the Company on
the compensation income recognized by Optionee from the early disposition by
payment in cash or out of the current earnings paid to Optionee.
13. SIGNATURE. This Stock Option Agreement shall be deemed executed
by the Company and Optionee upon execution by such parties of the Notice of
Stock Option Grant attached to this Stock Option Agreement.
[Remainder of page left intentionally blank]
-5-
<PAGE> 41
EXHIBIT A
NOTICE OF EXERCISE
To: ESS Technology, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase __________ shares of ESS Technology, Inc.
Common Stock, under and pursuant to the Company's 1997 Equity Incentive Plan and
the Stock Option Agreement dated ___________, as follows:
Grant Number: ________________________________
Date of Purchase: ________________________________
Number of Shares: ________________________________
Purchase Price: ________________________________
Method of Payment
of Purchase Price: ________________________________
Social Security No.: ________________________________
The shares should be issued as follows:
Name:__________________________________
Address:_______________________________
_______________________________
_______________________________
_______________________________
Signed:
_______________________________
Date:
________________________________
