<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
Commission Only (as permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] 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)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions 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:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement no.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
LOGO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 22, 1998
TO THE SHAREHOLDERS OF ESS TECHNOLOGY, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of ESS
Technology, Inc. (the "Company") will be held on Friday, May 22, 1998 at 1:30
p.m. local time at The Westin Hotel, 5101 Great America Parkway, Santa Clara,
California 95054 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.
2. To approve and ratify amendments to the Company's 1995 Employee Stock
Purchase Plan to increase the number of shares of Common Stock reserved
for issuance thereunder by 200,000 shares to an aggregate total of
425,000 shares;
3. To approve and ratify amendments to the Company's 1997 Equity Incentive
Plan to increase the number of shares of Common Stock reserved for
issuance hereunder by 2,000,000 shares to an aggregate of 5,000,000
shares.
4. To ratify the selection of Price Waterhouse LLP as independent
accountants for the Company for the fiscal year ending December 31,
1998.
5. To transact such other business as may properly come before the meeting
or any postponement or adjournment(s) 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 3, 1998 are
entitled to notice of and to vote at the meeting and any adjournment(s) thereof.
All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if such shareholder returned a proxy card.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JOHN H. BARNET
----------------------------------
John H. Barnet
Vice President, Chief Financial
Officer and Secretary
Fremont, California
April 28, 1998
IMPORTANT
----------------
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE. IF A QUORUM IS NOT REACHED, THE COMPANY WILL HAVE THE
ADDED EXPENSE OF RE-ISSUING THESE PROXY MATERIALS. IF YOU ATTEND THE MEETING AND
SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. THANK YOU FOR ACTING
PROMPTLY.
<PAGE> 3
LOGO
------------------------
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 22, 1998
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of ESS
Technology, Inc. (the "Company"), a California corporation, for use at the
Annual Meeting of Shareholders to be held on Friday, May 22, 1998 at 1:30 p.m.,
local time, or at any postponement or adjournment(s) thereof, for the purposes
set forth herein and in the accompanying Notice of Annual Meeting of
Shareholders. The Annual Meeting will be held at The Westin Hotel, 5101 Great
America Parkway, Santa Clara, CA 95054. The telephone number at that location is
(408) 986-0700.
The Company's principal executive offices are located at 48401 Fremont
Blvd., Fremont, California 94538. The Company's telephone number at that
location is (510) 492-1088.
SOLICITATION
These proxy solicitation materials, including an annual report for the
fiscal year ended December 31, 1997 were mailed on or about April 28, 1998 to
all shareholders entitled to vote at the meeting. The costs of soliciting these
proxies will be borne by the Company. These costs will include the expenses of
preparing and mailing proxy materials for the Annual Meeting and reimbursement
paid to brokerage firms and others for their expenses incurred in forwarding
solicitation material regarding the Annual Meeting to beneficial owners of the
Company's Common Stock. The Company may conduct further solicitation personally,
telephonically or by facsimile through its officers, directors and regular
employees, none of whom will receive additional compensation for assisting with
the solicitation.
The Company will provide a copy of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, including financial statements and
financial statement schedules (but not exhibits), without charge to each
shareholder upon written request to John H. Barnet, Chief Financial Officer, ESS
Technology, Inc., 48401 Fremont Blvd., Fremont, CA 94538 (telephone number:
(510) 492-1088). Exhibits to the Annual Report may be obtained on written
request to Mr. Barnet and payment of the Company's reasonable expenses in
furnishing such exhibits.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company (Attention:
John H. Barnet, Inspector of Elections) a written notice of revocation or a duly
executed proxy bearing a later date or by attending the meeting of shareholders
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 the shareholder wishes to
vote at the meeting, the shareholder must bring to the meeting a letter from the
broker, bank or other nominee confirming the shareholder's beneficial ownership
of the shares.
VOTING RIGHTS AND SOLICITATION OF PROXIES
VOTING
Holders of Common Stock are entitled to one vote per share on all matters,
except that in the election of directors each shareholder has cumulative voting
rights and is entitled to a number of votes equal to the
1
<PAGE> 4
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 the election of directors, 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.
Votes cast in person or by proxy at the Annual Meeting will be tabulated by
the Inspector of Elections with the assistance of the Company's transfer agent.
The Inspector of Elections will also determine whether or not a quorum is
present. The affirmative vote of a majority of shares represented and voting
(and constituting at least a majority of the required quorum) at a duly held
meeting at which a quorum is present and voting is required under California law
for approval of proposals presented to shareholders other than the election of
directors. In general, California law also provides that a quorum consists of a
majority of the shares entitled to vote, represented either in person or by
proxy. The Inspector of Elections will treat abstentions as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum but as not voting for purposes of determining the approval of any matter
submitted to the shareholders for a vote. Any proxy which is returned using the
form of proxy enclosed and which is not marked as to a particular item will be
voted for the election of directors, for the amendments to the 1995 Employee
Stock Purchase Plan and the 1997 Equity Incentive Plan and for ratification of
the appointment of the designated independent accountants, and as the proxy
holders deem advisable on other matters that may come before the meeting, as the
case may be, with respect to the item not marked. If a broker indicates on the
enclosed proxy or its substitute that it does not have discretionary authority
as to certain shares to vote on a particular matter ("broker non-votes"), those
shares will be considered as present for the purpose of determining the presence
of a quorum but will not be considered as voting with respect to that matter.
While there is no definitive specific statutory or case law authority in
California concerning the proper treatment of abstentions and broker non-votes,
the Company believes that the tabulation procedures to be followed by the
Inspector of Elections are consistent with the general statutory requirements in
California concerning voting of shares and determination of a quorum.
RECORD DATE AND SHARE OWNERSHIP
Only shareholders of record at the close of business on April 3, 1998, are
entitled to notice of and to vote at the meeting. As of the record date,
40,885,528 shares of the Company's Common Stock were issued and outstanding, and
there were 273 shareholders of record.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be presented
by such shareholders at the Company's 1999 Annual Meeting of Shareholders must
be received by the Company no later than December 31, 1998, in order that they
may be considered for inclusion in the proxy statement and form of proxy
relating to that meeting.
2
<PAGE> 5
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's bylaws currently provide that the number of directors shall
not be less than five or more than nine. 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.
Board of Directors has nominated the five persons named below to serve as
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. All of the nominees have served as
directors since the last annual meeting, except for Dominic Ng, who will stand
for election as a director for the first time at this year's annual meeting.
Michael Aymar who has served as a director since February 1993 is not standing
for re-election. 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.
NOMINEES
The names of the nominees, and certain information about them as of April
22, 1998, are set forth below:
<TABLE>
<CAPTION>
NAME OF DIRECTOR
NOMINEE AGE PRINCIPAL OCCUPATION SINCE
------- --- -------------------- --------
<S> <C> <C> <C>
Fred S.L. Chan..................... 51 President, Chief Executive Officer 1986
and Chairman of the Board of
Directors of the Company
Annie M.H. Chan.................... 46 Independent Investor and Management 1993
Consultant
Ilbok Lee(1)(2).................... 52 President and Chief Executive 1995
Officer of IC WORKS, Inc.
Peter T. Mok(1)(2)................. 44 President and CEO of KLM Capital, a 1993
venture capital management company
Dominic Ng......................... 39 President, Chief Executive Officer N/A
of East West Bank
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee (Mr. Lee is nominated to be a member of
the Compensation Committee effective May 22, 1998).
Except as set forth below, each of the nominees has been engaged in the
principal occupation set forth next to his or her name above during the past
five years. There is no family relationship between any director or executive
officer of the Company, except for Annie Chan and Fred Chan, who are married to
each other.
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. 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. 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. 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
3
<PAGE> 6
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. 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.
Mr. Ng has served as President and CEO of East West Bank since 1992. Prior
to that, he served as President of Seyen Investment, Inc. Mr. Ng is currently a
member of the Board of Governors of Town Hall Los Angeles and serves, among
others, as a director of the United Way of Greater Los Angeles and a director of
the Los Angeles Chamber of Commerce.
Mr. Aymar who served as a director of the Company since February 1993 is
not standing for election at this annual meeting. He has been employed at Intel
Corporation, a semiconductor design, development, manufacturing and marketing
company 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.
BOARD OF DIRECTORS' MEETINGS AND COMMITTEES
The Board met eight times, including telephone conference meetings, and
acted by written consent once during fiscal year 1997. The Board of Directors
has an Audit Committee, a Compensation Committee, and a Nominating Committee.
The Audit Committee of the Board of Directors currently consists of Messrs.
Lee and Mok and held three meetings during fiscal year 1997. 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.
The Compensation Committee currently consists of Messrs. Mok and Aymar and
held six meetings during fiscal year 1997. 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 Nominating Committee was formed in December 1997 and currently consists
of Messrs. Aymar, Lee and Mok. The Nominating Committee did not meet in fiscal
year 1997.
No incumbent director attended fewer than 75% of the aggregate number of
meetings of the Board of Directors and meetings of the Committees of the Board
of Directors on which he serves held during the fiscal year 1997.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive cash compensation for their
services, except that non-employee directors (Mr. Aymar, Mrs. Chan, Mr. Lee and
Mr. Mok) receive $1,000 each for each board meeting he or she attends. The
Directors are reimbursed for their reasonable expenses in attending meetings of
the Board of Directors.
4
<PAGE> 7
Non-employee directors of the Company are automatically granted options to
purchase shares of the Company's Common Stock pursuant to the terms of the
Company's 1995 Directors' Stock Option Plan (the "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 Directors' 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 has
continuously served as 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. Options granted under the
Directors' Plan have an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant with a term of ten years. The fair
market value of the Common Stock is the closing sales price on the Nasdaq
National Market on the last trading day prior to grant.
On April 18, 1998 the Board of Directors granted Mr. Mok and Mr. Lee 10,000
additional options to purchase the Company Common Stock under the 1995 Equity
Incentive Plan.
REQUIRED VOTE
The five nominees receiving the highest number of affirmative votes of
shares of the Company's Common Stock present at the Annual Meeting in person or
by proxy and voting on the election of directors shall be elected as directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES LISTED ABOVE.
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO THE 1995 EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, the Company's shareholders are being asked to
approve an amendment to the 1995 Employee Stock Purchase Plan (the "1995
Purchase Plan") to increase the number of shares of Common Stock reserved for
issuance thereunder by 200,000 shares to an aggregate of 425,000 shares. The
following is a summary of principal features of the 1995 Purchase Plan. The
summary, however, does not purport to be a complete description of all the
provisions of the 1995 Purchase 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.
GENERAL
The 1995 Purchase Plan was adopted by the Board of Directors in August 1995
and approved by the shareholders in October 1995. The Board of Directors
initially reserved 225,000 shares of Common Stock for issuance under the 1995
Purchase Plan. In April 1998, the Board of Directors approved an amendment to
the 1995 Purchase Plan to increase the number of shares for issuance thereunder
by 200,000 shares to a total of 425,000 shares, which amendment is the subject
of this proposal.
The 1995 Purchase Plan and the right of participants to make purchases
thereunder are intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
1995 Purchase Plan is not a qualified deferred compensation plan under Section
401(a) of the Internal Revenue Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
As of March 11, 1998, there were 208 participants in the 1995 Purchase
Plan, and only approximately 103,515 shares were available for issuance pursuant
to the Company's 1995 Purchase Plan.
5
<PAGE> 8
MATERIAL AMENDMENT
The Board of Directors believes that in order to attract and retain highly
qualified employees and consultants and to provide such employees and
consultants with adequate incentives through their proprietary interest in the
company, it is necessary to amend the 1995 Purchase Plan to reserve an
additional 200,000 shares of Common Stock for issuance under the 1995 Purchase
Plan. At the Annual Meeting, the shareholders are being asked to approve this
amendment to the 1995 Purchase Plan.
PURPOSE
The primary purpose of the 1995 Purchase Plan is to attract and retain the
best available personnel for the Company in order to promote the success of the
Company's business.
ADMINISTRATION
The 1995 Purchase Plan may be administered by the Board of Directors or a
committee of members of the Board appointed by the Board. The 1995 Purchase Plan
is currently being administered by the Compensation Committee of the Board of
Directors. All questions of interpretation of the 1995 Purchase Plan are
determined by the Compensation Committee, and its decisions are final and
binding upon all participants. Members of the Board of Directors who are
eligible employees are permitted to participate in the 1995 Purchase Plan,
provided that any such eligible member may not vote on any matter affecting the
administration of the 1995 Purchase Plan or the grant of any option pursuant to
it, or serve on a committee appointed to administer the 1995 Purchase Plan. No
charges for administrative or other costs will be made against the payroll
deductions of a participant in the 1995 Purchase Plan. Members of the Board of
Directors receive no additional compensation for their services in connection
with the administration of the 1995 Purchase Plan.
ELIGIBILITY
Subject to certain limitations imposed by Section 423(b) of the Code and
limitations on stock ownership as set forth in the 1995 Purchase Plan, any
person (including officers and employee directors) of the Company or its
subsidiaries as of one month before the offering date who completes a
subscription agreement on the form provided by the Company is eligible to
participate in the 1995 Purchase Plan, unless such person is five percent or
greater shareholder of the Company or is customarily employed for less than 20
hours per week or less than five months per year.
OFFERING DATES
The 1995 Purchase Plan is implemented by two offerings, each for a
six-month period. The offering periods commence on or about February 1 and
August 1 of each year, except that the initial offering period commenced in
October 1995. The Board of Directors may alter the duration of the offering
periods without shareholder approval if such change is announced at least 15
days prior to the scheduled beginning of the first offering period to be
affected.
TERMS OF OPTIONS
(a) Participation in the Plan. Eligible employees become participants in
the 1995 Purchase Plan by delivering to the Company a subscription agreement
authorizing payroll deductions at least fifteen days prior to the applicable
offering date, unless a later time for filing the subscription agreement has
been set by the Board of Directors for all eligible employees with respect to a
given offering.
(b) Purchase Price. The purchase price per share at which shares are sold
under the 1995 Purchase Plan is the lower of 85% of the fair market value of the
Common Stock on the date of commencement of the offering period or 85% of the
fair market value of the Common Stock on the last day of the offering period.
The fair market value of the Common Stock on a given date is generally the
closing sales price on the Nasdaq National Market on the last trading date prior
to the date of determination.
6
<PAGE> 9
(c) Payment of Purchase Price; Payroll Deductions. The purchase price of
the shares is accumulated by payroll deductions during the offering period. The
deductions may not be less than 2% and may not be more than 10% of a
participant's eligible compensation. A participant may decrease his or her
participation in the 1995 Purchase Plan once during any offering period but may
not increase the rate of payroll deductions at any time during the offering
period.
All payroll deductions are credited to the participant's account under the
1995 Purchase Plan and are deposited with the general funds of the Company. All
payroll deductions received or held by the Company may be used by the Company
for any corporate purpose. No interest accrues on the payroll deductions of a
participant in the Plan.
(d) Purchase of Stock; Exercise of Option. By executing a subscription
agreement to participate in the 1995 Purchase Plan, the participant is entitled
to have shares placed under option. At the beginning of an offering period, each
participant is granted an option to purchase up to that number of shares
determined by dividing such employee's payroll deductions accumulated prior to
the end of the offering period and retained in the participant's account as of
the end of the offering period by the lower of (i) eighty-five percent (85%) of
the fair market value of a share of the Company's Common Stock at the beginning
of the offering period or (ii) eighty-five percent (85%) of the fair market
value of a share of the Company's Common Stock on the last day of the offering
period. The maximum number of shares placed under option to a participant in an
offering is 250 shares of Common Stock until changed by the Board of Directors.
In no event, however, may the number of shares be more than 200% of the number
of shares determined by dividing the amount of the participant's total payroll
deductions to be accumulated during the offering period by 85% of the fair
market value of the Common Stock at the beginning of the offering period. The
Company may make a pro rata reduction in the number of shares subject to options
if the total number of shares which would otherwise be subject to options
granted at the beginning of an offering period exceeds the number of remaining
available shares in the 1995 Purchase Plan.
Unless the participant's participation is discontinued, each participant's
option for the purchase of shares will be exercised automatically at the end of
the offering period at the applicable price. Participants pay no commissions on
Common Stock purchased under the 1995 Purchase Plan. However, if a participant
decides to sell the Common Stock, the participant can expect to be charged a fee
or commission if he or she uses an agent, such as a stock broker.
No participant is permitted to subscribe for shares under the 1995 Purchase
Plan if immediately after the grant of the option the participant would own
stock and/or hold outstanding options to purchase stock possessing 5% or more of
the voting power or value of all classes of stock of the Company or of any of
its subsidiaries (including stock which may be purchased under the 1995 Purchase
Plan) nor is any participant granted an option which would permit the
participant to buy pursuant to the 1995 Purchase Plan more than $25,000 worth of
stock (determined at the fair market value of the shares at the time the option
is granted) in any calendar year. Furthermore, if the number of shares which
would otherwise be placed under option at the beginning of an offering period
exceeds the number of shares then available under the 1995 Purchase Plan, a pro
rata allocation of the available shares is made in as equitable a manner as is
practicable.
(e) Withdrawal. The participant's interest in a given offering may be
terminated in whole, but not in part, by signing and delivering to the Company a
notice of withdrawal from the 1995 Purchase Plan at least fifteen days prior to
the end of an Offering Period.
Any withdrawal by the participant of accumulated payroll deductions for a
given offering automatically terminates the participant's interest in that
offering. In effect, the participant is given an option which may or may not be
exercised during the six-month offering period. By executing the subscription
agreement, the participant is not obligated to make the stock purchase; rather
the subscription agreement is merely an election by the participant to place
shares under option. Unless the participant's participation is discontinued, the
option for the purchase of shares will be exercised automatically at the end of
the offering period, and the maximum number of full shares purchasable with such
participant's accumulated payroll deductions will be purchased for the
participant at the applicable price.
7
<PAGE> 10
In the event that a participant fails to remain in the continuous
employment of the Company, such participant will be deemed to have elected to
withdraw from the 1995 Purchase Plan and the payroll deductions credited to such
participant's account will be returned to such participant.
A participant's withdrawal from an offering does not have any effect upon
such participant's eligibility to participate in subsequent offerings under the
Plan.
(f) Termination of Employment. Termination of a participant's employment
for any reason, including retirement or death, prior to the termination of the
offering period cancels his or her participation in the 1995 Purchase Plan
immediately. In such event, the payroll deductions credited to the participant's
account will be returned, without interest, to such participant, or in the case
of death, to the person or persons entitled thereto as specified in the
participant's subscription agreement.
(g) Nontransferability. No rights or accumulated payroll deductions of a
participant under the 1995 Purchase Plan may be pledged, assigned or transferred
for any reason and any such attempt may be treated by the Company as an election
to withdraw from the 1995 Purchase Plan.
During his or her lifetime, a participant's option to purchase shares under
the 1995 Purchase Plan is exercisable only by him or her. However, a participant
may file a written designation of a beneficiary who is (i) to receive any shares
and cash, if any, from the participant's account under the 1995 Purchase Plan in
the event of such participant's death subsequent to the end of an offering
period but prior to delivery to him or her of such shares and cash, and (ii) to
receive any cash from the participant's account under the 1995 Purchase Plan in
the event of such participant's death prior to the end of the offering period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(h) Capital Changes/Acceleration of Option. In the event any change, such
as a stock split or stock dividend, is made in the Company's capitalization
which results in an increase or decrease in the number of outstanding shares of
Common Stock without receipt of consideration by the Company, appropriate
adjustments will be made in the shares subject to purchase and in the purchase
price per share, as well as in the number of shares available for issuance under
the 1995 Purchase Plan.
In the event of the proposed dissolution or liquidation of the Company, the
current offering period will terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Board of Directors. 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, each
option under the 1995 Purchase Plan 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 Board determines, in the exercise of its
sole discretion and in lieu of such assumption or substitution, to shorten the
offering period then in progress by setting a new exercise date.
(i) Reports. Individual accounts will be maintained for each participant in
the Plan. Each participant will receive after the end of the six-month offering
period a report of such participant's account setting forth the total amount of
payroll deductions accumulated, the per share purchase price, the number of
shares purchased and the remaining cash balance, if any.
AMENDMENT AND TERMINATION OF THE 1995 PURCHASE PLAN
The Board of Directors may at any time amend or terminate the 1995 Purchase
Plan, but no amendment or termination is allowed if it would impair the rights
of any participant under any grant previously made, without his or her consent.
In addition, the Company must obtain shareholder approval of any amendment to
the 1995 Purchase Plan in such a manner and to the extent necessary to comply
with Rule 16b-3 under the Exchange Act and/or Section 423 of the Code (or any
other applicable law or regulation). If not earlier terminated, the 1995
Purchase Plan will continue in effect until the earlier of 2005 or when all of
the shares of Common Stock reserved for issuance under this Plan have been
issued.
8
<PAGE> 11
FEDERAL INCOME TAX ASPECTS OF THE 1995 PURCHASE PLAN
THE FOLLOWING IS A BRIEF SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANTS AND THE COMPANY WITH RESPECT TO THE PURCHASE OF SHARES
UNDER THE 1995 PURCHASE PLAN. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND
DOES NOT ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES TO TAXPAYERS WITH SPECIAL
TAX STATUS. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
PARTICIPANT MAY RESIDE, AND DOES NOT DISCUSS ESTATE, GIFT OR OTHER TAX
CONSEQUENCES OTHER THAN INCOME TAX CONSEQUENCES. THE COMPANY ADVISES EACH
PARTICIPANT TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES
OF PARTICIPATION IN THE 1995 PURCHASE PLAN AND FOR REFERENCE TO APPLICABLE
PROVISIONS OF THE CODE.
The 1995 Purchase Plan and the right of participants to make purchases
thereunder are intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be recognized by a
participant prior to disposition of shares acquired under the 1995 Purchase
Plan.
If the shares are sold or otherwise disposed of more than two years after
the first day of the offering period during which shares were purchased (the
"Offering Date") and more than one year from the last day of such Offering
Period, a participant will recognize as ordinary income at the time of such
disposition the lesser of (a) the excess of the fair market value of the shares
at the time of such disposition over the purchase price of the shares or (b) 15%
of the fair market value of the shares on the first day of the offering period.
Any further gain or loss upon such disposition will be treated as long-term
capital gain or loss. If the shares are sold for a sale price less than the
purchase price, there is no ordinary income and the participant has a capital
loss for the difference.
If the shares are sold or otherwise disposed of before the expiration of
the one- and two-year holding periods described above, the excess of the fair
market value of the shares on the purchase date over the purchase price will be
treated as ordinary income to the participant. This excess will constitute
ordinary income in the year of sale or other disposition even if no gain is
realized. The balance of any gain or loss will be treated as capital gain or
loss and will be treated as long-term capital gain or loss if the shares have
been held more than one year.
In the case of a participant who is subject to Section 16(b) of the
Exchange Act, the purchase date for purposes of calculating such participant's
compensation income and beginning of the capital gain holding period may be
deferred for up to six months under certain circumstances. Such individuals
should consult with their personal tax advisors prior to buying or selling
shares under the 1995 Purchase Plan.
The ordinary income reported under the rules described above, added to the
actual purchase price of the shares, determines the tax basis of the shares for
the purpose of determining capital gain or loss on a sale or exchange of the
shares.
The Company is entitled to a deduction for amounts taxed as ordinary income
to a participant only to the extent that ordinary income must be reported upon
disposition of shares by the participant before the expiration of the one- and
two-year holding periods described above.
RESTRICTIONS ON RESALE
Certain officers and directors of the Company may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act.
The Common Stock acquired under the 1995 Purchase Plan by an affiliate may be
reoffered or resold only pursuant to an effective registration statement or
pursuant to Rule 144 under the Securities Act or another exemption from the
registration requirements of the Securities Act.
9
<PAGE> 12
DESCRIPTION OF CAPITAL STOCK
The securities to be purchased under the 1995 Purchase Plan are shares of
Common Stock, no par value, of the Company. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior rights of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights.
The Company has 10,000,000 authorized shares of "blank check" Preferred
Stock that may be issued with such designations, rights and preferences as may
be determined from time to time by the Board of Directors, without any further
vote or action by the shareholders. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock. Although the Company has no present intention to issue any
additional shares of its Preferred Stock, there can be no assurance that the
Company will not do so in the future.
REQUIRED VOTE
The approval of the amendments to the 1995 Purchase Plan to increase the
number of shares reserved for issuance thereunder by 200,000 shares 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 and constituting at least a majority of the required quorum.
THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE 1995 EMPLOYEE
STOCK PURCHASE PLAN.
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO 1997 EQUITY INCENTIVE PLAN
At the Annual Meeting, the Company's shareholders are being asked to
approve an amendment to the Company's 1997 Equity Incentive Plan (the "1997
Incentive Plan") to increase the number of shares authorized for issuance
thereunder by 2,000,000 shares to an aggregate of 5,000,000 shares. 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.
GENERAL
The 1997 Incentive Plan was adopted by the Board in April 1997 and approved
by the shareholders in May 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. In
April 1998, the Board of Directors approved an
10
<PAGE> 13
amendment to the 1997 Incentive Plan to increase the number of shares reserved
for issuance thereunder by 2,000,000 shares to a total of 5,000,000 shares,
which amendment is the subject of this proposal.
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.
In February 1998, the Board of Directors approved an offer to reprice
options under the Company's 1995 Equity Incentive Plan and 1997 Incentive Plan,
pursuant to which a total of approximately 3,380,000 options with an exercise
price greater than $7.69 per share were exchanged for options with an exercise
price of $7.69 per share.
As of March 11, 1998, options to purchase 3,745,838 shares of Common Stock
had been granted under the 1997 Incentive Plan (including the options considered
granted pursuant to the repricing program), 1,688,575 had been cancelled
(including the options surrendered for exchange pursuant to the repricing
program) and none had been exercised. As of March 11, 1998, options to purchase
942,737 shares remain available for grant. As of April 1998, there were 334
employees who participated in the 1997 Incentive Plan. Shareholders are being
asked to approve the Amendment to the 1997 Incentive Plan to increase the number
of Common Stock reserved for issuance thereunder by 2,000,000 shares at the
Annual Meeting.
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.
STOCK OPTIONS
The 1997 Incentive Plan permits the granting of options that are intended
to qualify either as Incentive Stock Options ("ISOs"), as defined under the
Code, 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 exercise price for any option issued under the 1997 Incentive Plan 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
NSO share must be no less than 85% of the fair market value of a
11
<PAGE> 14
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 30 days (or such other period of time as
determined by the Committee, not exceeding 3 months in the case of an ISO and 6
months in the case of an NSO) 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 6 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.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event any change, such as a stock split, reverse stock split, stock
dividend, combination or reclassification, is made in the Company's
capitalization that results in an increase or decrease in the number of
outstanding shares of Common Stock without receipt of consideration by the
Company, appropriate adjustment shall be made in the exercise price of each
outstanding option, the number of shares subject to each option, and the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the 1997 Incentive Plan. In the event of the proposed dissolution
or liquidation of the Company, such option will terminate unless otherwise
provided by the Committee.
In the event of a 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 substituted by the successor
corporation unless the administrator decides, in lieu of such assumption or
substitution, to accelerate the vesting of the option to make it exercisable as
to some or all of the shares subject to the option, including shares which would
not otherwise be exercisable. In the event of such acceleration of the option,
the optionee shall have 15 days from the date of notice of the option's
acceleration to exercise all or a portion of the option, and the option will
terminate upon the expiration of such period.
AMENDMENT OF THE 1997 INCENTIVE PLAN
The Board of Directors may amend the 1997 Incentive Plan at any time or
from time to time or may terminate it without approval of the shareholders;
provided, however, that shareholder approval is required for any amendment to
the 1997 Incentive Plan that: (i) increases the number of shares that may be
issued under the 1997 Incentive Plan, (ii) modifies the standards of
eligibility, or (iii) modifies the limitation on grants to employees described
in the 1997 Incentive Plan or results in other changes which would require
shareholder approval to qualify options granted under the 1997 Incentive Plan as
performance-based compensation under Section 162(m) of the Code. However, no
action by the Board of Director or the shareholders may alter or impair any
option previously granted under the 1997 Incentive Plan, unless mutually agreed
otherwise between the optionee and the Board of Directors.
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.
12
<PAGE> 15
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 "AMT"). 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. Because the alternative minimum tax calculation may be
complex, any optionee who upon exercising an incentive stock option may
recognize 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.
Nonqualified Stock Options. A Participant will not recognize any taxable
income at the time a NQSO is granted. However, upon exercise of a NSO 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 NSO 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.
13
<PAGE> 16
REQUIRED VOTE
The approval and the ratification of amendments to the 1997 Incentive Plan
to increase the number of shares of Common Stock for issuance hereunder by
2,000,000 shares to an aggregate of 5,000,000 shares 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 and
constituting a majority of the required quorum.
THE BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE 1997
INCENTIVE PLAN.
PROPOSAL NO. 4
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
fiscal year 1998, and recommends that the shareholders vote for ratification of
such selection. In the event the shareholders do not ratify such appointment,
the Board of Directors will reconsider its selection. Representatives of Price
Waterhouse LLP are expected to be present at the Annual 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.
REQUIRED VOTE
The ratification of the appointment of Price Waterhouse LLP as the
Company's independent accountants 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 and constituting a majority
of the required quorum.
THE BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE SELECTION OF PRICE WATERHOUSE LLP FOR FISCAL YEAR 1998
14
<PAGE> 17
COMMON OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 11, 1998,
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 of the Company's directors,
(iii) each executive officer named in the Summary Compensation Table below and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
5% SHAREHOLDERS, DIRECTORS, NAMED EXECUTIVE OFFICERS, AND ------------------------------
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP NUMBER PERCENT OF TOTAL
--------------------------------------------------------- ---------- ----------------
<S> <C> <C>
Fred S.L. Chan.............................................. 11,514,902(2) 28%
President, Chief Executive Officer,
Chairman of the Board of Directors
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Annie M.H. Chan............................................. 11,514,902(2) 28%
Director
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Trusts benefiting the children of Fred S.L. Chan and 3,608,954(3) 9%
Annie M.H. Chan...........................................
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Nicholas A. Aretakis........................................ 71,000(4) *
Vice President, Sales
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Michael A. Aymar............................................ 48,753(5) *
Director
c/o Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
John H. Barnet.............................................. 0 *
Vice President, Finance
Chief Financial Officer and Secretary
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Robert L. Blair............................................. 45,000(6) *
Executive Vice President, Operations
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
Ilbok Lee................................................... 27,500(7) *
Director
c/o IC WORKS, Inc.
3725 North First Street
San Jose, CA 95134-1700
Peter T. Mok................................................ 34,600(8) *
Director
c/o KLM Capitol Group
2041 Mission College Blvd.
Suite 175
Santa Clara, CA 95054
Chi Shin Wang............................................... 123,725 *
Chief Technical Officer
c/o ESS Technology, Inc.
48401 Fremont Blvd.
Fremont, CA 94538
All executive officers and directors as a group (11 15,598,434(9) 38%
persons)..................................................
</TABLE>
- ---------------
* Less than 1%
15
<PAGE> 18
(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. As
of March 11, 1998, 40,885,528 were issued and outstanding. Shares of Common
Stock subject to options that are currently exercisable or exercisable
within 60 days after March 11, 1998 are deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Includes 900,000 shares held by Mrs. Annie Chan (Mr. Fred Chan's wife) and
10,388,652 shares held by Annie M.H. Chan Living Trust. Also includes
options exercisable on or before May 10, 1998 and held by Mrs. Chan to
purchase 1,250 shares of Common Stock of the Company and options
exerciseable on or before May 10, 1998 and held by Mr. Chan to purchase
250,000 shares of Common Stock of the Company.
(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.
(4) Represents 1,000 shares held through 1995 Employee Stock Purchase Plan and
70,000 shares subject to outstanding stock options exercisable on or before
May 10, 1998.
(5) Includes 18,750 shares subject to outstanding stock options exercisable on
or before May 10, 1998.
(6) Includes 30,000 shares subject to outstanding stock options exercisable on
or before May 10, 1998.
(7) Includes 27,500 shares subject to outstanding stock options exercisable on
or before May 10, 1998.
(8) Includes 26,250 shares subject to outstanding stock options exercisable on
or before May 10, 1998.
(9) Includes an aggregate of 437,750 shares which the directors and executive
officers have the right to acquire by May 10, 1998. Does not include an
aggregate of 3,680,954 shares held by trusts benefiting Mr. & Mrs. Chan's
children.
16
<PAGE> 19
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to or earned for
services by the Company's Chief Executive Officer and the Company's four other
most highly compensated executive officers (the "Named Executive Officers")
whose salary and bonus for the fiscal year 1997 were in excess of $100,000 for
services rendered in all capacities to the Company for that fiscal year. It also
includes the compensation earned by Mr. Ericsson who would have been one of the
four most highly compensated executive officers if he were employed by the
Company on December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------- ------------------------------
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
--------------------------- ------ -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Fred S.L. Chan............... 1997 $247,167 $122,686 -- 100,000 $ 1,219
President and Chief
Executive 1996 225,500 480,000 -- -- 1,183
Officer, Chairman of the 1995 166,333 321,421 -- 375,000 1,183
Board of Directors
John H. Barnet............... 1997 $191,205 $ 50,000 -- 80,000 $401,219(2)
Vice President, Finance and 1996 46,250 413,432(3) -- 200,000 203
Chief Financial Officer and
Secretary
Nicholas A. Aretakis......... 1997 $130,146 $100,705 -- 100,000 $ 810
Vice President, Sales 1996 113,272 78,800 -- -- 810
1995 115,000 70,508 -- -- 810
Robert L. Blair.............. 1997 $159,361 -- -- 70,000 $ 845
Executive Vice President, 1996 116,728 -- -- 50,000 845
Operations 1995 118,551 -- -- -- 845
Bo Ericsson.................. 1997 $149,214 37,500 -- 70,000 $ 68,706
Vice President, 1996 18,269 -- -- 75,000 44
Marketing(4)
Chi Shin Wang................ 1997 $119,358 $ 30,000 -- 52,000 $ 657
Chief Technical Officer 1996 116,767 30,000 -- 100,000 102
</TABLE>
- ---------------
(1) Includes dollar value of premiums paid by the Company under the Company's
group term life insurance policy and accidental death and dismemberment
policy on behalf of the Named Executive Officer and, in the case of Mr.
Ericsson, $7,650 in consulting and $60,000 in severance payments.
(2) Includes $400,000 from Mr. Barnet exercise of his right to receive a $5.00
per share appreciation on 80,000 shares of options granted to him pursuant
to his employment agreement entered in October 1996. In addition, Mr. Barnet
paid off the loan of $400,000 from the Company (including all of the accrued
interest) made to him as part of his employment agreement.
(3) Includes a $400,000 sign-on bonus for Mr. Barnet upon joining the Company
and a $13,432 bonus earned in 1996 but paid in 1997.
(4) Mr. Ericsson resigned from the Company in December, 1997.
17
<PAGE> 20
STOCK OPTION GRANTS IN FISCAL YEAR 1997
The following table sets forth further information for the Named Executive
Officers with respect to grants of options to purchase Common Stock of the
Company made in the fiscal year 1997 and the value of all options held by such
executive officers on December 31, 1997. In accordance with the rules of the
Securities and Exchange Commission, the table sets forth the hypothetical gains
or "option spreads" that would exist for the options at the end of their
respective ten-year terms. These gains are based on assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted to the end of the option term.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------------------- ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM($)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL 1997* PER SHARE($) GRANT DATE DATE 5% 10%
---- ---------- ------------- -------------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fred S.L. Chan............... 100,000(1) 4.02% $15.8813 7/21/1997 7/21/2007(1) $851,973 $2,130,751
John H. Barnet............... 40,000(2)** 1.61% $14.4376 7/21/1997 7/21/2007(2) $340,789 $ 852,301
40,000(3) 1.61% $10.2500 12/3/1997 12/3/2004(3) $153,175 $ 352,657
Nicholas A. Aretakis......... 100,000(4)** 4.02% $14.4375 7/21/1997 7/21/2007(4) $745,256 $1,820,567
Robert L. Blair.............. 70,000(5)** 2.81% $14.4375 7/21/1997 7/21/2007(5) $569,451 $1,412,608
Bo Ericsson(6)............... 50,000(7) 2.01% $24.0000 2/20/1997 3/12/1998(7) $ 63,762 $ 127,711
20,000(7) 0.80% $14.4375 7/21/1997 3/12/1998(7) $ 9,183 $ 18,210
Chi Shin Wang................ 20,000(8)** 0.80% $27.8750 1/3/1997 1/3/2007(8) $268,143 $ 648,436
32,000(9)** 1.28% $14.4375 7/21/1997 7/21/2007(9) $272,631 $ 681,840
</TABLE>
- ---------------
* Total number of options granted by the Company for the fiscal year 1997 is
2,490,293 shares. This does not include the shares of options considered
granted pursuant to the repricing program effected in May 1997. None of the
executive officers of the company participated in that repricing program.
** The option was repriced on February 17, 1998. The repriced option has an
exercise price of $7.6875, which was the closing sales price of the
Company's Common Stock on the Nasdaq National Market as of the close of
February 13, 1998. The repricing options have a new vesting schedule
pursuant to which unvested shares as of February 17, 1998 will vest in three
equal annual installments starting February 17, 1999. Repriced shares may
not be exercised until the earlier of the Company's Common Stock trading at
or above $15 for ten consecutive trading days or February 17, 2001.
Furthermore, even if the Company's common stock trades at or above $15 for
ten consecutive days prior to February 17, 1999, the shares may not be
exercised until February 17, 1999. The expiration date for the repriced
options that were not vested as of February 17, 1998 are as follows: (i)
one-third of such options expires two years prior to the expiration date of
the surrendered options (the "Original Expiration Date"); (ii) one-third of
such options expires one year prior to the Original Expiration Date and
(iii) one-third of such options expires on the Original Expiration Date.
(1) The option is exercisable in two equal installments starting July 21, 2001
and expires in two equal installments starting July 21, 2006.
(2) The option is exercisable in two equal installments starting July 21, 2001
and expires in two equal installments starting July 21, 2006. This option
was repriced on February 17, 1998.
(3) The option is exercisable in two equal installments starting December 3,
1997 and expires in two equal installments starting December 3, 2003.
(4) The option is exercisable in four equal installments starting July 21, 1999
and expires in four equal installments starting July 21, 2004. This option
was repriced on February 17, 1998.
(5) 20,000 shares are exercisable starting July 21, 2000 and expire July 21,
2005; 20,000 shares are exercisable starting July 21, 2001 and expire July
21, 2006. The remaining 30,000 shares are exercisable starting July 21, 2002
and expire July 21, 2007. This option was repriced on February 17, 1998.
(6) Mr. Ericsson left the Company in December, 1997.
18
<PAGE> 21
(7) The option expired on March 12, 1998 without vesting due to termination of
employment.
(8) The option is exercisable in five equal installments starting January 3,
1998 and expires in five equal installments starting January 3, 2003. This
option was repriced on February 17, 1998.
(9) The option is exercisable in two equal installments starting July 21, 2001
and expires in two equal installments starting July 21, 2006. This option
was repriced on February 17, 1998.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END VALUES
The following table sets forth certain information concerning the exercise
of options by each of the Named Executive Officers during fiscal year 1997,
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, 1997. Also reported are values of
"in-the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and $7.594 per share, which was the
closing price of the Company's Common Stock as reported on the Nasdaq National
Market on December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED FISCAL YEAR-END FISCAL YEAR-END(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred S.L. Chan.......... -- -- 150,000 325,000 $739,095 $1,108,643
John H. Barnet.......... -- -- 80,000 200,000 -- --
Nicholas A. Aretakis.... 50,000 $1,322,479 70,000 160,000 $433,580 $ 371,640
Robert L. Blair......... 50,000 $1,233,250 40,000 170,000 $185,820 $ 371,640
Bo Ericsson(3).......... -- -- 18,750 126,250 -- --
Chi Shin Wang........... -- -- 25,000 127,000 -- --
</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,
1997, the last day of trading for the fiscal year.
(3) Mr. Ericsson left the Company in December 1997.
19
<PAGE> 22
PERFORMANCE GRAPH
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, 1997 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). The stock
price performance on the following graph is not necessarily indicative of future
stock price performance.
<TABLE>
<CAPTION>
Measurement Period 'ESS Technology, Nasdaq Stock H&Q Technology
(Fiscal Year Covered) Inc.' Market - US Index Index
<S> <C> <C> <C>
10/6/95 100.00 100.00 100.00
12/31/95 153.33 104.40 99.66
3/31/96 125.00 109.27 101.58
6/30/96 123.33 116.19 108.81
9/30/96 114.20 122.39 115.51
12/31/96 187.53 128.41 123.86
3/31/97 161.67 121.45 118.06
6/30/97 89.60 143.71 142.11
9/30/97 101.27 168.02 172.22
12/31/97 50.60 157.57 145.22
</TABLE>
The following description data are supplied in accordance with Rule 304(d)
of Regulation S-T:
<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 $100.00 331.320 $100.00 839.63 $100.00
12/31/1995............................. $23.00 $153.33 345.901 $104.40 836.78 $ 99.66
3/31/1996.............................. $18.75 $125.00 362.034 $109.27 852.69 $101.58
6/30/1996.............................. $18.50 $123.33 391.587 $118.19 913.62 $108.81
9/30/1996.............................. $17.13 $114.20 405.510 $122.39 969.86 $115.51
12/31/1996............................. $28.13 $187.53 425.440 $128.41 1,040.00 $123.86
3/31/1997.............................. $24.25 $161.67 402.381 $121.45 991.30 $118.06
6/30/1997.............................. $13.44 $ 89.60 476.138 $143.71 1,193.17 $142.11
9/30/1997.............................. $15.19 $101.27 556.679 $168.02 1,446.03 $172.22
12/31/1997............................. $ 7.59 $ 50.60 522.072 $157.57 1,219.28 $145.22
</TABLE>
20
<PAGE> 23
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the following and the
Performance Graph in this proxy shall not be incorporated by reference into any
such filing.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
GENERAL
The Compensation Committee of the Board of Directors (the "Committee")
makes final decisions regarding executive compensation and stock option grants
to executives. The Committee is composed of two independent nonemployee
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, the 1995 Equity Incentive Plan, the 1995 Employee Stock Purchase
Plan, the 1995 Directors Stock Option Plan, and the 1997 Equity Incentive 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 and the 1997 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 and
the 1997 Equity Incentive Plan.
COMPENSATION OF EXECUTIVE OFFICERS
During the fiscal year that ended December 31, 1997, the Company's
executive compensation program was comprised of the following key components.
Base Compensation. The Company sets the base salaries of its executives at
the levels of comparably sized companies engaged in similar industries.
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 year 1997, 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.
21
<PAGE> 24
Stock Options. In fiscal year 1997 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 or
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 year 1997, 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.
Compensation of the Chief Executive Officer. The Compensation Committee
determines the CEO's compensation in the beginning of the fiscal year based on
the Company's previous years' corporate performance. Accordingly, Mr. Chan's
base salary for fiscal year 1997 was increased to $248,000 commencing January 1,
1997. In addition, as an incentive to Mr. Chan to achieve the objectives
established by the Committee for fiscal year 1997, the Board of Directors
exercised its discretion and recommended that Mr. Chan be awarded incentive
compensation of $122,686. All of Mr. Chan's incentive compensation was based
upon obtaining and surpassing corporate operating profit objectives. This figure
represents approximately 23% of the target bonus for Mr. Chan for fiscal year
1997. 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
Committee has considered the impact of Section 162(m) of the International
Revenue Code, which section disallows a deduction for any publicly held
corporation for individual compensation exceeding $1 million in any taxable year
for the CEO and the Named Executive Officers, unless such compensation meets the
requirements for the "performance-based" exemption to the general rule. Since
cash compensation paid by the Company to each of its executives officers is
expected to be below $1 million, the Company believes that this section will not
affect the tax deductions available to the Company. It will be the Company's
policy to qualify, to the extent reasonable, the executive officers'
compensation for deductibility under applicable tax law.
COMPENSATION COMMITTEE
Michael A. Aymar
Peter T. Mok
22
<PAGE> 25
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither Mr. Aymar nor Mr. Mok has been an officer or employee of the
Company or any of its subsidiaries.
EMPLOYMENT AGREEMENTS AND CERTAIN TRANSACTIONS
Since January 1, 1997, 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, which are described under "Executive
Compensation" above, (ii) the transactions described under "Compensation
Committee Interlocks and Insider Participation" above, and (iii) the
transactions described below:
In October 1997, Mr. Barnet exercised his right to receive a $5.00 per
share appreciation on 80,000 shares of option granted to him pursuant to his
employment agreement entered in October 1996. In addition, Mr. Barnet paid off
the loan of $400,000 from the Company (including all of the accrued interest)
made to him as part of his employment agreement.
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, 1997 were met, except that: (1) Messrs. Chen and Hideshima
filed a form 3 late; (2) Mr. Barnet filed a form 5 to correct the total number
of shares previously reported on a form 3; and (3) Messrs. Blair and Chan and
Mrs. Chan filed a form 5 each to correct the total number of shares previously
reported on a form 4.
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.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ JOHN H. BARNET
----------------------------------
John H. Barnet
Vice President of Finance, Chief
Financial Officer, and Secretary
Dated: April 28, 1998
23
<PAGE> 26
APPENDIX I
ESS TECHNOLOGY, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED ON MAY 22, 1998)
1. ESTABLISHMENT OF PLAN. ESS Technology, Inc., a California corporation
(the "COMPANY"), proposes to grant options for purchase of the Company's Common
Stock to eligible employees of the Company and its Subsidiaries (as hereinafter
defined) pursuant to this Employee Stock Purchase Plan (this "PLAN"). For
purposes of this Plan, "PARENT CORPORATION" and "SUBSIDIARY" (collectively,
"SUBSIDIARIES") shall have the same meanings as "parent corporation" and
"subsidiary corporation" in Sections 424(e) and 424(f), respectively, of the
Internal Revenue Code of 1986, as amended (the "CODE"). The Company intends this
Plan to qualify as an "employee stock purchase plan" under Section 423 of the
Code (including any amendments to or replacements of such Section), and this
Plan shall be so construed. Any term not expressly defined in this Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. A total of 425,000 shares of the Company's Common Stock is reserved for
issuance under this Plan. Such number shall be subject to adjustments effected
in accordance with Section 14 of this Plan.
2. PURPOSE. The purpose of this Plan is to provide employees of the
Company and Subsidiaries designated by the Board of Directors of the Company
(the "BOARD") as eligible to participate in this Plan with a convenient means of
acquiring an equity interest in the Company through payroll deductions, to
enhance such employees' sense of participation in the affairs of the Company and
Subsidiaries, and to provide an incentive for continued employment.
3. ADMINISTRATION. This Plan shall be administered by a committee
appointed by the Board (the "COMMITTEE") consisting of at least two (2) members
of the Board, each of whom is a Disinterested Person as defined in Rule 16b-3(d)
of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"). As used in this
Plan, references to the "Committee" shall mean either such committee or the
Board if no committee has been established. After registration of the Company
under the Exchange Act, Board members who are not Disinterested Persons may not
vote on any matters affecting the administration of this Plan, but any such
member may be counted for determining the existence of a quorum at any meeting
of the Board. Subject to the provisions of this Plan and the limitations of
Section 423 of the Code or any successor provision in the Code, all questions of
interpretation or application of this Plan shall be determined by the Board and
its decisions shall be final and binding upon all participants. Members of the
Board shall receive no compensation for their services in connection with the
administration of this Plan, other than standard fees as established from time
to time by the Board for services rendered by Board members serving on Board
committees. All expenses incurred in connection with the administration of this
Plan shall be paid by the Company.
4. ELIGIBILITY. Any employee of the Company or the Subsidiaries is
eligible to participate in an Offering Period (as hereinafter defined) under
this Plan except the following:
(a) employees who are not employed by the Company or Subsidiaries one
(1) month before the beginning of such Offering Period;
(b) employees who are customarily employed for less than twenty (20)
hours per week;
(c) employees who are customarily employed for less than five (5)
months in a calendar year;
(d) employees who, together with any other person whose stock would be
attributed to such employee pursuant to Section 424(d) of the Code, own
stock or hold options to purchase stock possessing five percent (5%) or
more of the total combined voting power or value of all classes of stock of
the Company or any of its Subsidiaries or who, as a result of being granted
an option under this Plan with respect to such Offering Period, would own
stock or hold options to purchase stock possessing five percent (5%) or
more of the total combined voting power or value of all classes of stock of
the Company or any of its Subsidiaries.
I-1
<PAGE> 27
5. OFFERING DATES. The offering periods of this Plan (each, an "Offering
Period") shall be of six (6) months duration commencing on February 1 and August
1 of each year and ending on July 31 and January 31 of each year; provided,
however, that notwithstanding the foregoing, the first such Offering Period
shall commence on the first business day after the date on which the
registration statement filed by the Company with the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended (the "Securities
Act") registering the initial public offering of the Company's Common Stock is
declared effective by the SEC (the "First Offering Date") and shall end on
January 31. Each Offering Period shall consist of one (1) six-month purchase
period (individually, a "Purchase Period") during which payroll deductions of
the participants are accumulated under this Plan. The first business day of each
Offering Period is referred to as the "OFFERING DATE." The last business day of
each Purchase Period is referred to as the "PURCHASE DATE." The Board shall have
the power to change the duration of Offering Periods or Purchase Periods with
respect to future offerings without stockholder approval if such change is
announced at least fifteen (15) days prior to the scheduled beginning of the
first Offering Period or Purchase Period to be affected.
6. PARTICIPATION IN THIS PLAN. Eligible employees may become participants
in an Offering Period under this Plan on the first Offering Date after
satisfying the eligibility requirements by delivering a subscription agreement
to the Company's treasury department (the "TREASURY DEPARTMENT") not later than
the 15th day of the month before such Offering Date unless a later time for
filing the subscription agreement authorizing payroll deductions is set by the
Board for all eligible employees with respect to a given Offering Period. An
eligible employee who does not deliver a subscription agreement to the Treasury
Department by such date after becoming eligible to participate in such Offering
Period shall not participate in that Offering Period or any subsequent Offering
Period unless such employee enrolls in this Plan by filing a subscription
agreement with the Treasury Department not later than the 15th day of the month
preceding a subsequent Offering Date. Once an employee becomes a participant in
an Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws or is deemed to withdraw from this Plan or
terminates further participation in the Offering Period as set forth in Section
11 below. Such participant is not required to file any additional subscription
agreement in order to continue participation in this Plan.
7. GRANT OF OPTION ON ENROLLMENT. Enrollment by an eligible employee in
this Plan with respect to an Offering Period will constitute the grant (as of
the Offering Date) by the Company to such employee of an option to purchase on
the Purchase Date up to that number of shares of Common Stock of the Company
determined by dividing (a) the amount accumulated in such employee's payroll
deduction account during such Purchase Period by (b) the lower of (i)
eighty-five percent (85%) of the fair market value of a share of the Company's
Common Stock on the Offering Date (but in no event less than the par value of a
share of the Company's Common Stock), or (ii) eighty-five percent (85%) of the
fair market value of a share of the Company's Common Stock on the Purchase Date
(but in no event less than the par value of a share of the Company's Common
Stock); provided, however, that the number of shares of the Company's Common
Stock subject to any option granted pursuant to this Plan shall not exceed the
lesser of (a) the maximum number of shares set by the Board pursuant to Section
10(c) below with respect to the applicable Offering Period, or (b) the maximum
number of shares which may be purchased pursuant to Section 10(b) below with
respect to the applicable Offering Period. The fair market value of a share of
the Company's Common Stock shall be determined as provided in Section 8 hereof.
8. PURCHASE PRICE. The purchase price per share at which a share of Common
Stock will be sold in any Offering Period shall be eighty-five percent (85%) of
the lesser of:
(a) The fair market value on the Offering Date; or
(b) The fair market value on the Purchase Date;
provided, however, that in no event may the purchase price per share of the
Company's Common Stock be below the par value per share of the Company's Common
Stock.
For purposes of this Plan, the term "fair market value" on a given date
shall mean the fair market value of the Company's Common Stock as determined by
the Board in its sole discretion, exercised in good faith;
I-2
<PAGE> 28
provided, however, that where there is a public market for the Common Stock, the
fair market value per share shall be the average of the last reported bid and
asked prices of the Common Stock on the last trading day prior to the date of
determination (or the average closing price over the number of consecutive
trading days preceding the date of determination as the Board shall deem
appropriate), or, in the event the Common Stock is listed on a stock exchange or
on the Nasdaq National Market, the fair market value per share shall be the
closing price on such exchange or quotation system on the last trading date
prior to the date of determination (or the average closing price over the number
of consecutive trading days preceding the date of determination as the Board
shall deem appropriate); and provided further, that notwithstanding the
foregoing, the fair market value of the Company's Common Stock on the First
Offering Date (which is the first business day of the first Offering Period
under this Plan) shall be deemed to be the price per share at which shares of
the Company's Common Stock are initially offered for sale to the public in the
Company's initial public offering of its Common Stock pursuant to a registration
statement filed with the SEC under the Securities Act.
9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF
SHARES.
(a) The purchase price of the shares is accumulated by regular payroll
deductions made during each Offering Period. The deductions are made as a
percentage of the participant's compensation in one percent (1%) increments
not less than two percent (2%), nor greater than ten percent (10%) or such
lower limit set by the Committee. Compensation shall mean all W-2
compensation, including, but not limited to base salary, wages,
commissions, overtime, shift premiums and bonuses, plus draws against
commissions; provided, however, that for purposes of determining a
participant's compensation, any election by such participant to reduce his
or her regular cash remuneration under Sections 125 or 401(k) of the Code
shall be treated as if the participant did not make such election. Payroll
deductions shall commence on the first payday following the Offering Date
and shall continue to the end of the Offering Period unless sooner altered
or terminated as provided in this Plan.
(b) A participant may lower (but not increase) the rate of payroll
deductions during an Offering Period by filing with the Treasury Department
a new authorization for payroll deductions, in which case the new rate
shall become effective for the next payroll period commencing more than
fifteen (15) days after the Treasury Department's receipt of the
authorization and shall continue for the remainder of the Offering Period
unless changed as described below. Such change in the rate of payroll
deductions may be made at any time during an Offering Period, but not more
than one (1) change may be made effective during any Offering Period. A
participant may increase or decrease the rate of payroll deductions for any
subsequent Offering Period by filing with the Treasury Department a new
authorization for payroll deductions not later than the 15th day of the
month before the beginning of such Offering Period.
(c) All payroll deductions made for a participant are credited to his
or her account under this Plan and are deposited with the general funds of
the Company. No interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for
any corporate purpose, and the Company shall not be obligated to segregate
such payroll deductions.
(d) On each Purchase Date, so long as this Plan remains in effect and
provided that the participant has not submitted a signed and completed
withdrawal form before that date which notifies the Company that the
participant wishes to withdraw from that Offering Period under this Plan
and have all payroll deductions accumulated in the account maintained on
behalf of the participant as of that date returned to the participant, the
Company shall apply the funds then in the participant's account to the
purchase of whole shares of Common Stock reserved under the option granted
to such participant with respect to the Offering Period to the extent that
such option is exercisable on the Purchase Date. The purchase price per
share shall be as specified in Section 8 of this Plan. Any cash remaining
in a participant's account after such purchase of shares shall be refunded
to such participant in cash, without interest. In the event that this Plan
has been oversubscribed, all funds not used to purchase shares on the
Purchase Date shall be returned to the participant, without interest. No
Common Stock shall be purchased on a Purchase Date on behalf of any
employee whose participation in this Plan has terminated prior to such
Purchase Date.
I-3
<PAGE> 29
(e) As promptly as practicable after the Purchase Date, the Company
shall arrange the delivery to each participant of a certificate
representing the shares purchased upon exercise of his option.
(f) During a participant's lifetime, such participant's option to
purchase shares hereunder is exercisable only by him or her. The
participant will have no interest or voting right in shares covered by his
or her option until such option has been exercised. Shares to be delivered
to a participant under this Plan will be registered in the name of the
participant or in the name of the participant and his or her spouse.
10. LIMITATIONS ON SHARES TO BE PURCHASED.
(a) No employee shall be entitled to purchase stock under this Plan at
a rate which, when aggregated with his or her rights to purchase stock
under all other employee stock purchase plans of the Company or any
Subsidiary, exceeds $25,000 in fair market value, determined as of the
Offering Date (or such other limit as may be imposed by the Code) for each
calendar year in which the employee participates in this Plan.
(b) No more than two hundred percent (200%) of the number of shares
determined by using eighty-five percent (85%) of the fair market value of a
share of the Company's Common Stock on the Offering Date as the denominator
may be purchased by a participant on any single Purchase Date.
(c) No employee shall be entitled to purchase more than the Maximum
Share Amount (as defined below) on any single Purchase Date. Not less than
thirty (30) days prior to the commencement of any Offering Period, the
Board may, in its sole discretion, set a maximum number of shares which may
be purchased by any employee at any single Purchase Date, which until
changed by the Board shall be 250 Shares of Common Stock (hereinafter the
"MAXIMUM SHARE AMOUNT"). In no event shall the Maximum Share Amount exceed
the amounts permitted under Section 10(b) above. If a new Maximum Share
Amount is set, then all participants must be notified of such Maximum Share
Amount not less than fifteen (15) days prior to the commencement of the
next Offering Period. Once the Maximum Share Amount is set, it shall
continue to apply with respect to all succeeding Purchase Dates and
Offering Periods unless revised by the Board as set forth above.
(d) If the number of shares to be purchased on a Purchase Date by all
employees participating in this Plan exceeds the number of shares then
available for issuance under this Plan, then the Company will make a pro
rata allocation of the remaining shares in as uniform a manner as shall be
reasonably practicable and as the Board shall determine to be equitable. In
such event, the Company shall give written notice of such reduction of the
number of shares to be purchased under a participant's option to each
participant affected thereby.
(e) Any payroll deductions accumulated in a participant's account
which are not used to purchase stock due to the limitations in this Section
10 shall be returned to the participant as soon as practicable after the
end of the applicable Purchase Period, without interest.
11. WITHDRAWAL.
(a) Each participant may withdraw from an Offering Period under this
Plan by signing and delivering to the Treasury Department a written notice
to that effect on a form provided for such purpose. Such withdrawal may be
elected at any time at least fifteen (15) days prior to the end of an
Offering Period.
(b) Upon withdrawal from this Plan, the accumulated payroll deductions
shall be returned to the withdrawn participant, without interest, and his
or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his
or her participation in this Plan during the same Offering Period, but he
or she may participate in any Offering Period under this Plan which
commences on a date subsequent to such withdrawal by filing a new
authorization for payroll deductions in the same manner as set forth above
for initial participation in this Plan.
I-4
<PAGE> 30
12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment
for any reason. including retirement, death or the failure of a participant to
remain an eligible employee, immediately terminates his or her participation in
this Plan. in such event, the payroll deductions credited to the participant's
account will be returned to him or her or, in the case of his or her death, to
his or her legal representative, without interest. For purposes of this Section
12, an employee will not be deemed to have terminated employment or failed to
remain in the continuous employ of the Company in the case of sick leave,
military leave, or any other leave of absence approved by the Board; provided
that such leave is for a period of not more than ninety (90) days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
13. RETURN OF PAYROLL DEDUCTIONS. In the event a participant's interest in
this Plan is terminated by withdrawal, termination of employment or otherwise,
or in the event this Plan is terminated by the Board, the Company shall promptly
deliver to the participant all payroll deductions credited to such participant's
account. No interest shall accrue on the payroll deductions of a participant in
this Plan.
14. CAPITAL CHANGES. Subject to any required action by the stockholders of
the Company, the number of shares of Common Stock covered by each option under
this Plan which has not yet been exercised and the number of shares of Common
Stock which have been authorized for issuance under this Plan but have not yet
been placed under option (collectively, the "RESERVES"), as well as the price
per share of Common Stock covered by each option under this Plan which has not
yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued and outstanding shares of Common Stock of the
Company resulting from a stock split or the payment of a stock dividend (but
only on the Common Stock) or any other increase or decrease in the number of
issued and outstanding shares of Common Stock effected without receipt of any
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"; and provided further, that the price per
share of Common Stock shall not be reduced below its par value per share. Such
adjustment shall be made by the Board, whose determination shall be final,
binding and conclusive. Except as expressly provided herein, no issue 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.
In the event of the proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that the options
under this Plan shall terminate as of a date fixed by the Board and give each
participant the right to exercise his or her option as to all of the optioned
stock, including shares which 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 or consolidation of the Company with or into another corporation,
each option under this Plan 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 Board determines, in the exercise of its sole
discretion and in lieu of such assumption or substitution, that the participant
shall have the right to exercise the option as to all of the optioned stock. If
the Board makes an option exercisable in lieu of assumption or substitution in
the event of a merger, consolidation or sale of assets, the Board shall notify
the participant that the option shall be fully exercisable for a period of
twenty (20) days from the date of such notice, and the option will terminate
upon the expiration of such period.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of shares of its outstanding Common Stock, or
in the event of the Company being consolidated with or merged into any other
corporation; provided, that the price per share of Common Stock shall not be
reduced below its par value per share.
15. NONASSIGNABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under this Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in
I-5
<PAGE> 31
Section 22 hereof) by the participant. Any such attempt at assignment, transfer,
pledge or other disposition shall be void and without effect.
16. REPORTS. Individual accounts will be maintained for each participant in
this Plan. Each participant shall receive promptly after the end of each
Purchase Period a report of his or her account setting forth the total payroll
deductions accumulated, the number of shares purchased, the per share price
thereof and the remaining cash balance. if any, carried forward to the next
Purchase Period or Offering Period, as the case may be.
17. NOTICE OF DISPOSITION. Each participant shall notify the Company if the
participant disposes of any of the shares purchased in any Offering Period
pursuant to this Plan if such disposition occurs within two (2) years from the
Offering Date or within one (1) year from the Purchase Date on which such shares
were purchased (the "NOTICE PERIOD"). Unless such participant is disposing of
any of such shares during the Notice Period, such participant shall keep the
certificates representing such shares in his or her name (and not in the name of
a nominee) during the Notice Period. The Company may, at any time during the
Notice Period, place a legend or legends on any certificate representing shares
acquired pursuant to this Plan requesting the Company's transfer agent to notify
the Company of any transfer of the shares. The obligation of the participant to
provide such notice shall continue notwithstanding the placement of any such
legend on the certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of
any option hereunder shall confer any right on any employee to remain in the
employ of the Company or any Subsidiary, or restrict the right of the Company or
any Subsidiary to terminate such employee's employment.
19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal
rights and privileges with respect to this Plan so that this Plan qualifies as
an "employee stock purchase plan" within the meaning of Section 423 or any
successor provision of the Code and the related regulations. Any provision of
this Plan which is inconsistent with Section 423 or any successor provision of
the Code shall, without further act or amendment by the Company or the Board, be
reformed to comply with the requirements of Section 423. This Section 19 shall
take precedence over all other provisions in this Plan.
20. NOTICES. All notices or other communications by a participant to the
Company under or in connection with this Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. TERM; STOCKHOLDER APPROVAL. After this Plan is adopted by the Board,
this Plan will become effective on the date that is the First Offering Date (as
defined above); provided, however, that if the First Offering Date does not
occur on or before December 31, 1995, this Plan will terminate as of December
31, 1995 having never become effective. This Plan shall be approved by the
stockholders of the Company, in any manner permitted by applicable corporate
law, within twelve (12) months before or after the date this Plan is adopted by
the Board. No purchase of shares pursuant to this Plan shall occur prior to such
stockholder approval. Thereafter, no later than twelve (12) months after the
Company becomes subject to Section 16(b) of the Exchange Act, the Company will
comply with the requirements of Rule 16b-3 with respect to stockholder approval.
This Plan shall continue until the earlier to occur of (a) termination of this
Plan by the Board (which termination may be effected by the Board at any time),
(b) issuance of all of the shares of Common Stock reserved for issuance under
this Plan, or (c) ten (10) years from the adoption of this Plan by the Board.
22. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account
under this Plan in the event of such participant's death subsequent to the
end of an Purchase Period but prior to delivery to him of such shares and
cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under
this Plan in the event of such participant's death prior to a Purchase
Date.
I-6
<PAGE> 32
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant
and in the absence of a beneficiary validly designated under this Plan who
is living at the time of such participant's death, the Company shall
deliver such shares or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares or cash to the spouse or to any one or
more dependents or relatives of the participant, or if no spouse, dependent
or relative is known to the Company, then to such other person as the
Company may designate.
23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF
SHARES. Shares shall not be issued with respect to an option unless the exercise
of such option and the issuance and delivery of such shares pursuant thereto
shall comply with all applicable provisions of law, domestic or foreign,
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 or automated quotation system upon which the
shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
24. APPLICABLE LAW. The Plan shall be governed by the substantive laws
(excluding the conflict of laws rules) of the State of California.
25. AMENDMENT OR TERMINATION OF THIS PLAN. The Board may at any time amend,
terminate or the extend the term of this Plan, except that any such termination
cannot affect options previously granted under this Plan, nor may any amendment
make any change in an option previously granted which would adversely affect the
right of any participant, nor may any amendment be made without approval of the
stockholders of the Company obtained in accordance with Section 21 hereof within
twelve (12) months of the adoption of such amendment (or earlier if required by
Section 21) if such amendment would:
(a) increase the number of shares that may be issued under this Plan;
(b) change the designation of the employees (or class of employees)
eligible for participation in this Plan; or
(c) constitute an amendment for which stockholder approval is required
in order to comply with Rule 16b-3 (or any successor rule) of the Exchange
Act.
I-7
<PAGE> 33
APPENDIX II
ESS TECHNOLOGY, INC.
1997 EQUITY INCENTIVE PLAN
(AS AMENDED ON MAY 22, 1998)
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.
(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.
II-1
<PAGE> 34
(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.
(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 5,000,000 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.
II-2
<PAGE> 35
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 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);
II-3
<PAGE> 36
(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.
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
II-4
<PAGE> 37
(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 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.
II-5
<PAGE> 38
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
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 restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
II-6
<PAGE> 39
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 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
II-7
<PAGE> 40
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 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.
II-8
<PAGE> 41
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 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
(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.
II-9
<PAGE> 42
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
ESS TECHNOLOGY, INC.
1998 ANNUAL MEETING OF SHAREHOLDERS
P R O X Y
The undersigned shareholder of ESS Technology, Inc., a California
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated April 28, 1998, and hereby appoints
Fred S. L. Chan and John H. Barnet, and each of them, with full power to each of
substitution, as proxies and attorneys-in-fact, on behalf and in the name of the
undersigned, to represent the undersigned at the Annual Meeting of Shareholders
of ESS Technology, Inc. to be held on May 22, 1998 at 1:30 p. m. local time, at
the Westin Hotel, 5101 Great America Parkway, Santa Clara, CA 95054, and at any
adjournment or postponement thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote if then and there personally
present, on the matters set forth on the reverse side.
This Proxy will be voted as directed or, if no contrary direction is
indicated, will be voted as follows: (1) FOR the Election of Directors in the
manner described in the Proxy Statement, (2) FOR the proposal to approve an
amendment to the 1995 Employee Stock Purchase Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 200,000 shares, (3)
FOR the proposal to approve an amendment to the 1997 Equity Incentive Plan to
increase the number of shares of Common Stock reserved for issuance thereunder
by 2,000,000 shares, and (4) FOR the proposal to ratify the selection of Price
Waterhouse LLP as the Company's independent accountants for the fiscal year
ending December 31, 1998.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
<PAGE> 43
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER(S). THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE FOR ALL NOMINEES FOR DIRECTORS AND PROPOSALS 2, 3 AND 4.
1. Election of Directors Nominees: Fred S.L. Chan, Annie M.H. Chan,
Ilbok Lee, Peter T. Mok, and Dominic Ng
FOR [ ] WITHHELD [ ]
[ ] ----------------------------------------------------------
FOR ALL NOMINEES EXCEPT AS NOTED ABOVE
2. To approve amendments to the 1995 Employee Stock Purchase Plan to
increase the number of shares of Common Stock reserved for issuance
thereunder by 200,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve amendments to the 1997 Equity Incentive Plan to increase the
number of shares of Common Stock reserved for issuance thereunder by
2,000,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To ratify the appointment of Price Waterhouse as independent accountants
of the Company for the fiscal year ending December 31, 1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
and, in their discretion, the proxies are authorized to vote on such
other business as may properly come before the meeting or any
adjournment thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD USING THE ENCLOSED ENVELOPE.
Please sign exactly as name appears hereon. Where shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee, or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership by authorized person.
SIGNATURE __________________________________ DATE ___________________
SIGNATURE __________________________________ DATE ___________________
